FYBA- B

Part 1: Welfare Economics UID- 171411

Welfare economics constitutes a branch of study that endeavors to formulate propositions by which
one can say that the social welfare in one economic situation is higher or lower than the other. It
hinges on the idea of consequences, wherein policies or reforms have a direct/indirect effect on the
social well -being of people. However, social welfare differs substantially from welfare as an objective
of a firm. Social welfare delves into government intervention in the state and their effort to provide
welfare to its citizens as is the case of the ‘cradle to grave’ support system by the Saudi government for
its citizens. On the other hand, welfare objective firms are involved in providing ‘inelasticlly’ demanded
goods to a wide variety of people at a subsidized rate, Instead of the main objective being generating
profits. The brick foundations of welfare were laid down post the ‘Russian revolution’ in 1922 where
people realized that the idealistic virtues of equality weren’t just a far-fetched dream but an idea that
was practically viable. The revolutionaries championed for a state run ownership system, rejecting
private ownership.

However, neo liberalization and globalization has greatly freed the markets, led by Margaret Thatcher
in Britain and spread to major countries in the world- leading to a global village. This has led to a
minimum government intervention by the state a belief in the concept of individual development.

Marred by the tides of former Spanish colonialism and then a military dictatorship, Chile has braved
many a wars to emerge as a ‘high-income’ economy by the World Bank and is considered one of South
America’s most stable and prosperous nations . Leading Latin American nations in competitiveness,
income per capita, globalization, economic freedom, and low perception of corruption.

The Chilean economy braved myriad hurdles in the form of various forms to governance to become one
of the most economically sound nations in Latin America and entering the The organization of economic
progress and development, ‘OECD’ club. However, the country went through a transitional phase from
1990, rising from the ashes of the Augusto Pinochet rule, who took over an ailing economy in 1972.
Under Allende, Pinochet’s predecessor, the government adopted a socialist perspective, wherein state
intervention was extremely high and most sectors received public funding from public taxes, thereby
plunging the economy into an economic depression with a rapidly falling GDP. The inflation rate stood
at 1000% and with no foreign reserves, the country fell into rapid decline in terms of the human
developmental index. A military coup was led by Augusto Pinochet who later served as the president for
eight years till 1980. Under Pinochet’s reform policies, the market restrictions were struck down, and
relied on the help of economists from the Chicago school of economist- famously known as the ‘Chicago
boys’, that were led by the Nobel Laureate , ‘Milton Freidman’. Under the free market, the government
concentrate on three objectives:- economic liberalization, privatization of the state owned companies
and the stabilization of rampant inflation.
The period following Pinochet’s departure was a ‘transitional’ phase of the Chilean economy from a
largely socialist state to a democratic one that gave birth to a free market. In 2015, the World bank
named Chile as the 48th most free market in the world. It also led to the privatization of the coal mining
business, with humongous foreign investment pouring in for the same. However the establishment of
democracy has given rise to a ‘semi- quasi’ welfare state wherein the ‘compensation theory’ sets in ,
that opines that, global economic integration may in fact produce an ‘expansionary effect’ on social
spending. For the purpose of maintaining political legitimacy, governments will expand further welfare
spending to compensate those who lose from economic globalization, as government used public taxes
in strict investment in certain sectors such as the copper industry instead of utilizing it for public welfare.

The success of the military junta’s neoliberal policies in globalizing the economy came at the expense of
Chile’s welfare state and ended five decades of continuous social spending that had been financed by
public revenues. While the neoliberal market forces emphasizing economic efficiency dominated
domestic socioeconomic policies, the authoritarian government did not find any incentive to
compensate the losers of the economic globalization.

Combined with the junta’s privatization policies, the allocation of education, housing, and social
security was largely determined by market forces in the new , liberalized Chile. The new 21st century,
‘Ricardo Lagos’ government continued the neo liberalization economic policies of the junta and went
even further in the process of integrating Chile into the global economy. Currently, Chile has signed 13
free trade agreements, two free trade association agreements with the European Union, and five
economic complementation agreements. In terms of housing, the government continued the practices
of the junta by allowing private sector participation in the construction of new homes but increased
public spending on housing by 50%. The government also changed the eligibility requirements for public
housing programs to benefit low income families and provided subsidies to poor neighborhoods to fund
utilities.

There are currently 34 government owned corporate companies in Chile, operating as a state owned
enterprise. The firms do enjoy a certain level of advantage in the largely neoliberal country. For eg,
ENAP is the only company allowed to produce oil in Chile. The country also produces 1/3 of the worlds
copper and the largest corporation to extort copper is a government owned one. State owned
companies are subjected to the same tax regulations as their private competitors , however reap a
benefit in the market by bringing down their cost of production and hence selling goods at a lower rate.

An explicit consumption subsidy for potable water (targeted to the poorest twenty percent of the
population) currently benefits seventeen percent of the population. Cross-subsidies have been virtually
eliminated in Chile, and existing subsidies are funded from the national budget. Water companies are
privately owned and are in a partnership with the government to provide subsidized water. Aguas
Andinas, majorly-owned by the Spanish company Aguas de Barcelona, is the largest company serving
water to the capital Santiago.

I believe that due to the seeds of globalization and the freeing of the Chilean market, the wage gap in
the Chilean economy has become the largest one amongst the OCED countries. After the establishment
of a ‘quasi ‘ welfare system, that did little to help the poorest of the poor, it focused on bringing in
foreign investment in the country. As a result, domestic companies collapsed in the global markets
leading to further unemployment. Welfare based firms today do have a role in providing welfare to the
Chilean economy, however majority of them are still privately owned firms, with an aim to eventually
generate further revenue.

The Chilean government can partner with companies, that enjoy a monopoly in the domestic markets
to further bring down costs for the public, as in the case of the water industry. This would be highly
beneficial for the people living below the poverty line and in reducing the wage gap. This would be
possible by giving the company an advantage in the domestic market by placing reforms for the ‘other’
companies in the same industry.

BIBLIOGRAPHY:-

 The book on welfare economics, lent from the lending library

 Liberalization and development by Deepak Nayyar
 Advanced Economics- By H.L Ahuja
 http://www.economicsdiscussion.net/business/objectives-business/7-main-objectives-of-a-
business-firm/18721
 https://www.slideshare.net/mayuripujare9/objective-of-firm-30346858
 http://www.socrethics.com/Folder2/Economics.htm
 http://www.thehindu.com/todays-paper/tp-national/tp-karnataka/russian-revolution-laid-
down-principles-of-a-welfare-state/article19990514.ece
 https://www.export.gov/article?id=Chile-State-Owned-Enterprises
 http://kaisnet.or.kr/resource/down/11_1_08.pdf
 http://www.history.com/topics/great-depression

Part 2: 16 Cases

COPPER INDUSTRY
 Supply
decreased,
demand
increases, with a
rise in price

1) Chile boasts of being the largest copper producer in the world, producing 1/3 of the world’s
copper. In January 2018, Chile’s state copper commission, Cochilco, raised its estimated 2018
average price for the metal to $3.06 per pound from its previous forecast of $2.95 per pound,
pointing to the potential for global supply disruptions in the coming year. This comes after the
news that supply for the year will increase by 200,000-300,000 tonnes to meet the global
demand. Strikes could affect about 4.2 percent of the world’s total copper production. But that
percentage could increase given the number of union contracts up for renegotiation next year.
Given the potential for supply issues, Cochilco predicted a global copper supply deficit of
175,000 tonnes in 2018, versus 67,000 in 2017.Cochilco expects Chile to produce 5.74 million
tonnes this year, up 4.9 percent from the 2017, when a strike at BHP’s Escondida copper mine,
the world’s largest, sharply reduced output. Production would rise slightly to 5.91 million tonnes
in 2019.

The main cause of the increased prices is the disrupted labour rights in the country. Under a new labor
code and with higher prices inflating workers’ pay expectations, Chilean mines will be negotiateing
contracts with 32 unions in 2018. That represents about three-quarters of the country’s copper output,
or about one-fifth of world production. Globally, labor negotiations could trigger disruptions at mines
producing about 40 percent of supply.
Furthermore, the new Chinese regulations to curb environmental pollution is expected to cause an even
more rise in the prices of coper. This would be in effect as China and Chile are major trade partners are
the policies formed in one nation will affect the other.

The government’s major response is to negotiate with labor unions to reach a settlement to meet the
increasing demand. Moreover, talks are also on with the Chinese authorities to reach a compromise to
bring down the cost of the metal.

I opine that the government is taking steps to bring down the increasing prices, but altering their own
domestic policies could aid in doing so. This situation is very much possible, as labor is one of the crucial
factors of production and it is appreciated if he/she is protected. However, the government could
negotiate to reach an agreement, where their demands would be met without compromising the state
of the economy. Moreover, foreign export (despite Chile being the biggest producer of copper) of
copper could be bought in to reduce prices and to pressure the trade union.

Sources:-

1. https://www.reuters.com/article/chile-copper/update-1-supply-disruptions-could-boost-
copper-prices-chiles-cochilco-idUSL1N1PC0WV
2. http://www.mining.com/web/copper-bears-beware-strike-risks-rise-top-producer-chile/
3. https://www.ft.com/content/3848dca2-1629-11e7-b0c1-37e417ee6c76
4. https://www.reuters.com/article/emerging-markets-latam/emerging-markets-chile-stocks-see-
highest-rise-in-two-years-on-copper-prices-idUSL1N1OB20B

2 ND CASE . : WHEAT

Supply decreased,
demand increased
with a rise in
Chileans almost eat more bread than anyone else in the world. This has given rise to a thriving wheat
industry in Chile despite having lesser agricultural land than most other Latin American countries. In
2007, the Chilean wheat production declined from the previous year. It stood at 1.1 milion tonnes in
2006, and farmers restored to planting alternative crops such as cereal to make profits. This caused an
increase in planting area in 2007, to meet the growing demand that had led to an increase in wheat
prices. In 2007, the industry produced over 1.3 million tonnes of wheat and imported another 2.6 to
meet demands.

The major reasons the situation occurred was due to huge crop losses in 2006, mainly due to disease
inducing pests in the crops. Moreover, the in the same year, the country did little to produce other
alternative crops to meet the internal demands. Normal weather conditions during planting and harvest
time in most growing areas, together with higher prices offered to producers for the coming harvest, are
the main reasons for the important increase in planted area and production in 2007.

Despite an even higher forecast for wheat plantings in 2008, production declined. Due to an increase in
fertilizer pricing, the cost of wheat production greatly increased, leading farmers to grow alternative
crops like oats to earn revenue. The government did little to intervene as they had already placed a
buffer system in 1985 against global competition in the crop market to protect local producers.
Furthermore, A fast growing salmon and trout feed industry became an alternative outlet for some
wheat producers who had no storage capacity and had to sell their wheat right after harvest. As the 7
conditions for perfect competition weren’t met, the wheat industry was indeed was an imperfect one,
wherein the industry defined the prices of individual firms. Here, the industry decided to plant
alternative crops instead of wheat to meet demand.
The phenomenon was a natural one as weather conditions often have a lasting impact on crop
production. The individual producers did what they could in their individual right to cut costs and keep
up with the demand. However, I believe government intervention in the free economy in 2007 could
have done more to save the wheat industry and bring down prices. By reducing the buffer placed in
1985, the government could have bought down the escalating prices and opened the wheat production
to alternative crops before they planted wheat.

Sources:-

 http://www.world-grain.com/Departments/Country-Focus/Chile/Focus-on-Chile.aspx?cck=1
 USDA-
https://gain.fas.usda.gov/Recent%20GAIN%20Publications/Commodity%20Report_GRAIN%20_
Santiago_Chile_27-04-2009.pdf
 https://www.indexmundi.com/agriculture/?country=cl&commodity=wheat&graph=production
(For the quantitative figures)