The World Bank’s second chance in South America

The World Bank annual meeting in Lima, Peru this weeks offers a unique opportunity. While China’s massive investments in infrastructure are much-needed, they come with huge risks. The World Bank can reduce those by working with these new efforts—with all their capital—to apply the Bank’s experience in protecting the environment and local communities.

Here is the money line from my perspective:

While Latin American leaders must be credited for using some of the proceeds to reduce poverty and inequality during the China boom, those same leaders invested little of the proceeds to diversify into services and manufacturing activities that could have picked up the slack now that commodity prices have plateaued and even begun to fall.

Until Latin American leaders make the tough decision to give up on some easy money and do the grunt work of developing other industries the region will continue to move through the commodity boom and bust cycle.

Source: The World Bank’s second chance in South America

An Ugly Crescendo in Peru

Recently, things in Peru have taken a turn for the worse. Some of these things have come from mother nature, in the form of flooding and landslides in Chosica and heavy rains in other parts of the country. Others have come from more human designed disasters such as Southern Copper’s decision to pull out of a US$1.4B project (Tia Maria) and Lima’s Mayor’s decision to gut and completely redo the transportation reform. Finally, there is the case of where the Peruvian economy is going. The government says it will grow at over 4% this year while banks such as Merril Lynch say the Peruvian economy is heading toward recession.

Let us look at things on a one-by-one basis to see just what is going on.  The sad case of the flooding and landslides in Chosica is a tragic event, as is any event with a loss of human life. As with most tragedies in Peru, the government response has been slow and tepid at best. To make matters worse, is that this disaster area is located just on the outskirts of Lima and not in some remote region of the Andes.

Now shifting our attention to mining, Southern Copper Corp. has been working in Peru for around a half a century and has, for the most part avoided many of the high profile protests and unrest that has afflicted many other mining companies in Peru. Now it appears that they have had enough. The Tia Maria project has been on the books for a number of years and no one doubts about the viability of the project. The anti-mining movement really started to gain some steam after the conflict over the Conga Project in Northern Peru. Southern Copper cited anti-mining terrorism as one of the reason that they are backing away from the Conga project but that is only half of the picture. Let us hope that this is just rhetoric and that there are other factors at play here such as lower demand from China, a drop in the price of copper, or other issues.

Moving back toward the capital, Mayor Castañeda has decided to cancel the transport reform program started by the previous administration. Although the reform package did have its flaws it should have been used as a base to continue to make improvements to a part of Lima that desperately needs a consistent and long-term effort to improve the lives of the nearly 10 million people who call Lima home. This situation is a way to common occurrence in Peruvian politics as instead of taking something from a previous administration and making it better each politician, in their own greedy way, wants to take credit from the program and always feels the need to scrap anything started earlier and start the whole process over. This is a colossal waste of time just to have someone’s ego massaged.

Finally, there is the issue of the Peruvian economy. The government is certain that their well run economy will continue to lead the region in growth. The fact that other’s are starting to see the situation differently is a break from the immediate past when the only economic news and analysis out of Peru was how fast the economy was growing and highlighting all the wonderful opportunities for investment.

Now, the reason for each of these is indeed distinct, and none is even remotely related to each other. However, when taking a step back and looking at the current situation of things in Peru it is not casting a rosy picture for a country that is supposed to be a beacon of growth and stability in the region.

UPDATE: Southern now says that it will continue with the project and its spokesperson was in error. Now there is an investigation into Southern’s stock trading as there were some wild movements based on the announcement that Southern would be pulling out of Tia Maria.

A Coming Crisis in Latin America?

When analyzing economic growth in Latin America today many people all to often focus on just growth rates and high rise buildings springing up across the landscape and forget to take a look at some of the issues behind the fancy showpieces. One such issue that really only gets occasional populist lip service is income inequality.

Despite the fact that from Bogota to Santiago there are new five star restaurants, glass covered corporate offices, and vacation packages to Miami and Madrid, these are the signs the economies are indeed growing but are they growing enough for everybody? Although no one can deny that poverty has been reduced in countries such as Colombia and Peru – two of the most recent economic darlings of Latin America – many of its citizens are perched perilously close to the edge of poverty. All it will take would be one little hiccup whether that be a decline in demand of copper from China, a political crisis at home, or a resurgence of armed conflict to cast hundreds of thousands back into the grips of poverty.

For instance in Peru, many have joked the national flag should be changed to incorporate the shovel, as it is this simple instrument that serves as the backbone of Peru’s economy as the mining and agriculture sectors have boomed as well as the domestic construction industry. At the moment Peru is reaping the benefits of its rock (mining) and dirt (agriculture) economy but at what cost. There seems to be very little incentive for education since a good job can be had from the skill set of properly handling a shovel. Other Latin American countries are not much different.

Let us hope that these decades of growth will not be wasted and in the coming years Latin American governments pay more than lip service to income inequality.