As stated a few days ago, here's a thread about Chile & Peru's nitrate price drop of the 1920s: Since the 19th century, nitrates have been used mainly to obtain the nitrogen required for fertilizer production and other chemical uses, particularly for explosives manufacturing./1
These nitrates were found in guano, which is the accumulated excrement of seabirds and bats. Guano is a highly effective fertilizer due to its exceptionally high content of nitrogen. Peru was one of the first producers of natural nitrate in the form of guano/2
exporting over 10million tons between 1840 and 1870, thus increasing the country's fiscal revenue. By the 1860s these revenues were in decline as deteriorating quality led to a reduction in exports. Secondly, Peruvian guano deposits were rapidly depleted due to its intense/3
exploitation, making saltpeter the main source of nitrates between 1880 and 1920. The saltpeter deposits were concentrated in the Atacama desert, then located in Peru's Tarapaca region & the Bolivian coastal region of Antofagasta. The deserts extremely arid climate provided/4
ideal conditions for the formation of natural nitrate deposits. Peru & Bolivia's efforts to control the British & Chilean companies that were mining the desert for nitrates resulted in the War of the Pacific (1879-1883), in which Chile defeated Peru & Bolivia & annexed both/5
of these nitrate rich regions. In the 1890s Chile practically monopolized the production of natural nitrate, supplying almost four-fifths of the nitrogen used in the world. Germany was one of Chile's major buyers of nitrate, buying more quantities of nitrate than Great Britain/6
and the US combined from 1912-1914. In 1915, a blockade against Germany excluded it from the natural nitrate market, which accelerated the research for the invention of synthetic nitrate. The crucial breakthrough came when Fritz Haber & Wilhelm Oswald developed the process of/7
nitrogen fixation through ammonia, making large scale production synthetic nitrogen economically feasible. If you haven't been paying attention, this is where the economics lesson begins. Peru relied solely on its nitrate export as a major source of revenue & did not diversify/8
it's economy. The combined effects of the War of the Pacific, the invention of synthetic nitrate and huge public spending without saving meant that it's economy went bust overnight as a result of its failure to diversify. In the case of Chile, they produce 1/3 of the world's/9
copper, and is also the country with the world's largest copper reserves. So when their nitrate exports dropped, they fell back on copper. With copper however, they were smart enough to learn lessons. They diversified their economy & created a stabilization fund where they/10
saved the proceeds from copper exports. Today they are the 2nd richest Latin American country with one of the most stable economies of the continent./11
LESSONS: Any country that has a natural resource needs to understand that natural resources are affected by 2 major factors: they are finite & they are under threat of obsolescence from new technology. This is why it is advisable to adopt an inter-temporal strategy/12
and use the revenue to develop other areas of the economy as the years go by, to a point when they're no longer in demand due to obsolescence. This realization is something some resource rich countries fail to do. Rather than save & diversify, they increase public spending./13
One country that has proven itself very capable of managing the proceeds from its oil is Norway. Norway developed all their critical industries run optimally, then created the Norwegian sovereign wealth fund, known as the Government Pension Fund Global, where they invested/14
some of the fund's capital abroad, mainly in equities, bonds &real estate. Today Norway's SWF is worth over $1 trillion in assets. With natural resources, the smart thing to do is save & diversify in times of prosperity so you have something to fall back on in times of adversity.
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