Latin America: End of “Supercycle” Threatens Reversal of Institutional Reforms

By Carlos Monge*

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By Eduardo Ballón and Raúl Molina (consultores) and Claudia Viale and Carlos Monge (National Resource Governance Institute, América Latina), from Minería y marcos institucionales en la región andina. El superciclo y su legado, o las difíciles relaciones entre políticas de promoción de la inversión minero-hidrocarburífera y las reformas institucionales, Reporte de Investigación preparado por NRGI con colaboración de la GIZ, Lima, Marzo del 2017. See blog text for high-resolution graphic

Policies adopted in response to the end of the “supercycle” have slowed and, in some cases, reversed the reforms that moved the region toward greater decentralization, citizen participation, and environmental protection over the past decade.  Latin American governments of the left and right used the commodities supercycle to drive growth and poverty reduction at an unprecedented pace.  They also undertook institutional reforms aimed at improving governance at large.

  • Even before demand and prices for Latin American energy and minerals began to rise in the early 2000s, some Latin American countries launched processes of decentralization (Colombia and Bolivia); started to institutionalize mechanisms for citizens’ participation in decision making (Colombia and Bolivia); and built progressively stronger environmental management frameworks (Colombia and Ecuador). Peru pressed ahead with decentralization and participation at the start of the supercycle, and when it was in full swing, created a Ministry of the Environment.
  • Implementation of the reforms was subordinated by governments’ overarching goal of fostering investments in the extractive sector. Indigenous consultation rights in Peru, for example, were approved in the second half of 2011, but implementation was delayed a year and limited only to indigenous peoples in the Amazon Basin.  President Ollanta Humala, giving in to the mining lobby, claimed there were no indigenous peoples in the Andes and that no consultations were needed around mining projects.  Local pressure forced a reversal, and by early 2015 four consultation projects on mid-size mining projects were launched.

These reformist policies have suffered setbacks since the decrease in Asia’s and particularly China’s appetite for Latin American energy and minerals has caused prices to fall – and the value of exports, taxes, and royalties, and public incomes along with them.  The latest ECLAC data show a decline in economic growth and a rebound of poverty both in absolute and relative figures.  The gradual fall in the price of minerals starting in 2013 and the abrupt collapse in oil prices by the end of 2015 reversed this generally favorable trend.

The response of the governments of resource-dependent countries has been “race to the bottom” policies, which included steps backward in fiscal, social, and environmental policies.  Governments’ bigger concern has been to foster investments in the new and more adverse circumstances.  In this new scenario, the processes of decentralization, participation, and environmental management have been negatively impacted as local authorities and citizens’ participation – as well as environmental standards and protocols – are perceived by companies and rent-seeking public officials as obstacles to investments.

  • Peru’s Law 30230 in 2014, for example, reduced income tax rates, weakened the oversight capacity of the Ministry of the Environment, and weakened indigenous peoples’ claim public lands.

The correlation between the supercycle years and the progress and regressions in reforms is clear. (click here for high-resolution graphic).  During the supercycle – when huge amounts of money were to be made – companies and government were willing to incorporate the cost of citizen participation, decentralization and environmental standards and protocols.  But now, governments are desperate for new investments to overcome the fall in economic growth and extractive rents, and extractive companies are not willing any more to assume these additional costs.  Those who oppose the “race to the bottom strategy” are fighting hard to restore the reforms and to move ahead with decentralization, increased participation, and enhanced environmental management, to achieve a new democratic governance of the territories and the natural resources they contain.

April 7, 2017

* Carlos Monge is Latin America Director at the Natural Resource Governance Institute in Lima.

Mexico: Environmental Initiatives Likely to Stir Things Up

By Daniela Stevens*

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Mexico City’s Reforma axis under a blanket of smog / Lars Plougmann / Flickr / Creative Commons

Mexico has made a big push on climate issues over the past month that could have far-reaching consequences internally and in the hemisphere.  On August 16, it announced a pilot Emission Trading System (ETS), also known as “cap-and-trade,” that will begin a simulation in November and officially initiate trading carbon permits in 2018.  Two weeks later, at the second Climate Summit of the Americas (CSA), the Mexican federal government signed a joint declaration with the Canadian provinces of Ontario and Québec to advance “cooperation activities on carbon markets.”  Mexico’s motives are not immediately clear.  For a middle-income nation, with annual growth (around 2 percent) compromised by the crash in oil prices, an ETS represents a potentially significant economic burden.  Mexican officials have not explained, moreover, how they might link their cap-and-trade to the Canadian provinces’ systems and to the Western Climate Initiative (WCI), North America’s largest carbon market and the second largest in the world.

The moves may be driven by increasing Mexican belief that more assertive, market-oriented approaches are necessary to meet its international commitments.

  • Mexico is dependent on fossil fuels for over a third of its total energy production, wreaking havoc with the country’s air quality. Over the last few months, Mexico City decreed several “environmental contingencies,” situations of abnormally high concentrations of ozone in the atmosphere.
  • Moreover, Mexico may be seeking the advantage that increased regional cooperation represents. Its international commitments on emission reductions are very ambitious, and a linkage to its North American partners lends itself almost as a natural solution to help in the advancement of its pledges.  Mexico could export sectoral offsets that American and Canadian partners need – contributing to Mexican revenues and to market stability.  Mexico would also benefit from the resulting transfer of information expertise, technology, training, and methodologies.
  • An important first step for the Mexican authorities would be to commit the resources to establish the robust institutional mechanisms and capacities to launch, monitor, enforce and sustain a system as intricate as a national ETS, and only after that, lend itself as a reliable partner in an internationally linked market.

The details of the pilot ETS have not been publicized, and the agreement with Québec and Ontario does not establish commitments beyond “identifying opportunities for linking systems as much as possible.”  Mexican companies already voluntarily buy and sell carbon bonds on a small national market – a system complemented by a carbon tax in place since 2013 – but an enforced and internationally linked market would highlight the disparities among the North American nations – and represent a challenge to Mexico.  Unlike its partners, Mexico is still an industrializing nation, with a thriving motor vehicle industry, and industrializing nations have traditionally been reluctant to pricing emissions.  Industrialized countries are the highest historical emitters and reached that status of development by polluting without paying the price.  Although the need to prioritize economic growth does not exempt Mexico from fulfilling its commitments as the eleventh highest global emitter, it does signal that besides opportunities, Mexico faces challenges with trading partners at different stages of development.  The Climate Summit of the Americas showed, however, that regional fora and of subnational partnerships can further environmental commitments beyond the global and national summits.  The CSA signaled an opportunity for the region to develop North American or, more ambitiously, hemispheric solutions to climate change.

September 15, 2016

* Daniela Stevens is a PhD candidate in the American University School of Public Affairs.  Her research focuses on national and subnational policies that put a price on carbon emissions.

Prospects for Energy Integration in Latin America

By Thomas Andrew O’Keefe*
 

South America’s presidents began discussing energy integration years before UNASUR made it one of its central initiatives, but these efforts have been hobbled by differences on what role the private and public sectors should play.  One tangible project that has emerged from UNASUR seeks to interconnect the electricity grids of Bolivia, Chile, Colombia, Ecuador, and Peru.  While the Colombian, Ecuadorian, and Peruvian grids (as well as that of Venezuela) are already linked, cross-border transmission of electric power is relatively insignificant.

Since the Sixth Summit of the Americas in Cartagena in April 2012, the UNASUR project has become part of a wider hemispheric agenda called “Connecting the Americas 2022,” which includes Panama and potentially – once the long-delayed Electrical Interconnection System for the Central American Countries (SIEPAC) becomes fully operational – all of North America.  The idea was promoted by the Colombians as hosts of the last Summit and emerged as one of the key mandates.  It seeks universal access to electricity through enhanced electrical interconnections, power sector investment, renewable energy development, and cooperation.  By focusing on electrical interconnections, the hope is to allow countries with excess power to export electricity to those facing deficits as well as permit greater integration of renewable energy resources and exchanges among countries with varying climate and seasonal needs.  Interconnection also expands the size of markets, creating economies of scale that can attract private sector investment, lower capital costs, and reduce electricity costs for consumers.  A separate initiative focuses on Brazil and the River Plate countries as well as the Caribbean.

A number of unanswered questions about “Connecting the Americas 2022” raise doubts about its viability.  For one thing, including Chile and Bolivia means that huge swaths of relatively empty territory will have to be traversed, which inevitably leads to losses of electrical power transmitted over long distances.  (The Chilean grid itself is not integrated, but divided into three separate systems.)  Furthermore, electricity generation in the Andean countries relies heavily on hydropower sourced from high mountain glaciers that are gradually disappearing as a result of climate change.  If “Connecting the Americas 2022” is to succeed, the regulatory frameworks of each participating nation must also be harmonized to facilitate long-term cooperation and network development.  Nationalistic concerns that have plagued the integrated Central American electricity network since it first came on line in the late 1990s must also be overcome.  The actual amount of electricity traded among the Central American countries has, to date, been minimal and is actually declining, as national governments have been reluctant to permit long-term contracts for the international sale of electricity that might put access to domestic electricity supplies at risk.  Such obstacles must be overcome to fulfill any vision for Latin American energy integration.

*Thomas Andrew O’Keefe is President of San Francisco-based Mercosur Consulting Group, Ltd. and teaches at Stanford University.