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In Latin America, Old Wounds Make New Trouble

Despite the hubbub over China’s slowdown, Ecuador has scored big points by taking advantage of China’s undiminished hunger for natural resources. But the experience of neighboring Peru points to the pitfalls ahead.

Ecuador’s leftist president, Rafael Correa, has signed away the exploitation rights for his country’s first large scale mining project, the Mirador copper mine, to a Chinese company, but not without securing $100 million in advance royalties and 52% of the mine’s entire future profits. Correa, who has also extracted billions in loans from China over the past few years, is shrewdly exploiting China’s inexorable commodities’ dependence.

He is also extracting everything he can from Ecuador’s mining sector. The FT predicts that he will tighten state control in the sector once it is better developed, as he did with the country’s oil industry in 2010.

Correa is up for re-election in 2013 and despite his clashes with indigenous groups who oppose energy extraction or mining, he has maximized the use of Ecuador’s resources to bait ravenous China and generate the revenues that can help maintain his high approval ratings.

Next door, in Peru, Olanta Humala, a far more pro-market president than his neighbor Correa, is having a much harder time managing his country’s resources.

Production at Peru’s Conga gold mine, the world’s second largest, has been halted since November, when the local community started destroying mining facilities after finding their water supply tainted. Newmont, the mine’s American operator, said the water contamination was to blame on mismanagement by the local government and recently threatened to cut 6,000 jobs if the strikes aren’t resolved soon. This threat carries weight in Cajamarca, a state with few jobs and rampant poverty.

Peru has seen one of the fastest growth rates in Latin America in large part because President Humala has been so successful at embracing and attracting private investment. But as Ecuador may someday discover, hypothetical mines can be more popular than actual, operating mines. Hypothetical mines generate headlines and cash payments by foreigners; actual mines generate waste and pollution.

In December, Humala sent troops and government officials into Cajarmarca to put down the protestors and negotiate a settlement with the mining company. It didn’t work.

It remains to be seen whether Humala will be able to convince Newmont to stay, and whether local communities will heed his call the country needs the kind of investment that foreign enterprises can bring to the mines. Humala will suffer an enormous blow if Newmont makes good on its threat and abandons the Conga project.

One key factor is the conflict between the people who live near the mine and the central government. Many local people in Latin America, especially when the locals speak languages other than Spanish, have been taught through centuries of exploitation and contempt, to regard central authorities as piratical oppressors. They have not reached this view because they are stupid.

Up and down the Andes, the relations between locals, determined to make a stand after so many generations, and central authorities trying to jump start development by opening mineral resources is intensifying. Even Bolivia’s Evo Morales has fallen afoul of local resistance to big mining projects.

Negotiating the interface between investors and locals under these conditions is going to be tough. In the old days, governments just crushed the locals and signed the deals. As Peru is discovering, that isn’t so easy anymore. But whether the locals, whose ideas about what their “fair share” should be are often unrealistic, and who frequently lack the capacity to manage the resources they seek, can reach reasonable and sustainable terms remains to be seen.

Latin America remains very much a prisoner of its past.

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  • Kris

    “Bolivia’s Eva Morales”

    Don’t Cry For Me, Bolivia.

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