Clark University

Creating Competitive Advantage: Forest Policy as Industrial Policy in Chile

Author(s): Roger Alex Clapp
Source: Economic Geography, Vol. 71, No. 3 (Jul., 1995), pp. 273-296
Published by: Clark University
Stable URL: http://www.jstor.org/stable/144312
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 Creating Competitive Advantage:
Forest Policy as Industrial Policy in Chile*
Roger Alex Clapp
Department of Geography and Institute for Environmental Studies, University
of Toronto, Toronto, Canada M5S 1Al

Abstract: For 60 years the Chilean government studied, promoted, managed, and
subsidized plantations; it bribed, cajoled, and threatened landowners to plant
trees; it funded, nationalized, and privatized the industries to process them and
then nationalized and privatized them again. The policies were contradictory in
their particulars, but consistent in the government's commitment to the forestry
sector. Some policies were ineffective, others were effective but blunted by
contradictory policies, and at least one was stunningly successful-the 75 percent
reforestation subsidy established in 1974. In a generation Chile has created one of
the world's most competitive forest resources, at a relatively low environmental
cost. It is not a natural forest capable of supporting multiple use, but as an
economic forest it is almost a masterpiece.
Early state activism and recent state withdrawal were both essential. From
1931 to 1973 state promotion expanded the forests, while the state's pulp mills
guaranteed a market; without those interventions the industrial and resource
base would not exist today. But without the military government's persistent
subsidies, privatizations, and guarantees against expropriation, the recent flood of
direct foreign investment is equally inconceivable. Finally, the timing was ideal.
Competitive advantage in the world market is of use only when a market exists,
and the last 20 years have seen the rapid growth of global trade in forest
products.
Key words: industrial policy, competitive advantage, authoritarianism, neoliber-
alism, plantation forestry, radiata pine, exotic species, Valdivian forest.

Chile has already been accepted in
principle as the next member to be
admitted to the North American Free
Trade Agreement (NAFTA). Far from
North America, with a population of only
12 million and less than a quarter of its
trade with the current members of
NAFTA, Chile seems an unlikely choice.
Chile owes the warm welcome to its rapid
economic growth in recent years, coupled
with a tariff structure already more open
than that established by NAFTA. Chile's
* I am grateful to Michael Watts, Dick
Walker, Jim Parsons, Meric Gertler, and the
referees of Economic Geography for their
helpful comments. All errors that remain are
my responsibility. The paper draws on disser-
tation research supported by the Inter-
American Foundation and the Institute for the
Study of World Politics.
newly earned status as the "tiger" of Latin
America is widely credited to the eco-
nomic reforms established under the
military government. Those policies are
now offered as a model for other develop-
ing countries. Mexico and Argentina have
undertaken reforms said to be along
Chilean lines, although they distance
themselves from the human rights record
of Augusto Pinochet's authoritarian re-
gime. Peru has taken that imitation one
step further, to the extent that Peruvian
President Alberto Fujimori has been
called another Pinochet. Peru has repro-
duced the model of authoritarian govern-
ment, tariff reduction, and direct encour-
to foreign capital through
agement
concessionary privatizations. Widely con-
demned during the 1980s (Garcia and
Wells 1983; Whitehead 1986), the "South-

273

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274 ECONOMICGEOGRAPHY
ern Cone Model" appears to have found
favor in retrGspect.
Chilean economic policy under mili-
tary rule is represented as a complete
break with the development model of
the previous 40 years, dispensing with
sectoral economic policies and accepting
the judgment of the market in determin-
ing the winners according to the laws of
comparative advantage (Villarreal 1990;
Gallagher 1992). In the process, the
country has exchanged a broad program
of import substitution industrialization
for specialization in a narrow range of
export-oriented resource industries. Win-
ners have indeed emerged among a
small group of sectors, among them
forestry. Total production in the forest
products industry doubled between 1983
and 1990 (INFOR 1991), and export
earnings tripled, reaching U.S. $1 billion
in 1992.
The history of forest policy in Chile,
however, shows that Chilean govern-
ments picked forestry long before the
market confirmed that judgment. I argue
that the Chilean forest industry has been
a century in the making, and that its
current success results from a sequence
of varied industrial policies, with impor-
tant debts to staple theory and import
substitution, as well as to the free-market
policies of more recent vintage. The
most important policies have been those
which promoted the growth of a cluster
of remarkably productive timber planta-
tions. Natural advantage, activist govern-
ment intervention, and market forces
have collaborated in the creation of a
diversified and internationally competi-
tive forest products industry. This paper
outlines the creation of the Chilean
plantations as an (un)natural resource
and considers the future prospects of the
forest industry. I conclude that Chile's
competitive advantage in forestry is real
but transitory: much as Chile's current
advantage was created, so the same
advantages can and will be reproduced
in other developing countries.
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Natural and Competitive
Advantage in Forestry
Competitive, comparative, and natural
advantage are elusive terms, varying
according to an author's purpose. In this
paper, competitive advantage is the abil-
ity of one nation to achieve higher rates of
growth and profit and larger market
shares in a particular sector than other
nations; in the extreme case, the less
competitive nation may import from the
more competitive nation, while its own
industry atrophies (Porter 1990). Compar-
ative advantage refers to the optimal use
of a factor within a region (Sedjo 1983).
Finally, natural advantage derives from a
region's physical geography, deriving
from either the region's existing stock of
resources or its natural capacity to pro-
duce those resources, relative to the
stocks or capacities of other regions.
In staple theory, a competitive advan-
tage can be achieved by recognizing and
exploiting a natural advantage arising
from the regional peculiarities of a na-
tion's physical geography (Watkins 1991;
Innis 1991). Such advantages at first are
natural capital-the abundance of existing
and accessible supplies of timber, miner-
als, and agricultural land on a frontier
(Cronon 1991). Frontier regions possess a
comparative advantage in resource extrac-
tion until the stock of natural capital is
depleted, at which point a wrenching
economic decline often occurs.
A region's endowment of old-growth
forests originally determines its natural
advantage in forestry; as those forests are
depleted or designated for preservation
around the world, natural advantage shifts
to regions where trees grow fast (Sedjo
and Lyon 1983). Chile depleted its native
forests-its natural capital-by the 1950s,
but has nevertheless retained a natural
advantage in forestry because of its
capacity for growing a few exotic trees, in
particular the Monterey (or Radiata) pine
(Pi?ius radiata). This relict species from
the California coast grows startlingly well
in Chile, and substantial sawlogs can be
harvested in 20-year rotations. Such a
 FORESTPOLICYIN CHILE
natural advantage stems from the produc-
tivity of present investments in forestry,
and promises a competitive advantage in
the future.
Competitive advantage in the present,
however, is determined not only by a
region's capacity to grow trees, but by its
current timber inventories, infrastructure,
and human capital. Chile's plantations are
not natural capital, but human creations
deriving from persistent but flexible gov-
ernment intervention that promotes pro-
duction for markets not yet in existence.
Chileans have long believed that their
country had a natural advantage in for-
estry conferred by the benign climate of
the country's south-central coast, and they
have systematically taken measures to
exploit it. Chile's current competitive
advantage results from investments made
long ago. It is now in the right place at the
right time, with a large and reliable
supply of pine coming on stream just as
lumber supplies overseas reach levels of
scarcity. In other words, Chile's advan-
tage for the moment consists not in the
fact that it can grow trees, but that it has
grown them. That supply did not exist as a
natural resource; private experimentation
and government preference created the
supply. More than 60 years ago the
Chilean state picked forestry as a sector in
which Chile would specialize, and the
economic evidence suggests that it chose
well.
In Chile, tree growth rates are signifi-
cantly higher, and rotations shorter, than
in Canada, the United States, and the
Scandinavian countries, the dominant
exporters in the global timber trade. But
Chile has no absolute advantage over
many other potential timber producers.
Monterey pine grows almost as fast in
other temperate west coast regions, and in
many tropical regions Caribbean pine and
several eucalyptus species grow faster
(Table 1). The worldwide biological poten-
tial of forestry is great, especially in the
tropics (Evans 1982), and the economics of
plantation forestry are favorable in many
regions (Sedjo 1983).
The global forest industry has begun an
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275
epochal shift, from a base of old-growth
forests that once seemed limitless to one
primarily of plantations and regenerated
forests (Sedjo and Lyon 1990). In that
transition, Chile is one of the most
advanced nations: pine plantations now
occupy 1.5 million hectares, or 15,000
square kilometers, of south-central Chile
(Fig. 1). Plantation forestry dwarfs native
forestry in production and profits and has
displaced it in the major markets for forest
products (Clapp 1993, 148-50). Chile's
plantations provide 85 percent of the
country's industrial wood harvest by value
and volume, but comprise only 15 percent
of the total commercial forest in area and
16 percent in standing volume (INFOR
1991). Their productivity nearly matches
Sedjo's (1983) predictions that a mere
5-10 percent of the world's productive
forest area, under plantation manage-
ment, could satisfy world industrial de-
mand.
Despite its potential, plantation forestry
is widespread in only a few countries. The
greatest obstacle remains the delay in
return on investment: plantation forestry
requires "landesque capital" (Blaikie and
Brookfield 1987), an investment of current
resources whose returns benefit only
succeeding generations. The long matura-
tion period of timber plantations, and the
risks and carrying costs which that delay
imposes, are disincentives to private
investment, despite the high returns
ultimately available. As a result, forestry's
shift from hunting-and-gathering to culti-
vation, conceptually equivalent to the
agricultural revolution, is a comparatively
recent phenomenon.
In moist areas of the tropics and
southern temperate lands, however, the
introduction of fast-growing trees has
shortened the forest rotation to the point
where many owners may expect to earn
returns within a generation. Foresters will
reduce that delay still further as they
concentrate on the fastest-growing strains
of timber trees. The time lag between the
market signal of increasing demand and
the plantation response of increasing
supply is now a matter of decades, not
276 ECONOMICGEOGRAPHY

Table 1
Timber Yields Compared

Site Yield (m3/ha/yr) Rotation (years)

Temperateand boreal softwood forests
Canadaaverage 1 -
British Columbia 1.5-5.3
U.S. average 2.6
Sweden average 3.3
Finland 2.5 60-100
Russia 1-2.9
Siberia 1-1.4 70-200
Softwood plantations
Britain (Sitka spruce) 14 40
South Africa (pine spp.) 10-25 20-35
New Zealand (Montereypine) 18-30 20-40
Chile (Montereypine) 20-30 15-35
East Africa (pine spp.) 25-45 20-30
Brazil (pine spp.) 15-35 15-35
Tropicalhardwoods
Malayandipterocarpforest up to 17
Mixed tropical high forest 0.5-7
Teak plantations 14 40-60
Eucalyptusplantations
Portugaland Spain 10-15 8-12
South Africa 15-20 10
Chile 20-30 8-20
Congo 30-40 7-20
Brazil 30-70 5-20
Sources: Evans (1982); Gessel (1984); Zobel, van Wyk, and Stahl (1987); Stier (1990).

centuries. In exceptional cases, rotations capture the employment and multiplier

are as short as five years, as on some
Brazilian eucalyptus plantations (Zobel et
al. 1987; Stier 1990).
Plantation forestry is growing rapidly in
importance. Many of the yellow pine
stands of the U.S. Southeast were estab-
lished as plantations in the 1930s and now
support a large and growing industrial
complex (Prunty 1963; Christensen 1989).
Exotic plantations in the tropics have also
expanded rapidly, doubling in area from
1965 to 1980 (Evans 1982). During the
1980s plantations already provided one-
third of Latin America's industrial wood
(Laarman and Sedjo 1992), supporting the
projection by McGaughey and Gregersen
(1983) that the proportion of Latin Amer-
ica's industrial wood to come from planta-
tions would rise to 50 percent by the year
2000.
Equally important is the development
of the processing industry necessary to
effects of the raw material base. In Chile
that industry has passed through Gereffi's
(1990) three stages in the development of
Latin American manufacturing industries,
emerging as a competitive export sector.'
Government participation in the creation
and evolution of the forest industry
occurred in response to political crises
associated with the transitions between
the stages. Plantation forestry in Chile
originated among a small group of forest-
ers and industrialists, during a first stage
when Chile was overwhelmingly depen-
1The first stage is characterizedby com-
modityexports,with minimallocalprocessing.
The second, importsubstitutionindustrializa-
tion, is limited by the size of the domestic
marketand is succeeded by a third stage of
export-oriented industrialization (Gereffi
1990).

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 FORESTPOLICYIN CHILE 277

Snow-coveredvolcano,
surroundedby
timberlineforest

coastaldry forest
(bosquemaulino)

Deciduoussouthern-beech
(roble-hualo)
Evergreensouther-beech
LIIII~
(coigiie)
Second-growthdeciduous LIZ~r1~C
southern-beechforest
(roble-rauli)

Plantations

Agricultural and
grazing land

Patagoniansteppe,
in the rainshadow "i::-
of the Andes
Deciduoussouthern-beech
(lenga);high-altitude
timberlineforest

Protectedspecies:

Araucaria

Alerce

MontaneValdivianrainforest
(evergreen,coigiie common,
old-growthrelativelyabundant)
CoastalValdivianrainforest
(evergreen,coigiie absent)

TemperateValdivianrainforest
(evergreensecondgrowth)

J
Figure 1. Present dominant forest types (Chile from Constituci6n to the Gulf of Reloncavi).

dent on its traditional commodity exports trates (Cardoso and Faletto 1979). Chile's
of minimally processed copper and ni- failure to capture the forward linkages

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278 EC)N(oMIC GEOGRAPHY
made possible by its mineral wealth is the
recurrent lament of histories of Chile from
1880 to 1930 (Monte6n 1982; O'Brien
1982; Zeitlin 1984). Industrial policy in
forestry since the 1930s has been moti-
vated in part by the desire to avoid the
repetition of such a failure.
The expansion of plantation forestry
beyond a local activity with limited
applications dates to the second stage of
import substitution industrialization (ISI),
promoted by protective tariffs and public
investments in state-owned enterprises
and joint ventures with the private sector.
Those policies emerged in reaction to the
Great Depression as a spontaneous situa-
tional imperative (Kaufman 1990) and
remained in force for more than 40 years.
Chile's small domestic market limited the
potential of import substitution, however,
and ISI stagnated earlier than in Mexico
or Brazil. As Watkins (1991, 89) argues,
tariffs established to promote import
substitution are "probably inappropriate
in the long run and . . . persist once
introduced." That stagnation led to the
bitter redistributive struggles of the 1960s
and 1970s, culminating in the military
coup of 1973 (O'Donnell 1978; Hirschman
1979) and the transition to a third stage, of
export-led industrialization. This period,
from 1973 to the present, has seen the
dismantling of tariff walls and the sudden
emergence of an export-oriented forest
products industry-as surprising as a
butterfly emerging from a chrysalis. The
transformation required both the indus-
trial base built up during ISI and the raw
material base established and expanded
over 60 years.
Plantation Forestry and
State-Led Development to 1973
Native Chilean trees were once thought
to grow so slowly that regeneration of the
native forest was considered impossible
(Elizalde 1970). Experimentation with
exotic trees began in the 1880s, and in the
persistently mild climates of coastal Chile
many species flourished. Arturo Junge, a
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Chilean of German origin and owner of a
plant nursery near Concepcion, first
planted the Monterey pine in Chile in
1890 (Krebs 1973). Junge received a
shipment of conifer seeds from Germany,
including an unidentified pine whose
growth outstripped all others. Trials of the
new species proved successful in the
Concepci6n area, and Matias Cousiino,
owner of the Lota coal mines south of
Concepci6n, established the first planta-
tions. Mine shafts required large volumes
of timber, which originally came from the
native forests on the hills overlooking the
mines. Worried about future timber sup-
plies as the coastal forest neared exhaus-
tion, Cousifio planted pine and eucalyptus
on the company's cleared land. Pine
proved too weak to serve as mine timber;
in contrast, eucalyptus withstood greater
stress, and its audible creaking before
failure warned miners of impending col-
lapse. Although pine failed as mine
timber, its rapid growth and long fiber
suggested other uses in construction and
papermaking, and the pine continued to
spread. When direct state promotion
began in 1931, pine already grew on
25,000 hectares.
The decision to promote exotic planta-
tion forestry came in the aftermath of the
crash of 1929. The Great Depression hit
Chile harder than any other country.
Gross Domestic Product declined 29
percent from the peak in 1928, and the
commodity export sector almost disap-
peared. By 1932, the value of the coun-
try's shipments of copper and nitrate had
fallen by more than 90 percent; imports
fell by more than 75 percent in the same
period (Loveman 1988). With no prospect
for reviving exports and unable to afford
imports, Chile began 40 years of import
substitution.
The timber industry was one of the first
sectors to receive government protection
and promotion. The primary aim of
Chilean policy was the creation of a
processing industry, promoted by statu-
tory monopolies and guaranteed raw
material supplies. In 1938 the state
established the Corporacion de Fomento

(CORFO) under the Ministry of the
Economy, beginning its direct role in the
forest products industry. CORFO's pri-
mary function until the 1960s was as
broker and financier, guaranteeing mar-
kets and providing credits to private
industrialists.
The first large-scale expansion of the
pine plantations dates to the same period
of state activism. The 1931 Ley de
Bosques fostered the exploitation of the
remaining native forest with steep tariffs
and domestic-content requirements,
while landowners who reforested cleared
land received exemptions from property
and inheritance taxes for 30 years. State
and corporate plantations led the way,
however: the Ministry of Agriculture
established many of the plantations di-
rectly, with capital provided by the
state-run pension funds.
The response to these policy changes
was rapid, but short-lived. Growth in
plantation area was evident by 1936, but
peaked in 1945, and then began to drop
off as demand for lumber stagnated in the
domestic market (Fig. 2). Chile looked to
export markets for further expansion, but
this attempt at export-led development
failed for a number of reasons. The quality
of Chile's hardwood lumber had declined
as old-growth forests were depleted, and
pine was not yet available in large
volumes. The Chilean industry also suf-
Iq
uc
CZ 1000
0
500
1930 1940 1950 1960 1970
; exports
domestic consumption
i
Figure 2. Lumberproduction:Exportsand
domesticconsumption,1930-1990.
Source:INFOR(1991).
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FOREST POLICY IN CHILE 279
fered from outdated technology, inade-
quate infrastructure, and a shortage of
capital. Most sawmills produced coarse
lumber of imprecise dimensions; the few
capable of producing boards of high
quality, like the Forestal Colcura sawmill
near Lota, were not competitive due to
high transportation costs in the region
(Krebs 1973). Chile's concentration on
domestic production was due in part to
the limited world market. Transportation
costs were high, and many countries had
not yet exhausted their native forests,
instead relying on lumber available lo-
cally.
Under import substitution, the export
of raw materials was penalized as a matter
of policy. Successive governments taxed
both exports and imports to provide the
investment capital for industrialization
and maintained the Chilean peso at
chronically overvalued levels, to cheapen
imported capital goods. Until 1974 the
nominal rate of protection averaged 116
percent for wood products and 128
percent for paper, but Wisecarver and
Tardones (1989) calculate that the effec-
tive rates of protection were 501 percent
and 1,299 percent, respectively. The high
export taxes, uncompetitive exchange
rates, and monopoly returns in the
domestic market combined to discourage
exports.
State commitment to the expansion of
the forest industry continued despite the
lack of export markets. In a joint venture,
the state and 44,000 private shareholders
founded Industrias Forestales, S. A. (IN-
FORSA) in 1956. CORFO, which pro-
- vided both direct funding and credit
guarantees, retained majority control
(Contreras 1989). An industrial forest
complex emerged along the lower valley
of the Biobio River, drawing its raw
1980
materials from the plantations of Concep-
ci6n province. As the plantations estab-
lished in the 1930s came on stream, pine
lumber soon replaced native timbers in
the lumber markets (Fig. 3). In 1959 the
complex added its first panel operations to
the pulp plants and sawmills, when
private investors opened the Maderas
280
14UU00
1200
iAg~
"'
800
600--
400 -
200--
0
1930 1940 1950 - 1960
E] pine
* other species
Figure 3. Lumber production from pine and
other species, 1930-1977.
Source: INFOR (1991).
Prensadas Cholguan fiberboard factory.
In 1960 a tsunami flooded much of the
southern coast, and a particle board
factory, Maderas y Sinteticos, S. A.
(MASISA), opened in Valdivia to supply
the increased demand for building mate-
rials.
In 1964, a Christian Democratic gov-
ernment augmented CORFO's allocation
of credit to the sector, in subsequent
years resorting to direct intervention and
nationalization. In 1968 CORFO took
over Forestal Colcura's large stationary
sawmill to keep it from bankruptcy.
CORFO also converted its stake in
INFORSA to direct ownership and began
construction of two long-fiber cellulose
plants. Celulosa Arauco began construc-
tion in 1967, with CORFO maintaining 60
percent ownership of the plant. Celulosa
Constitucion (CELCO) in Region VII
followed in 1969.
Both factories required reliable sup-
plies of pulp logs. A decline in plantation
rates during the 1960s led to predictions
of a shortfall in raw materials in the 1980s.
To restrict the export of unprocessed logs,
the Chilean Central Bank required a
certificate of quality for export approval,
effectively granting monopsony powers to
the large state enterprises as the main
domestic market for pine logs. To com-
pensate for the reduced incentives to
plant trees, the state increased state
promotion of plantations. The Corpora-
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ECONOMICGEOGRAPHY
cidn Nacional Forestal (CONAF) entered
A reforestation agreements with private
landowners. The landowners contributed
the land, and CONAF assumed responsi-
bility for the planting, care, and eventual
harvest. In addition, the Servicio Agricola
y Ganadero (SAG) began a program of
direct plantations that grew to exceed
1970 30,000 hectares annually during the early
1970s.
Under the Unidad Popular, Salvador
Allende's leftist coalition, state invest-
ment, intervention, and expropriation
made the forest industry the most social-
ized sector of the economy. Many small
sawmills failed for lack of working capital
(Mamalakis 1982), and plantation rates
declined as private landowners withdrew
capital from the sector. In part this
reflected a fear of expropriation: the
government nationalized 3 million hect-
ares of land covered with native forest/or
classified as suited for reforestation (Cruz
and Rivera 1983). No forest plantations
were expropriated during the Allende
years, however, because peasant demands
concentrated on agricultural land, and the
government's land reform actions came in
response to peasant demands.
The crisis and downfall of the Unidad
Popular have been analyzed at length
elsewhere; in the forestry sector it left an
industry almost entirely in state hands,
with responsibility for forest policy and
infrastructure divided among many state
agencies, each with a different mandate.
The Forest Department of the Ministry of
Agriculture, the Forest Division of SAG,
CONAF, and CORFO maintained sepa-
rate programs of forest management,
reforestation, and industrial processing, as
did the Ministry of Lands and Coloniza-
tion, the Institute of Agro-Pastoral Devel-
opment, and the Reforestation Corpora-
tion. The combination of programs raised
the annual average from 11,373 hectares
from 1940 through 1974 (Wisecarver and
Tardones 1989) to more than 45,000
hectares from 1965 to 1973 (Gomez and
Echefi/que 1988). Under military rule the
state eventually withdrew from direct
reforestation (Fig. 4), but the overall rate

100000
80000
t 60000
40000-
20000
1974 1976 1978 1980 1982
[E StatePlantation
* Private Plantation
Figure 4. Reforestation: Private and state
plantation rates, 1974-1990.
Source: INFOR (1991).
of reforestation between 1974 and 1990
rose to an average of almost 80,000
hectares annually.
Authoritarian Buccaneer
Capitalism 1973-1981
I believe that Adam Smith lives, Keynes is
dead and Marx was a nightmare.
-Pablo Huneeus (Loveman1988,329)
Under military rule economic policy
initially was secondary. The first priorities
of the junta were to eliminate individuals
considered dangerous and to outlaw
Marxist ideas. Unions and political parties
were prohibited, their leaders killed or
imprisoned, and political activities were
forbidden. Economic policy was orthodox,
concentrating on the reduction of infla-
tion, which reached 606 percent annually
in 1973. Orthodoxy did not preclude
industrial policy, however: in 1974 the
regime was under the influence of a group
of entrepreneurs accustomed to state
intervention, and the theory that Chile
held a natural advantage in forestry had
many adherents. Like previous govern-
ments, the military regime chose the
forestry sector to receive concentrated
national investment through direct pro-
duction subsidies.
The subsidies were among a bundle of
measures enacted as Decreto Ley 701 (DL
701), the forestry law of 1974. The
primary intent of DL 701 was to persuade
the private sector to assume the task of
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FORESTPOLICYIN CHILE 281
reforestation. The decree maintained
some of the tax exemptions established in
1931 and added direct payments to the tax
incentives. The key provision reimbursed
75 percent of the costs of reforestation.
Any land designated by CONAF as
suitable for reforestation was eligible for
1984 1986 1988 1990 the subsidy if the owner presented a
management plan and 75 percent of the
seedlings survived for one year. Refor-
ested lands were declared exempt from
expropriation forever. Additional pay-
ments subsidized other forestry tasks,
including thinning, pruning, and the
annual costs of administration.2The subsi-
dies were guaranteed until 1994, when
forestry policy was to be revised, but the
tax exemptions were declared permanent.
State participation in plantations in-
creased with the subsidy program,3but its
participation in the processing industries
disappeared in a whirlwind campaign of
2
The CentralBankalsoestablisheda special
line of creditfor reforestation.The loanswere
offered to individuals,with three years for
repayment and a one-year grace period, at
favorable rates during a period of high
inflation.The total borrowedexceeded U. S.
$12 million by 1979, when the credits were
withdrawn,the governmentdeclaringthat the
policyhad servedits purposein demonstrating
that afforestationwas good business.
3
DL 701 also increasedstate control over
the type of exploitationto which forestscould
be submitted.The 75% reimbursementobli-
gated the landownerto reforestthe areaafter
harvest, or to reforest another plot of equal
size. A managementplan was required to
ensure the conservation of the resource,
providingfor regenerationas well as harvest.
Similarplans were requiredfor the exploita-
tion of native forests, although ecologically
informedmodels for the managementof the
Valdivianforestswere still in the early stages
of developmentat the time. The dynamicsof
Montereypine plantationswere alreadywell
understoodand large landownersopted for
pine as the surestbet. AlthoughDL 701 made
no mentionof the species to be employedin
reforestation,the decree effectivelypromoted
the use of species already widely used in
plantations.
282 ECONOMICGEOGRAPHY
privatization. The generals had not at first
contemplated large-scale privatizations on
concessionary terms, but continued high
inflation in spite of the orthodox economic
strategy led to a dramatic shift in govern-
ment philosophy. General Augusto Pi-
nochet, emerging as the leader of the
military junta, appointed to key economic
posts a team of young Chilean economists,
students of Friedrich Hayek and Milton
Friedman at the University of Chicago,
known by supporters and opponents alike
as the "Chicago Boys." They proposed
monetarist measures in finance and a
strict adherence to state subsidiarity. The
state was to engage in finance, research,
training, extension, and export promotion,
but not direct production. Return on
capital, not industrial growth, was to
determine which industry thrived. Com-
modity exports, both traditional (e.g.,
mining) and nontraditional (e.g., fruit,
forestry, and fishing), were expected to
replace manufacturing for the domestic
market as the engine of growth, but the
market, not the state, was to make the
judgment.
The first step in establishing market
rule was to eliminate the accretion of
barriers to trade established during the
previous 40 years, and the new team
opted for shock measures rather than
gradualism. The government abolished
protective tariffs outright, replacing them
with a uniform import tax of 10 percent.
Unable to afford the cost of capital, or
undercut by cheap imports, manufactur-
ing firms collapsed right and left, and in a
few months the unemployment rate rose
from 9.2 to 16.4 percent (Foxley 1986).
The critical element of the new economic
policy, however, was the privatization of
437 of 507 state enterprises, intended to
generate an irreversible structural change
in the Chilean economy. Beginning in
1975, the sales took place rapidly, during
economic crisis and on concessionary
terms. In the forest sector, CONAF sold
nurseries, equipment, land, and planta-
tions at public auctions which continued
until 1979 (Mamalakis 1982).
The result was a concentration of
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property in the hands of the grupos-four
conglomerates that parlayed their access
to foreign credit into control of much of
the Chilean economy. The grupos were
diversified, with representation in all of
Chile's growth sectors, from fruit, for-
estry, and fishing to finance and real
estate. Banks supported a structure of
interlocking share holdings; they also
provided credit and working capital for
most of a group's firms. Indeed, finance
was the true boom industry during this
period, supported by an influx of foreign
capital.
The Cruzat-Larraingroup4 took control
of the Compaiifa de Petroleos de Chile
(COPEC), created by the state in 1934 as
Chile's primary oil company. COPEC
became the centerpiece of Chile's largest
group, serving as a holding company for
other former state properties in fishing,
mining, export, and finance, including 50
percent of the Bank of Santiago (Contreras
1989). The group bought CORFO's two
pulp mills at auction, together with their
affiliated plantations. The Vial group,
Chile's second largest, bought CORFO's
stake in INFORSA. The two conglomer-
ates earned the title of "the piranhas" for
their success in building up immense
holdings with little capital: Javier Vial
Castillo, chair of the Vial group, claimed
in a 1981 interview that the assets he had
acquired from the state six years before
had grown to eight times what he had
paid for them (Garcia and Wells 1983).
Two other groups eschewed financial
leverage, specializing in manufacturing in
the forestry sector. The Angelini group
4As institutions,the groups were new to
Chileancapitalism;as individuals,the names
of the elite were the same as in past decades.
As Zeitlin (1984) observes, Chile's capitalist
classhas alwaysbeen a small,tight-knitgroup
with interlockinginterests and holdings,with
alliancescementedby marriages.The namesof
the Matte and Larrainclans run throughout
Chileanbusinessandpolitics,oftenin tandem:
the founderof CMPCwas Luis MatteLarrain;
the vice-presidentin 1992was EliodoroMatte
Larrain.
 FORESTPOLICYIN CHILE
grew from a tight-knit Italian clan that
began its operations in Chile in 1954. The
group acquired a minority interest in the
Cholguan forestry complex in the 1950s;
during the privatization auctions it raised
its stake from 19.2 percent of outstanding
shares in 1970 to 65 percent in 1978. The
fourth conglomerate was the Compania
Manufacturera de Papeles y Cartones
(CMPC), which neither participated ex-
tensively in the auctions nor expanded its
operations beyond forestry. Instead it
consolidated its existing operations to
adapt to international competition after
losing its protected markets to the new
reforms.
When the privatization campaign be-
gan, reforestation was one of the first state
activities to cease. The proportion of
reforestation performed by the state fell
from a high of 91 percent in 1973
(Wisecarver and Tardones 1989) to almost
zero in 1979, while the rate of plantings
soared (Fig. 4). In 1977, CONAF ended
the reforestation agreements with land-
owners after 60,000 hectares of land had
been planted. The trees were first offered
for sale to the landowners, but many
could not buy, lacking the capital to
purchase CONAF's 75 percent stake. In
some cases the trees alone were sold to
third parties; in others the land was
confiscated and trees and land were sold
together at auction (Cruz and Rivera
1983).
The most striking transformationin the
sector has been the expansion of private
plantations, almost all of them on the
industrial plantation model. New planta-
tion areas averaged almost 80,000 hect-
ares annually from 1974 to 1990, more
than three times the rate from 1960 to
1973. By 1986 Chilean plantations cov-
ered more than one million hectares,
exceeding the goal that CORFO estab-
lished for public plantations in 1970.
Some 70 percent of that area had been
planted within the previous ten years
under DL 701 subsidies.
When the government adopted its new
economic policy, the reforestation subsi-
dies were already in place, with a 20-year
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283
guarantee. The new advisors soon
stripped away regulatory protection for
the domestic forest industry, however. In
July of 1975 all restrictions on forestry
exports were lifted, permitting the export
of all classes of wood, including in the
form of unprocessed logs. In 1978 the
Central Bank dropped the requirement
for certificates of origin and quality for log
exports (Mamalakis 1982), removing
CONAF from the business of inspecting
export shipments.
In keeping with the military's desire to
remake the government, the advisors
severely rationalized the institutional
framework of forestry regulation. CONAF
assumed control of all state forestry
activities, from subsidies and enforcement
to the administration of national parks and
protected areas. The state reduced COR-
FO's role as a holding company by selling
most of its assets. INFOR's new role as an
independent research institution included
the development of standards for sam-
pling, quality control, and grading, as well
as inspection and consulting under con-
tract to private corporations. In addition,
private organizations now inspect and
certify the dimensions and moisture con-
tent of Chilean logs and lumber, as well as
their freedom from rot and stains. With
the blessing of the government, the
largest forestry firms established CORMA
(Corporacion de Madera) as a trade
organization. In 1977 CORMA established
a team of roving inspectors in its Depart-
ment of Quality Control and Certification.
In 1979 it contracted with Alfred Knight,
Ltd., an English firm specializing in
quality control, to gain international ac-
ceptance for its seal of approval.
The campaign for privatization ex-
tended to the ports. In 1979 the loading
and unloading operations were opened to
the private sector to allow companies to
invest in expanding operations. In 1980
the share of cargo reserved for the
Chilean merchant marine-in effect a
monopoly rent-was eliminated, substan-
tially reducing shipping prices. And in
1981 the government eliminated the
requirement that port workers carry
284 ECONOMICGEOGRAPHY
stevedore identification cards, opening
port jobs to all comers at substantially
lower wages.
The elimination of protections for port
workers was only one element of the
junta's labor policy; other measures soon
appeared in the forestry sector. The
division of tasks in Monterey pine forestry
lends itself to temporary labor, but the
seasonal rhythm of plantation forestry5did
not itself create the pattern of irregular
and insecure employment that developed
in the 1970s and still prevails today.
Before 1979 no formal labor policy ex-
isted. The informal policy toward unions
was one of elimination. The Chicago
model assumed efficient markets, and the
economic team saw their mission as the
elimination of obstacles to the free opera-
tion of markets, including the labor
market, where wages were to find their
market level.
Unions were one such obstacle, and
from 1973 to 1979 they were suppressed,
often brutally. In 1979 economic times
were good, however, and pressure for a
return to democracy was building at home
and abroad. To defuse worker opposition
to proposed constitutional changes, the
junta issued its Plan Laboral, a framework
for the legalization of unions under
conditions that ensured the dominance of
the employer. The plan permitted unions
in workplaces, but outlawed industry-
wide unions. Strikes were authorized after
a supervised vote, but limited to a month;
after that period all strikers were sum-
marily fired. In a provision that effectively
prohibited organization in the forest sec-
tor, the plan excluded seasonal and
temporary workers from its protections.
Only permanent workers could unionize,
5 From
June to August seedlings are
planted, to promote root growth during the
wet Southern Hemisphere winter. The harvest
of mature trees takes place during the dry
season, from January to April. As a result
seasonal unemploymentis high during the
spring and autumn, and few workers have jobs
throughout the year.
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only permanent workers could strike, and
only permanent workers were entitled to
employer pension contributions.
The plan effectively promoted tempo-
rary labor contracts in agriculture and
forestry. Before 1979, permanent workers
carried out most tasks for forestry compa-
nies (Morales 1989). After 1979, workers
were hired on contract; most worked for
less than four months at a time, often for
less than two. Under the twin pressures of
political repression and economic shock,
the labor contracting system emerged as a
repellent form of exploitation. The con-
tractors were exclusively responsible for
hiring and disciplining their workers, who
could not form unions. Few workers
needed union protection as much as
forestry workers, isolated in labor camps
amid the plantations and dependent on
their employers for food and shelter. In
the early 1980s most worked more than 48
hours in a week, and 41 percent earned
less than the (already low) legal minimum
(Lara 1985). The proliferation of indepen-
dent contractors made enforcement of the
remaining labor laws almost impossible,
and the large companies disclaimed re-
sponsibility for the practices of their
contractors.
The Fall of the Chicago Boys
1981-1985
The Chilean economy as a whole-if
not all Chileans-enjoyed a period of
heady growth during the late 1970s. Gross
Domestic Product from 1975 to 1981 grew
by more than 50 percent; inflation de-
clined to an annual rate of 30 percent; and
copper, fruit, fishing, and forestry, the
country's resource industries, flourished.
Unemployment lingered at 17 percent
and wages remained low, as manufactur-
ing industries failed and Chile lost its
highest-paying factory jobs. Finance and
real estate also thrived on swelling flows
of foreign capital, deposited in Chilean
banks to take advantage of its high real
interest rates. For a time the capital influx
gave Chile a positive balance of payments,
 IN CHILE
FORESTPOLICY
but it found insufficient outlet in produc-
tive investment. Instead, excess liquidity
fueled a speculative bubble in real estate
and financial assets. When the bubble
burst under the pressure of the Latin
American debt crisis, the shock waves
brought down the country's financial
system in a widening circle of ruin.
Several Chilean writers (Paeile 1986;
Contreras 1989) trace the severity of the
collapse to the structure of the conglom-
erates. The Vial and Cruzat-Larrain
groups consisted largely of firms bought
from the state, and the rapid inflation in
asset prices gave both great net worth on
paper. Their very size increased the
deposits, both foreign and Chilean, that
the banks in the groups could attract. The
banks in turn concentrated their loans
within the group's affiliated companies;
lenders allotted capital not according to
principles of creditworthiness or diversifi-
cation, but by group membership. The
government was reluctant to interfere
with what appeared to be market forces
by enforcing credit regulations (Gallagher
1992). At the height of the boom inter-
locking holdings of debt and equity bound
the groups together. With the financial
system so precariously balanced, the
Chilean economy was vulnerable to any
slackening of economic growth.
Doctrinaire monetary policies appear to
have made matters worse (Blackburn
1986). Inflation had declined, but in the
government's view, not fast enough. The
economic team blamed inflationary psy-
chology and put Chile on the dollar
standard. The peso was pegged at 39 to
the dollar, and the government declared a
public commitment to maintaining the
rate "in perpetuity." Inflation did decline,
but not enough to match the inflation of
the dollar, and the strong peso gradually
undermined the country's producers. As
the purchasing power of the peso appreci-
ated, the terms of trade for Chilean
products worsened. Imports became
cheaper than Chileans had ever seen, and
domestic manufacturers could not com-
pete.
Nor could Chile's exporters. As their
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285
prices in foreign currency rose, their
markets disappeared and investment in
the production of goods ceased. Foreign
debt continued to increase, as capital
gravitated toward an appreciating cur-
rency, backed by the prestige of the
military government. The debt was de-
nominated mainly in dollars, with a
floating interest rate pegged to the
London Inter-Bank Offered Rate (LI-
BOR). When dollar interest rates rose
after the 1979 oil price rise, LIBOR
followed, increasing the real interest rates
on Latin American debt to unbearable
levels (Branford and Kucinski 1988).
While the debt grew, the country's export
capacity-its capacity to repay that debt-
did not.
The international recession of 1981-82
precipitated a financial implosion. The
world price of copper, the source of most
of Chile's export earnings, fell by 25
percent in 1981. The domestic sugar
monopoly went bankrupt, and other busi-
nesses followed. A liquidity crisis ensued
among the banks as their assets lost value.
In November of 1981, government regu-
lators took over four banks (Blackburn
1986), stemming the tide for several
months. In mid-1982 Mexico defaulted on
its debt payments, inaugurating the most
recent Latin American debt crisis and
increasing stress on the Chilean financial
system. The regulators were obliged to
intervene again in some of the country's
largest banks, including the Bank of
Santiago. Other companies of the Cruzat-
Larrain group depended on the bank for
daily working capital; when the bank cut
off credit, the assets of the group's
shareholders disappeared along with the
liquidity of its borrowers. The entire
Cruzat-Larraingroup toppled together.
The Vial group also collapsed in the
crash. INFORSA, Vial's forestry branch,
had expanded adventurously during the
previous three years, spinning off filial
companies to operate its sawmills and
manage its plantations. In 1981 INFORSA
began a spectacularly ill-timed expansion
of its paper and particle board plants,
borrowing heavily in the process; its total
286 ECONOMICGEOGRAPHY
debt in 1982 came to more than ten times
its assets (Paeile 1986). During 1982 the
corporation was unable to meet its debt
payments and was forced into bankruptcy.
The Bank of Chile finally intervened,
assuming INFORSA's debts and taking
possession of Vial's shares in the company.
The Vial group disappeared, and several
of its directors, including Javier Vial, were
convicted of violations of the banking laws
(Contreras 1989).
The collapse of the two groups exacer-
bated the deteriorating economic situa-
tion. In 1982 GDP fell more than 14
percent, bringing it down to levels not
seen since 1978. At the same time a power
struggle was under way within the cabi-
net. From 1981 to 1983 a blando (soft)
faction within the cabinet contested the
duro (hard) economic policy associated
with the Chicago team, advocating deval-
uation of the peso and protection for
domestic producers. In 1983 Pinochet
transferred his support to the blandos.
After a series of major cabinet reshuffles,
the military began to undo the more
extreme measures of the economic model.
Monetary policy led the way. In June of
1982 the currency was devalued to 47
pesos to the dollar, and in September a
crawling-peg policy was introduced, ad-
justed by the Chilean rate of inflation.
The peso lost half its value by July of
1983, causing the value of Chilean debts
to skyrocket. Western banks, newly aware
of their immense exposure to Latin
American debt, refused to extend further
loans, and the pace of bankruptcies
increased, particularly in the agricultural
sector, where beneficiaries of the regime's
counterreforms had taken out hard cur-
rency loans to modernize their operations.
The state intervened again, taking over
the Bank of Chile and four more banks in
Januaryof 1983. In the process, more than
60 percent of INFORSA's shares reverted
to a state that had gone to great lengths to
rid itself of direct ownership. In effect, the
state declared the major companies in the
chosen sector of forestry too big to fail.
Protection for domestic producers was
reinstituted in 1983, but on a much
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smaller scale than existed before 1973.
The uniform tariff on all imports was
doubled to 20 percent, and a government
jobs program was established to alleviate
unemployment. The new advisors ad-
vanced a debt refinancing scheme, allow-
ing "viable" Chilean businesses to re-
schedule 30 percent of their debts. In a
temporary measure, the state raised the
DL 701 plantation subsidy from 75 to 90
percent and established more than 40
percent of the plantations added in 1984
(Fig. 4).
The Chilean forest industry underwent
immense changes under the neoliberal
program, but the benefits of those
changes were not necessarily positive.
Ownership of the industrial plant was
transferred from the state to concentrated
private ownership and back again, but
despite the spree of mergers and acquisi-
tions little productive capacity was added,
while the largest volume of forestry
exports continued to be in the form of
unprocessed logs (INFOR 1990). Interna-
tional finance was widely available before
1982, but INFORSA's paper plant was the
only major new investment in industrial
capacity during the period (Paeile 1986),
an exception timed so poorly and financed
so speculatively that only determined
government intervention rescued the
plant, at considerable cost to the Chilean
population as a whole. The high debt
levels of the grupos limited their capacity
for productive investment, and the con-
glomerates proved incapable of generat-
ing forward linkages beyond those already
existing before the coup. Three of the four
pulp plants operating in 1987 owed their
existence to CORFO and state-led devel-
opment, not to the previous 14 years of
free-market capitalism.
Although exports increased rapidly,
overall production under the military was
comparable to the previous decade under
the interventionist governments of Frei
and Allende (Cavieres et al. 1986, 39). In
Chilean plantation forestry, however, the
time lag between policy initiatives and
measurable results is roughly 20 years.
The economic fortunes of the forest
 FOREST POLICY IN CHILE
industry from 1994 to 2010 will pass
judgment on the measures taken by the
military.
Part of the judgment need not wait.
The Vial and Cruzat-Larraingroups were
among the first corporate raiders, and
their dominance marked a period of
authoritarian buccaneer capitalism in
which the raiders amassed private profits
at public expense, without adding to the
country's productive capacity. That it was
authoritarian and capitalist is undeniable:
Chile remains the prime exemplar of the
Southern Cone model, the nation that
carried the logic of bureaucratic authori-
tarianism to its extreme (O'Donnell 1978;
Collier 1979; Whitehead 1986). To Chile's
misfortune, it was also a buccaneer
capitalism in its dependence on leveraged
buyouts, a pattern that presaged the
global trends of the 1980s. The Chilean
groups were among the first corporate
raiders, and nearly proved to be the
undoing of the neoliberal model.
The Internationalization of
Chilean Forestry Since 1985
In 1986 the outlook for the forest
industry was bleak, with far more raw
material in the pipeline than industrial
capacity available to process it. Chile's
inability to generate its own processing
facilities seemed to doom the country to
repeat its experience with nitrates, in
which the nation became dependent on
the production of primary commodities
for manufacturing industries and con-
sumption in core areas. A World Bank
(1986) report on the Chilean industry
predicted a shortfall of 12 large sawmills,
four board factories, and four new pulp
mills. The pulp mills alone were to need
more than half of the total required
investment of U.S. $2.5 billion by 2000.
The bottleneck was predicted to worsen
in 1994, when the trees planted under the
DL 701 subsidies came on stream.
Chile's heavy debt load and Latin
America's continuing inability to attract
foreign capital aggravated the capital
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287
shortage of the mid-1980s. The World
Bank saw obstacles for foreign investors in
the concentration of the sector, which
allowed a small number of firms to control
much of the raw material supply. Pulp
production requires the largest scale for
efficient operation, and the existent pulp
companies owned large sectors of the
plantation resource. In the view of the
World Bank study, the organization of the
Chilean forest industry left no room for
foreign capital and was doomed to stagna-
tion.
The study's prediction has turned out to
be spectacularly wrong. The volume of
foreign investment in the forest industry
is growing ahead of schedule and will
probably surpass the World Bank's pro-
jected requirement of U.S. $2.5 billion.6
Chile is now awash in foreign capital, and
multinational firms announce new invest-
ment projects almost on a monthly basis.
Three new cellulose plants began opera-
tion during 1992 alone, and more will
follow. The furniture subsector has shown
the most rapid growth of all the forest
products industries and is the more
remarkable for being a labor-intensive
tertiary manufacturingindustry producing
primarily for the domestic market. In
short, the forestry industry has expanded
as its early Chilean proponents expected
and is poised to avoid the staples trap,
despite its dependence on foreign capital
(in contrast to the Canadian case de-
scribed by Hayter and Barnes (1990)).
The internationalization of Chilean for-
estry began with the second round of
privatization auctions. Despite the dis-
missal, of their economic advisors, the
military government remained deter-
mined to limit direct state participation in
industry. The industries seized in the
bankruptcy of the private sector were
6
Giiell (1990)estimatesforestryinvestment
from 1987 through 1989 at U.S. $1.7 billion;
FAO (1991) estimates investment from 1987
through 1993 at $3 billion; Susaeta and
Benedetti(1990)estimateinvestmentbetween
1989and 1996 at $2.5 billion.
288 ECONOMICGEOGRAPHY
auctioned again, with most of the proper-
ties going to the forest sector specialists
CMPC and Angelini. Like Cruzat-Larrain
and Vial in the first round of auctions,
CMPC and Angelini employed foreign
capital to acquire the state's assets. Unlike
the first round, however, this round of
auctions took place at a time when no
commercial bank would lend such
amounts in Latin America. Instead, each
group leveraged its initial financing
through joint ventures with New Zealand
firms Fletcher Challenge and Carter Holt
Harvey.
The investments by New Zealand's two
largest forestry companies in Chile link
the two countries with the greatest areas
of pine plantation and experience in their
processing and marketing. But New
Zealand is only one of many foreign
countries with growing interests in the
Chilean resource. Foreign direct investors
include corporations from the Middle
East and Japan, as well as Europe and
Scandinavia (Clapp 1993, 146). Perhaps
the most important development in bring-
ing foreign capital into Chile has been the
growth of indirect foreign investment
through the Chilean stock market,
spurred by the debt-for-equity swaps
promoted by the military government in
the mid-1980s. The swaps reached U.S.
$1.96 billion from 1985 to 1987 (Loveman
1988), and deals came in rapid succession
during 1987, with 38 percent of the new
shares in the forestry sector (Martner
1988).
In short, since 1986 the number of
forestry companies has proliferated. Own-
ership has become more widespread,
because of Chile's continuing search for
new capital and because foreign corpora-
tions are now vying for access to Chile's
rapidly maturing timber supply. Many
multinational forestry companies expect a
worldwide timber scarcity and have en-
tered the sector, without displacing Chil-
ean ownership. Since the 1982 recession,
plantation ownership has become more
widespread, among individuals as well as
companies. During the 1970s the forestry
affiliates of CMPC and COPEC's two pulp
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companies established or controlled most
of the plantations. By 1986, COPEC's
plantation holdings had grown to 215,000
hectares and CMPC's to 160,000 hectares,
but their combined share of total planta-
tion land had shrunk to less than 40
percent (Paeile 1986). Almost 50 percent
of the total, 504,000 hectares, belonged to
5,000 individual landowners with an aver-
age of 100 hectares under plantation. The
share of plantation land under the control
of individuals continues to rise (Wise-
carver and Tardones 1989).
As plantations on private land have
expanded, an increasingly liquid market
in raw pine and eucalyptus logs has
developed. A network of canchas (log
depositories) links buyers and sellers, and
a host of independent loggers and truck-
ers fell the trees and transport them to the
canchas (Clapp 1993). With the growth of
the network, corporate owners of large
blocks of plantation are no longer able to
demand monopoly prices for their timber.
As a result, foreign corporations are
increasingly willing to risk establishing
forest industries in Chile without guaran-
teeing their entire timber supply in
advance.
With the tonic of more sustainable
exchange rates and increased foreign
capital, decades of investment have begun
to pay off in increased production and
exports. Figure 5 traces the rise in the
forestry sector through 1989, dividing the
industry into four subsectors: lumber,
paper and pulp, furniture, and silviculture
and extraction. Each market has charac-
teristics that should allow Chile to main-
tain or increase its international market
share.
In lumber, Chile's main product is
low-grade pine boards and beams, pro-
duced in great quantity. Chilean sawmills
consume almost half of the country's raw
timber-87 percent of it pine-and export
55 percent of the sawn lumber, in various
stages of elaboration. Almost half goes to
Japan and the Middle East, but Chile
exports to at least 38 countries (INFOR
1991; Abalos 1991). Analysts disagree on
the quality of Pinus radiata, some calling

[B Paper [] Lumber [
[3 Furnittre
Figure 5.Valueof goodsproducedin the for-
estry sector, 1975-1989.
Source:INFOR(1991).
it strong and others weak; for most
purposes it is strong enough. It serves as a
basic structural material for undemanding
materials, such as pallets or boxes, and
provides competent framing lumber. On
world markets it attracts a lower price
than equivalent boards of Douglas-fir or
spruce, and compared to well-sawn tim-
ber from old-growth forests, Chilean pine
is light, soft, and splintery. That has not
prevented it from competing in markets
throughout the world, including the
United States, where stumpage prices
may rise so steeply in the next 30 years
(Haynes and Adams 1992) that cheap
imported softwoods may become wide-
spread.
There are quality gradations in the bulk
market for softwood lumber that depend
largely on human management. Beams
and structural wood obtain a slight pre-
mium over the wood used for boxes;
together they make up 90 percent of the
market. New technologies for laminating
veneers into structural beams have cre-
ated structural timber much stronger than
pine in its natural state; Chilean firms
now produce laminated beams for export.
The remaining 10 percent of the market is
for knot-free lumber. The real price of
"clears"continues to rise, while the price
of other wood lags behind the rate of
inflation. Clear wood formerly came only
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FOREST POLICY IN CHILE 289
from high-quality logs from ancient for-
ests; it now comes predominantly from
plantations, where careful pruning elimi-
nates the tree's knot-forming reaction to a
dying branch. If a predicted shortage of
knot-free wood materializes (Sutton 1985),
then intensively managed plantations will
earn a premium, and plantation employ-
ment could increase.
The products of unpruned plantations
could be relegated to the pulp market,
where prices have trailed Chilean infla-
Silviculttre tion. Wood pulp is a classically cyclical
industry, moving in tandem with eco-
nomic cycles and alternating between
periods of overcapacity and tight supply.
It produces a uniform commodity, and as
with so many commodities, the price of
pulp is flat over the long run (Manthy
1978; Sedjo and Lyon 1990). The risks of
revolutionary technological change are too
high to contemplate in an industry with-
out significant growth prospects, and
improvements are made at the margins:
efficiency and profit depend on increasing
economies of scale and reducing factor
costs. New pulp mills are vast integrated
operations functioning continuously at
high volumes (Kauman 1987). Such oper-
ations require cheap raw materials, which
Chile offers in abundance. The country's
pulp capacity has grown with extraordi-
nary rapidity since 1985 (Fig. 6), and
three mills began operations in 1992
alone. With those plants coming on
stream, Chilean pulp exports should rise
substantially, even as the global pulp
industry enters a period of retrenchment.
Furniture offers the most hopeful pros-
pect, because it depends on adding value
to raw lumber, and because that value is
limited only by the imagination of design-
ers and the skill of woodwrights. From
1985 to 1990 returns from the furniture
subsector quadrupled in real terms, and
furniture now contributes more than 40
percent of the total value produced by the
forest sector. One item that has proven
especially successful is the export of
furniture ready for assembly. Knock-down
kits of bookcases and cabinets, shipped in
small cartons and erected by the buyer,
290 ECONOMICGEOGRAPHY

0 50 100 km
I . -. I l i - I i i -.I t't

Longitudinal
Highway
..dw Pulp Mill

t ( = 10,000hectares,or 100km2)
PinePlantation
Landover 1000meters

Figure 6. The plantation forestry complex of the lower Bioblo.

have provided a profitable use for the ment, the Chilean Industrial Promotion
uncherished wood of the Monterey pine. Society (SOFOFA) awarded a prize to
In recognition of this unlikely achieve- Industrias Fourcade of Loncoche, specifi-

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All use subject to JSTOR Terms and Conditions
 FOREST POLICY IN CHILE
cally for demonstrating that pine wood
could be used successfully to produce
cabinets of high quality (Diario Austral,
25 November 1990).
The most startling growth continues to
be in the export of raw logs and wood
chips. The forest industries of several
Asian countries, notably Japan and South
Korea, have long outstripped their own
supply. For many years their mills have
imported logs from the Pacific coast of
North America, but those supplies have
diminished in the past decade as old-
growth forests become scarce and British
Columbia and the United States National
Forests place restrictions on log exports.
Russia has not yet organized the exploita-
tion of its abundant Siberian forests,
leaving Chile and New Zealand an open-
ing in the Pacific Rim market.
Faced with a shortage of domestic
processing capacity during the 1975-81
boom, Chilean plantation owners re-
sponded to the new market with alacrity.
Chile first exported raw logs in 1975 after
the lifting of restrictions on wood exports.
In 1980 the volume of exports exceeded
one million cubic meters, almost equal to
the volume of lumber exports. The
proportion of raw logs and wood chips in
the country's exports rose to more than 20
percent by value. Many Chileans de-
plored the export of potential jobs, but
industry spokespersons defended the ex-
port of minimally processed wood, argu-
ing that in the absence of international
markets the price of logs would be
artificially low, constituting a subsidy to (a
few large) industrial establishments, at the
expense of (many small) plantation own-
ers. Indeed, the neoliberal model consid-
ered exports of any kind better than
production for the domestic market, and
expected improved job creation to be an
inevitable effect of export-driven growth.
On balance, the exporters have won the
argument. The share of exports in total
forest production increased rapidly, but
domestic consumption did not fall, and
the development of value-added manufac-
turing in furniture has been furthered, not
hindered. Additional markets for wood
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291
also led to increased efficiency in the use
of raw materials: Wisecarver and Tar-
dones (1989) calculate the production
during 1985-86 at 4.47 times the annual
production from 1965 to 1969, on an area
only 2.19 times greater, suggesting that
both plantation management and indus-
trial processing have improved. The most
rapidly growing export category, however,
is wood chips, more than half of which
come from the native forest and not from
Chile's vaunted plantations. This special
case is discussed at length in Clapp (n.d.).
Conclusion: Industrial
Policy Revisited
Chile's persistent attempts at industrial
policy have coincided with the creation of
an estate of exotic plantations. Since 1931
those policies have ranged from tax
incentives to state micro-management to
the combination of afforestation subsidies
and repeated campaigns of privatization
that characterized the military govern-
ment's forest policy. In effect, the Chilean
government studied, established, man-
aged, and subsidized plantations; it
bribed, cajoled, and threatened landown-
ers to plant trees; it funded, nationalized,
and privatized the industries to process
those trees, and then nationalized and
privatized them again. Chile has tripled
the volume of its forest resources in one
generation, while concentrating its indus-
trial impact on a smaller area of land and
increasing its area of forest preserve
(Clapp n.d.). Current production does not
yet reflect the great increase in plantation
rates since 1974; the most important
economic returns are only now being felt.
The future returns will exceed the bene-
fits measured to date.
Were these policies necessary, or
would the free market have generated
reforestation without state promotion?
Much of the Chilean debate over the
plantations concerns the hypothetical
costs and benefits of plantations without
governmental subsidy and the justice of
devoting public funds to the development
292 ECONOMICGEOGRAPHY
of a privately owned resource. Advocates
of the governmental subsidy, like Emilio
Guerra (November 1990 interview,
Temuco) of CORMA, argue that the "high
social return, but insufficient private
return" of reforestation justified the pub-
lic expenditure. In addition, the subsidy is
held to promote an ecologically appropri-
ate use of deforested land, benefiting the
environment as well. For these reasons,
advocates argue that capital requires
additional incentive. I argue that the
environmental balance is positive, but not
uniformly so, and that the plantation
model of forestry minimizes those bene-
fits (Clapp 1995).
It is difficult to evaluate whether state
policy led or followed the market,7 be-
cause leadership in forestry has alternated
between the government and the private
sector. In each stage leadership consisted
of enlarging the scale of the sector and
providing a broader base for subsequent
actions by the other. A few visionary
individuals established the initial planta-
tions with private funds. The state pro-
moted the first major increase in scale
through tax incentives and in some cases
funded it directly through the govern-
ment-run pension funds. On balance, the
state led the market in establishing pulp
mills, in part because the state activism of
the 1960s discouraged the large private
investments that would have been neces-
sary to construct the mills; the state has
since withdrawn from the pulp subsector.
That rapid increase in scale is critical in
7 Robert Wade's (1990, 234) definition of
leadership is the most useful: "a selective
industrialpolicythatfollowsthe marketsimply
assistsprivatefirmsin a given industryto do
whatthey wouldin any case do in responseto
price signals.It confersthe government's'seal
of approval'on some (notnecessarilyall)of the
industry's intentions. A selective industrial
policy that leads the market involves (1)
governmentinitiativesaboutwhatproductsor
technologiesshouldbe encouraged;(2) public
resourcesor influenceover privateresources
to carry through these initiatives;and (3) a
largerbefore-the-factplan or strategy."
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commodity industries like pulp and pa-
per, where economies of scale are essen-
tial for competitive operation. In less
capital-intensive industries like lumber
and furniture, the private sector has led
the state, although the state has funded
research programs and sometimes inter-
vened to save major installations from
bankruptcy. Over the long term the
question of whether government or mar-
ket led in the development of the Chilean
forest industry is a chicken-and-egg prob-
lem. Each has led at different times; both
were essential for the reproduction of the
industry.
It is equally difficult to evaluate
whether the incentives were economically
efficient, since estimates of the true costs
of afforestation vary. A World Bank study
found that afforestation would have been
profitable even without the DL 701
subsidies; another study found that refor-
estation would have been unprofitable,
absent a substantial rise in the price of
wood (cited in Wisecarver and Tardones
1989). The opportunity costs of the public
funds and the private resources attracted
by the subsidies further complicate the
issue. Several academic critics assert that
landowners make an immediate profit on
the subsidy-that the subsidy has been a
governmental giveaway. Cruz and Rivera
(1983) found that the true cost was lower
than the subsidy, given the low wages
then prevailing. Morales (1989) also states
that the private sector had no net financial
investment in the creation of the re-
source. Industry spokespersons respond
that the subsidy is inadequate, covering
only half the costs of reforestation
(CORMA 1991). The industry further
claims that, regardless of the ratio of
reimbursement to actual cost, the subsidy
has made money for the state, with the
public investment yielding a net internal
rate of return of between 4 and 11 percent
in tax receipts (Giiell 1990).
But those issues are marginal to the
success of the project: Chile has created a
forest and a competitive advantage. In its
current form it is not a natural forest
capable of supporting multiple use, but as
 FORESTPOLICYIN CHILE
an economic forest it is almost a master-
piece. The state may have paid too much,
but it got what it wanted: a growing
industry in a competitive world. The
repeated and public commitments to
forestry by successive elected govern-
ments established a national priority. That
commitment was continued enthusiasti-
cally by a military regime that tried to
eradicate any trace of those governments
in other areas. The military judged that
Chile could not compete with the devel-
oped world in manufacturing, unless that
manufacturing sector could take advan-
tage of a cheap and reliable supply of raw
materials. Its bleak (and accurate) view of
the country's economy demanded that it
promote the few industries in which Chile
possessed such raw materials; as a result,
forestry law DL 701 was one of the first
economic measures that the military
introduced.
Like so much of the military regime's
transformationof the country, DL 701 was
a political intervention as much as an
economic measure, through which the
government signaled its commitment to
Chile's capitalists that forestry was a
regional growth sector, chosen with a few
other select areas of the economy to be
guaranteed profitable. The 75 percent
subsidy for reforestation, guaranteed for
20 years, was a token in earnest. Entre-
preneurs responded to this sign of com-
mitment by channeling their surplus
capital to the forest sector. Without
secure indications that the sector would
immediately be profitable, they appear to
have relied instead on the promise of a
partnership with a powerful and autono-
mous state.
That partnership was necessary because
the profitability of investment in forestry
is clearer in hindsight than in advance. As
Leslie (1987) argues, the uncertainty of
interest rates over a rotation and the
arbitrary choice of a discount rate makes
precise calculations of the return on
forestry investment undependable. Fur-
thermore, Chilean and international mar-
kets for wood have evolved rapidly in
recent decades. The illiquid and volatile
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293
markets for wood that prevailed in the
mid-twentieth century made the ultimate
returns of a long-term project like planta-
tion forestry unpredictable.
Finally, the land reforms of 1965-73
never extended to forested land, but the
perceived risk of expropriation would
have inhibited the smooth operation of
the land markets necessary to allow a
plantation owner to realize the value of an
immature plantation. Forestry in Chile
has suffered from both market failure and
market absence. The state increased its
involvement in afforestation during the
1930s and 1960s precisely because it
judged private capital and initiative insuf-
ficient to assure the development of the
industry.
The question of whether the develop-
ment of a commercially viable forest
industry required industrial policy is
currently unresolved, and will likely
remain so. The most convincing proof that
state promotion of an infant industry has
proven successful would be to observe
whether that industry continues to thrive
after the state withdraws all support. This
was to happen, in part, when DL 701
expired in 1994. The coming decade will
therefore pass a provisional judgment on
the infant industry hypothesis. But the
verdict will not be a clear one, because
the government is unlikely to refrain from
intervening to promote the forest industry
in one way or another. Such an experi-
ment is rarely attempted in the real
world, because most governments are
unwilling to accept the risk that a
carefully nurtured industry might fail.
The neoliberal policies of the military
were an exception to the rule and resulted
in the failure of most of Chile's manufac-
turing industries. Since DL 701 guaran-
teed state support for 20 years only
months before the neoliberal policies
were introduced, forestry was not sub-
jected to as stern a test.
The experiment is unlikely to be
concluded, because the present Chilean
government is aware of the perils of the
staple trap (Watkins 1991, 88) and is
poised to promote continued diversifica-
294 ECONOMIC GEOGRAPHY
tion within the forest industry. Just as
Taiwan anticipated the loss of its compar-
ative advantage in cheap labor by promot-
ing heavy industry (Wade 1990), Chile's
democratic government has adopted a
dynamic notion of comparative advantage
within the forest sector by resolving to
take advantage of the native forest's
potential to produce quality hardwoods as
well as low-value forest commodities. The
latest draft of the next forestry law would
extend subsidies for the "rehabilitation"of
the native forest and maintain reforesta-
tion subsidies for all species except pine
and eucalyptus, which are judged to be
overplanted. In a reaction to charges that
large companies benefit disproportion-
ately from the DL 701 subsidies, small-
holders will be reimbursed at a higher
rate of 85 percent. Should the draft
become law, Chile will have begun to put
the same resources into native forest
management and smallholder forestry that
it did into corporate plantation forestry.
I have placed "rehabilitation"in quota-
tion marks because the ecological effects
of the new forestry law as currently
written are potentially negative. The law's
writers have taken three risks: first, that
landowners will find the subsidy sufficient
incentive to choose forest management
over the alternative, which is to clear-cut
and plant exotics; second, that the advo-
cates of value forestry are correct that
little-known Chilean hardwood lumber of
high quality will find an ample market
decades from now. Both are sensible risks,
worth taking. The third risk-the subsi-
dized destruction of its old-growth for-
ests-is too great. Opposition to that
destruction is growing, but faces a formi-
dable obstacle in the well-organized forest
industry, particularly from exporters of
hardwood chips (Clapp n.d). The state
could confer a measure of protection to
Chile's ancient forests simply by restrict-
ing its subsidies to the management of
native second-growth forests, which offer
the most promise for rapid yields in any
case.
Can other countries reproduce Chile's
successes? Plantation forestry is not a
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rarefied art: the species are well known
and the techniques are straightforwardly
applied. They are within the reach of
many tropical and temperate regions with
adequate rainfall-if governments decide
to make forestry a priority and pursue it
with enough persistence to assure a
critical mass of raw material at some
future date. Without government prefer-
ence, it is unlikely that the private sector
will establish plantations on the scale
required, given the long time horizon
required for investments in forestry. The
precise form of the preference can vary.
Tax exemptions reduce future receipts
rather than present cash, and are easier to
budget; favorable tax treatment effectively
promoted Brazil's extensive plantations
(Stier 1990). Subsidies produce quicker
results, but are expensive and require
direct appropriation.
The strategies can be reproduced, but
not the advantageous position of the
timber exporter in a timber-scarce world.
Other countries will not have the same
advantage in international markets as
those who made their commitment to
forestry early, like Chile. The advantages
of timing are transitory, and future
exporters of raw lumber may find many
low-cost competitors, if only because the
technology of plantation forestry is so
easily adopted, once it has been shown to
be worth the wait. Chile's future as a
maker of forest products will depend on
its ability to increase the range and
sophistication of its exports.
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