Illegal Mining Industry in Peru - Case Study Example

Illegal Mining Industry in Peru Name: Course: Institution: Date: Introduction Mining remains an essential economic activity in the economy of Peru since the early days. With the arrival of the Spaniards in the region, Peru began specializing in mining of special metals and particularly silver (Sheahan 2010 p.50). They introduced the use of money in trading activities to the indigenous people. Peru minted the first silver coin in the period and this marked the beginning of commercial mining that has continuously expanded to date. The Spaniards targeted Peru for its richness in natural resources, particularly special metals that would generate a huge amount of income. They settled in Peru and enforced slave labor on the indigenous population while expanding the mining sector through transformational techniques. In the previous decade, the mining industry in Peru has received enormous domestic and foreign investment. GDP Composition Presently, the portfolio of the mining sector is $41 billion in Peru, demonstrating the high level of focus to mining by the country. Peru is the leading gold producer and exporter in South America and in 2013, it formed part of the top six gold producers who account for half of the global gold production. In the same year, gold accounted for 21% of the country’s exports at 185 tonnes, which accounted for 6.5% of gold mined globally. The gold mining industry immensely contributed to the economic growth of Peru through its large contribution to the GDP as well as the job creation. In 2011, the four leading gold mines in Peru employed approximately 4500 workers contributing 1.4% of the total GDP (Hansen & Withal 2014 p.157). In 2013, the industry contributed $8 billion to the national income. The mining GDP has experienced an accelerating growth rate approximated at 260% in the past 20 years. The mining sector has attracted over US$18B worth of investments in the past 5 years and accounting for 60% of the total exports. Economic Growth Attributable To Illegal Mining Despite the crucial role played by the gold mining industry in economic performance of Peru, illegal mining derails this performance. The region of Madre de Dios is the largest player in illegal gold mining in the country. The industry has approximately 100,000 illegal miners and 400,000 compatriots. The Madre de Dios region produces almost 70% of the 16 tons of gold produced by Peru making it the largest gold producer in the country (Sheahan 2010 p. 120). Illegal mining has accelerated in the past 5 years with most of the activities taking place in the rainforests. The amount of gold produced formally has declined over the years while gold exports remain relatively constant. This indicates a high level of illegal activity in the gold mining sector and the increasing spot rate of the commodity indicated a growth in demand (Griffin T. S. 2000 p.88). Out of 5 million ounces of gold produced by Peru, 22% originates from illegal mining undertakings while a third of the gold produced by southeastern regions emerges from illegal activities. Global M&A values illegal; gold mining at a value of US $1.8B with profits from the industry amounting to US $1B. Out of the profits generated from these illegal activities, the Peruvian government loses over US $305M per annum in form of taxes. Growth of the Informal Sector Common indicators demonstrate a continuous growth in the illegal industry particularly in the largest gold producing region in Peru. The demographics of the Madre de Dios region indicated a continuous growth in population, which translates to growth in the illegal industry. Between 1993 and 2007, the region experienced a rate of 80% population growth while the country had a 24% population growth. This indicated a high level of migration from other local regions to Madre de Dios. Between 2004 and 2010, the family income increased from US $370 to US $882 showing an increased participation in economic activities (Griffin T. S. 2000 p.112). Implications of the Illegal Economic Activities Despite the economic contribution of the illegal mining sector, it has resulted in environmental degradation through deforestation and pollution of rivers. It depletes the Amazon rainforest at higher rate than industrialization. Currently, illegal mining has destroyed over 70 sqkm of forest located in the Madre de Dios region. The region still has 159 tonnes of unexploited gold hence the devastating results will continue to manifest in future. Approximately 20% of Peru’s gold exports emerge from illegal mining sector that employs approximately 40,000 workers, which is almost ten times the number of workers under official employment (Sheahan 2010 p. 142). Alternative Sector Peru experiences a rise in global demand for its commodities while the favorable market prices offer the country an opportunity to increase its export quantity. The Peruvian government needs to focus on the design of policies that drive the nontraditional export sector to give the country a competitive edge. Since the country relies heavily on income generated from exports, the government should focus on nontraditional export commodities especially in agriculture. Between 2000 and 2005, the Peruvian government embarked on export diversification and asparagus emerged among the top ranking commodities. The commodity accounted for 25% of the total share of nontraditional commodities exported by the country (Sheahan 2010 p. 147). The Peruvian asparagus export sector emerged in the early 1950s along the Virú Valley as a family initiative and exported in cans to Denmark. Slow growth followed and by the end of the century, the sector experienced a rampant increase in exports. Experts funded by the (USAID) identified asparagus, paprika, and melons as commodities with the greatest export potential. Economic policies such as land privatization have played a major role in the development of the agricultural sector particularly the agro-export sector. In 2008, exports accounted for 27.1% of the country’s GDP with agricultural commodities accounting for 7.2% of the exports. The foreign direct investment was approximately U.S. $5.3 billion in 2007(Sheahan 2010 p. 174). The FDI has assisted the country in expanding its economy and particularly the agricultural sector and continuous investments would expand the sector to a sustainable level. Asparagus production would particularly benefit from the investment by increasing the production capacity. The sector would require an additional investment of $1.6 billion to maximize the potential of the sector and realize maximum returns. This investment would assist in funding the automation of farming activities for new farmers. Mechanization is an area that demands substantial amount of investment and produces desirable results. The $1.6 billion is a reasonable amount since its payback period is approximately 4 years. The assumption in this estimation is that the venture earns approximately $400,000 per annum (Sheahan 2010 p. 99). Investment in this sector would ensure a rise in the employment level due to the job creation of associated activities (Hansen & Withal 2014 p.123). The farming activities require direct laborers to till the land, plant, harvest, and in general handling of the crop. The agro-export sector in Peru utilizes a high level of technology in crop production that requires workers to manage and monitor. IT experts therefore contribute largely to the production process since they monitor the operation of the machinery. Business specialists also get an opportunity to join the sector in directing the farming activities to ensure cost minimization as well as profit maximization. The sector also requires appropriate marketing strategies to ensure the expansion of market for the asparagus product. Technical aspects such as machinery repairs and other miscellaneous activities also require workers hence a further creation of employment opportunities. Asparagus farming is appropriate for every form of economic status including the low socioeconomic status. Government policies may utilize this investment to upgrade the economic status of the poor population in the country (Hansen & Withal 2014 p.134). Subsidies may enable the poor population acquire access to high quality inputs and ensure production of high quality products acceptable at the international market. The amount acquired from investors therefore goes directly into the acquisition of advanced technology hence the flow of resources into the technological sector. The employment of individual workers to work in the sector further facilitates the distribution of resources into the household incomes. This boosts the per capita income of the nation hence the economic performance. The employment of the poor population to work on the farms enables the redistribution of national resources through the flow of resources into their household income. Taxation of the venture also enhances income redistribution through taxation of the high-income earners and the distribution of this amount in form of subsidies for farm inputs. Conclusion The positive NPV from the project appraisal indicate that the asparagus production is a viable investment and will generate income in excess of the initial investment. The venture has a payback period of approximately 4 years within which the returns will have covered the cost of the investment. This demonstrates a low payback period making the venture viable for investment due to the lowered level of risk. The returns increase with the increase in the rate of return hence the higher the market rates the larger the amount of returns obtained. The viability of the project demonstrates the potential of the Peru economy to develop while relying on other sectors apart from mining (Sheahan 2010 p. 282). The country could therefore address the negative implications of mining through the focus on agro-export activities that generate substantial income while preserving the nation’s natural resources and protecting the environment. References Griffin T. S. 2000. Peru’s Economy: Underemployment and the Informal Sector. Washington: Francis Group. Hansen A., Withal U., 2014.Emerging Economies and Challenges to Sustainability. Melbourne: Ashgate Publishers. Sheahan J. 2010. Searching For a Better Society: The Peruvian Economy from 1950. Victoria: Penn State Press. Read More