August 10th, 2012
02:46 PM ET

Peru’s resource-state curse?

By Christopher Sabatini, Special to CNN

Editor's note: Christopher Sabatini is editor-in-chief of the policy journal Americas Quarterly. The views expressed are his own.

News last week that over 100 people had been affected by a toxic spill from the copper mine in Antamina added more fuel to the debate in Peru over the safety and responsibility of mining.  Despite the spills and controversy, the extraction of natural resources in Peru contributed the largest share to the county’s impressive 7-plus percent average growth for the last seven years.  But can it continue?

For almost a year, another conflict has raged north of where last week’s spill occurred in Cajamarca between a handful of community leaders and Colorado-based Newmont over the mining company’s plans to develop and expand the gold and copper Conga mines.  Local community leaders, supported by international non-governmental organizations, claim that Newmont’s operations will pollute water sources, a charge disputed by the mining company and a number of studies it has commissioned. Public marches, road blockages and violence over the Conga mines have crippled the national government and forced President Ollanta Humala to make several cabinet changes.

In Peru and outside, the clash has been portrayed as emblematic of the escalating and inevitable tension between the global markets’ demand for natural resources and the environmental and political rights of the communities where those commodities are produced.

Both sides are right in seeing it as a sign of things to come.  But framing it only as a conflict between companies and communities misses one of the crucial elements that underlies the conflict: how well local governments manage and direct the revenues generated by the mining-resource boom to address long-simmering social demands.

Ultimately, even assuming the environmental benevolence of natural resource extraction companies (OK, admittedly a huge assumption), the responsibility of providing the basic public, social services to the poor rural communities where natural resource extraction activities often take place is that of a national government.  Unfortunately, in many of the countries where natural resource extraction investment has rushed in, the capacity of governments to fulfill these basic public functions has been – and is still – sorely lacking.  The failure of governments to provide the foundation for socioeconomic demands of these communities means that these conflicts will simmer, and with it the tensions between company and community.

Peru provides a perfect example of state failures and the challenge of resolving the tension between global demands for resources and local demands for respect and the safety of their citizens.

From 2000 to 2010, exports of commodities – from soy beans to oil, basically things you take out of the ground and sell – in South America soared. From 2007 to 2011 alone, Peru’s exports – the bulk of it primary products – increased by a yearly average of 12.9 percent, reaching a total of $45.6 billion in 2011.

The boom has brought a flood of tax and royalty income to the Andean nation – even before President Humala raised the tax rate on mining company profits. Then, in September of last year, shortly after reaching office, Humala increased the tax rates from royalties of 1-3 percent of companies’ operating profits to 12 percent, and imposed a special tax of between 2 percent and 8.4 percent on windfall profits.

Historically, the Peruvian state bureaucracy has always struggled with even the most basic functions, from internal security, to ensuring effective infrastructure (according to the World Bank, only 11 percent of roads are paved) to providing education in the ethnically and geographically challenging country.

But that’s only the national government.

In Peru, thanks to decentralization and tax laws, 75 percent of revenue generated from natural resource extraction is automatically transferred to provincial and district level governments. In the case of mining areas, this means rural (largely poor) counties and municipalities.

Many of the elected officials in charge of these local governments – and the huge pots of money they now control – have little education or preparation for public administration.  To make matters worse, there’s no local civil service, meaning that an entire body of public servants managing millions of dollars can be changed – and often are – when a new mayor is elected.

So, just to give an idea, the district of San Marcos – the home base of the now-famous Antamina copper and zinc mine (one of the 10 largest mines in the world) – reportedly received $60 million in tax-generated revenue from mining activities in 2011.

What has it done with the windfall? In the windswept, poor, Indigenous area stretching from the Andean highlands to the Pacific Ocean, the question is better what hasn’t it done?  For one, the district’s capital city, San Marcos, still lacks potable water. In fact, the city is a small-scale sprawl of poverty, hastily thrown up cement buildings and angry youth, many ready to rail against mining to any outsider.  The smaller rural villages are even worse off – without potable water, in some cases even basic infrastructure – because many of the resources passed to the district government remain in the seat of local government, San Marcos (a microcosm of the problem of centralization that played out at a national level for centuries).

The bulk of the new-found wealth hasn’t gone to social programs. Instead, it has funded massive, ridiculous Mussolini-esque public works: the refurbishment of town plazas, the improvement of (and often the construction of new) municipal buildings and, in the case of Chavín, the construction of a massive sports facility that includes an Olympic swimming pool that has yet to be filled (in the Peruvian highlands – not a region known for water sports). This is also not to mention the incredible stories of personal enrichment and corruption and the mysterious car accident that killed (or did it?) the former mayor of San Marcos.

Does any of this absolve the private companies that come and take the minerals, natural gas or whatever out of the ground from any responsibility to the local communities?  Of course not, especially when – as in the case of the Antamina spill – local companies fail to protect local citizens. Too often, natural resource extraction industries have despoiled local environments, exploited local workers and – as a result of corrupting public officials – gotten away with it.  But while by no means perfect – and it varies by country and company – international and national standards have often constrained the ability of international companies to run roughshod over environmental, labor and developmental standards.

But in all of this, governmental incompetence and corruption remain the primary drag on basic development needs – public investments in education, infrastructure and health care, for example.

The larger goals of development are public goods, delivered through governmental institutions.  When national or local public offices lack the capacity, oversight and leadership to do more than just accomplish personal or short-term goals, it isn’t merely the fault of the private sector. But these knotty, long-term challenges are embedded in the sad history of exploitation of local governments and the degradation of the public and political sector in these countries. Overcoming them is a long-term problem that goes beyond the friction between companies and communities, one that will shape the capacity of countries and investors to continue to provide natural resources for global economic growth.

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Topics: Energy • Environment • Latin America

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soundoff (23 Responses)
  1. Joseph McCarthy

    The Peruvians need to vigorously regulate foreign companies coming into their country and prevent them from poluting their countryside as well as their water resources. They should also try to negotiate some kind of a peace with the Shining Path guerillas and make them a part of their government and thus ending another long and bloody civil war.

    August 10, 2012 at 5:09 pm | Reply
    • LOLOLOLOLOLOLOLOLOLOL

      Joseph McCarthy
      What the Turks sorely need to do now is to sue the PKK for peace and work out some kind of time table giving the Kurds the independence they deserve. They should also set up a plebiscite in northers Cyprus to let those people decide Cyprus' future. Most of all, quit doing things at the behest of the U.S., Great Britain and France!
      August 8, 2012 at 7:17 pm | Reply

      August 10, 2012 at 5:31 pm | Reply
      • Lyndsie Graham

        Why laugh at a perfectly intelligent post like the one Joseph McCarthy made? It's 100% accurate.

        August 10, 2012 at 7:22 pm |
      • Patrick

        Joseph McCarthy and Lyndsie Graham are the same guy who says the same thing about every country. Rather amuzing that someone called you on it.

        August 10, 2012 at 7:41 pm |
      • Patrick-2

        Here goes this so-called Patrick(Phunnie boy) who stole my original screen name to show his Tea Party mentality. According to this jerk, all of us who post anything intelligent here are all one in the same.

        August 11, 2012 at 8:27 am |
      • Patrick

        You continue to be amuzing Marine5484/KRM1007Joseph McCarthy/Lyndsie Graham whatever personality you are at the moment. Whenever someone calls you on it, you accuse someone else of doing what you are doing. Surely your poisonous rants are bound to annoy anyone with intellect.

        August 11, 2012 at 10:28 am |
    • Leandro

      Dear Mr Mc Carthy I agree with the first part of your post however the second part come as a little naive you can talk with a group when it wants to do it and put down the violence, something the shining path guerrilla has never wanted to do more important right now they are associated with the narcotraffic cartels in the amazon region so it's not an altruistic group at all

      August 10, 2012 at 7:16 pm | Reply
    • LOLOLOLOLOLOLOLOLOLOL

      Same guy, different name:
      krm1007 ©™
      To address India's problems, one has to start with the basic premise that "small is beautiful: and that India has become unmanageable in size. At times, the sum of parts is greater than the whole. And that is precisely where India needs to head. A controlled breakup of sorts.
      August 10, 2012 at 5:19 pm | Reply

      August 10, 2012 at 9:37 pm | Reply
      • Gianfranco

        GUESS YOU´RE KIDDING ABOUT INDIA... THIS A SOUTHAMERICAN CONTRY, IT´S LIKE COMPARING USA WITH SWITZERLAND, NOT A FAIR COMPARISON ... AT ALL...

        August 11, 2012 at 9:36 am |
  2. Daniel

    Great article Christopher. Good to know you read up on Peru and understand the problem with decentralization and corruption at local levels of government. Hope to see more great articles on South America.

    August 10, 2012 at 8:39 pm | Reply
  3. jeremy

    Excellent article. I have been involved in mining in Peru and elsewhere for over 12 years. The depiction of corrupt and ineffective local governments is dead-on. Not only do the mines pay out tens of millions of dollars to the communities (as they should) but then, when local governments do nothing with the money, turn and around and use their own money to develop community projects and infrastructure. To be sure, mining companies are in the business to make profits, but I have been to dozens of meetings where the community lives in ridiculously poor conditions, and the local government arrives at the meeting in a fleet of 70k dollar SUV's wearing poorly fitting Italian suits. These small community governments have proven themselves incapable of managing these funds and projects, and honestly should be taken out of the equation. Nation Government, working with other groups and governments for oversight, should work with local communities to establish the best use of these funds, and then supervise the expenditures directly, until the projects are finished. That is exactly how we build mines here, and our value for money spent, compared to the local governments, is 20 fold more successful, and always for the same reason. Our companies and staff are accountable to others, and that makes all the difference. Thanks for the venue, all the best. jer

    August 11, 2012 at 11:06 am | Reply
    • jennings

      these are important insights. but they don't help NGO's raise money from guilt-stricken europeans and americans who enjoy the fruits of the miners work yet want to blame them for the continued poverty of the regions in which they operate. the disconnect at the local governments and state level has to be addressed, or else actions will continue that will have the effect of killing the goose laying the golden eggs.

      August 13, 2012 at 1:48 pm | Reply
  4. j. von hettlingen

    So sad, that a minority controls a country's natural resources. Everybody tries to enrich himself as much as possible at the expense of the majority. These people should be jailed for greed and graft.

    August 12, 2012 at 2:27 am | Reply
    • Patrick-2

      Thank you, j.von hettlingen. How so very true that is!

      August 12, 2012 at 11:53 am | Reply
      • Patrick

        HAHAHAHAHAHAHAHAHAHAHAHAHAHAHA...

        August 12, 2012 at 5:09 pm |
  5. LOLOLOLOLOLOLOLOLOLOLOL

    Same guy, another name, same BS.
    J. Foster Dulles
    What this country needs to do is to stand on the sidelines and let China and it's Southeastern Asian neighbors work out their own differences. We also need to ignore these right-wing idiots here who want to butt into every problem in the world. Enough is enough already!
    August 14, 2012 at 5:09 pm | Reply

    August 14, 2012 at 7:26 pm | Reply
  6. LOLOLOLOLOLOLOLOLOLOLOL

    Same guy, same M.O. , and the laughs keep coming.
    krm1007 ©™
    I have read with interest the thesis presented on CNN that "less is more" in a political context as applied to India. Although Mies Van Der Rohe adopted this in an architectural context its economic and political connotations are indeed powerful. Empowering subjugated minorities in India by splitting it into smaller states would trigger uber economic demand for western nations who have given so much financial and technology aid to India with no return to show for the investment. I concur with this approach and with economic background find the premise to be on solid footing. Central Asian States (CAS) are a case in point on this successful approach. We need to understand that India has an unmanageable large population mired in poverty and we are spinning our wheels trying to feed it. It is also too big of a geographical unit to govern. Again, we saw how a few teenage talibans were able to invade it with a few BB guns.
    August 15, 2012 at 11:22 am | Reply

    August 15, 2012 at 1:12 pm | Reply
  7. Joseph McCarthy/Quigley/LyndsieGraham/krm1007 ©™/Joe Collins/J. Foster Dulles/Marine5484

    I am a useless piece of camel dung. I post anti American, anti GB, anti semite, anti India, anti modern anything because I am a good moooooslem. I steal people's monikers because I am so ashamed of myself and post the most stupid comment. When people get angry with me, I claim insanity. I am the same guy.

    August 18, 2012 at 8:44 am | Reply
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    November 6, 2012 at 2:00 pm | Reply
  9. Natalie Portman

    it sucks a lot!

    January 23, 2013 at 8:55 am | Reply
  10. Michael Batalla

    things, so I am going to

    http://dumm.co.uk

    November 30, 2013 at 2:04 am | Reply

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