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Multinational Corporations and the Politics of Dependence

Copper in Chile

PRINCETON UNIVERSITY PRESS

Introduction

In 1912, looking back over the history of nitrates and forward toward the future of copper, the celebrated Chilean writer and historian Francisco Encina regarded with despair the process which he called the "denationalization" of those industries that exploited the country's basic natural resources. He was distressed by the spectacle of the nation's vital industries falling more and more completely into the hands of foreigners, whether British or North American — and he lamented a course of development in which Chileans were content to play essentially a secondary and supportive role to foreigners who were taking over the most important centers of economic growth.

Encina's term was denacionalización, and he longed for Chileans bold enough to recapture the sources of their own natural wealth and recover control over their own destiny. In the quarter of a century following the Second World War, the new term to describe Chile's plight became dependencia. And, at last, there were men bold enough to answer Encina's call and talented enough to be capable of taking over and running the industries.

Between 1945 and 1970 the Chileans closed in on the foreign-dominated copper industry in their country, successfully surrounded it, and proceeded to take it over. During that period they developed the skills necessary to mine copper, smelt it, refine it, and by the early 1970's they possessed the capacity to carry out all the operations of production on a large scale on their own.

The early formula for recovering control over the national destiny was, logically, the opposite of denacionalización — namely, nacionalización, or putting authority for basic decisions in Chilean hands — although the early Chilean writers would never have entertained the thought of state ownership as part of the notion. The more recent formula for recovering control over the national destiny has been, with equal logic, the opposite of dependencia — that is, independencia, or autonomía. In the early 1970's Chile in fact nationalized the copper industry. The reassertion of sovereignty over the exploitation of natural resources is, in all likelihood, one of the few undertakings with support deep enough to survive, in one form or another, even the most intense domestic conflict.

I

This is an analytical history of the formation of copper policy in Chile from World War II through the end of the Allende regime in 1973. It is the history of the interaction of two systems — a system of multinational copper companies operating under unstable conditions of imperfect competition, and a system of domestic interest groups in Chile trying to respond to rising demands for national development and national welfare — both struggling to take advantage of each other and reduce each other to manageable proportions.

The Chileans characterized their side of this interaction as the struggle against dependencia.

What the idea of dependencia gained in popularity after the Second World War, however, it unfortunately lost in precision — in academic as well as political discussion. From the debates on copper policy, this study will abstract three definite objectives that were associated with the movement against dependencia: first, the objective of asserting Chilean sovereignty over its own economic and political life; second, the objective of forcing or enticing the foreign corporations to make more of a contribution to Chilean goals of growth and welfare; third, the objective of freeing Chile from having to contribute "captive production" to a vertically integrated corporate system that did not serve Chilean interests.

I shall argue that the first two meanings of dependencia embodied legitimate concerns toward which Chilean administrations, despite costly setbacks, made cumulative progress. The third meaning of dependencia, however, was based upon an inadequate analysis of international oligopoly behavior and did not acknowledge the limits within which any oligopolistic producer must pursue his individual interests. Pursuit of this objective may put Chile (as well as other nationalistic "independents") in a weak position outside the international copper oligopoly, rather than secure for the country a strong position of interdependence within the international industry.

The quarter-century struggle against dependencia, then, which has been necessary to mobilize national skills and gain national confidence in bringing the copper sector more and more under national control, could finish by substituting one kind of international dependence for another — perhaps worse.

II

The introduction of foreign corporations into the center of national life represents a complex challenge to the interests and to the sovereignty of the host country.

Natural resource companies, such as Anaconda and Kennecott, are large, oligopolistic, vertically integrated. They have substantial discretion in formulating investment policy, pricing policy, marketing policy. A tight hold on the combination of capital, technology, and experience that are necessary to find ore-bodies, bring them on-line, and process and market the output gives them the power to exclude competition. They make their policy decisions according to a global strategy based on their own internal needs — not purely in response to market forces (as an atomistic company in a situation of perfect competition would), nor purely in response to the environment created by the host country (as a domestic company would).

At the same time the potential contribution of such corporations to host countries is very great. The economic impact that Anaconda and Kennecott had on Chilean society was enormous. The total value of copper production by these two companies alone accounted for 7% to nearly 20% of Chilean Gross Domestic Product. Tax revenues from copper financed from 10% to 40% of government expenditures. Copper exports ranged from 30% to 80% of all hard currency earnings. No domestic decision about the rate of economic development, the strength of the balance of payments, the level of aggregate employment, the breadth of social welfare programs could be made without a careful calculation, from outside, of how the foreign copper companies might be going to exercise their discretionary power.

This produced an ambivalence about conflict and cooperation, an edge of hostility beneath the game of mutual accommodation. On the one hand, responsible Chilean statesmen wanted to please the foreign companies and obtain as many benefits for their country as possible by cooperative methods. On the other hand, responsible Chilean statesmen felt a mandate to bring the foreigners more and more under national control, force them to serve domestic goals, make them responsive to the society over which they exercised so much power.

The idea of dependencia grew out of this ambivalence. Its most fundamental meaning came from a sense that basic decisions about the pace and direction of national development were being dictated by North American corporate officials, unaccountable to any Chilean body politic, according to the internal logistical needs of the vertically integrated companies that those officials served — or, occasionally, according to the foreign policy preferences of their government. No matter how appreciative of the contributions of the foreign copper companies, Chileans of diverse political and economic views nursed a simple mistrust of concentrations of power, mistrust of alien self-appointed and self-perpetuating economic organizations whose private, secret, and often mystifying decisions affected the welfare and prosperity of the entire national community. The struggle against dependencia sprang from the desire to "restore" sovereignty and independence over the course of national development.

The result was a fight for control over a society's destiny beside which the populistic movements in the United States to regulate the banks, the railroads, and the "trusts" dwindle in magnitude and in difficulty.

All of Fortune's 500 largest US corporations combined do not play nearly the role in the economy of the United States or pay more than a fraction of the percentage of US taxes that Anaconda and Kennecott alone supplied in Chile. All the ranches in Texas, the banks in New York, the aerospace industry in the Northwest are not as responsible, economically, for the fate of their respective states as the copper industry is for Chile. The Rockefellers and the Morgans with all their affiliates at their height were minor operators in comparison to the position that Anaconda and Kennecott occupied for half a century in Chile. Yet if any of these groups were controlled and operated by foreigners according to obscure strategies linking them to headquarters and affiliates outside the United States, it is unlikely that the fear of international dependence and the sense of political frustration would be as comparatively muted and cautious as the Chilean reaction.

The tension about "foreign control" had a strong hold on many Chilean groups even when the foreign presence was considered clearly indispensable for the copper industry. Once the foreign presence was not considered absolutely necessary, the movement toward national control was very rapid — despite warnings that such a policy would have substantial real costs. As Chilean competence in carrying out operations at the production stage increased, the political appeal of national take-over became irresistible. Chilean leaders could not refuse the opportunity to "recover" control over the country's basic natural wealth and "restore" sovereignty over the course of national development.

III

Alongside the challenge to Chilean sovereignty, dependencia incorporated a feeling that the powerful foreign companies were not performing dynamically enough to satisfy the needs of national development. This interpretation of dependencia stimulated cycles of pulling, pushing, and shoving to encourage or oblige the foreign corporations to commit more of their resources to Chile and share the rewards more generously. With varying degrees of success, these cycles produced a movement to overcome the fundamental disparities of power between the copper companies and successive domestic administrations, and to use ever greater bargaining strength in the service of Chilean goals. In this sense, the struggle against dependencia took a course that reflected a fundamental evolution in the balance of power between the international investors and the host country.

In natural resource oligopolies where the largest barriers to entry exist at the production stage — petroleum, copper, and natural gas are the most important — the balance of power between foreign investors and domestic governments begins very much tilted in favor of the foreign producers and tips inevitably away from them toward the host governments. Foreign investors in the typical copper project, for example, must make a large lump-sum investment under conditions of great risk and uncertainty with little possibility of testing or adjusting incrementally. They will not invest unless they have the promise of substantial returns.

When the initial concession is negotiated, the host country is able to evaluate the location and value of prospective mineral deposits even less adequately than the foreign investors. Since the foreign companies enjoy near-monopoly control over the techniques and resources needed to bring a major mine on-line, the host country has little choice but to accept terms weighted heavily in favor of the foreign investors.

But once one or more foreign enterprises commit themselves and invest, and once the mines are successful, the bargaining strengths change abruptly. Uncertainty is reduced, and the old doubts are forgotten. The host government gazes out at a profitable operation, carrying off resources the country was sure it had all along, in which a large part of the revenue is flowing away to foreigners. The price paid to the foreign investor seems, in retrospect, too high, and the government in power (or its opponents) point out that the country is being cheated. The foreign company, on the other hand, has sunk its capital and won its bet, and has an attractive mine that it will now continue to operate up to some point even though its share of the revenues may be reduced. Empirically, few large natural resource concessions in underdeveloped countries remain long unchanged. The terms of the original agreement are tightened in favor of the host country.

During the process of loosening conditions to attract new investments and tightening conditions after they have proved successful, the host country gradually moves up a learning curve of negotiating skills and of direct operating skills for the industry. Historically, most Third World countries began to watch the growth of new resource industries with very little domestic capability to monitor industry behavior, very little knowledge of terms of concessions in other countries, and very few skills in negotiating sophisticated agreements. Once the industry was established, the government had an incentive to build a skilled bureaucracy, bring in foreign consultants, demand hiring of nationals in supervisory positions, and require participation of its representatives in the arrangement of international marketing and finance. As the host country invaded those areas that were once the exclusive province of the foreigner, it could play the game of mutual accommodation in a tighter and tighter fashion. As the country gained direct operating skills, the cost of replacing the foreigner was lowered.

With agonizing slowness, Chile accumulated both negotiating and operating expertise as part of the drive against a dependent relationship with the North American copper companies in the post-World War II era. Despite clear instances in which particular domestic groups moved against the trend to serve their own private interests, the broad movement to push the copper sector by various means (some successful and some counterproductive) to provide the resources for sustained national development gained momentum. Despite widely advanced hypotheses to the contrary, as the foreign copper companies expanded operations in Chile over time they did not gain power, or influence, or allies on the domestic scene. Rather, their power became attenuated, their position became more precarious, their alliances proved most fragile.

Nowadays the direction of the shift in bargaining strength in natural resource industries is clear. At the end of the Second World War and through the 1950's, it was not. Rather, sanctity of contract (together with the paraphernalia of 99-year concessions and 20-year government guarantees of "inviolability") served the function of attempting to cement the relationship between foreign investor and host government on the initial favorable terms to the foreigner. But in a situation where rapidly diminishing uncertainty meant that ceteris did not long remain paribus, sanctity of contract could not have much operational meaning. Sanctity was steadily "violated" by "undependable Latins" no less than by "untrustworthy Arabs" and other "firebrand nationalists" in a process that reflected frustration about the original terms and shifts in relative bargaining power.

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Excerpted from Multinational Corporations and the Politics of Dependence by Theodore H. Moran. Copyright © 1974 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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