Chinese Investment in Peru’s Mining Industry: Blessing or Curse?

Over the last decade, Peru has become one of Latin America’s economic success stories, by achieving sustained growth under a political democracy, cutting poverty in half and producing an expanding new middle class. 

Peru’s expanding relationship with China has played an important role in Peru’s economic growth. In particular, Peru’s trade and investment relationship with China is overwhelmingly concentrated in the mining sector. Although over 30 countries are involved in Peru’s mining industry, China has become the leading market for mining resources, including iron, copper and gold.

However, will expanding relations with China help or hinder Peru in efforts to sustain economic growth and raise living standards?

In a new working paper, Cynthia Sanborn and Victoria Chonn examine Peru’s trade and investment with China, regulation on extractive industries in Peru and Chinese firms in Peru to assess the impact of China’s presence in Peru. 

Main findings:

• Peru’s relationship with China is fundamental to the country. 
  • Trade with China contributed to Peru’s booming economy and helped the country weather the effects of the global financial crisis. 
• While China’s relationship with Peru is largely asymmetrical and has reinforced Peru’s position as a mineral exporter, the country has not experienced significant de-industrialization. 
  • The Peruvian industry has benefited from expanded markets and access to lower priced intermediate goods. 
• Amid a context of global uncertainty, new investments from China have allowed Peru to develop large-scale mineral projects with important spinoffs in other sectors of the economy. 
• Chinese firms do not operate in a clear “Chinese way” in Peru’s mining sector, but are emblematic of the challenges faced by foreign investors. 
  • In several cases, Chinese firms failed to meet environmental and social responsibility standards, firms failed to share responsibility between missteps  and faced reluctance or inability on the part of the government to enforce those standards. 
  • Company staff hired in all cases, both Chinese and Peruvian, made mistakes in engaging with unions, communities and local elected officials. However, Chinese investors and political allies have begun to learn from other firms in the industry, and hired better managers and consultants. 
• Chinese and Peruvian authorities have also increased efforts to help firms develop major projects. 

Both China and Peru have demonstrated they are serious about complying with global standards. Sanborn and Chonn conclude that Peru is well-positioned to oversee a positive mining based relationship with China, especially since Peru joined the Extraction Industry Transparency Initiative (EITI) and Chinese firms joined the program in Peru. However, the authors recommend enhancing the EITI program by including local governments and suggest expanding mining-sector labor protections to include contract workers, eliminating the financial incentive for offering informal work.