What Is Driving Peru’s Relationship with China?
What is the state of Peru-China commercial ties today?
Amidst global efforts to mitigate climate change, analysts forecast a spike in demand for the building blocks of the clean energy transition, namely, critical minerals—resources that are essential to the economy but vulnerable to supply chain disruption. In fact, under a scenario in which the Paris Agreement’s goals are achieved, the International Energy Agency (IEA) predicts that a demand boom for copper, lithium, nickel, and cobalt could lead to a more than fourfold increase in total mineral demand from 2020 to 2040. Latin America and the Caribbean (LAC) will supply much of this growing critical mineral demand. Most saliently, the region holds two-thirds of global lithium reserves, a metal whose demand is projected to increase by 42 times (relative to 2020 levels). However, the region also shares significant supplies of other critical minerals, bearing over 40 percent of global copper reserves and sizeable shares of nickel and cobalt.
Considering the region’s long history of natural resource governance challenges, endless reports have highlighted current and future socioenvironmental impacts provoked by this incipient mining boom. However, the boom’s potential economic impacts have received less attention. While heightened demand could increase economic rents, reduce the balance of payments deficit, and potentially fund social programs (as occurred during the last commodity boom that coincided with the “Pink Tide“), high rents could alternatively foster a “green resource curse.” This neology derives from a phenomenon called the resource curse, which describes a paradox in which countries with an abundance of natural resource wealth often experience lower economic growth and higher levels of conflict, rent-seeking, poor investment, corruption, poverty, and democratic backsliding.
Historically, key factors contributing to this curse include high dependence on commodity exports, lower competitiveness of non-commodity exports, and mismanagement of rents due to a lack of institutional capacity. To date, these factors remain top concerns in LAC: from 2015-2019, 42 percent of all regional economies were export commodity-dependent, including all countries in South America, and many other countries were verging on dependence. Moreover, in 2021, the mining sector alone accounted for 15 percent of Chile’s GDP, and mining exports made up over 62 percent of the country’s total exports. In the same year, mining accounted for 10 percent of GDP and 60 percent of exports in Peru. Additionally, institutional and administrative capacity—especially for redistribution of wealth, efficiency of spending, and successful implementation of policies—remains a concern in LAC. This is particularly relevant as a growing body of research suggests that institutional quality plays a critical role in determining the effects of newfound resource wealth.
Amidst booming mineral demand, high commodity dependence, and continued governance challenges, this plausible “green resource curse” merits speculation. However, in practice, examining the unique characteristics of the critical mineral economy raises crucial caveats that diminish the likelihood of a modern-day resource curse. First, myriad factors will impact the level of demand for minerals and thus rents received. According to a 2022 Brookings Institution report, critical mineral demand depends on “the pace of the energy transition, technological developments, improvements in recycling, and domestic mineral development in the European Union and United States.” For example, innovations in batteries could likely avert the need for lithium. In addition to this list, policy change plays a pivotal role, especially through subsidies, local content requirements, and incentives. This was illustrated in the passage of the US Inflation Reduction Act, which could increase demand for Chilean lithium.
Secondly, the resource curse catalysts of the 20th century, fossil fuels, operate under different life cycle models compared to the minerals used in clean energy. To keep producing energy, fossil fuels must be burned and replenished after each use. In comparison, once non-fuel minerals are mined to be used in clean energy technology, they stay in use for 10-30 years (the current shelf life of batteries and renewables), after which they could be recycled. Without the need to drill for oil or mine for coal, according to some estimates, in the long term, the total global mining burden is actually predicted to drop in a renewables-driven world. Thus, the “one-time mining” structure of critical minerals usage poses less of a risk for the resource curse in the long term compared to the unsustainable consumption model required by fossil fuel dependency.
Lastly, context-specific factors are key to determining whether resource curse symptoms will manifest, according to a 2022 study. The energy transition will differentially impact each country, so country-level risk assessments are a sensible first step towards identifying and mitigating potential negative outcomes. For example, a 2019 study found that under the IEA’s 2 degrees scenario, increased metal demand will cause the highest GDP growth in Chile and Cuba at 10.5 percent and 14 percent, respectively. Other metal producers like Brazil, Peru, and Argentina are predicted to experience more manageable growth between 0-2 percent of GDP. Considering all of these factors, a widespread resource curse caused by critical mineral mining is unlikely to materialize in LAC.
Regardless, high dependency on mining revenues amidst potential skyrocketing demand certainly remains a cause for concern. Given the high rents forecasted for certain countries, governments should consider implementing transparent and fiscally responsible policy options to avoid rent mismanagement, encourage economic diversification, and promote specialization in value-added, price-stable economic activities.
Policy options previously deployed to mitigate the resource curse have caused conflict between developed and developing countries as well as mining and energy industries. Economic policies intended to stop the cause of the resource curse through levers like price controls, export caps, and suspension of foreign direct investment have been criticized for reducing overall revenues. Instead, policies working to mitigate the effects of the curse, such as citizen rebates, sovereign wealth funds, and regulations limiting government spending, better enable countries to receive and responsibly allocate their newfound wealth.
Given the dire need for climate finance in the region, governments could simultaneously boost twin goals by diverting extractives revenues towards climate action. Similarly, to reduce economic dependence, rents could be invested in studies and projects to diversify regional supply chains towards renewable energy technologies. This would require high investments in R&D as well as education to build human capital, which could facilitate a just transition. Importantly, these investments must take into consideration the volatility of commodity prices; historically, unpredictable commodity price swings have led to abrupt cuts in funding for social programs. To avoid this, revenue investments could be backed by stabilization funds, earmarked for short-term projects, or blended with other financing sources. For example, in 2012, Colombia instituted a sovereign wealth fund administered by the central bank called the Regional Savings and Stabilization Fund which is drawn upon to mitigate fluctuations in royalty income.
Overall, a widespread green resource curse is unlikely to take hold across LAC. However, the impacts of unforeseen mining rents in certain countries can and should be mitigated by implementing responsible fiscal policies and allocating rents towards a diversified, decarbonized economy.
What is the state of Peru-China commercial ties today?
The Dialogue is pleased to share the 2013 China-Latin America Economic Bulletin.
Studies show an improvement in environmental and social practices among Chinese mining companies in Peru.