Chinese investments in Ethiopia

Jade writes*

Last summer, I spent a month in Ethiopia. My family and friends thought my travel plans were surprising, but upon arrival in Addis Ababa, I learned that I didn’t attract much attention from the Ethiopians. They are used to seeing Chinese faces like mine. The value of Chinese investment projects in Ethiopia reached an estimated 4 billion USD last year. China is Ethiopia’s largest trade partner in terms of  exports (16% of the total, worth 344 million USD) and imports (33% of the total, worth 2.65 billion USD). These numbers reflect two sets of policies.

First, Ethiopia wants to attract foreign investments by improving its investment and business climate. Favourable policies combined with a big domestic market and a strategic location in the Horn of Africa make Ethiopia attractive for foreign investors.

Second, China huge Belt and Road Initiative (BRI) means that trillions of dollars in infrastructure financing are flowing to developing countries. On the one hand, BRI can be seen as a massive development project, providing unprecedented economic growth. On the other, BRI might result in unsustainable debts to Chinese creditors [pdf] and lost sovereignty. These are the two main narratives around Chinese investment in Africa.

It is indisputable that foreign investments have brought economic growth to Ethiopia. It has the fastest growing economy in the region, but growth has not necessarily brought higher incomes or better living conditions for the poorest citizens of one of the poorest countries in the world

This relationship may resemble the picture of foreign investors swooping into African countries to plunder natural resources with the cooperation of local elites, but Ethiopia’s story seems different. For one, Ethiopia does not have fossil fuels or rare earth minerals. Its main export is coffee, and  Chinese investments are focused on infrastructure and manufacturing. Second, the crackdown on corruption under Prime Minister Abiy seems effective. Our usual suspects, the resource curse and corruption, are not the main perils facing high-growth Ethiopia.

So is it just a matter of time until economic growth ‘trickles down,’ or are  new industrial parks, power plants and railways only benefitting Chinese companies and employees? And what other adverse effects might there be?

I was in the northern Afar region. Here, Afar men have worked for generations to extract blocks of salt in the sweltering desert heat. The salt is then transported by camels to the nearest market. The trek takes several days. When I was there, I saw many trucks marked with Chinese characters. New tarmac roads were just under construction, with the promise of more efficient transport. But infrastructure developments could have huge environmental impacts.

Will these developments destroy the environment and traditional ways of living, or bring prosperity? In the end, it is probably a combination of both.

Bottom line: Chinese investments in Ethiopia have brought economic growth, but development is a more complicated story.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Inequalities and industrialisation

Alex writes*

Inequality in Europe changed with 19th century industrialisation. At that time, wealth was concentrated amongst the upper echelons of society, but the industrial bourgeoisie used their profits to join the landed aristocracy [pdf]. 

Work in cities led to rapid urbanization of Western Europe throughout the 19th century. Terrible conditions led people to call for more rights. This was first met by deaf ears, but the Communist Manifesto of 1848 mobilised the workers to call for decent working and living conditions. Stronger labour rights meant less working hours for children  and reasonable salaries for adults. Politicians in Western Europe supported such reforms to compete with rising social democratic and socialist political parties. Germany’s Bismarck, for example, enacted laws in 1883-84 that compensated workers for sickness and accidents. The development of labour rights led to political rights. Voting rights in Germany were granted universally in 1919 under the Weimar Republic.

The changing norms in society led to new institutions, the labour rights movement, universal voting rights, and the welfare state. These changes increased economic development as prosperity benefited more people. Changing norms in Germany and Sweden (where men could vote in 1919 and women in 1921) gave rise to notions such of “Gemeinschaft und Volk” or “Samhälle och Folk” (Community and People), which led to institutions such as “Folkhemmet,”  a political idea that presented the Swedish welfare state as a home for the people and means of development.

Bottom line: The normative changes that Europe has experienced throughout the 19th and early 20th century are largely due to industrialisation. Wealth inequalities and a growing workforce demanding more labour rights led to a more equal distribution of wealth. Hence a shift from solely economic growth to better economic development. These labour rights then further translated into voting rights, changing values, and a welfare state that would protect workers and citizens from the hazards of life. 


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Accountability and development

Dyma writes*

One of the main outcomes of the Revolution of Dignity in Ukraine was the removal of a Russian puppet government. It was believed that the Russian grip on Ukraine’s economy was so strong that it was almost solely to blame for the country’s bad economic performance. After the revolution and a period of deep recession and inflation, the first quarter of growth relieved the country. However, in the years to come GDP growth was nowhere near as fast as some predicted or hoped for (Trading Economics, 2019). Ukraine was also lagging in development measures. Why?

Let us start with one of the root causes of the problem. In order to stay in power, the government had no problems with popularity right after the revolution, given the alternatives. After time, however, leaders had to defend their position, and they did this by avoiding responsibility for slow or missing progress. The government had two groups to please: normal people and economic elites. Normal people have no problem starting another revolution. Economic elites have a lot of political leverage due to the double balance problem (North et al., 2006).

In order to please the people, the government subsidises communal utilities: water, electricity, natural gas, and internet. In order to please the oligarchs, the government effectively subsidises their economic activity: usage of the national railway system, their businesses and factories, including the commodities that they need such as natural gas and coal (Evans, 2006). As a result, commodities used by the heavyweight industries owned by the oligarchs are available at below-market prices.

But what’s the connection between too low prices and slow development?

Let us use natural gas as an example. If it can be bought for less than the market price by people and industries, then two things happen. First, the subsidy money is usually extracted from another government controlled industry, which makes that industry uncompetitive. Secondly, the industry that ends up purchasing the cheap gas becomes uncompetitive too, should the price of gas increase because of a higher market price or a reduced subsidy. The reason for this being the fact that gas may constitute half of the price of the final product – an increased cost or a decreased market price for that product disables the business to some extent.

Uncompetitive businesses, in turn, do not invest into R&D, innovation, education, infrastructure and technology, which slows down growth and development. Apart from the lack of ability to invest, there is usually lack of incentive too. If the gas is that cheap, why would you look for more advanced technology?

Bottom Line: After a revolution and a period of recession Ukraine is not experiencing fast growth or development rates that one would expect or hope for. The mechanism that is preventing the improvement from happening has its root in the government’s need to avoid responsibility to the people and oligarchs. Through subsidising communal utilities as well as the large-scale economic activity of big economic players in the country, the government effectively makes those industries uncompetitive. Which, in turn, prevents any investment into R&D, innovation, education, infrastructure and technology.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Transitional privatization

Jorn writes*

Privatization has occurred in many countries and throughout different types of economies, but is most prominently featured in transitioning economies that move from a planned system to a market-led one. There are multiple ways to go about privatization. Which methods are employed determines for a large part which types of stakeholders are advantaged. This impacts ownership structures and consequently efficiency. The goals of economic growth and development are often at odds when choosing between methods.

This post first discusses common privatization methods. Secondly, it addresses the main considerations for governments deciding between these methods. Finally, it highlights the tension between growth and development.

Common forms of privatization are the public sale of shares and auctions of whole companies. The former enables more citizens to take part in the privatization, but risks dispersion, which tends to inhibit restructuring efforts. The latter is expected to create the highest value for the government and more efficient business governance, as ownership is with a large party that can easily replace inefficient managers.

When companies have a strategic importance, states often privatize via public tenders or direct negotiations. Their benefit is the control the government exerts over assets vital to the country and the guarantee that companies will have large ownership blocks, allowing for restructuring. It is also easier to limit foreign influence via these methods. A downside is that these processes are easy to be politicized, which creates advantages for the incumbent political elite.

A final method, employed especially in former Soviet and other Eastern European countries, is the use of voucher sales [pdf]. This process entails handing out vouchers with which citizens/employees can obtain ownership of companies. Many former Soviet states chose this method because most citizens possessed too little capital to obtain shares via other methods. The advantage therefore is that equality is promoted. The disadvantage is that the market process has no influence here, thus companies may not be obtained by the most efficient owners.

The dominant literature on privatization argues that private ownership is more efficient than state ownership; management ownership more than employee ownership; outsider ownership more than insider ownership and foreign ownership more than domestic ownership. See for more information this EOCD report on privatization in the Baltics [pdf].

Employees have incentives that collide with profit-maximization, such as the will to retain jobs and high wages. Managers have these incentives to a smaller extent, while the incentives of outsiders are likely to align most with profit maximization. In the case of poorer countries with weak institutions, foreign ownership provides a large advantage to enterprises. The foreign owners have better access to capital, management skills, and international business networks. However, political issues matter too. For privatization efforts to be feasible, they needs support from powerful groups in society and to some extent the population. Moreover, a government may be reluctant towards foreign ownership of its companies, as economic power often leads to political influence.

There thus exists a tension between development-oriented method and growth-oriented methods. The former stimulate for instance employee or management ownership, a form of more equitable, but less efficient ownership. The latter create ownership structures driven by primarily foreign investors. Although these are expected to be more efficient and thus stimulate economic growth in terms of production, they grant less benefits to ‘ordinary’ citizens and may slow down a country’s development.

Bottom line: The choice between methods of privatization is crucial, because it has a large impact on the ownership structure and subsequent development of enterprises. In many instances, growth and development will be at odds here.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Bangkok chokes on growth

Genie writes*

Bangkok had quite a hazy start to 2019. In January, the city was blanketed in smog and had a concentration of PM2.5 particles that was at dangerous levels. The Bangkok Metropolitan Administration (BMA) tried washing up the streets and buildings with water cannons, but the smog persisted. This lead Bangkok residents to express their dissatisfaction on social media platforms. But, was there more that the BMA could have done? Maybe slowing down growth in Bangkok could help.

In the past 250 years, Bangkok grew from a village on the bank of the Chao Phraya River to a megacity with over 14 million residents. Today Bangkok is the centre of economic activity for Thailand. The gross regional product (GRP) per capita for Bangkok is double the national GDP per capita. Bangkok’s GRP also represents 44.2 percent of Thailand’s GDP. The primacy of Bangkok’s economy is a result of government policies that have devoted funding to Bangkok and preference of foreign investors. Bangkok also benefits from being a first-mover agglomeration economy which makes it difficult for other cities to compete with Bangkok.

With Bangkok’s economic growth comes air pollution (related post).  The concentration of economic activity in Bangkok has lead to an increase in the city’s population, and consequently, an increase in the quantity of vehicles needed to transport that population. The lack of adequate public transit developments early on has also made Bangkok residents dependent on private cars. Thailand’s Pollution department estimates that vehicle emissions is responsible for approximately 60 percent of Bangkok’s greenhouse gas emissions and particulate matter. Bangkok’s current air pollution situation is harmful to the health of residents and can cost up to 6.6 billion baht (€180 million) in losses for the healthcare and tourism sector. Thus, improving the air quality is crucial for both Bangkok’s economic growth and development.

The haze is an important wake-up call for Bangkok. Urban experts urge the BMA to improve transport policies and invest in public transportation in Bangkok. However, the growth in Bangkok may no longer be economic. The worsening air pollution is one example of the many challenges that Bangkok faces that has potential to undermine its long-term economic growth and residents’ quality of life. It may be an indicator that the additional costs for Bangkok’s economic growth exceeds the additional benefits, and growth is uneconomic. Bangkok already receives high levels of public investment as the Thai government attempts to uphold its deteriorating quality of life, so it may be worth investing in peripheral regions that can ease pressures in the capital.

Bottom line: Bangkok’s economic growth may no longer be economic because of increasing costs such as air pollution. Therefore, instead of investing more resources in Bangkok’s growth, allocating resources for the development of peripheral regions can help promote Thailand’s development.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Italy’s simple solution will fail

Maddalena writes*

Today 5 million Italians live in extreme poverty in an economy that suffers from chronically low growth and high public debt. But let’s not worry too much about that, the new populist government came up with a very simple solution. During their electoral campaign, the 5 Star Movement proposed the implementation of a basic income for those families who live below the poverty line. The leaders of the movement believe that this measure will fight poverty, inequality and social exclusion, guaranteeing access to jobs, adequate education and information. Sounds like real development!

This is how it works. The state gives a special card, charged with €780 every month, to any Italian or European who have a difficult financial situation and meet particular requirements (such as limited financial and capital assets). In the meantime, these people will also be reintroduced to the labor market through specialized centers that will provide training programs to those who need to be trained and will guide to job opportunities those who are already qualified. This project also includes incentives for enterprises to hire the beneficiaries of this basic income. The enforcement will be strict: those who cheat risk 2-6 years in prison. So far so good.

The sad truth is that usually “an affordable UBI is inadequate, and an adequate UBI is unaffordable”. The problem is also that in the case of Italy, the basic income is neither one or the other. This reform would approximately cost €9 billion every year, an expenditure that is not affordable for an economy with a public debt of 132% of GDP. Ignoring that little detail, the populist coalition endorsed a deficit of 2.4% of GDP, three times larger than the 0.8% adopted in the previous years and over the 1.6% limit suggested by the minister of finance.

The expectation behind this reform is that it will create job opportunities for people who will eventually contribute to boost the economy through fiscal stimulus. However, this will only happen in the long run and will require a short-term increase in taxes in a country with one of the highest tax wedges in the  OECD. In the meantime, another risk is that the cost of borrowing will rise, increasing the costs of servicing debt for businesses. This will harm the balance-sheet of domestic banks that are the main holders of Italian debt. Another risk that should be considered is the incentivization of undeclared work, which would result in tax evasion which is already particularly high in Italy.

In addition, this reform is also inadequate for the composition of the country. Giving the differences between north and south, €780 is too little for those living in the North and too generous for those living in the South. In the long term, this would contribute to the timeless division of the country, increasing the existing resentment of the North towards the South.

Moreover, the amount of €780 has been established according to the idea of “relative poverty”, that accounts for all those people who have an income that is below the 60% of the median income”, which means that inflation and the performance of an economy are not taken into account in the calculation. This means that this sum will require constant adjustments and political controversies in a country that doesn’t have bureaucratic apparatus that is efficient and responsive enough.

Bottom line: The implementation of a universal basic income is unlikely to succeed given Italy’s weak institutional framework and unaffordable in its even weaker economic situation.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

AI threatens development

Willem writes*

Presidential elections recently took place in Nigeria. The build-up to these elections saw tragic violence between groups of pastoral Muslims and farming Christians that was sparked largely by fake news circulating on Facebook. This fake news was designed specifically to instigate ethnic violence. Facebook is active in Nigeria with their initiative Internet.org, which aims to realize global internet connectivity, and meanwhile gives users ‘free’ access to Facebook. In Nigeria alone, 53 million new mobile internet users are expected to come online in the next seven years, a profitable market for Facebook.

Mark Zuckerberg takes a selfie with Nigerian president Buhari (source)

The spread of fake news is but one example of the disruptive impact that digital technologies can have on society. In particular,  artificial intelligence (AI) is expected to have a profound influence on societies in the near future.

Studies on the potential impact of such AI technologies on economic growth are remarkably unanimous in their conclusions: AI is great for growth.  A model by the McKinsey Global Institute predicts that between now and 2030, AI will deliver additional economic output of a whopping $13 trillion. A question that has received much less attention, however, is how this growth can translate into economic development.

AI has already made positive contributions to economic development in numerous areas: early detection of epidemics, disease detection in crops, and providing financial services to rural areas, to name a few. However, particularly for poorer countries, it seems that it will be very difficult to actually realize these benefits.

The social effects of technologies are shaped by institutional, political, economic context in which they are rolled out. The example from Nigeria shows that in a society that is already characterized by ethnic divides, AI can reinforce or aggrevate existing systemic biases and lead to inequalities and even violence against certain social groups. Evidence from the U.S. suggests that algorithms and AI applications systematically aggrieve those in lower social classes and those with lower digital ‘literacy’. In poorer countries, which generally have more social inequality and lower quality insitutions, these social effects of AI are likely to be even larger. Furthermore, persisting differences within many developing countries between those who are able to participate in the design and implementation of AI and those who are not, could result in an uneven distribution of the benefits from AI.

Mitigating these negative effects presents a daunting task to policymakers, and demands a wide range of economic and institutional reforms. Even for the richest countries, regulating tech giants like Facebook is proving very difficult. However, the speed at which AI evolves and the potential benefits it promises make that this should be a top priority, particularly for poorer countries. Tragedies like those in Nigeria may unfortunately be a new reality, but inequality, social unrest and political instability resulting from AI must be minimized if development is to occur.

Bottom line: AI may be great for economic growth, but not for economic development. Poorer countries need to implement drastic economic and institutional reforms if they are going to benefit from AI.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

A visit from the Russian mafia

Kato writes*

The collapse of the Soviet Union was followed by major economic transformations in the dawn of 1990s Russia. Rapid privatisation of the market and liberalization of economic policies gave rise to many private businesses. Since the collapse of SU left many soldiers, and Soviet team sportsmen unemployed, they came together to form racketeering groups specializing in exploiting the profits the private sector made. Extorting, or “appropriating someone’s property under threat of violence or damage to that subject’s prop­erty” (Volkov, Vadim. Violent Entrepreneurs : The Use of Force in the Making of Russian Capitalism, p.3) was their business model, and given the lack of rule of law, this model proved to be a major success. Since this period coincided with the gradual restoration of Russian central authority, structure of all formal institutions of Russia came came to be shaped by gangsters. Now, in such conditions, paying a bribe was a given, and an economy characterized with corruption started to grow and influence its neighbouring country: Ukraine.

Everything was up for grabs, and therefore ‘Aluminium Wars’ took off. Aluminium Wars were waged by gangsters for the influence on Russian Aluminium production. Violence soared, and those who came out as winners, formed into the network of oligarchs, who practiced huge control over Russian resources. Why these above-mentioned processes had a great impact on Ukrainian economics has an origin in a great political and economic proximity of the two countries.

It has to be noted that Russian ethnic population in Ukraine is substantial, amounting to 17%; therefore, so is proportion of the pro-Russian electorate [pdf, p.5.] In addition to that, Ukraine is dependent on most of its oil and gas from Russia, and this dependency is exacerbated given Ukraine has special discounted prices for these resources [ibid, p.7]. Another indicator to the dependency of Ukraine on Russia is how over time, Russia has always been a significant market for Ukrainian exports. For instance, looking at Ukrainian exports of 1996, 38.7% of total exports is owed to Russia [ibid, p.8]. Lastly, Ukraine is, and was in the 90s, a major receiver of Russia FDI, that’s why in the resource sector “out of the six Ukrainian oil-refining plants (ORPs), four are owned by Russian companies.” [ibid, p.10].

Given the above mentioned, it is reasonable to conclude that the economic phenomenon present in Russia had a great potential of impacting that of Ukraine. Importantly, the clear link is to be made between the roaming banditry and Russian economics at first, before discussing its implications on Ukrainian economy.

The interconnectedness of gangsters and economics ran deep. Russian entrepreneurship was based on engaging in criminal activity such as extortion, bribery, and even murder – “During that time, murder was a depressingly common way of resolving business disputes.” Violent entrepreneurship soared with the increased availability of valuable natural resources. According to CNN, out of the Russian oil, gas, timber and aluminum industries, rose a small number of individuals, and among those small group of people, were not only Russian, but also Ukrainian individuals.

Bottom Line: Russia’s and Ukraine’s strong economic interconnectedness is essentially predisposed by their geographic and cultural proximity. Therefore, Ukrainian economics was greatly influenced by the violent entrepreneurship that took off in post-soviet Russia.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

Redefining economic success

Hanna writes*

The current linear economy measures success in terms of growth. This definition of success fails to include many environmental and social factors that are important for the wellbeing of society and the natural environment.

This one-minded economic system is increasingly being challenged. For long, thinkers and entrepreneurs have tried to come up with alterations to the current system to reduce its negative impacts. Others have even gone as far as proposing alternatives. Two such alternatives to the linear economy aim to step away from the wasteful take–make–dispose flow and redefine the values of the economic system.

The circular economy, as its name states, aims to transform the linear economy into a circular one. Meaning, that, as defined by the Ellen Macarthur Foundation (EMF) [pdf], it is “restorative and regenerative by design and aims to keep products, components, and materials at their highest utility and value at all times.” In practice this translates to shifting ever increasing intensity of production to product quality and towards reuse and upcycling. Making it “restorative and regenerative by design.” Here a distinction between a technological and biological cycle is made. This distinction is made to maximize the use of the product by diversifying its application and ensuring its safe return to a natural state (e.g. decomposition). The circular economy is further said to be economically beneficial and a source for employment creation. As estimated by the EMF, the European Union could increase its net benefits by €0.9 trillion by embracing the circular economy by 2030.

The steady state economy goes one step further and calls for downsizing and degrowth of the current economy to a size that can be sustained by the planet. Firmly decoupling the economy from growth and focusing it on limiting environmental degradation and improving the quality of human capital and consumer goods. In other words, there is an upper threshold or limit to the steady state economy. This threshold calls for a sustainable and consistent population size (births+immigrants = deaths+emigrants) and capital stock production. Fair distribution of wealth and the efficient allocation of goods and services are said to be easier to achieve in a steady state economy with a stable population.

To achieve either model, behavioural patterns and institutions supporting “growth and accumulation” as measures for success would have to be challenged and altered. This poses a significant challenge to society and will surely not be accomplished overnight. However, first efforts to implement the circular economy are on their way. Other trends within the business sector are evolving, implementing more sustainable practices and slowly reshaping ‘business as usual.’

Bottom Line: Current definitions of success being equal to constant growth must be altered to include environmental and social factors that contribute to wellbeing. This can be done by altering the current linear economic model and moving away from the throwaway society to one that is more restorative by nature. This shift is already in process but still has a long way to go.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, etc. (Or you can just say something nice 🙂

Peru’s poverty of riches

Daniela writes*

“Peru is a beggar seated in a golden bench.” This famous phrase by Italian scientist Antonio Raimondi is especially relevant to describe the socio-economic reality of the Peruvian mining industry. While it is perceived to be thriving in terms of contribution to GDP and hence output, there is a different story to be told in terms of development for neighbouring mining communities which are responsible for natural resource extraction. Most surprisingly, it is not a new story, but one that has persisted over the centuries.

Probably unbeknownst to the reader, Peru is the second largest exporter in the world of copper, silver and zinc and the fourth largest exporter of gold in the world. The industry accounted for 62% of total exports in 2017, constituted 10% of GDP and 5% of employment generation in the same year.

Even though mining projects by 2021 are valued at almost $70 billion dollars, it is mostly benefitting large multinational companies and local giants. On the other hand, the miners, responsible for the manual labour, will probably not reap the most gains. Today, 50% of the population in these mining communities is living under the poverty line, 15% remain illiterate and overall, the communities count with a disheartening human development score of less than 0.5, while the country counts with an average of 0.75 out of 1.

History seems to repeat itself, as these regions continue to be the poorest in the country, 500 years after the institutionalization of the Spanish mita, used to colonize the native population. Miners, similar to other poor communities in Peru, face a significant obstacle to development: they remain at a historical disadvantage in obtaining their rights against a persistent pattern of extractive institutions and exploitation. In the present, miners stand powerless against giant corporations which do not have it in their agenda to contribute to the progress of these communities but rather to generate enormous profits.

In addition, informal mining and conflict-ridden communities neighbouring major mining projects are two crucial phenomena to consider in terms of limited progress for Peru.

Although the Ministry of Mines and Energy (MINEM) has predicted to formalize almost 10,000 miners this year, informal miners constitute at least 750,000 of the mining community, while those directly formally employed lag behind at 190,000. This means that at least 75% of all miners in Peru are waiting for their rights to be recognized by the state. If the efforts by MINEM are successful, formalized miners will have rights to extract resources over a certain area through concessions, which most miners are unable to do so at the moment.

Informality, alongside environmental concerns and poor living conditions, has sparked conflicts in mining communities and deterred potential investment. It is estimated that $12 billion dollars in investment could go forward if conflicts in the South of the country would be resolved. Mining conflicts are most prevalent in this region given that this is where most mining activity takes place. These conflicts are mostly caused by environmental concerns, dissatisfaction of the miners with the role of the State and direct confrontations with major enterprises. While these are mostly protests, some have scaled up to pose a risk to human life, most notably in Tia Maria and Conga.

While the government is making significant strides to try to overcome conflict and informality, there remains the question whether the reforms will achieve meaningful progress and institutional change.

In order to address this issue, the government is currently working on the establishment of three main types of funds. This includes a macroeconomic stabiliser “Fund of Fiscal Stabilization“, eight regional social funds, and the most recently set “Fund of Social Advancement”  set to begin its operations in 2019. While the latter two intend to contribute to the provision of basic public goods and services in mining communities – including water, sanitation, infrastructure and education – the former is a sovereign wealth fund intended as a risk stabilizer if a catastrophe were to happen in the economy. The Fund of Social Advancement seems to be the most promising, given that it intends to merge the efforts of the regional funds into a centralized mechanism, for which $15.1 million dollars have already been destined.

Nevertheless, a significant weakness of these funds is that, while they seem specialized in the provision of essential public goods, they do not intend to tackle the long-term challenge of breaking the barriers of path dependency. Essentially, a potential solution could be to centralize efforts into a macro-encompassing fund which guarantees security and the development of future generations. For instance, Peru could mimic the Norwegian Sovereign Wealth Fund model by guaranteeing that a significant share of the profits of natural resource extraction are destined to the sustainable development of the mining industry and the communities involved.

Bottom line: Even though the mining industry in Peru is perceived as thriving by dollar counts, there is a different story to be told in terms of the development of neighbouring mining communities to major projects.


* Please help my Growth & Development Economics students by commenting on unclear analysis, alternative perspectives, better data sources, etc. (Or you can just say something nice 🙂