Ite is a small coastal district in the Tacna region of southern Peru. Despite the desert landscape, an irrigation project in 1939 turned Ite into an agricultural and cattle town, where the main products are onions, corn and the chili peppers used to make paprika.
In the last eight years, this farm town has undergone big changes due to the massive inflow of revenues from a district mining project operated by Southern Peru Copper Corporation. In Peru, 50 percent of income tax revenues from mining and hydrocarbon drilling activities are distributed among the regional and local governments in the areas where extraction takes place.
In Ite's case, this influx of money caused the budget of the municipal government to jump from less than $500,000 to more than $13 million per year. Since Peru's law requires these subnational funds to be used in investment projects, the municipality embarked on a race to build all the infrastructure the town lacked. As a result, locals say, "There's nowhere to build one more road or sidewalk."
In addition to the town's perfectly maintained roadways, the infrastructure projects also included an oceanside statue, a stadium, three schools, a football court, a playground and a modern, mirror-sided municipal building abutting the district's new main square.
This extensive construction has definitely impacted both local living standards and the economy; the latter is the central topic of a research project now underway by RWI's Latin America office.
Ite was the first district where field research was conducted on the impact of subnational revenues on local economies. Through interviews with local government officials and across different economic sectors, including agriculture, construction and small shop and restaurant owners, we gathered information to determine if oil and mining revenues have distorted the local economy.
We found that such distortions do exist. The high demand for municipal workers to build and maintain public infrastructure, at salaries up to four times higher than farm labor, has left the agricultural sector shorthanded, affecting production.
How has the agricultural sector confronted this shortage? Surprisingly, few landowners are selling or renting their lands, and there is no large influx of workers from other regions of the country to fill those spots. Some have left their lands barren, but most have resorted to longer hours and help from their families. Cattle-raising, however, has fared worse, and many ranchers have sold cattle too labor-intensive and costly to keep.
Interestingly, at the request of agricultural producers, the municipality has now been sending cuadrillas, or groups of municipal workers, to work private farms—paid for out of the same subnational mining revenues that created the farm labor shortage.
In 1977, the large influx of foreign currency to the Netherlands from natural gas exports generated a decline in the manufacturing sector, due to a loss in competitiveness as the country's currency appreciated. This phenomenon was dubbed "Dutch disease."
Although there are similarities between Dutch disease and distortions at the subnational level caused by sudden oil and mining revenues, what is happening in Ite seems to be a different kind of disease. There is indeed decreased competitiveness across other sectors in Ite, but this decline follows the surge of local currency into the district, and the resulting municipal wage increase in the wake of subnational expenditure rules.
RWI's research into the fallout of subnational income on local communities will continue in three other regions in Peru. Our final report will try to determine if this is indeed a new disease that could affect other countries where extractive revenues are transferred to subnational governments.
The Cholo Disease