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Pinochet’s Shadow: Privatisation in Chile

Felipe Gonzalez, Senior Lecturer in the School of Economics and Finance at Queen Mary University of London has written for 'History Today' on how privatisation of Chile’s natural resources was a pillar of Augusto Pinochet’s military dictatorship.

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In April 2023, the left-wing Chilean government led by Gabriel Boric announced its strategy for the lithium industry: a public-private collaboration under the umbrella of a National Lithium Company. Such collaborations are common, allowing the state to combine its strengths with those of the private sector. Chile has one of the largest reserves of lithium in the world and does business with the market’s leading producers. These relations have been shaped for almost half a century by policies implemented by Augusto Pinochet, dictator of Chile 1973-90. As the importance of lithium continues to rise, battle for control of the industry intensifies, and Pinochet’s long shadow continues to loom over the young democracy.

There are many reasons why lithium-related policies might become a cornerstone of countries that hold large reserves. The metal is crucial for smartphones, laptops and electric vehicles. As the world grapples with the urgent need to move away from fossil fuels, lithium-ion batteries have emerged as the frontrunner.

To many in Chile, the announcement of a public-private collaboration was a shock. It seemed like a sharp turn towards nationalisation and a show of no confidence in the private sector. Globally, the reaction was different. Almost 50 companies from 12 different countries contacted the Chilean state to express their interest in doing business. These differing reactions are rooted in the country’s history with nationalisation and privatisation reforms.

Seeking to improve Chile’s economic performance, Pinochet privatised hundreds of state-owned firms. Many of these companies had been nationalised by his predecessor, socialist president Salvador Allende. After a tight election in 1970, the Allende government, under a left-wing coalition known as Unidad Popular, had implemented a radical policy involving the nationalisation of banks and mining companies with the goal of pursuing a ‘democratic road to socialism’. Things did not go to plan. Three-digit inflation, a collapse of real wages and increasing polarisation all preceded a military coup in September 1973. For many in the business world, nationalisation policies and state-owned companies rhyme with Allende, Unidad Popular and communism.

Pinochet was influenced by a group of market-friendly economists known as the ‘Chicago Boys’, who considered private ownership to be superior to state ownership. Among the firms privatised by the dictatorship was SQM (Sociedad Quimica y Minera), now one of the world’s largest lithium producers. Founded in 1968, the company began as a private-public collaboration dedicated to the exploitation of nitrate, a chemical primarily used for fertilisers. From 1971, following Allende’s plan to acquire specific industries, SQM operated as a state-owned enterprise. Then, as part of its privatisation wave, the Pinochet dictatorship sold it in the 1980s to Julio Ponce Lerou. Lerou had been a board member of several state-owned enterprises since 1973. He also happened to be the dictator’s son-in-law.

Privatisation was one of the pillars of Pinochet’s economic policy. The sales, however, were not above board. After the 1988 referendum that ended his dictatorship, and the subsequent transition to democracy in 1990, an investigation carried out by the Chilean Congress revealed that during the privatisation process information about the sales was scarce, the methods behind acquisitions inconsistent and the legal framework regulating the purchases loose (to say the least). The investigation also revealed that many firms were under-priced. How could firms survive the transition to democracy? The answer was by adapting. One of the survivors was Ponce Lerou and SQM.

Not only did SQM keep its contracts with the Chilean state, it signed a new one in 1990, allowing it to exploit the world’s largest source of lithium, Salar de Atacama. In the years that followed, the company became the world’s main producer of lithium. By 2014, the exploitation of lithium represented 40 per cent of the company’s revenues.

The remarkable resilience of the company across a period of democratisation with changing governments was possible only by carefully maintaining ties with the new centre-left coalition. SQM’s strategy included hiring prominent politicians and, crucially, supporting their campaigns financially. An investigation in the early 2010s found some of this funding to be illegal; the company had paid hundreds of individuals for consulting services that were never delivered. The exact influence of the links between the government and the mining company are unclear. What is certain, however, is the influence the political scandal has had in creating a lack of confidence in the incumbent class of politicians and the institutions they represent. A wave of protests swept across Chile in 2019, an outpouring of anger that has finally put the country on a path towards replacing its constitution, originally drafted in 1980 under tight military control.

SQM has made headlines for more than its involvement in politics. After years of investigations, in 2014 Ponce Lerou was fined more than $70 million for illegal purchases of stocks in 2009-11 involving pension funds. In 2019, the fine was reduced to fewer than three million dollars. Ponce Lerou is a billionaire with a net worth of over three billion dollars. Approaching 80, and having survived several scandals, he resigned as chairman of SQM in 2015 but still owns 17 per cent of the company, 24 per cent of which was recently sold to the Chinese firm Tianqi Lithium.

Every scandal involving SQM over the past three decades has sparked public outrage that slowly dissipates when another (unrelated) scandal emerges. The pandemic, coupled with social crises that surfaced in 2019, saw the public shift their attention to a constitutional process that is far from the finish line. And yet every time a policy veers towards nationalisation business leaders express discontent and point to the collapse of the Allende years. Supporters of state control do the same by emphasising the blatant corruption of Pinochet’s regime. As Chile looks towards the future, it remains divided by its past.

This article first appeared in History Today on September 9 2023.

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