La Sangre de la Tierra: The Good, the Bad, andthe Ugly of Foreign Direct Investment in Peru

Item Type text; Electronic Thesis

Authors Cooke, Alexandra Danielle

Publisher The University of Arizona.

Rights Copyright © is held by the author. Digital access to this materialis made possible by the University Libraries, University of Arizona.Further transmission, reproduction or presentation (such aspublic display or performance) of protected items is prohibitedexcept with permission of the author.

Download date 12/02/2021 15:20:05

Link to Item http://hdl.handle.net/10150/297545

LA SANGRE DE LA TIERRA:

THE GOOD, THE BAD, AND THE UGLY OF FOREIGN DIRECT INVESTMENT IN PERU

By

ALEXANDRA DANIELLE COOKE

A Thesis Submitted to The Honors College

In Partial Fulfillment of the Bachelors degree With Honors in

IDS-International Studies

THE UNIVERSITY OF ARIZONA

MAY2013

Dr. athleen Schwartzman De rtment of Sociology

The University of Arizona Electronic Theses and Dissertations Reproduction and Distribution Rights Form

The UA Campus Repository supports the dissemination and preservation of scholarship produced by University of Arizona faculty, researchers, and students. The University Library, in collaboration with the Honors College, has established a collection in the UA Campus Repository to share, archive, and preserve undergraduate Honors theses.

Theses that are submitted to the UA Campus Repository are available for public view. Submission of your thesis to the Repository provides an opportunity for you to showcase your work to graduate schools and future employers. It also allows for your work to be accessed by others in your discipline, enabling you to contribute to the knowledge base in your field. Your signature on this consent form will determine whether your thesis is included in the repository.

Name (last, First, Middle)

LCCJ~J AbcCl\t~{c.... ~ D~V1,\~\\~ Degree title (eg BA, BS, BSE, BSB, BFA):

\SA Honors area (eg Molecular and Cellular Biology, English, Studio Art):

~~I""(\~vf.,cJL St-v 6-~~S Date thesis submitted to Honors College:

(Y\ \ 5+ ~O\ ~

The University of Arizona Library Release Agreement

I hereby grant to the University of Arizona Library the nonexclusive worldwide right to reproduce and distribute my dissertation or thesis and abstract (herein, the "licensed materials"), in whole or in part, in any and all media of distribution and in any format in existence now or developed in the future. I represent and warrant to the University of Arizona that the licensed materials are my original work, that I am the sole owner of all rights in and to the licensed materials, and that none of the licensed materials infringe or violate the rights of others. I further represent that I have obtained all necessary rights to permit the University of Arizona Library to reproduce and distribute any nonpublic third party software necessary to access, display, run or print my dissertation or thesis. I acknowledge that University of Arizona Library may elect not to distribute my dissertation or thesis in digital format if, in its reasonable judgment, it believes all such rights have not been secured.

)vf Yes, make my t esi available in the UA Campus Repository! ~ . 7 ) Student signature: ~ ......... L Date:

.-' -rh 11~' 2v'-~

Thesis advisor signature: Date: -/--¥r«-L.:!~~.L.-'-t-'""~{)13

D No, do not release my thesis to the UA Campus Repository.

i Student signature: ~~ ___ ~ ____ ~_~ Date: ~ ___________ _

Last updated: 04/01/13

Abstract This thesis analyzes the potential connection between foreign direct investment (FDI) into the Peruvian mining sector and development outcomes over the past thirty years (1980-2012) . This research presents the economic and political background for the period before analyzing trends over time and by bivariate analysis with FDI as the independent variable and development indicators as the dependent variables . Development indicators were defined as poverty rates, gross savings rates , health expenditure, and malnutrition with analysis occurring at the national level and at specific departments (Ancash, Arequipa, Cajamarca, La Libertad, Moquegua, Puno, and Tacna); canon minero, a specific tax on mining profits for regional use, was substituted for FDI at the department level. Trends over time were discussed. Bivariate analysis yielded none or weak correlation between indicators and FDI . Analysis discussed the potential causes for patterns referencing neoliberal policies such as privatization and decentralization that altered the system structure and government support for in healthcare and poverty measures. Poor regulatory measures, mismanagement at regional levels, and the growing influence of multinational mining firms have altered the landscape and power dynamics . The recent shift in mineral prices and environmental concerns from social protests was also discussed along with potential solutions for improvement.

Cooke 1

Since Spanish discovery of Latin America, foreigners have been searching

for opportunities to invest and reap the benefits of the natural wealth residing in

the continent. Latin America is home to over 400 different mineral reserves

including gold, copper, tin, aluminum, silver, molybdenum, and other metals

(Cunningham 2005). For many reasons, the majority of mines are owned by

foreign-based companies leading to the high concentration of foreign direct

investment in this sector. High commodity and metal prices along with more

investor-friendly policies internationally have led to an increase in foreign capital

flows into expanding mining operations in Latin America. While increases in

foreign investment in Latin America may be initially seen as beneficial, there exist

major debates involving the benefits and disadvantages of foreign direct

investment (FDI). Foreign direct investment is considered an "investment made

outside the home country of [an] investing company in which control over the

resources transferred [through the investment] remains with the investor,"

resources which can include assets like capital, technology, management, and

access to markets (O'Brien and Williams 2010, 186). Proponents of liberal

economic policy argue that foreign direct investment contributes to strong

economic growth and is a major engine for development.

The issue is particularly contentious in industries based upon natural

resource extraction like mining, oil and gas. High resource prices over the past

decade have led governments to reconsider their natural resource policy and to

choose how to best harness their reserves and the following investment for

Cooke 2

national growth and benefit. Recent academics have begun to shed more light on

some of the hazards of approaching investment in only natural resources.

Historically, these "commodity booms" have generated short-term wealth but

were ultimately detrimental to economic stability and political stability in the long­

term (Arellano Yanguas 2008, 10). Mineral dependency has also been linked to

significantly higher levels of inequality, low levels of education and health, greater

exposure to risk and vulnerability, and environmental degradation when not

managed properly (Pegg 2006, 377-378). Some of these negative effects along

with worries about foreign exploitation of national reserves have caused leaders

like Evo Morales in Bolivia to nationalize the natural resource-based industries

and reject increased foreign influence (Zissis, May 2006). Others instead have

chosen to court foreign investment in its industries and integrate benefitting

industries in their central plans for their economy with varying levels of success.

European and external interest in Latin America for its natural resources

and local markets is not new. Many Latin American countries have arranged their

economic systems and incentives to favor export-driven orientations, particularly

dealing with natural resources, over the past centuries. Renewed reforms

through structural adjustment programs solidified policies that privileged

international investors and private interests. In exchange for international

investments, nations sacrificed control over social spending, reducing funding to

social programs in healthcare and education that increase the potential of its

citizens. The reforms also transferred control of these industries to foreign

ownership and direction and provided a potential outlet for the escape of

Cooke 3

economic gains that would benefit multinational companies over citizens. With

FOI flows reaching an all-time high in Latin America in 2011 (a 31 percent

increase over the previous year), a reanalysis of the effects of FOI is crucial to

better understand and direct its potential for gains to benefit both investors and

the region's citizens (O'Neil, June 2012). This paper will attempt to analyze in a

multi-faceted approach the effects of this increased foreign direct investment

(FOI) in mineral industries and the degree to which foreign investments have

contributed to economic and social development.

Literature Review

The Role of FDI for Growth in Developing Countries

With the growth of multinational corporations and increased globalization,

FOI has evolved into an engine for economic growth in developing countries.

Foreign direct investment is seen as more stable and less likely to flee in times of

crisis, overall more of a commitment than foreign portfolio investments that only

involve financial elements of a company (Grosse 128, 1997). The literature

argues that foreign direct investment benefits the host country in a multitude of

economic and cultural ways. First, FOI provides additional resources and

capabilities in the form of new capital, technology, access to untapped markets,

and better management skills (O'Brien and Williams 192, 2010). Foreign direct

investment also provides governments additional tax revenues with increased

economic activity and an improved balance of payments, arguing that the growth

in FOI leads to an increased gross domestic product (GOP) and an increased tax

base (O'Brien & Williams 192, 2010). These acquisitions and expansions are

Cooke 4

also thought to better incorporate the host economy with the global marketplace,

increase the overall competition, efficiency and labor output, along with exposing

citizens to different customs and norms of other countries (O'Brien & Williams

192,2010).

Foreign direct investment can be seen as important signal of confidence to

investors in a particular country which attracts other forms of financing like

portfolio investment and bank lending (Grosse 149, 1997). Porzecanski and

Gallagher discovered that "the most significant determinants of FDI [were1 market

size, economic growth rates and export orientation," all of which are considered

factors of economic strength and potential (Porzecanski and Gallagher 239,

2007). Prior to neoliberal reforms, economic uncertainty and nationalizations of

mining operations dissuaded FDI from taking a larger role in the economy (Bury

225.2005). Neoliberal economic policies, or the "Washington Consensus," were

initially started to revive faith for investors in debt-laden national economies and

to spur international investment (O'Brien and Williams 328, 2010). In one

analysis, host countries that enacted aggressive measures to attract foreign

investment produced benefits with a net value of "almost four dollars for every

dollar expended" (Moran 4, 1998). Historically, increased FDI in natural

resources has also seen notable success in helping promote development in the

Latin American countries of Chile, Brazil, Columbia, and Argentina (Moran 7,

2010).

The Potential Risks of FDI to Developing Countries

Cooke 5

Despite its potential for gains in a host country, foreign direct investment

comes with the potential for major disadvantages in long run. For example, FDI

can create internal conflicts for governments aiming to maintain stability

economically and politically within the receiving country by challenging

independent decision-making and altering its priorities. Scholars argue that

nations receiving foreign direct investment have suffered a loss of national

sovereignty and decision-making power over its strategic reserves (Todaro &

Smith 593, 2011). Multinational companies previously without a voice in the host

country suddenly control large stakes in the national economy and garner

significant political weight for decision-making processes. With newfound

democracy and foreign ownership, political leaders face the challenge of

legitimately balancing the interests of domestic industry, democratic voters, and

transnational companies heavily invested the host country economy. Typically,

leaders must sacrifice one interest to appease the others. O'Grady, for example,

argues that the structure of the market economy and globalization of today has

largely allowed "the highest bidders [t01 have the power to 'purchase' what they

want" (O'Grady, Nov 2005). Instead of functioning as the voice of its citizens,

democracy is undermined by the buying power of vested interests and lobbying

groups, particularly the "most powerful, best-organized constituents" composed

of local elites and multinational firms, as "politicians don't have an incentive" to

reform policies and change the status quo (O'Grady, Nov 2005). In this way,

foreign direct investment can be seen as a way for a transnational company to

Cooke 6

capture a host country's economy and alter the decision-making process to its

benefit, either through directly interacting with a government or with local elites.

Additionally, multinational corporations have gained more economic

control and bargaining power over trade terms and capital at the expense of

governments through FDL During the 1990s, the government permitted almost

unlimited repatriation of capital and profit remittances abroad along with lowered

taxes and favorable tax terms (Agosin 11, 1995). Progressively as more and

more countries have adopted neoliberal trade policies, "competition to attract

exploration and mining investment has intensified" typically resulting in more

generous terms for investors (McMillan and Waxman 151, 2007). Neoliberal

reforms enacted "sound economic policy" by enforcing deregulation, privatization,

and policies that privileged the market (and the investor) over the state.

Highly focused foreign direct investment also risks excluding other

productive sectors such as services and manufacturing from potential

investment. Accumulation of economic resources in one sector can entrench the

dominance of a single industry as other sectors are ignored and begin to atrophy.

For example, Collier discovered that in the long-term, economies experiencing

commodity booms were producing less manufactured products than they would

have without high export prices (Collier 44,2010). The net effect was that the

economy stayed at relatively the same level of income it would have been

without the boom (Collier 44,2010).

Part of the expected benefits of FDI in an industry is the creation of

backward and forward linkages (for example, the creation of a smelter for metal

Cooke 7

processing) and spinoff industries like housing that support or respond to the

growth in the initial sector. However, investment in one sector does not

necessarily translate to these linkages or enclave industries. Recently for

example, the "rapid decline in transportation costs has severed the link between

mining and downstream processing" as a potential spin-off industry for local

growth; local suppliers are now seen as unlikely to benefit as "much of the

produce and services is imported" (Pegg 2006, 381). In fact, an analysis of FDI in

Latin America following neoliberal reforms found "almost unanimous evidence

that FDI resulted in very limited productivity 'spillovers' for the region"

(Porzecanski and Gallagher 2007,229-230). While some minor spinoff industries

supportive of large-scale mining schemes have seen varying success, growth

potential is seen as minimal within the sector. A study recently determined that in

the mining sector "a one percent increase in output [would] generate a 0.04%

increase in employment in the mining sector," signaling the diminished capacity

for job growth in the industry (World Bank 35, 2005). Current mining projects are

also less labor-intensive and even when labor is needed, specialized laborers

with more technological expertise to operate machinery are required (Pegg 380,

2006). In much of Latin America, "most potential local workers lack specific

training and education to prepare them to become qualified mining workers

(World Bank 166,2005). As a result, skilled workers are imported from

developed countries and host country workers are disadvantaged from the

absence of training schemes for host country workers. Similarly, alleged

technological and knowledge benefits to an industry do not always accrue if new

Cooke 8

technologies are sub-par or not transferred to host country subsidiaries (O'Brien

and Williams 2010, 208).

More importantly in terms of development, neoliberal policies' aim of

attracting foreign direct investment to Latin America and solving its debt crises

came at the expense of public expenditures on social programs. Inflation and

large government debt deterred foreign investment and economic growth;

neoliberal policies enacted by the International Monetary Fund's structural

adjustment programs aimed to resolve national debts and regain international

competitiveness. In order to do so, governments were forced to undergo austerity

and heavily reduce public expenditures, sell off national industries, and

deregulate their economies (Bury 220-226, 2005). Cutting public spending

resulted in "jeopardizing funds devoted to maintaining and equipping schools and

hospitals, as well as the salaries of teachers and health workers" (Kaufman and

Nelson 6, 2004). Social welfare programs were also minimized as "social

insurance health coverage declined with rising unemployment. .. swelling the

already large numbers dependent on inferior public health services" (Kaufman

and Nelson 6,2004). Similarly as government subsidies were eliminated,

"poverty rates have either declined very little or have actually increased" during

the periods of reforms in Latin America (Bury 223, 2005). Decentralization also

left constrained regional governments incapable of handling new responsibilities

(Ewig 219, 2004).

Particularly with extractive industries, much of the literature supports the

idea that human welfare gets worse with resource dependence (Daniele 546,

Cooke 9

2011). Mineral-dependent states had significantly higher levels of inequality,

lower spending on education and healthcare, greater risk of conflict and social

tension, and lower institutional quality (Pegg 377-379, 2006). Ideally, "a policy of

prudently saving and investing rents from resource extraction" should promote

future wellbeing of its citizens, though this often does not occur (Atkinson and

Hamilton 1793, 2003). On a macroeconomic level, "the state's capacity to ensure

a sustainable flow of net returns from [mining was] challenged by [World] Bank

recommendations" during the 1980s and early 1990s and posed another

obstacle to harnessing government revenues for social programs (Pegg 380,

2006). Resource-rich economies are more inclined to operate as "factional

political states whose energies are diverted into building and maintaining political

coalitions" rather than encouraging long-term growth (Auty 498, 1998).

Additionally, resource industries can come with unexpected side effects including

environmental concerns dealing with water use and toxic chemicals like cyanide

and mercury released in mine tailings and further complications with land-tenure

patterns as mines slowly become physically larger than their closest city (Bury

230,2005).

Methodology

Why Study Peru?

Once again as FDI in mineral-based extractive industries has grown, the

effect of this influx remains unclear in its role for effective development. As more

and more countries are increasing exports, a better analysis into the nature of

Cooke 10

FOI is important for the future economic and social development of a country so

as to make the resource the most beneficial to all. In order to better analyze the

effects of foreign direct investment in extractive industries, I will analyze the

recent developments in Peru occurring roughly from the 1980s to present day.

Peru represents a good case to analyze as a case for the effects of FOI in

Latin American countries and neoliberal reforms. Under Alberto Fujimori's

controversial rule starting in 1990, Peru ardently followed the tenets of

neoliberalism and radically altered its policies to attract foreign direct investment.

Prior to Fujimori, "annual inflation rates were higher than 7500%, GOP had

decreased by 30% in three years, and guerrilla violence [aimed at large and

foreign firms] was escalating throughout the country" as the country defaulted on

its international debt (Bury 222-223,2005). Fujimori's policies aimed to fix these

problems through orthodox neoliberal reforms that dramatically altered the

environment for foreign investors. In 1991, his administration "opened all sectors

of the Peruvian economy to FOI and lifted restrictions on remittances of profits,

dividends, royalties, access to domestic credit, and acquisition of supplies and

technology abroad" (Bury 222, 2005). In doing so, companies did not need to pay

royalties for the resources they extracted nor pay tax on their profits until they

had recovered their initial investments (Arellano-Yanguas 19, 2008; Arellano­

Yanguas 620, 2011). The Foreign Investment Promotion Law (No. 662) included

the right of foreign investors "to receive non-discriminatory treatment, freedom to

conduct commercial and industrial activities and the right to transfer profits

Cooke 11

abroad" (Swedish Trade Council, 2006)1. His administration also "offered new

tax-stability packages to foreign investors for terms of ten to fifteen years and

implemented wide-ranging privatization programs" to open up state-owned firms

to international investors (Bury 222, 2005). In the agreements, governments

renounced the right to introduce later "changes to fiscal policies without

companies' approval" (Arellano-Yanguas 19, 2008). In 1992, Fujimori responded

to increasing national opposition by enacting a "self-coup" that closed parliament

and rewrote the constitution, which highlighted the new role of foreign investors

for the country's continued economic progress (Bury 222, 2005).

These neoliberal reforms have largely remained intact and have arguably

shaped Peru's growth over the decades. According to a country-level study by

the International Monetary Fund (IMF), Peru has become "one of the most open

and liberal economies-not only in Latin America but in the world" (Bury 223,

2005). The growth and optimism for Peru led the World Bank Director for the

Andean region to proclaim "Peru will be the 'tiger of the Andes' and [he

forecasted] sustainable growth for the next five years" (Arellano-Yanguas 10,

2008). For example in 2007, Peru's gross domestic product grew at "a real rate

of 9%, which was the highest growth rate since 1994" (Gurmendi 16.1,2010).

For the past decade, the "Peruvian economy has grown at an annual average

rate of 6.3%" which has led to an appearance of a stronger middle class in the

country (O'Grady, Dec 2011)

1 For a short table of government decrees based to promote FDI overall and in the mining sector, see Appendix 1

Cooke 12

Much of Peru's recent stability and growth is attributed to the influence of

the mining sector and its wealth of reserves. In 2010, the minerals sector

contribution to GOP reached a record high at 8.8% and is seen to grow

(Gurmendi 17.7, 2012). Peru is expected to produce 180,000 kilograms of gold in

2015 alone, the highest producer in Latin America and Canada (Gurmendi 17.5,

2012). Peru has a

potential production

Table 2. Peruvian mineral production and exports (source: Ministry of Energy and Mines. 2000; 2(01).

value of 11.3 billion

USO per year in non-

ferrous and ferrous

minerals with copper

Mineral

Copper Gold Lead Silver Tin Zinc

Production ::'O()() (metric lonnes)

567751 135

252257 2353

30403 773757

World Percentage of ranking world production (reserves) 2000

6 4.5 1\ 5.8 4 9.1 2 13.0 3 18.0 4 LO.5

Bury 223, 2005. being the most profitable metal for production

Percentage increase (1990 99)

65 534

30 15

531 67

value at 3.67 billion UOS per year alone (Swedish Trade Council, 2006).

Export value (US$ million) 2000

931 1145

190 180 166 496

Between 1990 and 2000, mining products accounted for an average of 45.3% of

national exports (Bury 224,2005). From 2002 to 2007, the percent of mining

exports within total exports

increased even more, rising Figure 3.l Mining and fuel as a percentage of internal tax revenue

4(\(00 j

from 55 to 70 percent; mining

sector's contribution to internal

tax revenue also increased

24% from 5 to 29 percent, as

.-. /

! :: : 1"<1" "'"' 'I·

P

'''''1·,0( n")'#'O 'I<i.f l":-I "",,", , ... • wmo !iJ3l~ 1J""-2

5C06 1 1S~

) I-- ->- +

t9ge $W XXIJ 2O)"i 1XJ2 2Of.IJ 2('().Ij X05

; 10%

. ,0/,

shown in the excerpt above Soorces MEF [20073, SUNAT 2007)

(Arellano-Yanguas 2011,620).

Cooke 13

However, the bulk of the industry is not locally or nationally owned and

has been driven by foreign interests. Overall, "more than 300 foreign mining

companies have been established in Peru since 1990" (Gurmendi 17.4, 2012) .

Origin countries ofFDI and designated sectors

2001

-

Source: Proinversi6n

In 2004,

approximately 75% of

the mining industry

was foreign owned

(Swedish Trade

Council, 2006). Much

of the industry is

concentrated in large

multinational

corporations

including Barrick

Gold, Newmont

Mining, and Xstrata Copper (Swedish Trade Council 2006). Peru was also seen

as the "seventh most attractive area for investments in exploration" (Gurmendi

16.3, 2010) . Between 1994 and 2001 , the mining sector was the second-largest

recipient of FOI, totaling $10.7 billion (US) dollars (Bury 225) . Between 2002 and

2007, the stock of foreign direct investment (FOI) in the mining sector increased

by 65%, contrasting a 12% overall increase in FOI (Arrellano-Yanguas 2011 ,

620). Since then , mining has become the largest recipient of FOI with more than

Cooke 14

23.1 % of the total FDI in 2010 (Gurmendi 17.1, 2012). Investment in the mining

sector alone doubled from 2009 to 2011 (O'Grady, Dec 2011).

Peru provides a strong example for a case study additionally because the

nation, which is progressively becoming a middle-income nation, is still grappling

to overcome many of the ills of a developing nation. Peru is only now

economically recovering from the period of debt repayment and the following

"economic stabilization program that stabilized the economy but did so with little

to no safety net," leaving millions still in poverty and without seNices (Ewig 219,

2004). During the internal conflict before and during the Fujimorista era,

"thousands of cases of serious human rights abuses committed by the armed

opposition groups ... and by the state security forces" were documented (Amnesty

International 20, 2009). Despite the apparent wealth and growth like many Latin

American nations, Peru faces a historical legacy of extreme inequality and

disparities in overall quality of life. As the lead author of the "Poverty and

Inequality 2011: Latin America" report claims, "Inequality is the great scar across

Latin America ... In the same country you can have municipalities with European

standards and others that are closer to Burkina Faso" (Tuckman, 2012).

Peru is not exempt from this fate as major disparities persist between rural

and urban residents along with indigenous peoples. Though poverty rates and

health indicators have improved at a national level, not every region has seen

similar progress. In 2010, the rural poverty rate was higher than the national

poverty rate by 30.2%; 30.8% at the national level compared to 61% in rural

areas (World Bank database, 2013). For example in Lima, 56% of residents can

Cooke 15

go do leisure activities, spend on personal needs, but in rural areas where 2% of

population belongs to middle class , only 84% of people can afford to buy food

(Cabitza, Feb 2012). In addition to th is, many of the rural residents are part of a

relatively large indigenous population, whom were additionally targeted during

the violent Fujimori period. Many of these people from these 71 ethnic groups are

marginalized by

Under-five Mortality Rate (per 1000 live births)

• -, "\ WOtid Hea tth , Organization

society and are Inequities In mottaIfty0o

doubly

discriminated in

that many view

Spanish as their

second

language or a

150 .,.---------- - - - ---- - - .

100 +-------'-... _..c--- - --- --- -

50 +-------~---~ .. ~------ . ~

i ~ ! ¢I o +----~---.,.----~---~- . ~

1970 1980 1990 2000 2010 !§ ....

Year

• Peru .Americas region

completely foreign tongue (Amnesty International 2009). Another

example of inequalities are seen in the graphs and statistic taken

from the World Bank and the World Health Organization showing

60 55

31

under-five mortality rates . In the graph, the under-five mortality rate shows Peru

only slightly below the Americas region and catching up fast, highlighting the over

improvements in health. However, the table disaggregating the national statistics

shows a different picture of Peru ; socioeconomic status and location greatly

affect the mortality rate in a way that is initially hidden by the national statistic.

With the introduction of the Millennium Development Goals in 1990, there

has been a renewed focus on increasing the level of development beyond solely

64

4

Cooke 16

economic growth. The Millennium Development Goals introduced ambitious aims

to eliminate and reduce poverty, hunger, illiteracy, gender inequality, child and

maternal mortality, HIV/AIDS and infectious diseases, and environmental

degradation that were previously marginalized in development spheres.

Neoliberal reforms reshaped and eliminated many of the options for governments

address these new goals. For example in Peru, cutting federal budgets also cut

health expenditures; the public health system was operating on a budget in 1990

that was 15% of what was spent in 1980, posing a risk to properly tackling

health-related goals (Ewig 221,2004). The World Bank and lending institutions

like the Paris Club creditors slowly sanctioned social spending in the mid-1990s

as the economy began stabilize (Ewig 229, 2004). More recently, current

president Ollanta Humala has advocated for social inclusion by implementing

new measures that would increase the windfall tax on mining corporations to

generate one billion dollars per year of funding that would end up in social

programs (The Economist, June 2012).

As the mining sector and the national reserves have become a "critical

source of tax revenues" for the government, the industry's role and contribution

to development has become more contentious (Valencia, July 2012). Mining

employs very few individuals in the country, employing only 1.4% of the total

official workforce in 2006, and the impact on the local economies is inconclusive

(Swedish Trade Council, 2006). The surge in number of foreign owned mines,

"which [have] been a beneficial source of inward investment[, have] prompted

concerns that the country is sacrificing its environment for a short-term burst of

Cooke 17

growth" (Watts and Collyns, Sept 2012). In addition to political pressure to tax

more from mining firms, social protests arising from environmental concerns

have instigated a vindictive attitude towards mining companies in the country. A

recently proposed expansion in 2011 of the Mina Conga in Cajamarca

threatened the destruction of four highland lakes that are crucial for the

agriculturally based community along with potential damage to water resources

downstream (Watts and Collyns, Sept 2012). On the health side, incidents

revolving around the mining operations have polluted water supplies recently and

in the past and have poisoned local citizens with the dangerous chemicals used

in production like cyanide and mercury (Bajak, Nov 2011). Citizens are arguing

they are not seeing the benefits of the local mining enterprises and only the

disadvantages.

For these reasons, determining the relationship between mining

investment and development is particularly crucial to both promote the wellbeing

of the affected citizens and avoid jeopardizing the potential positive effects of

mining investment in the country. Data were drawn from a number of sources

including the World Bank, the United Nations Development Program, the

Peruvian Ministry of Economics and Finance, and the World Health Organization.

Many of these sources indicators only present indicators at the national level.

When data is available, I will analyze and compare indicators at a regional level

The following regions were identified as receiving the highest proportion of canon

minero revenues (further explanation detailed below) during the duration of the

period: Ancash, Tacna, Arequipa, Cajamarca, Moquegua, and La Libertad. Many

Cooke 18

of these regions either fall on the southern copper belt in the country (Moquegua,

Tacna, and Arequipa) or in the northern highlands where silver and gold mining

are concentrated (Ancash, Cajamarca, and La Libertad). While the amount of

canon minero fluctuates every year and may be higher in other regions over

those selected, these regions represent a strong concentration of mining activity

in the same duration of heavily increased canon minero income.

CAJAMARCAAND LA L1BERTAD Gold, Copper and Silver

~.

ANCASH Copper. GOld. Silver, Lead, Molibdenum and linc

PASCO. LIMA AND JUNIN Copper, Gold. Silver, Lead and Zinc

ICA ~ Iron AREQUIPA

Gold, Copper

Source: Swedish Trade Council, 2006

MOQUEGUAAND TACNA Copper and Molibdenum

Because these regions have had varying success dealing with chronic poverty

and health issues, they offer an opportunity to more closely examine the effect of

mining (using the canon minero revenues). Since Callao, Tumbes, Ucayali, and

Loreto did not receive canon minero income, these states were removed from

bivariate analysis. Callao health data was either unlisted or filed under Lima

statistics in many reports and was often excluded for this reason. Additionally,

many of these statistics are reported at a national level and do not reflect the

inequality and disparities in the country; when possible statistics will also be

Cooke 19

divided by department (as a proxy for regional differences) and incorporated to

examine issues hidden by the averaged national level.

As mentioned earlier, social spending and programs includes both

education and health care along with infrastructure and social safety net

programs. This paper uses health care and social safety nets as indicators of

poverty and development. This is not meant to imply a lowered importance on

these excluded sectors; in fact, education and health are joint investments for

development that should be made concurrently (Todaro and Smith 361, 2011).

The two have multiplying effects benefiting the other. For example, better health

can increase school attendance and spur on long-term investment in education

while better education improves the acquisition of basic skills like personal

hygiene and sanitation and literacy to build upon for future health lessons

(Todaro and Smith 361-362, 2011). However during Fujimori's rule, he continued

to support education and placed less priority on health care initiatives in aims to

promote school construction, as Ewig claims further as a tool of populism to

garner political support (Ewig 226, 2004). The reduced focus of health care

reforms is part of what draws our attention to health care over education in terms

of social spending.

At both the national and regional level and for each indicator, I will show

the trends over time first to give a basic impression of its progress. Then when

applicable, I will perform a bivariate analysis of independent indicators against

dependent indicators (defined in the sections below) to determine any substantial

relationships between the two. Independent variables are chosen as factors that

Cooke 20

should alter the outcomes of the dependent variable chosen. For bivariate

analyses, trend lines will also be mapped for the data set and analyzed for fit

through an R2 value. If the R2 value is above .25 (which represents the trendline's

fit to the data with 25% accuracy or higher), the trendline will remain along with

the R2 value for reference.

Independent Variables

FDI (canon minera at regional/evel)

I will analyze the effects of FOI on many development factors through data

analysis to determine correlations between the indicators. An increase in FOI

should react as a catalyst for economic growth and subsequently for

improvement in social indicators. In regards to mining and potential cases of

natural resource dependence in regards to FOI, overall outcomes are highly

dependent on the time period of investment, often due to political and global

economic factors (Moran 5, 2010). In order to properly frame this influence and to

further explain the exponential growth of foreign direct investment following

neoliberal policies, data will be broken down on a year-by-year basis. FOI, as a

national aggregate, will be measured as a percentage of the GOP to account for

fluctuations in currency due to inflation over time.

Since FOI is typically invested in particular firms or production sites, it is

necessary to consider FOI at the regional level. Additionally, mining sites can be

concentrated in particular regions (such as those listed for analysis) and

unequally attract investment. In this case, I will use the canon minera, or the

government income derived from taxes specifically coming from mining royalties

Cooke 21

that is specifically designated for regional use in development projects. The

canon is limited to the mining industry and does not draw upon other non­

extractive resource based industries. Originating in 1992, the canon minero has

been instated since the start of neoliberal reforms. Early on, only 20% of tax paid

on mining company profit went to regional governments, where more recently it

has grown to a 50% (Arellano-Yanguas 19-20, 2008). These profits made "tend

to boost company investment at the mine site and adjacent locations in

subsequent years" (Arellano-Yanguas 627,2011). The canon minero explicitly

aims to address a wide range of development goals and "to support the

construction and maintenance of roads in rural areas, electrification, schools,

medical centers and other projects that enhance the productive capacity and

quality of life of the mining communities" (CAD Ciudadanos al Dia 2). For this

reason, the canon minero will be used as a measure FDI at the regional level.

Ideally, increased levels of canon minero transfers would result in better

outcomes for development in its region due to an increase of targeted health,

education, and infrastructure projects. Possible shortcomings with this method

will be discussed later.

Dependent Variable

Poverty rates, gross savings rate, health via malnutrition and health expenditures

Ideally, an increase in FDI in a region would stimulate an increase in

economic activity either directly through the mine or through spin-off industries as

noted in the literature review. Either might increase employment and household

income, thereby decreasing the number of people below the poverty level.

Cooke 22

Alternatively, FDI might provide government revenue that could be distributed to

the poor in the form of direct or conditional cash transfer programs like Brazil's

Balsa Familia (Sugiyama 254, 2011). Overall, poverty reflects a better indicator

to look at livelihoods of citizens over more abstract and traditional economic

figures such as GOP or gross national income (GNI). For example, GNI per

capita assumes each citizen is paid equally throughout the nation and does not

reflect the inequity in distribution. In representing the level of poverty over time,

the poverty levels of people living under $1.25 per day and $2 per day are shown

to represent the extreme situations of poverty and for the readers to compare

levels of destitution to a global scale. Reduction in poverty reveals a greater

mobility for citizens between social classes and a distribution of wealth and jobs

that is not concentrated within those with established skills and/or power. Beyond

solely economic betterment, socioeconomic status greatly affects livelihoods and

outcomes in regards to access to quality education and healthcare, revealing its

importance for social development.

Gross savings rate was also measured at a national level to better

represent the transference of wealth to be used for development. Households

and economies have a choice to either spend incomes on consumption for short­

term benefit (of goods and services or construction) or on savings for long-term

development and later use. According to the Harrod-Domar growth model, a

higher level of domestic savings (and later mobilization of these resources) is

necessary in order to initiate and accelerate economic growth and development

(Todaro and Smith 111, 2011). Increased savings rates also reflect a greater

Cooke 23

ability for communities to afford resources and later potentially invest in capital to

improve their livelihoods. The World Bank has often reported that the "root of

higher vulnerability [to shocks] among the poor can be found in the lack of

savings capacity of the poor" (World Bank 146,2005). "Poor households are

more likely to spend all their income and hence save less than non-poor ones"

and be more vulnerable to economic shocks later, forgoing long-term

investments in human capital under duress (World Bank 124, 2005). Both the

household level and national level are important for economic progress; ideally

increased FDI would help households cope better to shocks (through better

wages or subsidized costs of goods in education and health care) and propel

economic growth at a national level to induce spending on long-term

investments.

While there are numerous health indictors of development, chronic

malnutrition is the best for this scenario. Malnutrition rates reflect an inability to

provide basic nutritional needs in a family, often seen as a minimum for basic

health. An inability at a minimum level usually translates to an inability to procure

even more advanced care involving treatment of cancer, tuberculosis, antenatal

and postnatal care, and childhood diseases. Malnutrition in children under the

age of five has also been associated with low academic performance,

developmental risks, behavior problems, and adult depression (Chilton 556,

2009). Malnutrition rates are highly influenced by socioeconomic status and

often, rural areas suffer more than urban areas. Under this reasoning in rural

Cooke 24

departments where foreign mining operations reside, malnutrition is a prime

target to direct health initiatives towards to benefit local citizens.

Total health expenditure sums private and public spending on the

provision of health services and of fees paid on health-related expenses. Health

expenditure is seen as a "more representative [measure] of the quantity of

human and material resources devoted to health care" (Guisan and Aguayo 8,

2007). In this way, health expenditure can be seen as a source of a government

"saving" income by investing in long-term outcomes to improve the health of

citizens and hopefully to increase later productivity. Cutting federal budgets also

cuts health expenditures; the Peruvian public health system for example was

operating on a budget in 1990 that was 15% of what was spent in 1980 (Ewig

221, 2004). FDI can potentially help increase health expenditures by providing

the government with more revenue that can be used on health programs and

infrastructure.

The poverty rate (determined as the percentage of the population below

the national poverty line) statistics were taken from the World Bank database at a

national level and from the Instituto Nacional de Estadistica e Informatica (INEI)

for regional levels. Gross savings rate and health expenditure statistics were also

taken from the World Bank database. For a better understanding of Peru's

commitment, these indicators were compared against the rates of developing

Latin American countries, OECD countries, and/or the world. Malnutrition rate

statistics at the regional and national level were taken from the INEI. Due to the

small sample size over time, the rates for malnutrition at a national level are

Cooke 25

included in the regional findings. Unfortunately because of the small sample size,

malnutrition was not included in bivariate national analyses so as not to show an

inaccurate relationship with the independent variables. This limitation also

prevented a measurement of health expenditure against malnutrition (ideally

treating health expenditure as a independent variable); instead health

expenditure is analyzed as dependent in regards to FDI.

Findings

National

8 7

Q.. 6 Q

"" 5 .... 0 Qj b/)

4

~ 3 ::: Qj 2 u 10.. Qj 1 Q..

0 -1

1980

Foreign Direct Investment to Peru

1985 1990 1995

Year 2000 2005 2010

Figure 1. Value of FDI

and net flows to Peru

as a percentage of

GOP from 1980-2010,

source World Bank

Database

The graphs above chart the dramatic changes Peru has undertaken in the

past few decades. Figure 1 illustrates the FDI trends since 1980 until 2010. From

1980 until 1993, FDI represents a miniscule part of national GOP. During the

period, FDI as a percentage never rises above 1 % and often indicates outward

flows of FDI (when FDI is shown as a negative percentage). Starting in 1993, FDI

dramatically jumps peaking at 7.32% of the national GOP in 1994. From 1993

until present day, FDI averages at 3.86% of national GOP; in comparison, FDI

Cooke 26

between 1980 and 1992 averaged at 0.0961% of GOP. While FOI fluctuates after

peaking in 1994, FOI steadily increases after a lull in 2000. After 1993, FOI never

reaches 1.51 % of GOP indicating an increasing and steady trend of FOI for the

future.

Gross savings rate

Fi re 2. Gross

na 'onal GOP from

19 0-2011, source

W rid Bank

Oa abase

o +--------,-------,--------,--------,-------,--------. 1980 1985 1990 1995

Year 2000 2005 2010

-Peru -Latin America & Caribbean (developing only) -World

Figure 2 illustrates the national gross savings rate as a percentage of

national GOP for Peru, developing Latin American countries, and the world.

Starting of the 1980s, Peru had a higher gross savings rate (at 32%) than both

the Latin America & Caribbean (LAC) region and at a global level (24% and 23%

respectively). The world and LAC region had similar gross saving rate until

breaking away from each other in 1990. Until 2002, world savings rates were

always higher than the LAC region; at this point, the rates remained very similar

between the two with any difference ranging within two percentage points. In the

Cooke 27

data set, Peru's gross savings rate followed the pattern of a parabola with high

gross savings rates at either end of the time period and a depression in the

savings rate from 1990 until 2001. From 1990 until 2005, the gross savings rate

in the LAC region is similar to, or slightly higher than Peru's. In 2005, Peru's

gross savings rate passes both the LAC region and world savings rates and

continues to present day to surpass their gross savings rates. Between 2006 and

2011, each region averaged the following savings rates: Peru at 27.7%, LAC

region at 22.5%, and the world at 20.7%. All regions/countries dip in 2009 before

returning to prior savings levels.

Poverty rate in Peru 60 ,-----~------~------~--------~----------------

c: ~ 50 +-------------:J~~~~~~r~~------------~ ~40 +----------~~~-----~---------~~~--------o :30 +---~--------~~-~------------------------o ~20 t----------~f-~~-------~ __ ~~ __ ~~------­.s ~ 10 ~--~-----~t---~~--~~~~~~~~~~~---

~ 0 +---~---~~~---~--~----~--~----~--~--~ ~ 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Year

-+-Poverty level of$1.25/day

___ Percentage earning $2/day

-~. Percentage below national poverty line

Figure 3 measures national poverty levels within Peru as determined by

the country's parameters and by meager income rates (either $1.25 per day or

$2 per day). With no data set before 1994, it is difficult to compare these rates

Figure 3. Poverty

rates in Peru of

the total

population from

1997-2010, source

World Bank

Database

prior to the Fujimorilneoliberal era. However, this earliest measure at 1994 shows

high rates of destitution with 28% of the population at $2 per day and 13% at

Cooke 28

$1.25 per day. These values are close to the maximum values expressed for

extreme poverty; the maximum value for $1.25 per day is 16% in 1999 with $2

per day as 28% in 1994, 1999, and 2001. Levels in 1997 potentially represent an

anomaly for these measures of extreme poverty (1 and 10% respectively) since

they are below even the current recorded levels and since there is no concurrent

drop in the national poverty rate. Between 1998 and 2002, $1.25 per day rates

range between 12-16% and $2 per day rates range between 24-28%, both at

their highest levels in the data set Similarly, the national poverty rates rise from

42.4% in 1998 to peak in 2001 at 54.8%. Peru's national poverty rate does not

reach below 42.4% again until 2007. After this period starting in 2004, extreme

poverty rates taper off and decrease, ending at 5% for $1.25 per day and 13% for

$2 per day in 2010. National poverty rates peak in 2000 and 2001 (see above)

and slowly recover to 34.7% in 2010. To compare, the national poverty rate

decreases by 8.0% from 1997 to 2010.

14

~ 12 '-'

o 1990

Total Health Expenditure -Peru -OEeD countries --World

~

.", ;-'-- -"..".=-- ./'--

1995 2000 2005 2010

Year

Figure 4.

Total health

expenditure

from 1995-

2010. source

World Bank

database

2015

Cooke 29

Figure 4 shows the changes in total health expenditure over time in Peru,

OEeD developed countries, and globally from 1995 until 2010. The graph

dramatically highlights how low Peru's spending on health is compared to

developed nations and world levels. During the period, Peru spends on average

4.75%, more than half of the averaged spending of OEeD countries (11% of

GDP) and world spending (9.6% of GDP). On a year-by-year basis, Peru still

spends no more than half of the level for world spending or for OEeD countries.

In 1995, health care expenditure starts at 4.5% of GDP in Peru and fluctuates

near this level until 2006. Starting in 2007, health care spending becomes a

minimum 5% of GDP, peaks the following year at 5.7% in 2008 before

decreasing again to 2007 levels in 2010 (5.1 % of GDP). OEeD countries

continually increase from 9.7% of GDP in 1995 to 12.9% of GDP in 2010, never

once dipping below the prior year's record. World spending follows a similar

pattern starting at 8.8% of GDP in 1995, though it does level off between 2001

and 2008 (averaging at 9.81% of GDP) before continuing to increase to 10.4% of

GDP in 2010. While OEeD countries and world health expenditures are expected

to increase, Peru's current trend shows a decreasing level of health expenditure

despite a growing economy.

FDI vs. poverty ratio (1997-2010) 60 ~----------~------------------~--------,...,

$-~50 +--------~--~-=~--~--~------------~

.5 - 40 +-------~-----~-~---=-"='IIIIr__r_--f • • ~ 30 +---------------------------------o Q.

~ 20 +----------------------------------'0 c: = 10 +---------------------~~~~~~~ c: o 'J:! ~ 0 +----~----~----~-----~--~----~ :; Q. o c..

o 1 2 3 4 5 6

Foreign Direct Investment (% of GDP)

Cooke 30

Figure 5.

FDlby

Poverty Ratio

(1997-2010)

The next four graphs are all bivariate analyses of the variables shown

prior. For each, FDI is the independent variable and dictating a change. FDI is

compared against the national poverty ratio, gross savings rate, and health

expenditure.

Figure 5 plots the relationship between foreign direct investment as a

percentage of GDP against the percentage of the population under the national

poverty line. Theorists predicted that as FDI increases, the national poverty rate

should decrease. The figure shows a moderate correlation with this prediction;

FDI flows explains 53% of the variance. It is important, however, to note that the

analysis spans from 1997-2010, a few years after the extreme growth in FDI to

the nation.

Cooke 31

FDI vs. gross savings rate (1980-2010) ')L 0v

')(\ ~. Figure 6.

0V ",.. • •• • FDI by gross

'lOr"' ~ • • • savings rate

• • .... .... (1980-2010) ~v """ • """t • • • • • • • 1 ,.. .... ~0. .....

r\

,.. 0

r\ v

-2 o 2 4 6 8

FDI (% of GOP)

Figure 6 suggests there is no significant relationship between FDI and the

gross savings rate. Many data points cluster close to the y-axis. These data

points all come from 1980-1992 and have the median at 0.13% of GDP as FDI,

showing the gross savings rate as very independent of FDI before its explosion

of FDI in 1993. However, if we separate the data into two time periods (1980-

1992 and 1993-2010), and remove two outliers (FDI greater than 6% of GDP),

the 1993-2010 period shows a positive linear relationship. This could indicate a

different relationship after 1996, in which gross savings rate responds to the level

of FDI in the country. Most likely, the impact of FDI and the correlation is better

explained through more influential economic factors.

FDI vs. Health Expenditure (1995-2010)

.. ., ... I • .. • • .. .4 """

() ()(), '':} 2 ()10.~1 1£:,:} J .~~ ,~ .~~ .~

R2 =:: 0.257

2 3 4 5 6

Foreign Direct Investment (% of GDP)

Cooke 32

Figure 7 .

FDI by health

.. expenditure (1995-

2010)

7

Figure 7 exposes a slight correlation between FOI and health expenditure

between 1995 and 2010. As predicted with increases in FOI, there is a slight

increase in health expenditure. There are no significant outliers in the data set

but as shown above in Fig. 4, the expenditures on health were rather flat over the

years (ranging between 4.3 % and 5.7%). FOI only explains 25.7% of the

variance. It is most likely the relationship between the two is mediated by the

political regime, which determines changes in health expenditure and dictates

low of levels of health expenditure.

Cooke 33

Regional

4500

~ 4000 WI v 3500 -0

rn~ 3000 p-, ... .. v 2500 Z~ ·c i Q.

2000 . :: i

~~ 1500

0 1000 ... g

~ 500 ,r;:/' ,>" ~ ,

"b< to'> ~ CIt'> 0

1997 199$ 1999 2000 2001 2002 2003 2004 2005 2006 2007 200S

Figure 1. Evolution of canon mifJero and royalty· transfers to subnational governments. /Vo{es: *Reference about royalties in footnote no 6. Source: Ministerio de Economia y Finanzas-Peru (2009).

!~ ~I-ii-------------------------------------------------------I

'~ ~I-I.---------~--~----~----------------------------------

I

:~ - - -r

l~ r ~ .

~ r I!! =I;I •••• ~_ //.~/~.///.,,<//~1// /:/.foi'f/

• 'CCOft mlaCl"O' • 'CMOftoU' .'CID03 IU· • 'other CIIU)llI' • 'othertrllu(en'

Figure 2. Per capita fiscal transfer~ to regional and local governments in Peruv!:ln ~UeVl)S Soles C:!04J7) ,)'rJune '\tinislCri{l dt' Economia y Finan/Hs-P ... 'rll (~009)

Taken from Arellano-Yanguas's paper, Figure 8 and Figure 9 both begin

to show the pattern in the growth of the canon minero over time, which mimics

Figure 8. Source:

Arellano-Yanguas

623,2011 .

Figure 9,

Source:

Arellano-

Yanguas 624.

2011.

Cooke 34

the extreme growth in FDI. Three items need to be taken into account before

properly analyzing the growth shown in Fig. 8. First in 2001, lawmakers

significantly "increased the proportion of revenue to be devolved from 20 to 50

per cent of the income tax paid" (Are"ano-Yanguas 622, 2011). Secondly,

legislature further concentrated transfers to the local jurisdictions where minerals

were extracted, a move that was supported by both local representatives and

mining companies (Are"ano-Yanguas 622,2011). Lastly, the world market

mineral price rise in 2005 further increased revenues, resulting in a 13-fold

increase in transfers over three years (Are"ano-Yanguas 623,2011). Even with

the adjustment in the proportion of taxes transferred to regions taken into the

consideration for the pre-2001 years, the level of canon minero transfers before

2001 are similar or less than the level of transfer in 2004. After 2005, the

transfers grow in a similar pattern to FDI in the same time period.

For Figure 9, Are"ano-Yanguas disaggregates the canon minero peak in

transfers further by looking at its distribution by region at a per capita basis. He

found that in 2007, "two-thirds of the total canon transfers .. .from the central

government to subnational governments were concentrated in six out of Peru's

25 regions-Ancash, Tacna, Cusco, Cajamarca, Moquegua and Pasco," which

accounted for only 16% of the total population (Arellano-Yanguas 623,2011).

Fig. 9 focuses on his attention to the proportion of revenues per capita by region

and how the distributions can be extremely unequal. Arguably, these

departments are those most concentrated with mining ventures and justly receive

larger portions; however, it is worth noting that the departmental breakdown

Cooke 35

differs greatly where the average national transfer was 426 Peruvian nuevo soles

(US$142) compared to Moquegua and Tacna where the transfer was close to

nine times that level (Arellano-Yanguas 623,2011).

1800000 ,---------------------~------------------------------

,-. til c: o

Canon Minero

-+-Ancash

=400000 +-------~~-------------------~--~\~--~--~~~~~

's ........ Cajamarca c: 1200000 +------------Q)

"0 til

,...,. Moquegua

~OOOOOO +-----------------------------IF-------~~--_=~~~--­Q)

:= c: ~800000 t-----------------------------~r-~----~~~~~~-­'> := '"' ~600000 +---------------------------~hb.---~~---------~----,5 '"' Q)

~400000 ~ r-

zoooo:: l:~~==~::~~~~~~~~~~~=:~~~~::~~~~ 2000 2002 2004 2006 2008 2010 2012

In my own analysis in Figure 10, I charted the growth in canon minero

transfers by each region in absolute terms of Peruvian nuevo soles from 2001 to

2011. All of the regions were originally graphed and sums calculated for the data

listed. The seven departments isolated in the graph received the largest sums of

Nuevo soles during the period. Ancash appears to be one of the biggest

beneficiaries of the canon over time along with Tacna and Arequipa. Nearly

every department's canon revenues are increasing or are expecting to rise in the

Figure 10.

Absolute canon

minero revenues

by department

from 2001-2011.

Source: Ministeric

de Finanzas y

Economia (2003 (

2012)

Cooke 36

next few years due to projected investment. While some regions have a minor

dip in revenues in 2010, most recover in 2011 to moderate levels.

Poverty by region 90 ~----------------------------------------

o +-------~------~------~------~------~ 2000 2002 2004 2006 2008 2010

Year

-+-Ancash

___ Arequipa

-a-Cajamarca

~ La Libertad

...... Moquegua

_Puno

~Tacna

-Peru

Figure 11 shows the same regions selected above but this time also

tracks the poverty rates along with the national poverty rate from 2001 to 2009.

The figure illustrates how each region followed different paths in poverty

reduction. All of the regions and the national statistic have decreased from their

original rates but exhibit fluctuations of growth and decline over the years.

Cajamarca and Puno started with much higher poverty rates than the national

level (by 23.2% and 22.5% respectively) while Moquegua and Tacna had much

lower poverty rates (by 25.2% and 22.0% respectively). From the start, there are

Figure 11.

Population under

the national

poverty fine by

department from

2001 to 2009.

Source; INEI

Cooke 37

apparent tiers of poverty rates from which the departments do not deviate from at

the end poverty level. There are fluctuations Moquegua in fact had three years

(2002,2004, and 2008) where the poverty rates increased compared to the

previous year, increasing by 9.1 % from the benchmark in 2001 to 2004 for

example. In Puno, there is almost no difference between 2001 and 2006 (a

difference in 1.7%). Cajamarca follows no distinct pattern over the years showing

dramatic decreases one year (up to 11.1 %), followed by an increase the next

year before by a leveling of the poverty rate. La Libertad is equally unpredictable,

gaining a 12.0% decrease in one year before leveling off its poverty rates.

Arequipa faced a dramatic drop between 2001 and 2005 of 19.2% (from 44.1 %

to 24.9%), but then stalled and only decreased between 2005 and 2009 by 3.9%.

After 2007 while many departments are continuing to decline in the poverty rate,

a few also exhibit increasing poverty rates showing there is no one clear pattern

for all of the regions.

Chronic malnutrition in children Figure 12.

Percentage of 45 = ~ 40

~Maquegua ... '0

children under five

:=,...., 35 ........ Ancash ..c:::;?

~ ~ 30 -.-Tacna ,- '0 = '0 25

0 ........ Cajamarca '.0 ~ 20

,- t":S

~Arequipa ~ ~ 15 ~ ~ 10

_La Libertad S ~ 5 -Puna

C.,j = 'S = 0 , 0

-Peru ... 1995 2000 2005 ..c:: 2010 Source: INEI

years old suffering

from chronic

malnutrition by

department from

1996 to 2009.

u Year

Cooke 38

Figure 12 illustrates the similar differences in patterns for mining regions

to reduce chronic malnutrition. Once again, the national figure shows a midrange

data set compared to the progress in the regions and does not express many of

the regional fluctuations during the period. There is a similar tier system with

Moquegua, Arequipa, and Tacna at very low starting and ending points of

malnutrition and with other regions such as Cajamarca, Puno, and Ancash as

more afflicted. The trends here are less dramatic than the malnutrition rates, but

show interesting patterns for each region. Both Tacna and La Libertad show

slight declines between 1996 and 2000 and then have relatively the same rates

of malnutrition in 2007 as in 2000. Both also decrease again in 2009. Moquegua

gradually decreases over the years, starting at 9.3% and ending at 4.2%.

However, Cajamarca, Ancash, and Puno all see major jumps in malnutrition rates

from 1996 to 2000 by 4.1 %, 9.4%, and 6.7%. Afterwards, each region decreases

(by a minimum of 0.6% and a maximum of 5.5%) and then continues to in 2009.

Arequipa follows a similar pattern to Moquegua though it is the only exception

with an increase of malnutrition between 2007 and 2009 by 0.6%.

'­o 60

o

Poverty vs. Malnutrition

+

• /'" V

... ..... ~ +. ~ •

~ ~+ \ = 0.5923x- .3194 .7

~ ~ .. K V.Of 'f

20 40 60 80 Poverty Rate (% of population)

Cooke 39

Figure 13.

Poverty and

malnutrition

(2009)

100

Figure 13 establishes the relationship for poverty and malnutrition. Prior

studies have proposed this claim that greater poverty puts households at risk for

greater malnutrition rates; this graph reaffirms this relationship for Peru. The

positive linear trendline shows a high correlation between the two with 87.4%

accuracy. While theoretically proven prior, reaffirming the relationship for Peru

helps indicate the validity of this assumption. Additionally, this relationship

permits an interchanging poverty and malnutrition rates to compare national and

regional statistics. So while the national figures do not go into detail about

malnutrition, the relationship allows for an assumption that the national rate

follows a similar pattern and an increased national poverty rate relates to an

increased malnutrition rate.

100 ~

:§ 90

f 80 ~ 70 > 0 c.. 60 -;

50 § '.0 ___ 40

~~ '-' 30 r...

~ "0 20 c: ::I 10 c: 0

0 .... ';; "3 o c.. 0 Q..

Canon minero vs. poverty

.... • •• .1.

• .~ r-~ ...... • • . ~ .... •• ••• • ~ ....... ....... ~ ..... ... • -4 •• t.

• ....... '

2 4 6 8 10 12 Log of canon minero income (in Peruvian nuevo soles)

14

Cooke 40

Figure 14.

Canon minero

income by

poverty (2005,

2007, and

2009) .

Source: MEF

(2012) and

INEt

Figure 14 is another bivariate analysis looking at the relationship between

canon minero income and the percent of the population under the national

poverty line by department Canon minero income was measured in Peruvian

Nuevo soles but was analyzed by taking the log of the total value for better

comparative analysis. Using three years of regional canon income and poverty

rate data, the graph above was produced. The data was pooled into one

analysis, so each region is represented three times above with one data point for

each year. There is no discernable correlation between the data points for the

three years. Some regions cluster but there is no relationship between the canon

minero income and poverty rates at a regional level. Similar canon minero

revenues have corresponding poverty rates that can range over 50% in

difference.

Cooke 41

c Q.) ...

60

:9 50 :E~ u;f. .5 ':;' 40 § ;; :E ~30 i:l Q.)

== > ..5 : 20

CI:I Q.)

5"0 . :: § 10 c o ... 6 0

o

Canon minero vs. malnutrition Figure 15.

Canon minero

• • by

• ~ • • f; malnutrition

• • , • • • ... "'" I ... (2000, 2007, . " • J.~ • •• ••• • .. ~ • and 2009).

• .... • ." • • •• • Source: MEF

• • • ~~ (2003 & 2012)

and INEI 2 4 6 8 10 12 14

Log of canon minero income (in nuevo soles)

Figure 15 similarly analyzes the canon minero income against chronic

malnutrition rates with few conclusive results. Once again the data was pooled

into one analysis, so each region is represented three times above with one data

point for each year. With the regional data for three years, the analysis yielded no

reliable correlation within the data points. Since data also comes from 2000 when

the canon minero revenues were comparatively miniscule, there was a more

varied set of x and y-values. However, there was still no apparent relationship

between an increase in canon revenues with a reduction in malnutrition rates.

There is some clustering of rates but this is most likely attributed to changes in

particular regions over the period rather than a relationship spanning across

different departments.

Discussion

Historical and Political Context

Above, the analysis tries to explain the impact of FDI from a strict causal

relationship, simplifying that if one FDI goes up (or down) then the affected factor

Cooke 42

will respond accordingly to this single change. While some graphs did show a

moderate or even high level of correlation, most of the graphs had loose to no

correlation. The data analysis reveals the multifaceted problems in pegging

numerical values of FDI solely to outputs that are reliant on how the former is

transferred into society. The isolation allows for a sober viewing of the facts but

political, economic, and societal influences are sorely needed to properly

describe the relationships. The results, at best, describe casually linked data; the

discussion following attempts to better explain the patterns over the past years in

a way that takes into account more factors than were available in the initial

analysis.

Foremost, the extreme influx in FDI to the region is strongly evident in the

graphs. By 1993, it is assumed that Fujimori had enacted strong control over the

economy and was reducing inflation in the country while moving to combat the

rebel movements. In 1991, Fujimori had passed both the Foreign Investment

Promotion Law and National Mining Cadastre Law [see Appendix Aj, which

dramatically secured the rights of the investor along with eliminating many

previous mining claim procedures to expedite the process (Swedish Trade

Council, 2006). More controversially in April 1992, Fujimori shut down the

national Congress and "re-organized" the judicial branch in an auto-go/pe,

effectively making his executive decisions incontrovertible (Barrantes and

Berdegue 2, 2012). The stabilization of the currency, the country, and particularly

the rights of investors along with the liberalization of the economy attracted

subsequent FDI as seen in the growth after 1993. For example in 1992, US-

Cooke 43

based Newmont partnered with the Peruvian Compania de Minas Buenaventura

(Buenaventura) to construct the Yanacocha gold mining operation, the "first new

large foreign investment in the Peruvian mining sector since 1976," in Cajamarca

(Bury 228,2005). The partnership became the largest landowner in the region

and introduced more than US$2 billion into the region through exploration,

employment, purchases of goods and services from 1992 to 2000 (Bury 229,

2005).

Particularly integral in receiving the boost of FDI was the implementation

of neoliberal policies and privatization under Fujimori. The laws mentioned above

allowed companies to transfer profits abroad and gave free reign to conduct

business within the nation. The practice of privatization was lauded as a way to

create "competition in the mining sector, [to promote] the country's image as an

investment target, and [to generate] resources to cover government

expenditures" as government expenses were being cut (Bury 225,2005). The

actions taken to follow neoliberal policies and to alleviate its economic woes

greatly shaped the country's current perspective on investment While left­

leaning presidents have run before on populist campaigns that potentially

threaten business interests, Peru appears to be faithfully following liberal

economic tenets, integrating them into their national economy. Agosin goes to

argue, "If the region's FDI laws had not been liberalized, there would not be the

high levels of FDI inflows into Latin America that exists today" (Agosin 18, 1995).

The assertion further affirms the idea that neoliberal reforms were the condition

to initially attract FDI to Latin America and Peru. No political coalition yet has

Cooke 44

been able to change the national Constitution, written in 1994 by Fujimori, or

modify the clauses that would alter incentives for private investment (Barrantes

and Berdegue 3,2012). As FDI increased, a general business climate developed

that encouraged more investment similar to a positive feedback-loop so long as

the investments were not threatened by conflict or nationalization. To future

illustrate the point, Peru nowadays is seen as an increasingly investor-friendly

country as its neighboring Bolivia and even Argentina nationalize natural

resource industries held by foreign corporations.

Privatization significantly altered much of the playing field in the mining

industry. Prior to 1990, gold and other minerals production was spread between

informal, small-scale operations in the Peruvian Amazon and limited medium­

scale enterprises that undertook mining underground veins and small deposits

(Bury 226, 2005). The original trans-nationalization of the mining sector in the

1990s involved primarily "joint enterprises or new operations, acquisitions of

mining operations through the privatization process, and the exploitation of new

mineral deposits" (Bury 225,2005). Production slowly concentrated into fewer,

large-scale operations where foreign mining interests provided new capital,

technology, and highly skilled professionals (Bury 226, 2005). Eventually, these

new large multinational mining operations outpaced small and medium-scale

enterprises in production, for example accounting for 67% of all Peru's gold

production by 2000 (Bury 227, 2005). Not all accounts continued with such

improvements however. A 1990s case study looking at FDI into Latin America

found a significant portion of firms made additional investments to expand

Cooke 45

production using existing technology instead of introducing new innovations

(Agosin 1995, 171). As such, the majority of the foreign direct investment

appears to be to expand current mining ventures into new geographic areas and

a limited few to improving aging mine infrastructure.

However, neoliberal reforms were not confined to the business sector and

had other significant impacts on the country. These neoliberal reforms are

particularly the reason why FDI would have a directly negative effect on health

and poverty indicators. Neoliberal reforms demanded that countries reduce

royalty rates and income tax rates, abolish duties on imported capital, reform

their mining codes and regulations, and generally reduce the ability of the state to

raise revenues (Pegg 380 & 383, 2006). The traditionally assumed linkage that

an increase in government revenue (generated by increased foreign investment

and profit) would increase government expenditures, particularly in health and

poverty-reliving programs, was then hindered due to neoliberal policies. The

limited governmental capture of business revenues is also indicated in Fig. 8, as

canon and royalty transfers remain low until the mid-2000s. Particularly in the

health sector during 1993, the World Bank recommended the following three

actions based on neoliberal principles:

"(1) initiation of clinic user fees, (2) decreased national spending on health

services and a transition of health care programs from a model of

universal access to primary health care to a model of selected primary

health care, and (3) the privatization of health services through the market

system" (Whiteford 36, 2005).

Cooke 46

The reforms espoused led to the Peruvian health care system, among others, to

abandon its policies of free or low-cost care and the central government turning

over essential functions and routine activities to the local governments (Whiteford

36,2005).

Significantly, the neoliberal reforms affected the structure of many sectors

in an attempt to decentralize decision-making and financial planning, based on

the belief that local governments and communities could make better choices for

their particular circumstances. In the mid-1990s, policymakers believed that the

introduction of "fees would enable cost recovery and encourage public

institutions to operate more like private entities, ever increasing in efficiency"

(Ewig 432, 2006). Fees came to cover "nearly 20% of state public health costs"

including basic costs for running health centers (Ewig 438, 2006). The measures

appealed to neoliberal principles trusting the markets over universal coverage.

However, the appearance of fees-for-service dramatically altered who could

receive medical care over others. A survey done by Ewig discovered that "more

than half of all poor Peruvians surveyed could not afford basic health care: 51

percent did no have enough money to pay for both medicines and health center

consultation" (Ewig 434, 2006). Decentralization also relied heavily on regional

officials to make decisions that had previously done by the central government in

attempts to target department-specific concerns through more sensitive methods.

"Decentralization, for [rural communities], became responsibility without

resources" (Whiteford 38, 2005); regional governments, already overwhelmed in

some regions, were not always trained or experienced handling the issues and

Cooke 47

lacked the capacity to handling these new responsibilities. Decentralization

evolved later to better local governance and incorporate local concerns into the

objective for new programs.

Meanwhile, citizens faced challenges receiving services and avoiding

during the period. Public health systems saw their funds significantly reduced

with the budget in 1990 equaling of 15% of total health expenditures in 1980,

severely limiting the scope of subsidized treatment for patients (Ewig 221, 2004).

A study by Paxson and Schady looking into the effects of the Peruvian crisis

suggested that "infant mortality and per capita GOP were [negatively] related at

the time of the [economic] crisis" in the late 1980s, highlighting a sharp increase

in infant mortality around 1990 across the country (World Bank 127, 2005). In

1994, the regions suffering with the "greatest health needs and least ability to

self-finance these needs ... received the lowest proportion of state health

expenditures" (Ewig 223,2004). Paxson and Schady "document a collapse in

public expenditures on health during the crisis period, which possibly led to the

important declines in health care utilization" (World Bank 127, 2005). During this

same period of neoliberal policies and Fujimori's presidency until 2000, the

national gross savings rate reflected lower levels in Fig. 2. Citizens most likely

focused on recovering from both the economic chaos and inflation at the end of

the 1980s and the following slashing of social safety programs in the 90s rather

than saving. Even more dangerously, many impoverished households aim to

reduce already low consumption to pay for vital expenses, potentially targeting

school expenditures and medical visits for children (World Bank 127, 2005).

Cooke 48

Decentralization has been good in theory but has a mixed bag of

successes and failures. Initially, the transfers were mostly bureaucratic and

symbolic; later, the programs were reworked to actually devolve power and

definitive decision-making capabilities to regional boards (Ewig 224,2004). The

decentralization allowed regions to experiment with practices to best fit the needs

of its citizens. However, one implication was that centralized ministry policies

were written developed in Lima but could not be implemented beyond the capital.

Limited national policy and increased regional power helped keep regions path­

independent of their neighboring states. Fig. 11 and 12, for example, show how

many departments in this regard had poverty indicators that were indifferent to

improvements in other regions, illustrating how each department could act

independently of one another. Furthermore with decentralization, much of the

means-testing that exempted the poorest from paying for government services

was unstandardized between the region and allowed for wild variations made by

untrained members and discriminatory practices that excluded citizens from

access (Ewig 438, 2006). Certain health system policies that decentralized

procedural and administrative decisions to the Comites Locales de

Administracion en Salud (CLAS) local boards, for example, succeeded in

improving health center infrastructure, increasing productivity, and improved the

health workers responsiveness to local needs and services (Ewig 234,2004).

The decentralization of many ministry actions to local communities was pursued

out of an act to increase accountability of departments that were often very

distant from authorities in Lima. Research shows that increased accountability

Cooke 49

reduces corruption and decreases the amount of waste spent by governments,

much in line with neoliberal ideals. Decentralization of mining revenues via the

canon minero followed the World Bank's poverty alleviation recommendation that

"an equitable share of revenues [sent to local communities should] vigorously

promote transparency at both the country and company levels" (Pegg 384,

2006). As explained further, the decentralization played a large part in shaping

the current atmosphere towards the government and corporations at the regional

level.

Fujimori's transfer of power in 2000 (instated after the release of a very

public scandal involving the administration officials) reintroduced democratic

ideals to the system and uncovered many of the atrocities committed during his

control. Videotapes released to the media revealed Vladimiro Montesinos, the

proverbial right-hand man of the president who was in charge of the army and

intelligence services, "cutting deals, bribing officials and handing out bricks of

cash" (Frontline/PBS, Oct 2005). The neoliberal reforms took the voice of

business as dominant, yet the scandal revealed that the voice of business

included corruption within the organization. A legal dispute between Newmont

and a French company, BRGM, ensued over ownership of the Yanacocha mine

in 1994 when BRGM attempted to sell its shares to one of Newmont's

competitors (Frontline/PBS, Oct 2005). A representative for Newmont was shown

meeting with the CIA-backed Montesinos in order to "level the playing field in the

case." In one of the tapes, Montesinos later met with the judge determining the

case; the court ruled in favor of Newmont Mining Corporation (Frontline/PBS, Oct

Cooke 50

2005). On a social level beyond corruption, major damage was done during the

Fujimorista reign that led to distrust with its indigenous citizens of the national

government. In the 1990s, women were targeted through family planning

initiatives and sometimes "coerced into tubal ligation, according to investigations

by Peru's own human rights ombudsperson's office (Ewig 442,2006). During the

internal conflict between the government and guerrilla groups, personal

documents and identity papers were destroyed which currently restricts people

from the right to vote and limits access to Segura Integral de Salud (SIS), the

national public insurance that covers the poorest (Amnesty International 20-21,

2009). For many, the transfer of government signaled a greater reliance on

alternative measures to voice concerns and opinions, often through cooperation

with civil society, non-governmental organizations, and progressively on global

institutions. In the return to democracy, the Peruvian state was under greater

pressure to enforce labor, environmental, and social standards due to greater

public voice and a new global attitude towards promoting international norms and

regulation over transnational companies (Kotschwar, Moran, and Muir, Fall

2011 ).

The early 2000s continued to usher in waves of foreign direct investment.

FDI decreased slightly between 1997 and 2001 most likely due to the backlash

from the Asian debt crisis in 1997 and the dot-com bubble bursting in 2000, yet

still remained higher than prior periods. Proinversi6n, Peru's agency for the

promotion of FDI, reported that much of the investment in 2001 was sectored in

the communication sector, particularly in the Spanish Telef6nica's (Proinversi6n,

Cooke 51

accessed 2013). Telef6nica originally bought out the national telephone company

in the 1990s and from late 2000 to 2005 expanded the company into mobile

telephone operations (Proinversi6n, accessed 2013). In 2004, metal prices drove

upwards as the increased world economic activity in countries such as China, the

United States, and other Asian countries created a higher demand in the global

markets (Swedish Trade Council 14, 2006). Mining at this point had already

been a significant sector in the economy due to the country's natural wealth of

reserves and investor-friendly policies. The leap in prices however enticed more

investment in order to explore new deposits and to expand and increase the

output of older mines as the ores gained from the mineral veins became more

profitable. This is supported by the growing investment in Fig. 1 starting in 2004

that continues to today, only halting with a minor dip in 2009 following the global

financial crisis.

The strong rise of raw material and commodity prices has spurred

optimism and action by countries with large natural resource reserves,

particularly in Peru. Nominal prices of commodities have risen to new records by

3.2 times between 2002 and 2008 along with rises in real prices between the

same period of 2.4 times (Suni 2010, 11). Whether due to an increased demand

or speculation, these elevated prices renewed interest in taking advantage of

reserves and their economic potential. Researchers illuminated that primary

commodity exports and civil war, both symptoms of the resource curse that

afflicts developing nations, are not correlated with the presence of natural

resources but instead with poor government and institutions (Daniele 559, 2011).

Cooke 52

Certain countries like Chile and even Western nations have balanced interests in

the industry and have successfully tailored "resource abundant" economies to

help generate higher per capita income and higher HOI indicators (Daniele 548,

2011). Peru also attempted to harness growing activity in the mining sector that

elevated economic growth through an increased taxation for the purpose of

rebuilding infrastructure and investing in human capital in health and education.

Progress in decentralization was accelerated under these institutions in

the democratization process. Peru still largely trusted the market but began to

value social inclusion and processes upholding international agreements on

human rights and actions. In 2003, Peru began to introduce participatory

budgeting at the regional level to allow citizens to directly propose and choose

projects for the districts and to monitor and control the budget for education and

health expenditures (Carrillo-Larco and Segura, 2012). In Peru, some of the

"departments richest in natural resources are among the poorest in the country

with [poverty indices in] Loreto at 66 percent, Cajamarca at 64 percent, and Puno

at 76 percent (Arellano-Yanguas 17,2008). With the canon minero revenues,

lawmakers significantly "increased the proportion of revenue to be devolved from

20 to 50 per cent of the income tax paid," placing even more significance on local

governance (Arellano-Yanguas 622, 2011). Local participation, public-private

partnerships, and civil society were relied upon to address these high poverty

indices and infrastructure problems, now with increased income coming from the

canon minero. At a national level, Peru adopted the Extractive Industries

Transparency Initiative (EITI), a global level action, which committed greater

Cooke 53

transparency to "prevent the pernicious effects of rent-seeking, lack of downward

accountability and poor information on the allocation of public resources"

(Arellano-Yanguas 10,2008). Peru also agreed to provide greater vigilance to

environmental issues and many presidents, including Toledo, Garcia and now

Humala, have run on platforms of promoting greater social inclusion of

marginalized groups and reducing poverty.

Part of the progression into the 21 st century included a revisiting of the

dominance of market interests and the reemergence of the idea that business

enterprises could not necessarily solve social, environmental, and governance

ills. The World Bank changed its outlook on private investment used to facilitate

development. Striking a Better Balance, a World Bank report on private

investment, rejected "the past 20 years of World Bank thinking that if you attract

foreign investment, poverty reduction will necessarily follow ... [the report]

highlights the manifest inadequacies of the existing 'investor-friendly only'

approach" (Pegg 384, 2006). One of the inadequacies was assigning too much

importance to the economic development and too much on strengthening the

private sector, thereby focusing less on environmental and social aspects (Pegg

384,2006). As discussed, "Minerals development [had] in the past decades been

the province of the investor, who was often foreign ... [and it was not the province

of] the local host communities in mining regions" (Pegg 383, 2006). Focusing on

businesses trusted enterprises to act within communities as an actor with

interests in helping sustain the local community. Historically, the extractive nature

of the initial founding of the country shaped the nature of policies of the state to

Cooke 54

favor a weak state that was alienated from its people. In some of these remote

areas, national governments were not always visible or seen as corrupt after the

long practices of Fujimori and prior officials; in many cases, businesses were the

most prominent and visible authority in provinces. Deregulation during Fujimori

also gave businesses and mining companies more leverage over the state as

operations expanded.

Meanwhile, mining escalated in rural highlands with the major increase in

prices but was now encumbered with greater calls to be more conscientious of

community needs and desire. The mining industry's control of the land is

unparalleled, as the companies come to own more and more claims of the land in

mining regions. Mining claims have increased the most in the highlands; mineral

claims account "for 49% of land resources [in] Cajamarca, 32% [in] Cusco, and

31 % [in] Huancavelica (Bury 225, 2005). In Apurimac, mining concessions now

account for 58.8% of the land (Cabitza, Aug 2012). These "new transnational

'mega' mining operations in the highlands ... rely on massive and diffuse

subterranean gold deposits, open-pit mining, [and] advancements such as

cyanide heap leaching," which minimize costs but are highly damaging to the

environment in most cases (Bury 227 & 230, 2005). The growth in mining

exploration and concessions has placed added pressure on many of these

communities that are dependent on agriculture and access to natural resources

for their livelihoods. Increased purchasing of land for mining operations limited

agricultural communities from expanding operations and crowded out former

landholders from purchasing land for non-mining activities (Bury 231, 2005).

Cooke 55

Communities are facing greater decreases in access to natural resources such

as new land holdings and decreased quantity and quality of water as mining

competes for water use (Bury 235-236,2005). As attitudes changed and mining

operations grew, companies began pursuing "communities' prior consent to

mining operations in their territories (the so-called 'social license')" and programs

aimed at alleviating social ills locally, or corporate social responsibility (CSR)

projects (Arellano-Yanguas 25,2008).

However, the process was incomplete and left certain inequalities

remaining that became more visible against the publicized growth and

improvement in the nation. Bury found that Yanacocha's rural programs which

improved access to economic and human resources favored either communities

closest to the mine or where the mine was likely to expand operations in the

future (Bury 235, 2005). This led to increased social tensions as one community

would benefit over another local entity. Some regions that are highly afflicted by

poverty have not seen as active citizen participation in local budgeting and

proposals of health projects as expected after neoliberal reforms, even

decreasing the number of projects in three regions (Carrillo-Larco and Segura,

2012). Critics of the mines have claimed that many of the activities have "created

a 'boom town' atmosphere that [leads] to serious political and social problems

while bringing only limited and isolated economic growth to the region" (Bury 230,

2005). As noted in Figs. 9 and 10, mining regions are even seeing significant

variation between each other in the canon minero revenues, which leads to more

inequalities between departments. A multivariate analysis of the recent waves of

Cooke 56

social protests in Peru by Arellano-Yanguas discovered that the "level of canon

minero transfer and incidence of conflicts increased markedly between 2005 and

2007, with the level of poverty playing a steadily diminishing role" (Arellano­

Yanguas 627, 2011). He concludes that while poverty is initially correlated with

conflicts, the newfound mining boom and "the associated dramatic increase in

mining rents and canon minero transfer tended to multiply the incidence of

conflict in mining regions receiving high amounts of transfers (Arellano-Yanguas

628,2011).

Indeed, local protests against mining enterprises grew and were spurred

on by a number of factors. Protesters often cite labor disputes, mismanagement

by the companies, and more recently significant environmental damage in the

communities as calls for action. Newer conflicts deal with environmental claims

and community discontent over claims to revenues. A local protest leader in

Cajamarca captures much of the discontent against the industry: "What mining

companies do is exploit the mineral and then leave ... What [our community

needs] is development that is sustainable for future generations" (Cabitza, Aug

2012). Predictions of strong economic growth and new investment raise popular

expectations for improvement in the community. However, the truth is that "open­

pit mines neither generate enough employment to match popular expectations

nor develop strong links with other sectors of the economy" (Arellano-Yanguas

27, 2008); actions are simply not as sustainable or progress inducing as hoped.

The canon minero has taken on part of the hope of investing wisely in

development projects along with CSR projects. Protests in part arise due to the

Cooke 57

asymmetric power relation between the multinational corporations and local

communities, making it "very difficult for communities to challenge

[multinationals] effectively within the structure of public meetings" (Jaskoski 24-

25,2012). Many protestors feel the initial land transfers to the mining

corporations are unfair as companies now reap astonishing profit levels and want

assurance of their future livelihoods (Arellano-Yanguas 630-631,2011).

Still, mining goes against a long history of citizen discontent and distrust of

mining organizations. Following the acquisition of the iron-ore mine Hierro Peru

by Shougang in the early 90s, workers protested against the company in

response to low wages (lower than the national average by $15 per day), unsafe

working conditions, environmental conditions, and for shirking occupational

health regulations (Kotschwar, Moran, and Muir, Fall 2011). In September 2004,

thousands of protestors blocked the road into Yanacocha, rebelling against

Newmont's decision to prospect Cerro Quilish, an area locally known for

providing fresh water (The Economist, 2005). Later in the year, a prospecting

camp at La Zanja, also near Cajamarca, was burnt and sacked by a mob of over

350 locals (The Economist, 2005). By December, three provinces were shut

down by local protests (The Economist 2005). In 2008, protestors in southern

Peru (particularly Moquegua and Tacna) wounded and took sixty officers hostage

during protests to demand a more equitable distribution of mining taxes to pay for

basic services (Ore, Oct 2008). As of late 2012, Barrick Gold, Zijin Mining Group,

and Bear Creek Mining Corporation had suspended mining projects; protestors

Cooke 58

had helped stall mine proposals pursued by Newmont Mining and the Grupo de

Mexico's Southern Copper (Flannery, Oct 2012).

One of the most prominent protests occurred in late 2011 in Cajamarca as

citizens opposed Newmont's proposed US$4.8 billion investment and exploration

for the new Mina Conga. Protesters, who already had lived in the shadow of

Yanacocha, questioned the approved environmental impact assessment (EIA) on

the new project. The mine would subvert natural waterways to create four new

reservoirs with two being used for mining operations. Protesting lasted over a

month and halted operations for weeks. In response to escalating violence,

President Humala declared a state of emergency in the region and requested

Newmont postpone its project until reassessments of the EIA and the community

approval were undertaken.

While protests may appear trumped up, they do reflect valid environmental

concerns among those about not receiving support for programs through the

canon minero. The corruption of the authoritarian regime of Alberto Fujimori

robbed agencies enforcing environmental regulation of credibility after

independence (The Economist, 2005). Yanacocha's cyanide heap-leaching

operations have altered watercourses and shifted millions of tons of earth,

literally become larger than the nearby city of Cajamarca with over 80,000 people

(Bury 230,2005). Similarly, large copper operations can move more than

130,000 tons of earth during extraction processes (Bury 230, 2005). Physical

alterations aside, faulty monitoring of mining operations has severely altered the

livelihoods of members in irreversible ways with significant health consequences.

Cooke 59

Severe pollution from US-based Doe Run's multi-metal smelter in the Peruvian

highland city of La Oroya has caused the environmentally-focused Blacksmith

Institute to include it on its list of the world's ten most polluted places (Salazar,

Dec 2011). "Medical studies carried out in 2005 and 2007 found that more than

80 percent of children living in the area around the [smelter] had blood lead

levels exceeding" the acceptable limit for lead set by the World Health

Organization (Salazar, Dec 2011). In Junin, regional health department also

found that 56% of the 800 million people in the region drink water that is

unsuitable for human consumption due to the high level of heavy metals

including arsenic (EI Comercio, Sept 2012).

Besides the physical damage, isolated incidents have not supported

mines' projection as environmentally friendly in the communities. In June 2000,

one of Newmont Mining's trucks spilled between 80 and 151 kilograms of

mercury just outside of the vi "age of Choropampa (Barcia, Aug 2012). Left

unaware of the incident, locals took the metals into their homes; as a result, fifty

to seventy residents showed symptoms of mercury poisoning and needed to be

hospitalized (Barcia, Aug 2012). A pipeline carrying a highly toxic copper slurry

concentrate away from the Antamina mine ruptured on July 25th, 2012 near the

village of Cajacay, spilling 45 tons of copper slurry and sickening at least 350

residents and 69 children (Briceno, Sept 2012). While the company did provide

initial medical treatment for the villagers (including hospitalization of 42

members), certain community members that showed test results of

"unacceptably high levels of copper and ... high levels of lead, [had not] received

Cooke 60

any special care" after the incident and at-risk members were not informed of

their health status up to a month after (Briceno, Sept 2012).

Re-continuation of Analysis

Ultimately, the success of using FDI flows into a country for development

does not necessarily depend on the level of investment but on how it is used.

This incorporates one of the major elements missing in our statistical analysis:

the political dimension. FDI is relatively a pure economic indicator; foreign direct

investment flows tend to respond to political developments and choices within the

country. In the case of this argument, the induction of the neoliberal economic

and political policies was what produced the difficulties with FDI and investment

in mining communities. Neoliberal policies reduced the roles of regulation and cut

off national subsidies that affected citizens, leaving businesses many times as

the sole fount of resources in some communities. The moderate correlation

shown in Fig. 5 between increased FDI and decreased poverty refutes in part the

idea that the FDI itself caused negative consequences in terms of poverty; it was

instead the package of policies that were adapted as a perquisite for FDI.

Neoliberal policies during the 1990s did not bode well for poverty levels at

a national level, as shown in Fig. 3, as extreme poverty levels remained highest

during this level. However, the similar elevation in the national poverty line also

highlights that there was a lag after the transition into democracy in 2000 for the

decrease in poverty. FDI continued to be high but the later deflections in poverty

were most likely imposed due to the creation of new programs to address the

issue as governments saw the prior policies had not worked to reduce poverty. In

Cooke 61

fact, the deflections in 2004 and afterwards reflect President Toledo's success in

reinstating a social safety net in that year (St. John 127,2010). While insufficient

to lift people out of poverty, it kept people from falling lower while the jump in

mineral prices helped generate more investment and government revenues for

programs. Additionally, success in Brazil and Mexico with conditional-cash

transfer programs (CCTs) led Peru to instate its own program, JUNTOS, in

fourteen departments to help impoverished families pay for school fees and

immunizations (Alcade-Rabanal, Lazo-Gonzalez and Nigenda S252, 2011).

Regionally, the poverty and malnutrition are also seen to decrease at a gradual, if

unpredictable level, again helping signify the overall improvement in health and

poverty indicators. However, the unreliable relationship of these indicators with

canon minero income (Figs. 14 and 15) and even over time (Fig. 11) highlights

how the patterns are not predictable by just FDI flows to each region;

unmentioned factors are also at play here.

For example in the regional analysis, progress of each region over time in

combating poverty and malnutrition illustrate that each region started off on

different footing in the process regardless of FDI flows. As mentioned above in

Peru, some of the "departments richest in natural resources are among the

poorest in the country with [poverty indices in] Loreto at 66 percent, Cajamarca at

64 percent, and Puno at 76 percent (Arellano-Yanguas 17, 2008). Other mining

regions, such as Moquegua, started with much lower poverty indices along with

many of the coastal regions. Interestingly in mining regions, chronic malnutrition

rates in 2007 had either decreased slightly or had stalled with very similar rates

Cooke 62

to 2000 (see Fig. 12). Cajamarca and Ancash, two departments with major

expansions in Yanacocha and Antamina mines, saw the greatest decreases in

chronic malnutrition while poverty rates decreased, but were not as unique

compared to the other regions. The decrease could be attributed to the affects of

CSR projects through Yanacocha and Antamina. Initial protests in Yanacocha

have progressively led the company to more fervently work to obtain a social

license through projects and pursue international certification in environmental

and social standards (Kotschwar, Moran, and Muir, Fall 2011). Antamina is

ranked highest (94.5%) among companies that are surveyed by the Peruvian civil

society watchdog Propuesta Ciudadana, which focuses on transparency of

voluntary contributions to development projects (Kotschawar, Moran and Muir,

Fall 2011). Again, the inequalities here are shown between the regions and do

indeed show many departments staying within its general "tier" of indicators.

These tiers are even more apparent in the three clusters present on the bivariate

analysis in Fig. 13 where poverty and malnutrition are strongly linked at the

regional level.

One of the factors that could influence social indicators is the fact that

health spending still remains low today, as noted in Fig. 4. To further clarify, total

health expenditure between 1995 and 2010 in Peru averaged 4.8% of the

national GOP, only an average 2.9% of that expenditure coming from

government coffers, a relatively low percentage for a upper-middle income

nation. Most health indicators including life expectancy, infant mortality, and

maternal mortality improved at national level despite the general reductions in

Cooke 63

health expenditure. Ewig credits much of the improvement in the health

indicators from the 1980s to 2000 "rapid urbanization rather than to

improvements in health services in this period" (Ewig 225, 2004). While the mild

positive correlation in health expenditure with FDI in Fig. 7 could be explained by

the traditional link to increased revenues, the periods of increased health

expenditure most likely arise from stronger and reliable economic growth. These

extended periods of growth would ideally allow governments to raise

expenditures without much concern. The exclusion of the earlier period (pre-

1995) also allows a stronger positive linkage along with the relatively small range

of health expenditure. By that point, institutions had often implemented measures

under neoliberal policies to make the sector appear more efficient and thereby

worthy of investing more money into. However, increased spending does not

always translate to success as the programs implemented vary in effectiveness

and scope of coverage and additionally depend on the objectives of politicians.

One major factor was not taken into enough account during the analysis:

the influence of politics and governance with FDI flows. As referenced earlier, the

major impacts of FDI depend on how they are captured and used by the

governments (or how they are not utilized). Even to a certain degree, the actions

undertaken by a business are often influenced by the politics of the nations. For

example, a weak state and regulatory structure ripe with corruption might incite

companies to follow suit of their competitors and undertake unsavory actions

while a stronger state and oversight could force businesses to make more

respectable decisions as they are held more accountable to both national and

Cooke 64

global standards. Good governance lends to good management and control of

natural resources and turns a natural resource into something for a national

government to look at as a national asset instead of a personal paycheck.

It is here that much of the incongruence lies along the perceptions by the

populace of both government and mining actors. During the Fujimori era,

corruption defaced the actions of governments and weakened regulatory

agencies with neoliberal reforms. Such as in the case of Newmont's meeting with

Montesinos, business interests became more powerful than government actors

and therefore above many local actors in the communities; they in part wrote

their own rules of the game within the country. At a national level, FDI was seen

as the main source of economic growth as the country scrambled to regain its

economic footing and quell rebel movements. As Peru democratized, the

presidents now needed to balance pleasing foreign opinions and interests that

had a strong hold on the economy along with pleasing the populace whom did

not always benefit from foreign enterprises.

The political actions of Fujimori when he took power radically changed

how politicians gained influence. Fujimori's success following his auto-golpe of

Congress "accelerated the process of party system decomposition by creating an

incentive for politicians to abandon existing parties and pursue office as

'independents'" (Levitsky and Cameron 6, 2003). Politicians after Fujimori's

success "sought to advance their careers within [the regime], focusing on

developing personal reputations as effective administrators" (Levitsky and

Cameron 10,2003). Legislators became 'free agents' by switching alliances to

Cooke 65

popular parties between elections to ensure victory, creating new candidate­

centric parties for each election sometimes or parties promoting single

departments. Presidential hopefuls began to see "their relationship to the media

establishment and cultivation of a positive public image" as crucial (Levitsky and

Cameron 12, 2003). Political institutions following Fujimori's rule benefited those

who stood for regional grounds, were self-promoting and self-focused, and

oppositionists.

The self-interest in politics following Fujimori, the weakened role of the

state, and the process of decentralization all gathered to form the perfect storm.

Each worked to slow down the transfer of mining funds and made development

projects harder to pursue. Local politicians chose to flout party lines or jump ship

between elections; as such, these members were not held as accountable for

their actions despite their regional influence. While sending government revenue

gained by extractive industry payments directly to their state and community for

use appears a sound policy, evidence has shown that local authorities "have

weak planning capability, little experience with tenders and contracts, and a

tendency to adopt short-sighted expenditures on futbo/ stadiums and other

popular undertakings beset by corruption even more pervasive than at the

national level" (Moran 10,2010). This is strongly significant when taken into

account that "more than 96 percent of regional and local government budgets

[are comprised of] financial transfers from the central government" (Arellano­

Yanguas 30, 2008). Disparate politics also provide incentives for politicians to

use regional interests and power for political gain at a national level.

Cooke 66

Poor regulation from the downsized environmental agency and uber­

powerful Ministry of Mining also did not prevent infringements of environmental

and social standards. Occasionally, the environmental reports done by the local

registries are challenging to take as truth. Before 2012, the environmental impact

assessments of a mining project, done before construction moves forward, was

done within the Ministry of Mining, the same industry in charge of promoting the

enterprises. In 2005, an independently operating, Colorado consulting company

examined mine's operation near Yanacocha and found that "while the mine's

operations have 'altered water quality and quantity in some locations and at

some times' they have also posed no threat to human health nor to drinking

water" (The Economist, 2005). Corruption undermines as accounts of sackings of

environmental experts in the mining ministry who rejected flawed environmental

impact assessments (EIAs) occur even as recently as 2011 (Salazar, Dec 2011).

An official report presented by the general bureau on environmental issues in

July 2010 revealed "several EIAs drawn up by consultancies hired by mining

companies [to expedite the backlogged process] contain entire paragraphs

copied and pasted from other reports" (Salazar, Dec 2011). In the case of Mina

Conga's controversial EIA, the environmental ministry criticized the narrow

definition of the area of direct influence of the mine, among other criticisms, and

contradicted the Ministry of Mining and Energy's statement three days before that

claimed the project had approval from the former (Jaskoski 37,2012). Another

former official within the mining ministry's environmental branch claimed "the lack

of job security and support suffered by the technicians who review the EIAs

Cooke 67

hinder 'ethical and transparent work'" necessary to properly monitor the industry

(Salazar, Dec 2011).

Additionally, mismanagement at the local level that impedes the use of

funds is a major obstacle to overcome to drive social development. The canon

minero graphed and utilized in Fig. 10 illustrates the transfers to the region but

does not confirm the money was spent. If regional governments and community

groups do not use the allocated money for projects, the money is only symbolic

and incites more potential conflict as citizens expect more income and projects

are coming but do not see the effects. The lack of correlation in graphs 14 and 15

between the canon minero and poverty and malnutrition indicate that either a)

different social programs are affecting the indicators in a more beneficial or

negative way, b) canon minero income is being used for development purposes

(health post or road building) but is disproportionately affecting the areas and

services used for the mines instead of the greater public, or c) the canon minero,

which is explicitly designated for development use, is not being properly used for

its intended purpose or is being used on lackluster programs.

Here in lies parts of the major drawback of increased investment and profit

in these organizations. The studies show that those regions rich in resources, but

with poor institutions, suffered from increased violence and conflict due to

motivations of greed or grievances of marginalized parties and overall feelings of

deprivation and inequality (Daniele 546, 2011). These are the roots of the current

conflicts, which are symptoms of the poor, expected outcomes in local

communities. As seen in Figs. 11 and 12 for the regional distribution, each

Cooke 68

mining region saw complicated patterns of improvements that did not follow the

same path as the national levels. Regions that had originally started in a certain

cluster remained in that cluster for both levels of poverty and malnutrition. The

regional inequalities persisted despite the decrease while at national levels the

country reported massive economic growth; generate a certain level of the

discontent at regional levels. Frustration was directed towards both government

agencies, led by local officials that stood for mostly personal advancement in the

system, and the multinational mining companies who manifested a significant

presence in the community economically and physically in most cases.

Additionally, many protests arise demanding justice when companies are

expanding geographically (and thereby expanding FDI). As put by the Economist

(2005), "environmental and social responsibility have become part of the price of

operating a mine in Peru" for a company. These expansions represent one of the

few times there is a more symmetrical power relation, as companies now act to

obtain social licenses from the community, and more open dialogue between

communities and the multinational companies.

Social Movements and FDI

As a result in current politics following many of the protests, "opposition to

mining activities can provide a very good basis around which to mobilize local

popular support" (Arellano-Yanguas 621, 2011). Regional and local governments

often come into power with marginal support of their electorate base, barely 20 to

25% of the populace (Arellano-Yanguas 622, 2011). Local politicians then rely on

cultivating a strong man persona typical of Latin America and employ tactics of

Cooke 69

clientelistic and populist measures to maintain power. Many of the mining claims

are still controlled by central government, so when "citizens' discontent over

potential adverse effects of mining activities arises, subnational governments

have all the incentives to transfer the brunt of popular satisfaction to central

government" (Arellano-Yanguas 622,2011). Members like Hernando Santos in

Cajamarca create a personality cult surrounding them and support the protestors

in part as bids on power and generate popular support. Meanwhile in the rural,

highland communities where projects are concentrated and government

influence is minimal, "companies say they are forced to play the role of the state

and build schools, roads and medical facilities, or face bouts of unrest" (Stauffer,

July 2012).

It is important to clarify that the local and national governments are not

solely to blame for the current situations. Without a doubt, each of those separate

incidents, such as the mercury spill and pipeline rupture, did not happen purely

because of poor governance. Businesses were responsible for these accidents.

There also is ultimately an incentive for companies to urgently "resolve current

conflicts and prevent future conflicts that threaten mining operations" (Arellano­

Yanguas 2008, 34). Companies use their resources to garner popularity and

project support for CSR projects and local development as a marketing tool.

Individual mining companies transform projects and "use the rhetoric of

promoting local development to gain local support through [their own form of]

clientelism, offering local communities with infrastructure development, marginal

jobs and other benefits for a peaceful coexistence" (Arellano-Yanguas 35, 2008).

Cooke 70

Companies also exert influence at the national level by lobbying for their interests

in policy and in allocations of public resources. Interviews within professionals in

the industry revealed "Buenaventura ... despite being a junior partner ... has

exceptional power in Yanacocha and in Peru's mining industry due to the

influence of the owners, the Benavides family;" additionally, interviewees showed

a strong consensus that Southern Copper and Buenaventura control Peru's

national mining association (Jaskoski 29, 2012). Such influence distorts the

practices between regions as particular mines receive preferential treatment and

comes at the detriment of citizens and the benefit of companies.

Nonetheless, companies are attempting to calm protests and promote

parts of development in new ways. In August 2010, the Newmont carried out

corporate-social responsibility projects aimed at providing potable water to many

of the residents of the community (Romero and Zarate, Aug 2010). Nearly every

OECD country operating in Peru has signed on to the EITI and public promotes

CSR projects and the importance of obtaining the social license. Companies are

more concerned nowadays about the "operational impact on people living in the

extraction areas and the potential for backlash unless they can more convincingly

demonstrate that those people also benefit" (Arellano-Yanguas 618,2011). Firms

are experimenting with new projects, aimed to create new, better relationships

with the communities they are working in. Chinalco mining company is one of the

most extreme examples, in paying US$50 million dollars to build an entirely new

town for residents living on the proposed US$2.2 billion dollar Toromocho copper

mining (Stauffer, July 2012). "Nueva Morococha," as the town will be called, will

Cooke 71

include such amentities as proper water, sewage, and electrical systems that

were not present in the soon-to-be-demolished town and families will live in new,

rent-free homes further away from mining tailings (Stauffer, July 2012). The

difficulty is that the measure currently goes against outright recommendations by

the World Bank to avoid resettlements and has had mixed responses in the

community; the project is noteworthy in its attempts.

The government, in response to the continued protests into 2012, has

taken new actions to improve the regulation of mining operations and promote

social inclusion. In late 2012, Humala's government responded to the conflicts by

creating an interdepartmental oversight institution, the SENACE (the national

environmental certification service), under the control of the environmental

ministry that would carry out the EIAs and approve future projects (Watts and

Collyns, Sep 2012). The creation appears simple, but radically breaks away from

the old tradition where the mining industry would evaluate mining projects'

environmental impact (Watts and Collyns, Sept 2012). The shift of power to

approve projects to the five-year old environmental ministry indicates a similar

shift in improving the attitudes toward enforcing standards upon the industry. The

old system invited corruption and collusion, as the same "government body in

charge of promoting [the] sector [was] also responsible for checking on it" (Watts

and Collyns, Sept 2012). The new arrangement removes these prior conflicts of

interest, so long as it has the capacity to enforce its regulations. As put by the

environmental minister (Jose de Echave) who resigned following the November

2011 protests in Cajamarca, "In any serious country in the world with lots of

Cooke 72

natural resources, the government's environmental authority is strong, puts into

place strong regulations and strongly sanctions companies that pollute ... In Peru,

we are not asking for something out of proportion" (Cabitza, Aug 2012).

Additionally, Humala has committed in speeches to increase public spending on

programs combating ever-present malnutrition rates, to award US$10 billion for

infrastructure contracts, and to inscribe access to water as a fundamental human

right in the national constitution (Andean Air Mail, Aug 2012; Emery, July 2012;

Cabitza, Aug 2012).

Data/limitations

There are limitations to the analysis. The data come from different sources

and agencies, which often use different metrics in their calculations. National

level data comes from the World Bank and the Peruvian government. Regional

figures come from the Peruvian Ministerio de Finanzas y Economia (MEF) and

the Instituto Nacional de Estadistica e Informatica (lNEI)). The World Bank

serves as a more unbiased outsider observing and recording national statistics,

and was viewed as the ideal sources for statistical analysis. The Peruvian

government is similarly the most reliable and centralized source for statistics at

the regionalleve', but there are potential discrepancies when relying upon this

source. For instance, using the example of maternal mortality statistics in 2009,

the "government [put] the figure at 185 per 100,000 live births while the United

Nations Population Fund (UNFPA) [stated] that 240 women die for every 100,000

live births" (Amnesty International 5, 2009). This could come from Peruvian

government incentives to reduce the level of "bad indicators" and encourage

Cooke 73

under-reporting or falsifying numbers to achieve such. Nonetheless, without a

primary field data, the best sources were

While the Peruvian government is explicitly trying to increase

transparency, my experience with the data revealed a very convoluted system for

reporting. Statistics could be found but were difficult at best to find through the

government websites; at times, links to reports (either current or older) were

shown but did not actually have any information posted. Older reports were either

backlogged or listed on corrupted web pages, unavailable to general public

without access to national registries. While this is not as much of an issue for

academic research, the inaccessibility undermines the Peruvian government's

aim of increasing transparency and allowing scrutiny by citizens in distant

reaches of the country. Statistics on a publication by one ministry were seen as

different by sometimes up to 20% to the same indicator on a different ministry's

publication. For this, I recognize the error that might arise from using these

particular statistics.

Conclusion

The Peruvian economy has progressively centralized around the natural

resource industry. Investor-friendly policies enticed a multitude of foreign

investors in the region particularly in industries that were being privatized in the

1990s and in the mining industry moving into the 21 st century to generate

economic growth. As of 2011, the industry is no less important; mineral, oil, and

natural gas export revenue accounted for 70% of Peru's exports and is only set

to increase (Emery, Sept 2012). The central government needs to sustain the

Cooke 74

flow of FDI to the mining sector in the current systems to "achieve its

macroeconomic objectives of growth, increase of exports, and fiscal balance,"

which adds pressure on national politicians to reduce community discontent that

dissuades new mining ventures (Arellano-Yanguas 23,2008). Many of the seeds

that led to community discontent were sown at the same time that neoliberal

policies were pushed onto the nation and national regulation was weakened and

regional government were faced with additional burdens in decentralization.

The immediacy needed to address mining volatility is something the

government has pushed off, hopefully until now as more pressures come to

reconsider the position of the mining industry. In May 2012, Peru posted its

biggest trade deficit since 2008 due to diminishing demand for copper and gold in

the weak global recovery; the deficit reached $106 million compared to the $907

million surplus the year before (Quigley, July 2012). Copper and gold prices are

projected finally decrease after continuous growth in the next few years as

demand falters, potentially significantly lowering the profit margins of operating

firms. The number of social conflicts also hit 171 active protests within Humala's

first year in office (Boyd, June 2012). More criticism is been placed on the

government's handling of mining revenues on a public level and in the form of

protests. The social protests and more specifically the reactions by government

officials has revealed the power struggle between weak environment ministries

with stronger sectoral (ie. mining) ministries that are close to powerful interest

groups.

Cooke 75

Neoliberal reforms and the subsequent flux of mining FDI dramatically

altered the playing field strategies for development in the country. Services were

cut and decentralized to already overwhelmed local agencies and regulatory

agencies remained vulnerable to corruption and manipulation. In most cases, the

increased FDI was not a strong impetus alone for change; the issue dealing with

FDI was the condition to increase it was the package of neoliberal reforms. While

there is a potential for FDI to continue to bolster growth and is almost necessary

in the current economic structure, much of the politics is standing in the way and

lowered capacity for governance are very troubling. If the government and its

opportunistic entities do not become more responsible, they risk increasing

protests and general discontent that would scare way potentially beneficial

investment and also not being able to take advantage of the momentary

elevation of prices for future development.

With recent actions in improving regulation and the general trends of

decreasing poverty and malnutrition, there is hope that the incomes from the

mineral reserves will be reinvested into the country. Mining industry is now rooted

into the economy, for better or worse, though different methods of economic

capture may promote prolonged use and saving over time. Lower upfront

payments, for example, and more "progressive taxes make the attraction of FDI

into the extractive sector easier and allow host authorities to benefit more fully

when oil, natural gas, and mineral prices rise" (Moran 9, 2010). Peru could tackle

projects with more centralized budget allocations directed to roads and schools

and infrastructural investments as seen in Chile, a country heavily dominated by

Cooke 76

the mining industry but with OECD-country social indicators (Moran 10, 2010).

Finally as mineral prices remain volatile, current mining windfalls alongside policy

changes could help diversify the economy into promoting manufacturing and

domestic-based industries that would be less vulnerable to global price

fluctuations.

Improved governance and communication between regional and national

levels, including vigilance by civil society, will help ensure revenues reach their

intended destination and are used effectively for development. As "a company

cannot take on duties that are those of a government," better cooperation

between the government and multinational mining institutions would help ensure

that communities are not reliant on CSR projects and could help capacity­

building in government agencies to develop future projects (Romero and Zarate,

Aug 2010). Better public-private partnerships would also help ensure there was

minimal overlap in projects and that investments were spread throughout the

community and not directed at vested interests. Overall, Peru is in the unique

position where it is beginning to overcome its historical legacy of inequality on its

own and is beginning to have the tools to solidify its economic status. The

country stands to gain from its natural wealth by investing in its people just as

much as multinationals hope to gain from the resource itself. The real balance

and benefit to both comes from promoting investment in the people and land, not

in rhetoric alone.

Cooke 77

Appendix A

National Mining Laws

Law Significance Year enacted General Mining Sets out general legislation. States that 1981 Law mineral resources are property of the

State. Includes Law for promotion of mining investment in the mining sector. Contains guarantees and promotional measures (tax stability, deduction of taxes and freedom to remit profits) applicable to all active parties within the mining sector (Swedish Trade Council 2006)

Environmental Establish environmental legal framework 1990 Code which must be complied by companies

active in the mining sector. Revision and correction of environmental impact under which the regulations of the different sectors have been implemented (Swedish Trade Council 2006) Ministry of Energy and Mine's environmental regulation was enacted in 1993.

Foreign Establishes clear rules and security for 1991 Investment foreign investment. Includes right to Promotion Law receive non-discriminatory treatment, (Decree, No. 662) freedom to conduct commercial and

industrial activities and to perform any import/export operations and the right to transfer profits abroad (Swedish Trade Council 2006)

National Mining Revised land-tenure rights; eliminated 1991 Cadastre Law many previous mining-claim procedures (Law No. 26615) instead centralizing and unifying

concessions under a new geographic reference system (Swedish Trade Council, 2006)

Legislative Decree Established companies who subscribe 1998 No 818 and Law contracts with the state for the No. 26911 development or extraction of natural

resources can recover the General Sales Tax on a monthly basis, are exempt from the Extraordinary Tax on Net Assets (lEAN) during project development, and can pay duties on a biannual basis for up

Cooke 78

to 7 years (standard policy is 4.5 years) (Swedish Trade Council 2006)

Ley de Canon, or Establishes the right for the national 2001 Mining Tax Law revenue services (SUNAT) to collect a (Law No. 27506) 30% corporate income tax; half of the tax

then goes to local governments where the mining extraction occurred. Portion is determined annually. Revenues are intended for use on infrastructure and development purposes

Mining Royalties Enacts a royalty on mining operations. 2004 Law (Law No. Determined monthly and is based on 28258) sales; either takes a percentage of the

value of the mineral concentrates or the equivalent at prevailing market prices. (MEF)

Law No. 28323 Redefined royalty distribution; designated 2004 20% of royalties to return to the local governments of the districts in which mining occurs with 50% of the tax to the local communities around the mine. 20% also goes to the provincial government where the mine operates. Monthly basis. (MEF)

Citations

Agosin, Manuel. Foreign Direct Investment in Latin America. Washington DC: Inter-American Development Bank, 1995.

Alcalde-Rabanal JE, Lazo-Gonzalez 0, & Nigenda G. "Sistema de salud de Peru." Salud Publica Mexico 53, Supplement 2 (2011): S243-S254.

Amnesty International. "Fatal Flaws: Barriers to Maternal Health in Peru." Amnesty International Publications. July 2009.

Andean Air Mail. "Humala Announces Fund to Tackle Child Malnutrition." Peruvian Times. 28 Aug 2012. http://www.peruviantimes.com/28/humala­an nou nces-fu nd-to-tackle-ch i Id-maln utrition/ 16638/

Arellano-Yanguas, Javier. "Aggravating the Resource Curse: Decentralisation, Mining and Conflict in Peru." Journal of Development Studies 47, no. 4 (Apr 2011): 617-638.

Arellano-Yanguas, Javier. "A Thoroughly Modern Resource Curse? The New Natural Resource Policy Agenda and the Mining Revival in Peru." Institute of Development Studies. Sussex, March 2008.

Cooke 79

Atkinson, Giles and Hamilton, Kirk. "Savings Growth and the Resource Curse Hypothesis." World Development 31, no. 11 (2003): 1793-1807.

Auty, Richard. "Social sustainability in mineral-driven development." Journal of International Development 10, no. 4, (1998): 487-500.

Bajak, Frank. "Peru's Gold Mine Conundrum". The Huffington Post. 25 November 2011. http://www.huffingtonpost.com/2011/11/25/peru-gold-mine n 1113475.html

Barcia, Manuel. "Pandora or Peru: Resisting the mining multinationals." AI Jazeera: Opinions. 30 Aug 2012. http://www.aljazeera.com/indepth/opinion/2012/08/2012829125214269373. html

Barrantes, Roxana and Berdegue, Julio. "Peru Case Study, Peru: Great Progress Greater Challenges." European Report on Development. (2012). http://www.erd-report.eu/erd/report 2012/documents/bp/casestudies/Perufinal.pdf

Boyd, Stephanie. "Peru's great transformation." AI-Jazeera: Opinion. 18 June 2012. http://www.aljazeera.com/indepth/opinion/2012/06/2012614113713713304. html

Briceno, Franklin. "Peru Toxic Spill: Cajacay Villagers Say Government Neglected Them After Antamina Pipeline Rupture." The Huffington Post. 4 September 2012. http://www.huffingtonpost.com/2012/09/04/peru-toxic­spill n 1854863.html

Bury, Jeffrey. "Mining mountains: neoliberalism, land tenure, livelihoods, and the new Peruvian mining industry in Cajamarca." Environmental Planning A 37, no.2 (2005): 221-239.

Cabitza, Mattia. "Should Peru pay for its own development?" The Guardian: Poverty Matters Blog. 29 Feb 2012. http://www.guardian.co.uk/global­deve lopmentlpoverty-matters/20 12/feb/2 9/peru-pay-for -own-development

Cabitza, Mattia. "Peru seeks to build a new relationship with mining companies." The Guardian. 8 Aug 2012. http://www.guardian.co.uk/global­developmentl2012/aug/08/peru-seeks-new-relationship-mining-companies

Carrillo-Larco, Rodrigo and Segura, Eddy. "Participative budgets, do the most vulnerable regions invest it in health care?" Revista Peruana de Medicina Experimental y Salud Publica 29, no. 4 (OctlDec 2012). http://www.scielosp . org/scielo. php ?script=sci arttext&pid=S 1726-46342012000400031 &Ing=en&nrm=iso&tlng=en

Cooke 80

CAD Ciudadanos al Dia. "Addressing the Demand-Side Causes of Bad Use of Canon Minero Resources." http://dev . revenuewatch. org/revenuewatch archive/training/CAD%20-%20Canon%20Minero%20Brief.pdf

Chilton, Mariana et al. "Food Insecurity and Risk of Poor Health Among US-Born Children of Immigrants." American Journal of Public Health 99, no. 3 (March 2009): 556-562

EI Comerio.pe. "Junin: el 56% de la poblacion be be agua contaminada". 25 September 2012. http://elcomercio.pe/actualidad/14 74405/noticia-junin-56-poblacion-bebe-agua-contaminada

Collier, Paul. The Plundered Planet: Why We Must-and How We Can-Manage Nature for Global Prosperity. New York: Oxford University Press (2010).

Cunningham, Charles et al. "Geology and nonfuel mineral deposits of Latin America and Canada: US Geological Survey." U.S. Department of the Interior and U.S. Geological Survey. (2005) http://pubs.usgs.gov/of/2005/1294/blindex. htm

Daniele, Vittorio. "Natural Resources and the 'Quality' of Economic Development." Journal of Development Studies. April 2011. Vol. 47, NO.4: 545-573.

The Economist. "Mining in Peru: Halting the rush against gold." 3 Feb 2005. http://www.economist.com/node/3627092/print?Story 10=3627092

The Economist. "Dashed Expectations." 23 June 2012. http://www.economist.com/node/21557344

Emery, Alex. "Peru to Award $10 Billion in 2013 Infrastructure Contracts." Bloomberg News. 28 July 2012. http://www.bloomberg.com/news/2012-07-28/peru-to-award-1 0-billion-in-2013-infrastructure-contracts-1-.html

Emery, Alex. "Peru Protests to Cut 2013 Mine Investment by 33%, Group Says." Bloomberg News. 5 September 2012. http://www.businessweek.com/news/20 12-09-05/peru-protests-to-cut-20 13-mine-investment-by-33-percent-group-says

Ewig, Christina. "Global Processes, Local Consequences: Gender Equity and Health Sector Reform in Peru." Oxford University Press (Fall 2006): 427-455.

Ewig, Christina. "Piecemeal but Innovative: Health Sector Reform in Peru." In Crucial Needs, Weak Incentives, edited by Kaufman, Robert and Nelson, Joan, 217-246. Maryland: John Hopkins University Press, 2004.

Flannery, Nathanial Parish. "Protests in Peru Scaring Off Mining Investment, Government Responds with Social Programs." Forbes. 29 Oct 2012.

Cooke 81

http://www.forbes.com/sites/nathanielparishflannery/20 12/1 0/29/protests-in­peru-scaring-off-mining-investment-government-responds-with-social­programs/

Grosse, Robert. Generating savings for Latin American development. University of Miami: North-South Center Press (1997).

Gurmendi. "2007 Minerals Yearbook: Peru." US Department of the Interior and US Geological Survey (2010): 16.1-16.13.

Gurmendi. "2010 Minerals Yearbook: Peru [Advance Release]." US Department of the Interior and US Geological Survey (2012): 17.1-17.14.

Guisan, Maria-Carmen and Aguayo, Eva. "Health Expenditure, Poverty and Economic Development in Latin America, 2000-2005." International Journal of Applied Econometrics and Quantitative Studies 4, no. 2 (2007): 5-24.

Jaskoski, Maiah. "Resource Conflicts: Emerging Struggles over Strategic Commodities in Latin America Phase II". Center on Contemporary Conflict. (October 2012). http://www.nps.ed u/ Academics/Centers/CCC/PASCC/Publications/20 12/20 1 2%200 15%20Resource%20Conflicts%20Phase%2011. PDF

Kaufman, Robert and Nelson, Joan. "Introduction: The Political Challenges of Social Sector Reform." In Crucial Needs, Weak Incentives, edited by Kaufman, Robert and Nelson, Joan, 217-246. Maryland: John Hopkins University Press, 2004.

Kotschwar, B, Moran, T, and Muir, J. "Do Chinese Mining Companies Exploit More?" Americas Quarterly (Fall 2011). http://www.americasquarterly.org/do-chinese-mining-companies-exploit­more

Levitsky, Steven and Cameron, Maxwell. "Democracy Without Parties? Political Parties and Regime Change in Fujimori's Peru." Latin American Politics and Society 45, no. 3 (Autumn, 2003): 1-33.

McMillan, Margaret and Waxman, Andrew R. "Profit Sharing between Governments and Multinationals in Natural Resource Extraction: Evidence from a Firm-Level Panel". Brookings Trade Forum (Aug 2007): 149-175.

Moran, Theodore. Foreign Direct Investment and Development. Peterson Institute for International Economics (1998).

Moran, Theodore and Wallenberg, Marcus. "Enhancing the Contribution of Foreign Direct Investment to Development". World Trade Organization. 8 March 2010. http://www.wto.org/english/res e/publications e/wtr10 forum e/wtr10 mora n e.pdf

Cooke 82

O'Brien, Robert and Williams, Marc. Global Political Economy. New York: Palgrave MacMillan, 3rd ed. (2010): 180-219.

O'Grady, Mary Anastasia. "Americas: Why Latin Nations Are Poor." Wall Street Journal. 25 November 2005.

O'Grady, Mary Anastasia. "Peru's Humala Passes His First Test". Wall Street Journal. Americas Section. 19 December 2011.

O'Neil, Shannon K. "Foreign Direct Investment in Latin America Hit Record Highs in 2011." Council on Foreign Relations. 2012 June 15. http://b/ogs.cfr.org/oneiI/2012/06/15/foreign-direct-investment-in-Iatin­america-hit-record-highs-in-2011/

Ore, Diego. "Protesters take police hostage in Peru mining row." Reuters. 28 October 2008. http://www.reuters.com/article/2008/10/28/peru-protest­mining-idUSN2842123120081028

PBS/Frontline. "Peru-The Curse of the Inca Gold." Aired October 2005. Executive producers: New York Times and Ann Derry. http://www.pbs.org/frontlineworld/stories/peru404/thestory.htm I

Pegg, Simon. "Mining and poverty reduction: Transforming rhetoric into reality." Journal of Cleaner Production 14, no. 3-4 (2006): 376-387.

Proinversi6n. "FDI Statistics". Accessed February 1 Oth, 2013. https://www.proinversion.gob.pe/1/0/modulos/JER/PlantiliaStandardsinHijos. aspx?ARE=1&PFL=0&JER=1747

Porzecanski, Roberto and Gallagher, Kevin. "Economic reform and foreign direct investment in Latin America: a critical assessment." Progress in Development Studies 7, no. 3 (2007): 217-233.

Quigley, John. "Peru Posts Biggest Trade Deficit Since 2008 on Metal Exports." Bloomberg Businessweek. 10 July 2012. http://www.businessweek.com/news/20 12 -07 -1 O/peru-posts-biggest -trade­deficit-since-2008-on-metal-exports

Romero, Simon and Zarate, Andrea. "As China Expands in Latin America, Tensions Fester at Its Mining Venture in Peru." The New York Times. 14 Aug 2010. http://www.nytimes.com/2010/08/15/world/americas/15chinaperu.html?page wanted=all& r=1 &

Salazar, Milagros. "PERU: Weak Environmental Impact Studies for Mines". Inter Press Service. 26 December 2011. http://www.ipsnews.netl2011/12/peru­weak-environmental-impact-studies-for-mines/

S1. John, Ronald. Toledo's Peru: Vision and Reality. University Press of Florida (2010).

Cooke 83

Stauffer, Caroline. "In Peru, Chinese mining firm moves a town to get to the copper underneath." The Globe and Mail. 3 July 2012. http://www.theglobeandmail.com/news/world/in-peru-chinese-mining-firm­moves-a-town-to-get-to-the-copper-underneath/article43873281

Sugiyama, Natasha Borges. "The diffusion of Conditional Cash Transfer programs in the Americas." Global Social Policy 11, no. 2-3 (2011): 250-278.

Suni, Paavo. "World Commodity Prices 2010 to mid-2012." The Research Institute of the Finnish Economy (ETLA). October 2010. http://sites.uclouvain.be/aiece/password/WCP-1 0-201 O.pdf

Swedish Trade Council in Argentina. "THE MINING AND MINING EQUIPMENT INDUSTRY: PERU". 2006.

Todaro, Michael P. and Smith, Stephen. Economic Development. Boston: Pearson (2011). Custom edition, based from 11th.

Tuckman, Jo. "Latin America's poverty data masks great inequalities, report says." The Guardian. 25 April 2012. http://www.guardian.co.uk/global­developmentl2012/apr/25/Iatin-america-poverty-data-inequalities

Valencia, Robert. "The Andean Tigers: Will Columbia and Peru Land on their Feet?" World Policy Institute: Blogs. 31 July 2012. http://www.worldpolicy.org/blog/2012/07/31/andean-tigers-wiII-colombia­and-peru-Iand-their-feet

Watts, Jonathan and Collyns, Dan. "Peru's environment minister hails 'landmark' mining reforms." The Guardian. 3 Sept 2012. http://www.guardian.co.uklworld/2012/sep/04/peru-environment-mining­reforms

Whiteford, Linda and Scott. Globalization, Water, & Health: Resource Management in Times of Scarcity. Santa Fe: School of American Research Press (2005).

World Bank. "Opportunities for All: Peru Poverty Assessment." December 2005. Report No. 29825-PE.

Zissis, Carin. "Bolivia's Nationalization of Oil and Gas." Council on Foreign Relations. 12 May 2006. http://www.cfr.org/economics/bolivias­nationalization-oil-gas/p 10682

Cooke 84

Graph references

Instituto Nacional de Estadistica e Informatica (lNEI). Peru: Evoluci6n de los Indicadores de los Objetivos de Desarrollo del Milenio al 2009. November 2010.

Ministerio de Economia y Finanzas (MEF). "Informe: Situaci6n, Perspectivas y Canon en la Mineria." Boletin de Transparencia Fiscal-Informe Especial. 2003.

Ministerio de Economia y Finanzas (MEF). "Noticias." Bulletin No 8, 11 July 2012.

World Development Indicators, The World Bank. Accessed last on March 20th,

2013.