The Wall Street Journal-20080114-Peru Struggles to Spread Resources Wealth- Leaving Many Mired in Poverty
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Peru Struggles to Spread Resources Wealth, Leaving Many Mired in Poverty
Lima, Peru -- Peru's government has a problem that would make most politicians salivate: It can't spend all of the money it has on hand. About $3 billion is piling up in the country's state-owned bank, a huge sum for a government with an annual tax haul of roughly $15 billion.
Soaring sales of copper, gold and natural gas are filling Peru's coffers with royalties and tax revenue. That leaves it facing a challenge shared by many developing nations riding the global commodity boom: deciding what is best to do with the windfall.
Chile is socking away copper revenue in a "rainy day fund" to spend when commodity prices slide. Oil-rich Middle East countries are buying stakes in companies in the West. Venezuela is on an import spree, while Chad, a much poorer African oil producer, is frittering away its gains through corruption.
With nearly half the country's population living below the poverty line, Peru's government says its top priority is sharing the wealth. That is as much a political choice as an economic one. Nearby Venezuela, Bolivia and Ecuador are run by populist presidents because voters there rejected politicians viewed as friends of the elites. In Peru, a populist challenger lost by a slim margin last year.
"The central issue in Peru," said former Prime Minister Pedro Pablo Kuczynski, "is how does government money reach the people?"
Since 2002, the economy of this mountainous country of 29 million has expanded at a robust 5.9% a year. But as in many poor nations, the gains have gone largely to those in the office towers and wealthy residential neighborhoods, while many in the hinterlands remain without electricity and decent sanitation. To shrink the divide, Peru now splits its share of mining and natural-gas revenue between the central government and outlying areas.
But few rural municipalities have used the money effectively. Government rules require the funds to be spent mainly on infrastructure, which has prompted a miniboom in bullrings, soccer stadiums and other vote-getting projects for local mayors. But mostly, the money sits in the bank. Overall, says Mining Minister Juan Valdivia, localities spent about one-third of the revenue allotted to them in 2007.
Peru's economic regulations are designed to make spending difficult to ensure fiscal discipline, a reminder of its history of hyperinflation, corruption and centralization. Few rural mayors or their staffs are trained in project design, budgeting, competitive bids or financial oversight. They didn't need to know any of that to add a kitchen to a local school -- the kind of project they could afford in the past. But the municipalities are required to follow the central government's complex procurement rules if they want to build large water systems or high schools.
To bridge the knowledge gap, President Alan Garcia's government has turned to the private sector, but that hasn't helped much. The Confederation of Private Business Associations is just now recruiting retired chief executives to teach management skills to rural municipalities.
In 2006, the Garcia government negotiated a "voluntary" contribution from the mining industry of $800 million over five years -- in lieu of a windfall-profits tax -- to be spent on rural projects near the mines. As its contribution, the Buenaventura mines helped rebuild schools in the Andean region of Huancavelica. ("It's in the middle of nowhere," said Jose Miguel Morales, the company's general counsel.) But many of the mining-financed projects are behind schedule, too, because the companies must first negotiate deals with municipalities and community officials.
The World Bank's International Finance Corp. has trained municipal workers in the town of Banos del Inca, near a huge gold mine in the northern Andes, to use budgeting and purchasing software to meet the government's rules. The town's funding from mineral resources has ballooned to $17 million from $1 million about five years ago, and it is using the money to improve irrigation and water systems. Even so, the town still is spending just half the sum it has available, said Javier Aguilar, an IFC program manager who is expanding the training program to five other regions.
In frustration, the Garcia government is working on a plan to spend one-third of the mineral funds either on checks for rural residents or unrestricted gifts to local communities. That money would be wasted on a one-time binge, critics on the right and left say. "It's quite demagogic," said Javier Diez Canseco, a former left-wing lawmaker. The mining money "should build alternate economic projects."
The Inter-American Development Bank had a safer idea. In 2003, it urged Peru to put natural-gas royalties into a fund that would be managed by an independent commission that would consider applications for funding from community groups and municipalities. Projects wouldn't be limited to infrastructure.
The idea was to get the money flowing quickly to worthwhile projects and reduce the political drag. Peru's Congress rejected the plan, worried it wouldn't get credit for the spending, and approved a bigger royalty payment to the localities. But regulatory requirements made it hard to spend the cash.
The result: After five years of economic boom, Peru's rural poor see little change in their lives. That is happening in other resource-rich countries, too, offering a potentially attractive opening for populist politicians.
