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Meeting with Felix Reategui, Center for Democracy & Human Rights, PUCP

20130407-152542.jpg Photo: Hilde

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On Growth in Peru: Our Meeting With Fernando Villarán

In her discussion of our meeting with Richard Webb, Peixuan briefly mentioned an attribute of Peruvian development that is perhaps the most important to many Peruvians- Peru has been growing! According to the World Bank, Peru’s Gross Domestic Product has been growing annually at levels from five to nine percent since 2005, with a brief lapse of only one percent growth in 2009. Fernando Villarán mentioned to us that Peru projects its growth to be maintained comfortably around six percent in the coming years.
Of course, as development students of the 21st century we are aware that economic growth on its own does not solve development challenges. The rest of this blog is filled with challenges for Peru to solve, from illegal mining to environmental degradation and human rights concerns. That being said, economic growth will always be a necessary condition for development, even though it is not sufficient on its own. Economic growth is a symptom of thriving business and more confident investors both in and outside of the country. These conditions can bring about an increased base of employment for the population, perhaps a decrease in poverty, and an increased capacity for the government to provide services to its citizens by way of increased revenue. Richard Webb mentioned how the canon tax on extractive industries in Peru has directly supported this outcome by returning revenues from legal mining to regions where the mining took place for infrastructure improvement.
With these dynamics in mind, it is clear that Peruvians have a vested interest in explaining why growth has taken off in the last decade. By exploring and diagnosing what the vehicles of Peruvian growth are, they can hope to continue to foster them and further develop them for the future. Fernando Villarán spent the majority of our meeting hashing out the “official” explanation of Peruvian growth, and explaining his criticisms and addendums the “official” story.
The current “boom” in the Peruvian economy dates back to 1993, when the economy was turned from a statist/populist system to one that was open to investment. This coincides with Alberto Fujimori’s self-coup d’état. This “boom” period became especially intense after 2002, when commodity prices and demand for Peruvian exports like gold, copper, silver, zinc, and tungsten skyrocketed. Not only did growth occur, but poverty judged by daily income below 7.40 soles a day (a little less than three dollars daily) dropped from 54.8% of Peruvians to 27% between 2001 and 2012.
Overall, the official story seems to focus on “big” actors and a trickle-down dynamic. Peru officially credits its growth to macro-economic stability, a more open economy, privatization, export promotion, and big firms in large industries like mining, natural gas, telecommunications, agro-exports, and construction. This strategy for growth was championed, particularly in Latin America, by the neo classical economics school of thought and the “Washington Consensus.” People like Pinochet and the “Chicago Boys” in Chile took similar approaches in the region. Perhaps the most important engine to Peruvian growth, according to proponents of this story, is success of the mining industry. Peru currently ranks at the top of Latin America in silver, zinc, tin, lead, and gold production; ranking second in copper.

Our meeting with Villarán: Photo credit to Tom Hilde

Our meeting with Villarán: Photo credit to Tom Hilde

Villarán does not seek to discredit this story entirely, but instead supplement it with some of the important vehicles for Peruvian growth at the micro-level. These bastions of growth do not trickle down to the rest of the economy, but drive the economy from the bottom-up. His first vehicle is Gamarra. Gamarra is the largest commercial center in Latin America. Over 20,000 firms operate in a space of twenty-five blocks. Primarily, these firms are either manufacturing, commercial, or service-oriented in nature. Textiles and clothes are an especially large part of the market. Located in the eastern part of Lima, Gamarra sells almost exclusively to the domestic market, and hardly exports. It has been growing along with the country. Villarán believes that the low prices here undercut Chinese prices, and serve as an organic vehicle for growth.
The second bottom-up vehicle is the San Martín region of Peru. This region was originally one of the poorest Andean regions of Peru. It has experienced the most dramatic drop in poverty in the country, and its prosperity is not linked to any of the “official” parties responsible for Peruvian growth. In this region, according to Villarán, farmers have organized into small and thriving cooperatives. Small cooperatives are nowhere to be found in the “official” poverty reduction story.
Third, Villarán credits microfinance with important poverty reduction and growth throughout the country. Peru is the top user of microfinance in the world. From 2005 to 2010, the amount of microfinance agencies doubled, with 3 million borrowers and a three-fold increase in the amount of funds loaned. Microfinance has been so successful that some entities have ceased to function in their original form and institutionalized as actual banks. There is a network of over a dozen of one such bank, called Cajas Municipales, which are supported by German specialists. Villarán believes the increase in prosperity due to microfinance is unaccounted for in the classic Peruvian growth story.
Finally, Fernando believes that the official story missed one industry in its entirety: gastronomy. Some parts of Villarán’s “unofficial” account could be subject to doubt, such as the magnitude of the San Martín region in the context of a whole country’s growth, or whether Gamarra is a driver or a reflection of the growth. The growth of the gastronomy industry, though, is clearly a glaring omission from the official story.
This group can vouch first hand for the fact that Peruvian cuisine is impressive, and agree with Peruvians that it is just waiting to join heavyweights like Mexican and Thai cuisine on the global stage. Villarán showed that it is no longer waiting, but making its move. From 2001 to 2009, the amount of restaurants in Peru increased from 40,000 to over 66,000. About 30,000 of these are in Lima, eclipsing even the 25,000 of New York. There are over seventy culinary schools in Lima, more than Paris. While Peru “imports” twenty foreign food franchises, it exports over seventy to other countries. As a testament to the rapid growth of Peruvian cuisine abroad, the amount of Peruvian restaurants in the United States has doubled (from 200 to 400) since 2006. Peru’s cuisine has become so important that Peru is starting to export the machinery required to make it, like ovens for Peruvian rotisserie chicken.
Part of the reason the gastronomy industry has not been included in popular accounts of Peruvian growth is that it is so hard to define. So many people play a role in bringing Peruvian food to the table. In an attempt to define it, a study found that two million Peruvians are directly employed making and serving Peruvian food, while five million are indirectly employed by way of making inputs for culinary production. This includes farmers making ingredients, and manufacturers making inputs ranging from tables to rotisserie chicken ovens. Although the value generated by mining is superior, by this account the gastronomy industry employs more Peruvians than the mining industry does.
With these vehicles in mind, Fernando hopes to round out the official story of Peruvian growth and add parts of the economy, like microfinance and gastronomy, which ought to be fostered moving forward. Of course, it requires mentioning that neither of these stories fully recognizes the magnitude of the informal and illegal economy in Peru. Fernando quantifies this economy, which does not pay taxes or collect social benefits like health insurance or pensions, as 60-70% of Peru’s real economy. A large part of this economy consists of independent and micro-business where one to ten people work for the informal firm. Hopefully, as Peru continues to grow, this part of the economy can be brought into the official fold.

 

– Miguel Albornoz

Peru: A Land Blessed and Cursed by Gold

Peru has throughout its history been a country rich in natural resources, going all the way back into the days of the Incan empire. The Incan empire was rich with gold and used gold in many of its decorations and culture traditions, however, at the time of the 15th century it was not used as currency as the Incas relied on a barter system. Stories of the gold in the Andes are part of what drew Pizarro and the other conquistadors to modern day Peru, following in the success of Cortes and the Spanish in Central America. In the city of Cuszco, gold was present only in the Cathedrals and a handful of Incan artifacts that had survived the conquest. In the cathedral many of the Christian statues and craftwork were endowed with gold. Our guide explained that it was to fit previous Andean traditions of Incan religious icons featuring a copious amount of gold, and along with adopted art styles, was a way to ease the transitions of faiths for the conquered. Yet even though this Christian iconography was decades removed from some of the oldest Incan artifacts, the Incan artifacts were almost completely bare of gold. Except for a gold plate, and a few smaller trinkets found in the past century, Incan gold had been stripped from it cultural bearings and reutilized for Spanish wealth in the Old World. Incidentally using gold in Christian installations was one of the few ways the Andean people could keep it from falling into the hands of the Spanish. In the short term the beneficiaries were the Spanish and the population of the Peruvian coast and the imperial seat of Lima of the richness of the Andes.

Gold Incan plate featuring religious symbols.

Gold Incan plate featuring religious symbols.

Going to the modern day, gold is still very much still a large part of the Peruvian economy and culture. It is still one of the most significant gold producers in the world and the extraction industry is one of the greatest contributing sectors to its economy. It would be wrong perhaps to completely dismiss the benefits the mining industry has had for the Peruvian people and their desire to utilize it to improve their standards of living, however, like before gold is coming with costs to the Peruvian people. Many of the prime investors and benefactors of the gold mines are foreign firms, such as the American firm Newmont which has invested billions in its operations, and not all of the Peruvian people have been willing to see mining expand on to their lands. Issues such as mercury poisoning, strip mining, and the elimination of natural resources long valued by indigenous cultures have led to a blowback against the mining companies and the government. Taking aside the environmental concerns for a moment, I would question the long term development benefits the gold extraction industry has had for the Peruvian people. While spending time around Madre de Dios and looking at the labor populations the industry, there seems to be wide reaching failures in developing long term infrastructure, meeting educational needs, or even sustainable living situations for its work force. The boom and bust cycle of the mines, the migratory nature of the business and it’s labor force, and the impoverishment of the land used by the operations limit the long term development achievements that should come with sustainable economic activity. A great deal of the profit from the enterprise is not seen from the miners and workers, but the commodities traders who deal the gold on the international market and often live far away from the impact of the mining industry and are little invested in its long term dividends. A problem I can see is what will happen when the boom ends or the supply dries up in each region; the mining industry has not seemed to develop viable alternative economic activities to take its place after it leaves from an area.

Mining town at the edge of a gold mine in Madre de Dios

Mining town at the edge of a gold mine in Madre de Dios

I do understand the difficulty in arguing too many in Peru that gold mining is limited in its development impact. The incredible boom in commodity prices since the financial crisis, has led to a sustained spike in the value of resources that Peru is heavily endowed in. The mining sector is a large part of how Peru has kept such high growth, many poor Andeans willing flock to its work force for better pay, and the state revenue from the mines has helped fund President Humala’s social programs. While in Cusco I heard one person compare modern mining with the conquistadors and a Peruvian answered that the difference is that now it is the Peruvians harnessing their own land’s wealth and not the Spanish seizing it. With that in mind I am well aware that it is not a simple answer to condemn the mining industry and to label gold as a drag on Peruvian development. Gold has been an important part of Peru’s history and identity and in the end its gold should be used to enrich its citizens. However, unlike the Inca’s after the conquest they should make sure there is something worthwhile in its place once it is gone from its land and that the pursuit from gold hasn’t extracted such heavy costs from them.

-Will Follmer

Centro Etnobotánico Ñape

AOA Envorionmental Graphics
Photo: Hilde

Our meeting with Kurt Holle

While in Lima we had the pleasure of meeting Kurt Holle, co-founder and general manager of Rainforest Expeditions. Rainforest Expeditions has signed a 20-year contract with the community of Infierno to help manage the community-led eco-lodge, Posada Amazonas. Posada is the only eco-lodge contracted with Rainforest Expeditions that receives 60% of the business profits, which then gets evenly distributed throughout the community of Infierno by the community leaders. After having such a memorable experience at Posada Amazonas and getting to personally know some of the community members of Infierno, it was very interesting to gain some insight into the business aspect of this project.

Rainforest Expeditions is based heavily in conservation ethic. Kurt did an excellent job outlining the importance of eco-tourism as a critical part of conservation efforts in the Amazon- often times it seems as though the Amazon’s carrying capacity is imposed by the market rather than the actual forest. The community, through their partnership with Rainforest Expeditions, preserves over 5,000 acres of rainforest. This includes no hunting or clear-cutting on these preserved lands. Kurt stressed the importance of using the rainforest in an ecologically responsible manner in order to prevent it from being abused i.e. illegal gold mining. The combination of tourism and conservation efforts made by Kurt and his team at Rainforest Expeditions has successfully kept out gold miners thus far.

During our meeting, I had the opportunity to ask Kurt to tell us about some of the biggest challenges he faced when setting up this project with the community of Infierno. He said that communication and reaching consensus presented the greatest challenges, especially in the beginning. Kurt and his partner spent 8 months visiting every single family in the community to make sure everyone was involved in the decision-making process. The most important goal was to build trust, which was something that could only be achieved over time. The communication process required a lot of patience, empathy, humility, and persistence.
Assessing and gaining access to an ideal location for the eco-lodge presented another lofty challenge, mostly due to the fact that many parts of the Amazon have already been subjected to extreme human pressures. In order to achieve a more holistic experience, the location needed to provide clients with the feeling of remoteness and isolation, but still in range of transportation and some modernity (wifi, etc).

Although I cannot speak on behalf of the entire class, I had a feeling that many of us were interested in hearing about Rainforest Expeditions’ post-2016 plans for the lodge when the contract expires. After our Posada experience we have all developed a personal stake in this project and would love to see the continued success of the lodge. According to Kurt, the community is looking to renew the contract for another 5 years. Many of the members have expressed concern about not being prepared to manage the corporate and international marketing aspect of the business. Our guide, Rodolfo, had also expressed these sentiments to us a few days earlier. In the future, the community will need to work on creating a better accounting track record so that they can begin to invest in aspects of the community that do not deal with tourism.

After speaking with Kurt it became very clear how invested and passionate he is about these projects. His love of the Amazon, stemming from early childhood, has guided him to pursue conservation efforts through the creation of a unique and valuable partnership with the community of Infierno.

-Brittany Patterson

Meeting with Richard Webb

Day 7, March 21, 2013

Today’s third meeting was with Richard Webb, the former president of the Central Reserve Bank of Peru and founder of the Instituto del Perú. During the one-hour meeting, Mr. Webb covered topics including economic growth, urbanization, illegal mining, law enforcement, and the budget surplus. The most interesting things that he discussed were rural economic development in Peru and gold mining vs. economic growth.

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First, Mr. Webb introduced his new book Conexión y despegue rural. According to his study, earth-shaking changes have taken place in rural area in Peru over the past 20 years. This can easily be seen from the annual growth rate of per capita rural income, which was 1.4% during 1900-1994, then increased to 7.2% during 1994-2011. One of the main reasons is the improvement of communications platforms. Success in transportation infrastructure, especially roads, and the popularization of cell phones and the internet significantly changed the previous isolation of rural areas, and hence provided opportunities for rural people to be part of the market. In 2001, it took 8.8 hours for rural people to travel to the nearest city. Now in 2011, the number has fallen to 4.4 hours. Increased accessibility has helped to integrate the market and rural producers.

Behind the changes was the government’s solid financial support. Mr. Webb showed us that investment in the transportation sector increased from 16% of public investment in 1972-1980 to 34% in 2003-2011. Furthermore, the Peruvian government improved road maintenance. In 1996-1997, the Peru Rural Road Rehabilitation and Maintenance Project established a micro enterprise based road maintenance program. The government of Peru chose a cooperative approach between the public and the private sectors. The government contracted out road maintenance work to local micro enterprises. These private companies then employed workers who lived along the roads. By doing so, it inspired local people to maintain the roads. The program was awarded the World Bank’s best project that year. As we know, the 1990s were the period during which the public sector underwent New Public Management reforms, which tried to improve government efficiency. Based on the road case, we can see that the Peruvian government did a good job in coordinating micro enterprises and public services.

Since our arrival in Peru, many people we’ve met continue to talk about gold mining. In this meeting, Mr. Webb pointed out that mining is the most critical source of economic growth in Peru now. Above all, the Peruvian government benefits from the taxes revenue collected from mining activities. The growth of tax revenue even exceeds the growth of GDP, enabling the government to run a budget surplus. For legal mining, 15% of profits received by the mining companies return to the mining regions and help to develop infrastructure in those community. Mining activities also increase the demand for the machinery used for mining which further contributes to the development of the industry.

However, the main problem is illegal mining. It causes negative externalities. Obviously, illegal miners do not pay taxes on their earnings and local people suffer from the damage and contamination done by the mining. The government has tried to enact laws to control it, but enforcement faces many obstacles. The government has not been able simply to shut down illegal mining operations, as attempts to do so have resulted in massive conflicts between law enforcement and illegal miners who are among the poorest of poor people. Mr. Webb said that one of the possible solutions is to raise the cost of illegal mining which could prevent people from doing it, but this idea still has long way to go. Also, Mr. Webb mentioned that gold mining is not the only source of economic growth in Peru. The fishing industry, manufacturing, and tourism are growing very fast. It is a balanced economy that will lead to the sustainable economic growth of Peru.

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By Peixuan Zhou

On the Edge of Civilization

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Monday morning we left Posada Amazonas for Puerto Maldonado, the capital of the Madre de Dios region. Only several hundred kilometers from the Brazilian border, and smack dab in the middle of the resource rich Peruvian Amazon, Puerto Maldonado has recently experienced unprecedented growth. Much like Skagway during the Klondike Gold Rush, Puerto Maldonado has the air of gritty, buzzing city in a western film. But while John Wayne might not fit in here, revolvers were still to be found at the bank as the Amazon’s wealth was packed into an armored vehicle and consumed by the Peruvian economy right before our eyes.

As part of a national decentralization strategy the Peruvian government has allowed regional governments to encourage economic development as they see fit. While in theory this seems like a good idea by spreading responsibility around, a lack of experience in balancing competing interests has meant that growth has mainly come in the form of extractive industries, such as timber and gold, at the expense of the rainforest. While Peru has sufficient laws and physical capacity to impose its will, corruption in regional institutions has meant that federal mandates are rarely carried out in the jungle as expected. Bribes are a common (and effective) way of ensuring that the authorities look the other way as illegal mining and logging destroy some of the world’s richest and most biodiverse ecosystems.

Traveling out of Puerto on Tuesday morning, we followed the Interoceanic highway north towards Brazil in order to see former illegal mining sites. Even our prior research was no preparation for the vast destruction that awaited us. As with the trip in general, the visit to the gold mines highlighted the importance of placing classroom work in context. What we envisioned as small clearings located along the riverbanks or deep in the forest were actually massive blemishes located along the highway. An 8 kilometer tract of land had been clear-cut and then mined adjacent to the Interoceanic Highway in what was one of the most blatant ecological crimes we had ever witnessed. It was reminiscent of childhood films Fern Gully and the Jungle Book, with dead trees and vultures dotting an eroded, otherworldly landscape whose patches of water were so polluted not even palm trees could survive.

Besides the obvious ecological damage the highway is leading to as it pushes deeper into the jungle and allows industry to reach untapped resources, there was a less apparent impact on Peruvian society. The increase in corruption and bribery has been just the tip of the iceberg as investors and illegal actors have started laundering money, running prostitutes, and smuggling contraband. This type of organized crime is only one step short of other activities such as drug smuggling and weapons trafficking and has the potential to snowball. Increases in informal sector activities are only going to hurt the country and reduce the people’s faith in the government. This is a worrying trend for a state where military dictatorships and land seizures have been perennial problems contributing to past armed conflicts such as that with the Sendero Luminoso.

— Seth Sykora-Bodie (Photo Credit – Lindsay Ahlman, more from Seth later)