ECONOMY: Growth, Extractives investment, Coca production

28 June 2014

Growth slowdown

In common with most other Latin American countries, growth rates are dwindling in Peru.  The annualised growth rate in April 2014 at 2% was the lowest for any month for five years. This contrasts only too sharply with official predictions that growth this year will be around 6%. Although not too much should be made of one month’s figures, both external demand and domestic demand were down in the first quarter when compared to the same quarter last year. At the same time, Peru is running a very high current account deficit – equivalent to 6.6% of GDP. Growth in investment income, which has help drive the economy in recent years, is also down sharply, with several large mining projects (Conga, Tia María and Quellaveco) currently on ice. Lower growth means lower fiscal revenues which, in turn, probably mean decreased social spending over the next year.

Measures to help foreign investors would put controls at risk.

The government's reaction to the slowdown in the growth of the economy has been to propose a package of reforms to facilitate investment in extractives. The measures were being considered in Congress at the end of June and were expected to pass. The package widens the provisions in the 1993 Constitution for mining contracts with tax stability clauses, and includes expansion of existing projects as well as new ones. Under the 1993 Constitution, such contracts cannot be modified by Congress, thus extending the power of the executive. The package also includes measures to reduce red tape and further relax environmental controls, already eased earlier this year. Important decisions, such as those on reserved areas or elaboration of environmental standards, would no longer be taken by the Ministry of the Environment (MINAM).

The domestic business sector has welcomed the measures. However, in the view of José De Echave, ex-minster of the environment and director of the respected NGO Cooperacción, the attack on environmental regulation is an extremely serious reverse. In his view, the new and hard fought-for MINAM needs strengthening, not weakening. It needs to become a “genuine environmental authority” rather than one “managed by private sector interests and there for the sake of appearances” ( Business interests, he suggests, are seizing the opportunity presented by the concern over growth, to diminish the powers and position of the MINAM and its associated agencies.

There is also concern – and puzzlement – that since these measures are bound to provoke mobilisations and the inevitable responses, Peru will see further and significant social unrest. Manuel Glave, a specialist in mining at GRADE, a Lima think-tank, suggests the package may represent an autogol – an own goal -- in the midst of the local electoral season.

Coca acreages down, but yields and prices up

Annual figures produced by the UNODC (the UN Office on Drugs and Crime) suggest that there was a substantial (17.5%) decrease in the number of hectares planted with coca in 2013. Much of this decline is attributed to an increase in coca eradication, notably in two areas previously considered ‘untouchable’: the Monzón district and that of Pichis-Palcazu-Pachitea, both areas which have seen significant increases in yields in recent years and both areas of significant trafficking to Brazil and Bolivia. A secondary cause was the voluntary reduction in plantations in the Lares-La Convención districts of Cusco. UNODC attributes this to the fact that increased employment by municipal governments in the region has led farmers to abandon coca farming in favour of more lucrative occupations, such as working on road construction.

At the same time, however, coca yields have increased by 10.3% with respect to those of 2012. UNODC attributes this to the use of improved technologies which permit more crops to be cultivated on less land. It also notes that technological developments mean that it takes less coca to produce a given amount of pure cocaine. As a corollary of decreased supply, prices for dried coca leaf increased substantially in 2013 by 30.3%. Prices for cocaine hydrochloride were also up by a similar margin (31.9%).

Geographically, 55% of Peruvian coca is now grown in the lowland provinces of two regions: Ayacucho and Cusco. The Alto Huallaga, previously one of Peru’s main growing areas, has decreased in importance over recent years, largely because of the success of eradication and the establishment of alternative activities such as palm oil production. However, Ayacucho and Cusco make for more formidable eradication targets, partly because of the nature of the terrain and also the continued presence of Sendero Luminoso which provides coca growers with armed support against the eradicators.

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    The Peru Support Group exists to promote social inclusion, sustainable development and the observance of human rights in Peru. To that end the PSG highlights shortcomings in observance of established norms, whether international or local in nature, in its research, advocacy and publications. In so doing, it underscores the relationships that exist within the political system, how institutions work, and the effectiveness of policies that aim to reduce poverty and inequality within the context of sustainable development.

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