Peru’s informal mining sector threatens economic growth

Peru’s informal mining sector threatens economic growth
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Peru faces the critical challenge of regulating the informal mining sector. Leaning on the extractive industries for private investment, the rise of an extrajudicial gold rush could jeopardize economic progress.

Much like its Andean regional neighbors, Peru experienced remarkable growth in the post-Fujimori era since 2000. The Peruvian economy has expanded an average of 6.11 percent per year since then and has attracted considerable private investment due to a booming extractive sector. Despite the country’s economic upturn in the last decade, the central government faces serious challenges with a pestering informal mining sector that, if unchecked, may decrease investor confidence in Peru’s capacity to enforce the rule of law.

The state’s inability to control growing informal sectors, some of which are grounded in criminal activities, is threatening the overall economy. For example, Peru is now a leading producer of cocaine and the largest exporter of coca leaf. Illegal logging in the shrinking Peruvian Amazon is another persistent problem: 80 percent of timber exports are harvested illegally.

Like timber and coca leaf, illegal mining has now become a disturbing reality for the Peruvian state. One-fifth of exported Peruvian gold is illegally mined, and much of it is bought by the United States and Europe. The rise of illegal gold would not be such important news for investors if the extractive sector did not constitute the largest chunk of the Peruvian economy. In 2005, extractive industries made up 50 percent of Peru’s earnings. That number is now closer to 60 percent.

Peru’s economy largely depends on mining, and its growth in the 2000s is largely attributed to the growth in its mineral exports. Peru is now the sixth largest gold producer, although it also exports other valued minerals such as arsenic, bismuth, and copper. Peru also enjoys having one of the largest natural gas reserves in the continent, and its reserves have generated $6.19 billion in royalties to the Peruvian state since 2004.

It is imperative for the Peruvian government to handle the illegal mining sector for two reasons: first, it must retain investor confidence and second, it needs to increase state revenues. Investors thinking about the mining sector in Latin America have many options. Colombia, Ecuador, Peru, Chile and Bolivia all share the Andes and have vast amounts of mineral wealth. Chile, Peru’s main mining competitor and neighbor, has a developed and fully regulated mining sector operating under a liberalized, export-oriented economy. The Peruvian government needs to provide investors with an economically integrated, regulated mining model if it wants to keep up with its highly developed neighbor.

Peru has shown political intent to modernize its mining sector by passing anti-corruption legislation and a free trade agreement with the United States. The problem for the Peruvian state, however, is the enforcement of laws, not their adoption.

Integrating Peru’s vast mining sector would also benefit the government by increasing state revenues. Tackling the informal mining sector would demonstrate the state capacity to become a modern, export-oriented economy as well as increase mining royalties by 20 percent (one fifth of gold exports).

Integrating the informal mining sector would have a two-pronged effect. Politically, the current social democratic government could claim to have increased political accountability and strangled the heart of Peruvian corruption. Fiscally, Peru would have a significantly larger budget from the previously informal and unaccounted mining royalties.

The Peruvian government is not in a position to dictate terms to the global market. Gold and copper prices are highly elastic in the long run, and could easily drop in the same way they increased in the 2000s. Fortunately, post-Fujimori Peru has not had to deal with a grave external shock related to commodity prices. It should therefore brace its economic infrastructure in the event this worst-case scenario becomes a reality.

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.