Quechua people in Conchucos, Peru
Quechua people in Conchucos, Peru


Corporate Conquistadores: Peru’s Mineral Extraction Industry Boosts Economy While Rural Poor Continue To Suffer – Analysis

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By: Margaret Boland

Peru has showcased remarkable economic growth in the past decade, shedding its troubled financial history and significantly emerging in the international market. Many attribute the recent economic successes of Peru to a booming commodities market that has provided Peruvian mines with an influx of foreign investment and, consequently, a surge in mining exports.

However, Peru’s reliance on the mining sector to sustain economic performance and modernize the country has failed to generate mass economic improvements for the rural poor, many of whom are further marginalized by the focus now being fixed on the increase in mining exports and the failure to address widespread inequality. Although the environmental consequences of mining in Peru and the local protests that have followed are concerns of the Council on Hemispheric Affairs, these issues will not be addressed in this report (though this crucial topic certainly deserves further in-depth analysis). Instead, this article addresses the socioeconomic isolation that constrains rural peoples largely due to their proximity to mining projects and the failure of public and private initiatives to address the root of this disparity. Ultimately, the neoliberal economic model adopted by the Peruvian government, which relies on mineral exports, prevents the rural contingency of the population access to economic prosperity.

Growth of the Mineral Extraction Industry

Peru’s economic fortunes became apparent in 2002 when a majority of its extractive commodities, including minerals, exhibited great gains in terms of production and export capacity. Since 2002, the Peruvian economy has nearly doubled with an annual average Growth Domestic Product (GDP) growth rate of 5.5 percent. The impressive growth of the economy is predominantly accredited to the rise in foreign investment into the mining industry by countries such as Canada, China, and India, coupled with a favorable commodities market. The mineral extraction sector accounted for nearly 60 percent of Peru’s total exports in 2011, as the country is one of the world’s largest producers of gold, copper, zinc, and silver. [1] Neoliberal trading agreements and a relatively stable political system make Peru a desirable location for further investment opportunities.

The rise in global demand for Peru’s mineral resources has subsequently generated an increase in proposals by foreign companies that wish to undertake mining projects in the country. According to the Geological Mining and Metallurgical Institute of Peru, the government granted 3,100 mining permits in 2011. This figure increased dramatically in 2012 to 4,668 mining permits issued to 582 companies. However, as foreign interest in the region has become more aggressive and the number of mining projects increases, rural Peruvians are further marginalized by mining companies’ acquisition of their lands, rising prices of goods, and limited employment opportunities.

Poverty is still pervasive in Peru despite the influx of wealth from the mining industry. Around 25 percent of the country’s roughly 30 million citizens still live below the national poverty line. Although this figure has significantly decreased from nearly 50 percent in the early part of the century, the national rural poverty rate remains high at 50 percent, with nearly 20 percent of those residing in the mineral-rich Andean region considered to be extremely poor. [2] Furthermore, according to the United Nations Development Program’s 2011 Human Development Index, a measure of a country’s life expectancy, literacy, education, and standards of living, Peru ranked 80 out of 187 countries. For a country that boasts one of the highest average growth rates of the past decade, Peru’s rural poverty is a significant indication of the failure of economic growth to translate through all socioeconomic divides.

Lack of Economic Spillover

The dominance of the mineral extraction industry further marginalizes rural populations by infringing upon local markets and failing to create economic spillover for the rest of the economy. The expansion of the mining industry and the influx of foreign investment to the region have allowed for a dramatic rise in GDP per capita levels and a strengthening of the national currency. Although urban centers, such as Lima, boast expensive housing market values and posh luxury stores due to a growing middle class, the wealth appears nearly absent in more rural regions where the economy garners its exports. A 2004 World Bank Report described a positively correlated relationship between economic growth and poverty reduction. [3] However, the report explained how this relationship is weaker in Peru than in the average country due to the low capacity of its vulnerable institutions to handle revenue flows and the dominant mining sector’s failings to generate adequate employment opportunities. The blame lies both with the mining companies and the lack of comprehensive government initiatives.

The neoliberal free market expectation is that as one industry expands due to foreign interest and trade agreements, the remainder of the economy will prosper because of higher income levels and growing domestic and foreign demand. The mining industry, however, has failed to provide this path for all of Peru. According to a 2012 study by the Peruvian Economy Institute, only 14 percent of manufacturing inputs are purchased from local Peruvian providers. [4] The remainder of inputs is imported from cheaper markets such as China. The economic model deteriorates further as the value of the Nuevo Sol (the national currency of Peru) has risen alongside favorable commodity prices, causing general costs to rise throughout the nation. Other industries subsequently lose their competitive edge in the international market, as they have to deal with rising production and transportation costs.

The above process has two major consequences for local economies. The first is that many people are leaving behind their less-profitable businesses to earn more in the mining sector, which leads to a less diversified economy. The second is that families have to relocate farther from cities, as they can no longer afford rising prices to maintain their living standards. A research team headed by Newmont, a U.S.-based mining company with significant holdings in Peru, investigated local unrest in mining communities such as Cajamarca and from it reported, “There were stories of families feeling like they were forced to move out of town because the company bought up land, or because they could no longer afford to live close to the city because of local inflation following the emergence of the new mining economy.” [5] Another study by the National Academy of Sciences explained that, of those polled, more than half who sold their land to mining companies were then unable to afford new land equal in value to their previous holdings due to price inflation. [6] Although mining companies are initiating social programs in rural regions to spur economic growth, rising prices from the success of mining exports have forced local entrepreneurs and workers to move farther away from these centers and into further isolation. The government must intervene to help provide locals the collaborative mechanisms to benefit from the presence of mining corporations either through the protection of local land and food prices or by bolstering the competitiveness of homegrown industries like textiles and agricultural production.

Limited Direct Employment Opportunities

When promoting the industry, many mining companies advocate employment opportunities for rural peoples. However, such opportunities do not provide sufficient wages, and workers are exposed to hazardous conditions. Since the physical capital used in mineral extraction is often imported and not developed within Peru, the industry fails to generate significant direct and indirect employment. Today, locals increasingly question whether mining corporations will follow through on their enticement of employment opportunities as, historically, the companies have not kept their promises of a bounty of jobs to follow. They began to doubt that jobs would materialize in 1992 when the Peruvian government, then under the control of President Alberto Fujimori, initially privatized their holdings on the mineral extraction industry. At that time the Shougang Corporation, a Chinese firm that purchased Hierro Peru in the Marcona region, fired local employees and brought in 350 of its own workers, causing widespread anger and distrust by local governments. [7] While companies have since pledged to prioritize jobs for local populations, the suspicion over promises of employment lingers and the nature of the business remains a disappointing source of quality employment opportunities. Simple government quotas or company employment policy cannot easily remedy the lack of available jobs in the mining industry, as it is an inherent complication of an economic system dominated by the extractive sector.

Institutional Failure of the Canon Minero

At times, the government has attempted to compensate for the social and economic losses associated with mining projects, but fails to adequately direct funds to the essential needs of recipients. Canon minero, a tax placed on mining revenues, provides some level of monetary assistance to those whose land it has seized for extraction.

Revised in 2003, the tax demands that 50 percent of revenue from mining companies be passed to subnational governments to be spent under specific frameworks. Peru’s decentralized government includes a structure of larger regional, to smaller provincial and district levels wherein each has their own elected executive with subsequent responsibilities and budgets. The canon minero is distributed to each of the three government levels depending on the prevalence of mining in each area. 25 percent of the tax is dedicated to the specific regional administrations where mining production occurs while the remaining 75 percent is issued between the provincial and district governments. From that 75 percent, district governments that house mining projects receive 10 percent and provincial governments, including all of their district governments, receive 25 percent, regional governments (and their provincial and district governments) where mining occurs receive 40 percent. The division of the canon minero evidently provides districts directly affected by mining operations a far larger spread of the tax, as they receive not only the standard 10 percent but also the proportional amounts assigned to all provinces, regions, and districts. [8]

In theory, the canon minero provides a system for wealth to spread from the mining industry to the rest of Peruvian society. However, the concentrated location of mining operations leads to a flood of resources to poor, rural governments that do not have the institutional capacity to apportion the funds in an efficient manner. For example, in 2011 the Ancash region where the Antamina copper mine is located, received 582 million Nuevo Soles (the equivalent of $227.08 million USD) under the canon minero. Similarly, the next three largest mining areas (Arequipa, La Libertad, and Cajamarca) were granted over 315 million Nuevo Soles. However, out of the 22 regional governments in Peru, six of them did not receive any of the funds gained from the tax and three regions received only between 2 and 7 million Nuevo Soles, respectively. [9] Though many argue that the regions where mining occurs deserve to gain more from the tax as they are the ones who are directly affected, the calculations surrounding the division of funds additionally isolates rural regions that do not immediately benefit from any economic development through mining operations. Yet even those governments that receive large payments from the canon minero are unable to spend revenues adequately due to poor governance and other limitations, often, on average, only exhausting 57 percent of mining royalties. [10]

Furthermore, the canon minero was established in part to alleviate the major issue of inequality in rural regions of Peru and to ensure that newfound wealth in the country could reach all levels of society and stimulate further modernization. Yet laws surrounding the application of the canon minero restrict the amount of places where funds can be dedicated and consequently, the tax has failed to adequately provide necessary social structures for the impoverished such as health care, education, and other public investment to improve living conditions. Instead, the mining tax is mainly allocated to finance infrastructure projects, new plazas, municipal offices, or even public pools. [11] Therefore, while the aforementioned projects may be developing rural regions, limitations on spending mean that the quality of programs such as health care and education do not improve.

One report conducted by the U.S. Senate Committee on Foreign Relations explained the inability to allocate funds to such necessary investments by stating:

“Local Peruvian governments do not have the technical capacity to use [resource revenues] effectively…This is creating a degree of social conflict and an increasing sense of frustration among the Peruvian people who have not seen ground-level benefits of this economic windfall in the form of services, health, education, or infrastructure to improve their everyday lives.” [12]

Thus, living conditions, health care, and education continue to lack sufficient finances to improve standards and to guarantee longstanding socioeconomic gains in rural regions despite the influx of mineral wealth in the country from the neoliberal economic system.

Prospects for Development in Peru

The mineral extraction industry has been a crucial part of the development and modernization of Peru and will continue to be a cornerstone of the country’s economy well into the future. Despite the industry’s involvement in boosting GDP growth rates and average income per capita, Peru’s current economic model relies too heavily on its mineral commodity exports and is neither sustainable nor socially viable. Although mining companies have attempted to quell local protests by providing basic goods and services, they fail to uphold their promises of employment, forcing many to move off their lands. The Peruvian government is also to blame for the lack of institutional capacity to manage funds from the canon minero, as it stalls social development in the shape of education and health care.

Overall, Peru faces a risky socioeconomic future if it continues to rely on the private mining sector to deliver modernization in rural regions. The government must interact more directly with mining companies and the affected communities to ensure that local populations know that their grievances are heard at all levels. At the same time, the government must promote other sectors of the economy, such as the textiles industry, to become competitive on the international market and spur foreign investment in these areas. This would ensure the spread of wealth to other regions as well as reduce the country’s dependence on profits from the mining industry. Recent bilateral trade agreements with China, the European Union, and the United States, as well as Peru’s involvement in the Pacific Alliance and the Trans-Pacific Partnership, attempt to promote investment in other industries, though the mineral extraction industry remains the major player. The Peruvian government and the investing companies, whether domestic or international, cannot rely on outdated economic models and must adequately address the growing instances of inequality among rural populations alongside this growth.

Margaret Boland, Research Associate at the Council on Hemispheric Affairs

References

[1] “Peru Economy Profile 2013.” IndexMundi Country Profile. Index Mundi, n.d. Web. 26 Mar. 2013. <http://www.indexmundi.com/peru/economy_profile.html>.

[2] Enabling Poor Rural People to Overcome Poverty in Peru, International Fund for Agricultural Development, accessed June 18, 2013, http://www.ifad.org/operations/projects/regions/pl/factsheet/peru_e.pdf

[3] “Opportunities for All: Peru Poverty Assessment.” The World Bank (December 2005)

[4] Enrique Calfucura, Astrid Martinez Ortiz, Cynthia Sanborn and Juan Luis, Natural Resource Extraction: The Good, The Bad and The Ugly, America’s Quarterly, accessed June 18, 2013, http://www.americasquarterly.org/charticles/natural-resource-extraction-chile-peru-colombia/ .

[5] “Listening to the city of Cajamarca.” Centre for Social Responsibility in Mining (November 2012) http://www.newmont.com/sites/default/files/u110/CSRM_Listening%20Study_%20Draft%20for%20Comment.pdf.

[6] Bebbington, Anthony and Jeffrey T. Bury. “Institutional Challenges for Mining and Sustainability in Peru.” Proceedings of the National Academy of Sciences 106 (October 13, 2009): 17296-17301. Accessed June 19, 2013. doi: 10.1073/pnas.0906057106.

[7] “China, Latin America, and the United States: The New Triangle.” Woodrow Wilson International Center for Scholars eds. Cynthia Arnson and Jeffrey Davidow (2011).

[8] Enrique Calfucura, Astrid Martinez Ortiz, Cynthia Sanborn and Juan Luis, Natural Resource Extraction: The Good, The Bad and The Ugly, America’s Quarterly, accessed June 18, 2013, http://www.americasquarterly.org/charticles/natural-resource-extraction-chile-peru-colombia/ .

[9] Enrique Calfucura, Astrid Martinez Ortiz, Cynthia Sanborn and Juan Luis, Natural Resource Extraction: The Good, The Bad and The Ugly, America’s Quarterly, accessed June 18, 2013, http://www.americasquarterly.org/charticles/natural-resource-extraction-chile-peru-colombia/ .

[10] “Macrorregión centro recibió casi S/. 10.300 millones por canon minero.” El Comercio Peru (May 14, 2003) accessed July 10, 2013, http://elcomercio.pe/economia/1576321/noticia-macrorregion-centro-recibio-casi-10300-millones-canon-minero.

[11] Enrique Calfucura, Astrid Martinez Ortiz, Cynthia Sanborn and Juan Luis, Natural Resource Extraction: The Good, The Bad and The Ugly, America’s Quarterly, accessed June 18, 2013, http://www.americasquarterly.org/charticles/natural-resource-extraction-chile-peru-colombia/ .

[12] “Mining Conflicts in Peru: Condition Critical” OXFAM America (March 10, 2009) http://www.oxfamamerica.org/publications/mining-conflicts-in-peru-condition-critical.

COHA

COHA, or Council on Hemispheric Affairs, was founded in 1975, the Council on Hemispheric Affairs (COHA), a nonprofit, tax-exempt independent research and information organization, was established to promote the common interests of the hemisphere, raise the visibility of regional affairs and increase the importance of the inter-American relationship, as well as encourage the formulation of rational and constructive U.S. policies towards Latin America.

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