Peru's Mineral Wealth and Woes: Backgrounder
Peru's government, like those in other emerging economies, sees development of minerals and timber as the fastest way to lift the country out of poverty, particularly in the country's largely untouched Amazon region
By Toni Johnson | Council on Foreign Relations | February 10, 2010
Introduction
LIMA, PERU -- The commodities boom of the last decade fueled growth, but it also poses social and environmental problems. Peru is emblematic of the economic promise and trials facing nations rich in mineral wealth. One of the world's largest producers (PDF) of gold, copper, tin, zinc, and silver, Peru has been the fastest growing country in Latin America over the last decade, and it has cut poverty during that time from 50 percent to about 34 percent. But Peru is also grappling with the fallout from its resource wealth, including governance challenges, controversial oil and gas concessions in the Amazon, mercury pollution from unregulated gold mining, the deforestation threat from illegal logging and new dams, and the impact of the new Trans-Oceanic Highway with Brazil.
Economic Ups and Downs
Demand from emerging markets such as China and India have fueled a resource boom in Latin America, and many resource-rich countries are reaping the benefits of increased commodities prices. Peru is one of them. In 2007, the mining sector represented 63 percent of the country's export revenue. Though neighboring Chile isconsidered exemplary (Reuters) as a well-managed Latin American economy and Brazil has emerged as world-class economic competitor, Peru's decade of economic growth and stability makes it one of the region's best performing countries. Between 2002 and 2008, the Peruvian economy grew between about 5 and 10 percent per year. The country cut the ratio of public debt to less than 30 percent of gross domestic product (GDP) by 2007, down from nearly half at the beginning of the decade. In 2010, GDP is expected to grow as much as 5.5 percent.
Peru is also attempting to make the government more business and foreign-investment friendly and more transparent, while other countries in the region, such as Venezuela and Ecuador, are working to socialize their extraction industries. "We've tried every macroeconomic model, and we've learned from our mistakes," says Francisco Sagasti, a senior associate at FORO, a development think tank based in Lima. "No one is pushing for nationalization here" (CSM).
Peru has made great strides in returning to democracy and economic stability following two decades of political and economic turmoil. President Alan Garcia's first term in the late 1980s (BBC), with its "populist economic policies" that triggered hyperinflation that topped 7,500 percent, put the country on the verge of economic collapse. Former President Alberto Fujimori's achievements to end Peru's hyperinflation, institute market reforms, increase foreign investment, and bolster the country's flagging GDP during the 1990s were overshadowed by charges of authoritarianism, corruption, and human rights abuses. Economic reforms were continued under the administrations of former President Alejandro Toledo and President Garcia, who won his second term in 2006.
One U.S. embassy official called Peru "the swing state in this ideological struggle" between countries in the region that lean toward socialism and those that favor free markets. Despite some success in reducing poverty, the country still has more than double the poverty rate and a little more than half the per capita income of Chile. Government services and infrastructure are limited. Many poor Peruvians, particularly in its rural areas, feel left behind--making them wary of some of the government's pro-industry policies.
Mining and Governance Problems
Many resource-rich developing countries that should benefit from high commodities prices are victims of the so-called resource curse, developing slower than countries with fewer mineral resources. Development in these countries is impeded by a number of factors (PDF), including government corruption, unequal redistribution of revenues, mismanagement of funds and a lack of transparency in cash flows, and a general lack of governing capacity. Peru seems to be avoiding some of the biggest pitfalls, making inroads on development while also improving revenue and expenditure transparency, but corruption remains a problem and governing institutions in Peru are still weak.
The country has developed strong government transparency rules, such as requiring state websites to track government revenues and spending. It is the only Latin American country to join the Extractive Industries Transparency Initiative, an international group of nations as well as mining, energy, and civil society organizations devoted to improving the governance of resource wealth. However, it has yet to complete the EITI certification process, which requires outside validation that member countries are complying with measures to ensure better governance, such as transparency in royalty payments and expenditures. The government is also working to decentralize its budget to give more control to regional governments. That includes sending 50 percent of mining tax revenues directly to governments in the regions where they were generated, but the money has largely remained unspent as regions struggle with a lack of competency. The country's low social safety net and infrastructure spending has continued to be a challenge, analysts say.
Peru also faces the danger of the boom-bust cycle seen in other extraction-dependent countries if it fails to diversify its economy. For example, the drop in oil prices following the 2008 economic downturn has put the Venezuelan economy in decline. Mining dependency poses another problem: It is investment intensive but produces few jobs. Peru's government is making progress in growing agricultural, textiles, and manufacturing sectors, which require more workers; it is attempting to do this through bilateral and regional trade agreements with countries such as China, Brazil, the EU, and the United States. FORO's Sagasti argues moving from an extraction economy to a "knowledge-based economy" is one of Peru's biggest difficulties.
Tensions between Development and Conservation
Several countries in the region, such as Brazil, Chile, and Ecuador, are roiled in disputes pitting rural land owners and indigenous communities against government concessions and mining companies. According to Peru's national ombudsman's office, 47 percent of social conflict in the country in 2009 concerned environmental and land disputes related to the extraction industry.
Peru's government, like those in other emerging economies, sees development of minerals and timber as the fastest way to lift the country out of poverty, particularly in the country's largely untouched Amazon region. In Peru, land ownership is private, but the government has full rights to the resources below ground--such as minerals, oil, and gas--and above it--such as water, fish, and timber. In an op-ed in 2007, President Garcia, infamously dismissed (El Comercio) what he called "the law of the dog in the manger, which says, 'If I do not do it, then let no one do it.'" Without the state to give out concessions, Garcia wrote, the land would remain undeveloped, with "unused resources that cannot be traded, that do not receive investment, and do not create jobs."
But indigenous groups and communities in the Amazon fear the government is engaged in a large-scale giveaway of their land to industry at the expense of their cultural heritage. "For the indigenous people, the land is sacred, but in [Western culture] the land is simply a resource," said Roger Rumrill, an expert on the Amazon's indigenous communities. The government recently created new concessions that would open up 70 percent of the Amazon to oil and gas exploration, though many of these concessions haven't been given out yet.
The simmering conflict over these indigenous lands and oil and gas concessions (AQ)boiled over in June 2009 in a deadly clash between activists and government forces. In the course of implementing a 2009 U.S-Peru trade promotion agreement, the government attempted to make changes to the way the indigenous land is handled, including reducing barriers to sales of "idle land" within the boundaries of titles owned by indigenous communities. Those changes, say activists, violate the UN International Labor Organization's Convention 169--which Peru ratified in 1994--that states governments should safeguard for indigenous people the use of lands "not exclusively occupied by them, but to which they have traditionally had access for their subsistence and traditional activities."
Years of neglect by the central government in Lima has left rural regions with infrastructure and governance challenges that they are working to address, but the rush to decentralize has left these governments inadequately trained to handle many of their new responsibilities, said Vito Verna, a representative from the ombudsman's office. The inability to adequately provide basic services adds to the social conflict. "Decentralization is vital," says Verna. "Right now people don't have access to the state."
Though mining gets most of the blame for many environmental problems--such as water pollution and decreased water access--Roque Benavides, head of Buenaventura Mining Company, argues the real cause of social conflict stemming from environmental disputes is the government's inability to address everything from mercury pollution from informal gold mining, to pesticide runoff from farms, to improving water infrastructure generally.
Some critics argue that the government does not adequately supervise mining companies and defends them when things go wrong, says Epifanio Baca, who works for a coalition of civil society groups called Propuesta Ciudadana. The U.S.-based advocacy group Amazon Watch points to the government's failure to addressunregulated dumping of wastewater containing heavy oil, barium, boron, and arsenic as well as deforestation and soil erosion from oil and gas operations.
A similar source of conflict is shaping up in the government's plan to build six new dams in the Amazon region for exporting electricity to Brazil, which could potentially flood thousands of hectares of land. "It is difficult to understand why the Peruvian government, that is presently confronting a serious social conflict in the Amazon region, precisely due to lack of information and discussion of their activities, once again reverts to adopting the same behavior as for the hydroelectric power plants that are projected," wrote Peruvian forestry expert Marc Dourojeanni in June 2009.
Informal Gold Mining
The rapid rise in unregulated gold mining, which is taking a huge environmental toll, highlights Peru's difficulties in managing resources in the face of skyrocketing global commodities prices. Informal gold mining yields about 20 percent of Peru's total gold output of 170,000 metric tons and employs an estimated 40,000 to 100,000 people (Latin America Times), according to Pedro Sanchez, minister of Energy and Mines. One informal gold miner said his river dredging operation yields as much as twenty grams per day at about $35 per gram, giving him an income of several thousand dollars per month (WashPost)--a hefty profit for an area with an average salary of $125 per month. Meanwhile, an estimated thirty to forty tons of mercury annually from dredging operations is dumped back into Amazonian Rivers and released into the air.
Peru is not alone is grappling with this problem. Small-scale gold mining, about 20 percent of the world's production, is responsible for more mercury pollution globally than any other industry, says the U.S. Environmental Protection Agency. At a UN Environment Program meeting in February 2009, environmental ministers from 140 countries agreed to create alegally binding mechanism to reduce the mercury supply and to take steps to prevent releases of mercury into air, land, and water.
In Peru, Minister of the Environment Antonio Brack Egg has vowed to clean up gold mining but faces opposition from the thousands of people profiting from the industry. "Many people criticize the fact that oil and gas are operating in the Amazon area even though they are using clean techniques," he says. "But very few people talk about the problems of illegal mining activities, which involve child labor, prostitution, and contamination from mercury."
He supports the international mercury treaty. He also argues that gold should have standards similar to the international certification of diamonds, created in 2000 to stave off human rights abuses associated with the diamond trade. Another idea being considered is heavy restriction of mercury sales--similar to restrictions in Peru and Colombia of kerosene, which is used in the production of cocaine.
But mercury isn't the only environmental problem caused by informal mining. Larger-jungle operations are creating significant deforestation and destruction of the topsoil (BBC) in the Amazon state of Madre de Dios. So far about eighteen thousand hectares have been destroyed. Egg hopes to use reforestation projects to attract miners into forestry jobs.
Environmental Management and Other Environmental Challenges
According to the international environmental group WWF (formerly known as the World Wildlife Fund), Peru faces a number of environmental hurdles, including a lack of adequate water infrastructure, deforestation and loss of biodiversity, increasing aridity associated with climate change, and inadequate environmental enforcement capabilities. The U.S.-Peru trade agreement contains provisions intended to strengthen Peru's environmental management, including improved monitoring of the trade of mahogany, an endangered species of wood.
Taking up about 20 percent of the Amazon, Peru has the fourth largest tropical rainforest in the world after Brazil, Indonesia, and the Democratic Republic of Congo. Deforestation accounts for about 70 percent of Peru's carbon dioxide emissions. Minister Brack Egg said the government is working to protect more than fifty-four million hectares of forest, about 90 percent of Amazon through initiatives aimed at combating climate change, protecting indigenous lands, sustainable logging, and ecotourism.
Still, illegal logging is a significant problem in Peru and may get worse after the completion of the Trans-Oceanic Highway--more than seven hundred miles of road linking Brazil's Amazon with Peru's port cities of Matarini, Ilo, and San Juan. The highway will open up previously inaccessible areas of Peru's Amazon, which could compound illegal logging and mining activities and increase deforestation from general land development along the highway.
Adapting to climate change is another issue facing the country predicted to be one of three countries hardest hit. According to the UN Population Fund, glaciers in the Andes, the source water for the entire Amazon, shrank about 24 percent between 1987 and 2004 and could be nearly gone by 2050. The government is moving to improve water infrastructure to enable water recycling as well as capturing rainwater and requiring certain types of agriculture to use water more efficiently.
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