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Commodities boom has unlikely fallout in Latin America

Commodities boom has unlikely fallout in Latin America
Monday, March 06, 2006
By Matt Moffett, The Wall Street Journal

LA ENCANADA, Peru -- When gold prices started rallying briskly a few years ago, residents of this impoverished Andean mining town hoped for things like improved schools or sewage treatment. That is because Peru's federal government had begun allocating a big share of natural resource revenue to local administrations.

But people in La Encanada, where motorists share the streets with sheep herders, didn't count on the peculiar spending priorities of the town's flamboyant mayor, Fidel Valera Sanchez. He is building a 15,000-seat soccer stadium, revamping a sports arena and preparing the groundwork for a 10-story municipal hotel -- which would be by far the tallest building in town. A sign in the big municipal bull ring he is constructing reads "The great men like Fidel Valera are remembered by their works."

A China-fueled commodities boom is pouring money into state coffers across Latin America. With growing grass-roots demand for some of the wealth, many national governments are sending an unprecedented portion to local authorities, who presumably know where it is most urgently needed. In many places, it isn't working the way it was supposed to.

"The gold is being trucked out, but the benefits aren't coming back to the community," says Absalon Salazar Huayhua, a small farmer and rancher in Encanada.

That is contributing to a surge of support for populist candidates across the region, as local officials fail to meet the rising expectations of the poor. Mr. Salazar is organizing a voting drive for a fiery populist presidential candidate, Ollanta Humala, an ex-military officer who has come out of nowhere to grab second place in polls anticipating next month's election.

This year Peru has earmarked $800 million in taxes paid by mining and energy companies for town halls in the mountains and jungles where the resources are produced. In a country with a long tradition of strong central government, local and regional leaders were handed a once-in-a-lifetime opportunity to help the half of Peru's population that earns less than $2 a day. But many of them are blowing it.

Some of the revenue is being siphoned off through fraud, federal officials say. Despite desperate social needs, other leaders can't make up their minds what to do with the cash influx. More than 30 percent of the money is sitting idle in bank accounts, Peru's economy ministry says. "The money coming in has completely outrun the capability to spend it," says Pedro Pablo Kuczynski, Peru's prime minister and economic architect.

Still other mayors are throwing away the earnings on white elephants, ranging from heated swimming pools to ornate public plazas. In the northern oil town of Tumbes, almost half the population lives without sewage service and one-quarter are illiterate. But the local government recently unveiled a 7-foot-long cement monument to the iguana, after earlier having built a ball-shaped monument to soccer referees. A town spokesman says the monuments are good for tourism and that the government is also spending money on services.

Augusto Baertl, a longtime mining executive and consultant, says Mr. Humala's strength with the poor reflects "that in a time of abundance, the gains are not reaching the people with the greatest needs." Polls show that Mr. Humala has pulled within striking distance of conservative front-runner Lourdes Flores. They are vying to succeed Alejandro Toledo, a centrist whose market-oriented policies have weighed on his popularity. Mr. Humala has vowed to boot out traditional politicians and revise mining and energy contracts with foreign companies on terms he says will bring more income to poor Peruvians.

Bolivia also has endured a populist backlash, in part because of the slow flow of benefits from a natural-resource boom. Leftist Evo Morales was elected president in December pledging to take a tougher line with the foreign companies that control the country's vast oil and natural-gas reserves. Last year, Bolivia approved a controversial new tax on energy multinational companies that will be used in part to fund local and regional governments. But, as in Peru, Bolivian local leaders haven't always made good use of the income. Local administrations hadn't been able to spend about one-third of the oil and gas revenue they had been receiving even before the new fees, according to Bolivia's economy ministry.

More common throughout the region are local leaders who are spending too freely. The central Brazilian city of Paulinia is rolling in money from a local oil refinery, and Mayor Edson Moura, a member of a centrist party, isn't shy about flaunting it. At the entrance to the city, he built a pair of giant arches, in the shape of a medieval castle gate. In 2004, he built a $40 million municipal building and shopping-center complex, and spent $200,000 for an inaugural concert by pop singer Ivete Sangalo. (Not a single merchant has rented space in the shopping center.)

Mr. Moura last year announced plans to turn Paulinia into a film mecca. He then flew himself and a delegation, at government expense, to France for the Cannes Film Festival. State attorneys have launched investigations into Mr. Moura's contracting policies and a citizens group is trying to get him removed. A spokesman says Mr. Moura has done nothing wrong and is dedicated to diversifying Paulinia's economy.

In Colombia, local corruption involving oil revenue has been so flagrant that the central government has been trying to "recentralize," or assert greater control of oil revenue. Decentralization critics note that Chile, the strongest economy in Latin America, is also one of the most centralized. Rather than giving local leaders carte blanche, Chile's federal government has been squirreling away some of the windfall from higher copper prices into a stabilization fund to be tapped in the future should prices fall.

Peru's economy minister last year presented a bill seeking to create such a rainy-day fund, but regional and local leaders blocked the proposal in Congress -- a sign of just how strong the local officials have become.

For centuries, Peru had been ruled by strong central leaders, from the Spanish viceroys of the 16th century to the military strongmen of the 1960s and '70s. The move to earmark greater revenue to grass-roots politicians was part of the democratic effervescence following the ouster of authoritarian President Alberto Fujimori, whose decade-long rule ended amid a corruption scandal in 2000.

Throughout Latin America, there has been a steady trend toward decentralization of public budgets, with state, regional and local governments' share of spending rising to 19.3 percent in 2004 from 13.1 percent in 1985, according to the Inter-American Development Bank. Advocates argue that local control can foster transparency and efficiency. Local leaders say they deserve the money to defray the social and environmental costs of natural-resource industries.

Peru has assigned local and regional governments half the income taxes paid by mining companies, a payment known in Spanish as the canon. Grass-roots governments also get the lion's share of a royalty on mining-company sales that went into effect last year.

To keep localities from padding payrolls with patronage jobs, the central government initially specified that canon money could go only into infrastructure projects. Analysts say that fostered an unhealthy emphasis on brick-and-mortar projects, often of questionable benefit. A couple of years ago, the impoverished town of Calamarca budgeted 60 percent of its canon revenue for soccer fields and upgrades to public plazas.

Decentralization also has been plagued by corruption. A couple of years ago in the rough-and-tumble mining town of Yungay, radio reporter Antonio de la Torre Echeandia denounced spending irregularities in the government of Mayor Amaro Leon. Yungay's budget had recently been swollen with mining revenue. In February of 2004, Mr. de la Torre was stabbed to death by assailants, one of whom he identified with his dying breath as the mayor's driver. Last December, a Superior Court convicted Mr. Leon as the mastermind of the murder and sentenced him and the two assassins to 17-year prison sentences.

Peru has tried promoting citizen activism by mandating "participatory budgets," in which residents of each barrio gather and vote on spending priorities. But only 3 percent of the citizens surveyed by the national university in the mining center of Cajamarca had ever attended such a budgeting session.

When citizens do participate, they don't always vote the way development economists might prefer. Barrios in the town of Jangas have repeatedly voted to spend money fixing up churches rather than on basic services or economic development. After signing off on the first church repair request, town officials have started turning down others.

Inefficient public spending helps explain the odd paradox between Peru's superb macroeconomic performance and its ugly public mood. The economy is set to expand more than 6 percent this year, inflation is infinitesimal and exports have doubled since 2003. Amid a surge in commodity prices, Peru is sitting in the catbird seat as the world's second-largest producer of silver and a major source of zinc, tin, copper and gold.

Yet in a region-wide survey of attitudes conducted by Latinobarometro, a Chilean polling company, Peruvians ranked last among 18 nations in terms of their satisfaction with democracy and the market economy, as well as their confidence that their taxes were being well spent. Stanford-educated President Toledo, who has pursued a market-oriented agenda, has an approval rating languishing in the teens. Due to suspicions of corruption, one Andean mayor was lynched a couple of years ago, and several other local leaders have narrowly escaped angry mobs. There also have been repeated, disruptive protests against foreign companies, especially mining firms such as Newmont Mining Corp. and Barrick Gold Corp.

Beatriz Boza, founder of Citizens Up To Date, a watchdog group in Lima, says it will take many years to fortify Peru's stunted institutions and civic sense. To raise awareness, her group posts municipal budget information on the Internet and trains local journalists to monitor public spending. The group also gives awards to town leaders who spend wisely, such as Alfredo Edgar Vera Arana, a medical doctor who is mayor of the isolated mountain mining town of Independencia.

Mr. Vera used canon money to build a garbage-treatment plant to replace the open dump that fouled local air and drinking water. The town built the plant itself for $130,000 -- about 20 percent of what an outside engineering firm bid. It sorts and processes 25 tons of garbage a day. Proceeds from recycling of inorganic waste like metal and paper have helped reduce Independencia's garbage-collection fee to half that of neighboring towns. Skin and stomach ailments related to poor sanitation have plummeted, local medical officials say.

The six tons of compost produced daily in the plant are being used to help farmers switch to export crops from traditional subsistence crops. The city also has used some canon money to guarantee bank loans for the farmers. Alejandro Antunes, 65, was recently hoeing a field full of artichokes that will be exported to Europe at a price five times what his traditional potato crop would fetch. "Even at my age," he says, "I'm learning something new."

Mr. Vera's steady hand is the exception. "They gave an open checkbook to mayors who never had money to fix a pothole before," says Alejandro Villegas Rojas, who runs a training and consulting program for public officials, known as "The School for Mayors." A psychologist by training, Mr. Villegas has been trying to teach some lessons in budget priorities to free-spending mayors like La Encanada's Mr. Valera, a friend from his youth.

After some prodding, Mr. Valera has been focusing on more substantive projects, involving roads, electrification and a new hospital. "We are trying to do important works without losing sight of those that people enjoy," Mr. Valera says.

The mayor certainly isn't abandoning his flashy style. Ahead of elections, Mr. Valera published a 110-page color booklet detailing the building boom, including photos of himself visiting the Eiffel Tower and the Vatican while on an economic-assistance mission in Europe.


LINK: http://www.post-gazette.com/pg/06065/666059.stm