Natural resource profits and the implications for Peru's ...

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0144-333X.htm

IJSSP 34,5/6

Natural resource profits and the implications for Peru’s public health system

392

Downloaded by University of North Florida At 11:36 13 October 2015 (PT)

Received 8 July 2013 Revised 23 August 2013 22 October 2013 17 December 2013 Accepted 18 December 2013

Mark Fafard College of Public Health, University of North Florida, Jacksonville, Florida, USA, and

Rob Haley Health Policy and Administration, University of North Florida, Jacksonville, Florida, USA Abstract Purpose – The Peruvian Canon system was designed to collect a percentage of taxed profits from the country’s natural resource industries and redistribute these funds into communities that are important to the natural resource extraction process. However, these communities often lack significant basic resources, such as adequate public health facilities and basic medical supplies. The paper aims to discuss these issues. Design/methodology/approach – This analysis focusses on the political and economic factors within Peru’s Canon distribution system and proposes public policy strategies that could more effectively ensure natural resource profits reach extraction zone communities. Findings – Policymakers should consider the implementation of policies that require a transparent Canon collection and distribution system. Policies should be developed that mandate an adequate percentage of Canon funds for investment in Peru’s public health system. Research limitations/implications – A significant portion of the available literature on local conditions within natural resource extraction communities and systematic empirical data available are lacking. Originality/value – This analysis can lead to the development and implementation of public policy that more effectively targets improvements throughout Peru’s natural resource communities. Keywords Informal economy, Human rights, Human resource management Paper type Research paper

International Journal of Sociology and Social Policy Vol. 34 No. 5/6, 2014 pp. 392-400 r Emerald Group Publishing Limited 0144-333X DOI 10.1108/IJSSP-07-2013-0069

Introduction Advances in technology are resulting in a more politically connected and global economy. This connectivity is of particular importance to developing nations as they are often challenged to create policy that increasingly favors the designation of finite and limited resources to fund global demands (Haley et al., 2010). Peru is a developing country with a mineral-dependent economy whose high level of nonrenewable, natural resource exports represents a significant contribution to its total Gross Domestic Product (Bureau of Western Hemisphere Affairs, 2010)[1]. Peru implemented public policy to position its natural resource industry as a funding mechanism to help alleviate poverty conditions, particularly within Peru’s natural resource extraction communities. These policies were intended to ensure a percentage of natural resource profits are eventually returned to the communities where resources were extracted. However, it remains unclear why many of these natural resource communities are similarly characterized with the multiple levels of disparities that are also experienced in those communities without the natural resource advantages.


Efforts to identify public policy that may more effectively reduce poverty and improve Peru’s public health system are challenging due to a lack of research on the Peruvian natural resource tax system, generated welfare distribution measurements and a lack of transparency in natural resource-profit distribution methods (Cordano and Balistreri, 2010). Unfortunately, available literature on local conditions within natural resource extraction communities is either lacking or sponsored by private sector industries (Arellano-Yanguas, 2011)[2]. Due to this lack of systematic empirical data, the intention of this analysis is to contribute to a greater understanding of policies that could more effectively target natural resource tax revenues toward improving Peru’s public health system. Ultimately, this analysis can lead to the development and implementation of public policies that effectively target improvements throughout Peru’s natural resource communities. Background With a rich supply of natural resources located throughout the country, Peru is considered one of the world’s largest natural resource producers of silver, zinc, copper, tin, lead and gold (US Geological Survey, 2010). Peru is also the world’s 52nd leading oil producer (Central Reserve Bank of Peru, 2010). However, approximately 30 percent of the population continues to live on as little as $2 (USD) per day with poverty rates over 55 percent in rural areas (Tebaldi and Mohan, 2010; Central Intelligence Agency (CIA), 2007)[3]. With the onset of several government programs, poverty rates have declined in the past decade and economic inequalities in terms of equitable income distributions continue to persist (CIA, 2007). In an effort to reduce the country’s poverty rates, Peru incorporated a progressive decentralized economic measure known as a Canon. The Canon system was intended to improve the effectiveness, efficiency and legitimacy of its tax systems (Von Haldenwang, 2010). However, this decentralization facilitated a complicated royalty-budget management system characterized by a combination of royalties, taxes and non-tax revenues; all of which vary in accordance with the economic cycle of fluctuating commodity prices in global natural resource markets. These factors create significant difficulties in tracking local-municipality funding streams that often give rise to corruption, distrust, opacities in regulations and procedural norms and complex proceedings (Von Haldenwang, 2010). As a result, communities both inside and outside natural resource perimeters often apply demonstrations and civil disobedience as their primary method to achieve equality with regional and central governments, and the region’s natural resource industry (Arellano-Yanguas, 2011). An analysis of Peru’s macro-micro political, economic and public health concepts provides clarification for some of the reasons why impoverished health care situations are considered “normal” within areas that should have an economic resource advantage through a Canon system. Methodology Three political-economy of health measures provide public policy insight into why the Canon system may not be effective in improving the socio-economic conditions of their local communities. These three political-economy of health measures are: historical perspective on the politics and economics, dialectical models of social change and disease causation theory(s) which are multifactorial and encompasses social etiology (Morgan, 1987). This approach was chosen because it provides a multifaceted analysis of “why” the current situation, provides options to internal improvements via policy, and incorporates an equal focus on the political and economic infrastructures that

Peru’s public health system

393

IJSSP 34,5/6


394

border a health care system. Thus, a political-economy of health analysis offers a unique view of the relationships between Peru’s economy, decentralization, resource-royalty (Canon) distribution and community-based health facility conditions in resource rich communities. The methods used for this study originated with a multidisciplinary literature review of Latin American studies and statistics, sociology, anthropology, economics and political science. The purpose of the literature approach was to supplement the political-economy of health analysis by holistically outlining the local economic situations through a historical and theoretical framework of the political-economic infrastructure that surrounds the public health system. Although these methods identified areas which policy implementation may result in local level health care improvements, there is also a need to focus on developing a more involved methodology that addresses the lack of systematic empirical data available; such as mixed method and primary data collection methods at the regional and local levels. Peru’s Canon system In 1976, several sizeable oil fields were discovered in Peru. This finding, in addition to Peru’s other rich natural resources, prompted regional movements that put significant political pressure on the central government to tax the profits made by the mining and oil companies and redistribute these funds into resource regions, municipalities and districts. The central government agreed to allocate 9 to 10 percent of mining and oil royalties be returned to the regions; this action became known as the “Canon.” (Arellano-Yanguas, 2011). The Canon tax distribution system is defined as “the effective and adequate participation that regional and local governments enjoy in the distribution of total revenues obtained by the State from the exploitation of natural resources” (Gobierno del Peru, 2005). In 1992, Peru’s central government passed the Canon Minero law that allocated as much as 20 percent of oil and mining royalties returned to regions within natural resource perimeters (Arellano-Yanguas, 2011). Between 1998 and 2006 revenues reportedly increased from mineral and energy regions to their local municipalities while government funding to these municipalities decreased, resulting in less investment to the public health system in Peru’s natural resource communities. As a substitute for local revenue declination, mining and oil-taxed royalties became the single largest source of income for local governments (Von Haldenwang, 2010). By 2001, the Canon Minero increased to 50 percent and in 2004 another amendment passed to ensure oil and mining royalties reached local jurisdictions (ArellanoYanguas, 2011). In 2006, Peruvian legislation required 50 percent of oil and mining royalties taken in by the state to be transferred to the region and redistributed to mining communities (Inter Press Service, 2008; Ministerio de Economia y Financias). By 2007, two-thirds of total Canon transfers and 52 percent of fiscal transfers were targeted toward six of Peru’s 25 regions (16 percent of the total population) (ArellanoYanguas, 2011). Natural resource profit distribution Peru’s natural resource profit distribution formula is based on the following units: districts receive 20 percent of funds; provincial departments receive 60 percent; and regions receive 20 percent (from smallest to largest) (Slack, 2004). For example, Peru’s oil institutions are known to allocate anywhere from 5 to 20 percent of gross revenue royalties (based on o5,000 barrels to 4100,000, respectively) into regionally based


Canon systems that are intended to distribute these royalties to improve the living and public health systems of their local communities (Cordano and Balistreri, 2010). However, nearly $30 million of Peru’s Canon funds had not been distributed to regional provinces (Slack, 2004). In a 2007 case report, the International Council on Mining & Metals indicated that the link between greater transfers and better outcomes at the sub-national level is not automatic; which can therefore lead to diluting potentially positive effects if the government fails to spend money efficiently, through misguided policies, lack of public expenditure management, and administrative capacity (Dietsche et al., 2007). Serious weaknesses in Peru’s Central Government’s oversight of fund transfers as well as local governments lacking the policies and mechanisms needed to adequately account for these funds prevent sufficient accounting and Canon fund distribution (Slack, 2004; World Bank and Inter-American Development Bank, 2002). As a result, communities frequently voice their concerns against the majority of Canon funds allocated to only a few of Peru’s provinces (Inter Press Service, 2008). Meanwhile, there is significant public discontent within natural resource extraction regions due to the inadequate usage of Canon funds Arellano-Yanguas (2011). Current public health initiatives Throughout Peru, it is common for public hospital equipment to be significantly outdated by three to four decades. Utilities and building structures remain deteriorated, causing many facilities to function at o50 percent capacity (Carillo, 1988). Equipment maintenance systems are often challenging due to the various donations and name brands used in the hospitals and clinics, along with a lack of technological staff needed to conduct medical repairs. Similarly, a 2005 MINSA diagnostic report on infrastructure, equipment and maintenance of hospitals found that 59 percent of hospital materials were considered in good working condition, 8 percent were repairable and 33 percent needed to be replaced (Ministerio de Salud, 2006)[4]. As Peru’s public health system continues to suffer from a lack of adequate facilities and funding a discussion as to how policymakers may solve existing disparities has led to proposals requiring new funds to compensate those regions that suffer from the greatest disparities. However, any reform to the current and established funding distribution mechanism is considered politically unviable (Martinez-Vazquez and Sepulveda, 2011). Although transfer or aid programs can help alleviate impoverished conditions, they are limited and are only effective in the short term unless permanent interventions become part of the initiative. For the individual or community, these conditions further restrict access to health care and economic development and contribute barriers to poverty reduction initiatives within these natural resource regions (Gyorkos et al., 2009). For example, a national government program known as “Basic Health for All” (BHA) was designed to target specific public health departments in need of allotment increases. In the end, BHA not only failed to redistribute a sufficient amount of resources to the departments in need, but out of total funds, only 37 percent (16 percent of total Ministry of Health expenditures in health) of BHA expenditures were received by these departments (US Agency for International Development, 1999). Resource rich countries and public policy Internationally, efforts made to resolve problems associated with natural resource expenditure distribution to local communities reflect a number of broad challenges.


395

IJSSP 34,5/6


396

These challenges include, but are not limited to, conflict due to damaged social conditions as a result of profits gained in government and corporate levels; and the lack of transparency in government and corporate involvement with different levels of profit allocation. For instance, Ecuador and Bolivia have each experienced indigenous conflicts with government and corporate actors due to resource extraction practices and its negative impact on local inequalities. Bolivia experienced perhaps the most extreme tensions in which indigenous conflicts ultimately led to the overthrow of Bolivian government during the 2003 “Gas Wars” (Slack, 2004; Bureau of Western Hemisphere Affairs, 2011). In many developing countries, governing conditions such as authoritarianism, militarization and regional secessionism form as various levels of government determine how to use revenue, how much is collected and where funds are allocated. Due to the significant profits mining and oil industries typically generate, they can weaken other areas of a country’s economy. As a result, reliability on natural resources becomes a driving force in a country’s economy, which creates additional instability in overall growth. For example, countries may reflect very high per capita wealth but in turn suffer low growth rates, weak political institutions and have not successfully developed other sectors of their economies (Slack, 2004). They use oil to avoid the process of government institutional building while economic diversification is needed to sustain prosperity (Slack, 2004). To divert dependence on natural resource industries, some countries place more emphasis on national taxation systems. Chilean municipalities display the greatest share of tax collection in South America, although the effect it has on communal levels is unclear. Argentinian provinces also collect a share of revenues through taxation that appear to improve overall poverty rates for the country. Meanwhile, in Bolivia, Mexico, Paraguay and Peru, few if any taxes are collected at regional levels. This may serve as a contributing factor to the differences in poverty rates at local levels throughout Latin American countries. However, due to the poverty conditions within sectors of Bolivia, Mexico, Paraguay and Peru, it is difficult to instill taxation within some of their regions (Martinez-Vazquez and Sepulveda, 2011). Policy implications Widespread attempts to address poverty and public health conditions within natural resource-communities are often attempted through policy amendments at local levels. Defined as “localist” policy paradigms, these attempts consist of three components: (Haley et al., 2010) the mandatory redistribution of natural resource revenues from central to subnational and local government, with preference for the localities’ where the mines and oil wells are located, (Bureau of Western Hemisphere Affairs, 2010) the establishment of formal provisions for local citizens to participate in decisions on how to spend these revenues within their communities and (Cordano and Balistreri, 2010) efforts made to encourage active participation among institutional actors in companies and civil organizations in the local decisions making process on how revenues are allocated (Arellano-Yanguas, 2011). Protocol at national, regional and local levels should focus on implementing adequate fund distribution tracking for Peru’s Canon system that includes clear, consistent and transparent data collection practices for the government, industry and local municipalities. Policymakers should consider policies that standardize the collection and distribution of funds collected from natural extraction revenues. The standardization of Canon system practices would allow for a more transparent system


to monitor and report the collection of natural resource extraction revenues as well as the distribution of these funds. Peru’s policymakers can also identify public health goals within natural extraction communities and determine the appropriate funding levels for these goals. Policies should be established to financially link specific Canon fund distributions to public health goals that target population health. Furthermore, policies should be developed that would facilitate improvements to the Canon mapping system; such as (Haley et al., 2010) clarifying how funds are collected, allocated and audited (Bureau of Western Hemisphere Affairs, 2010), assuring the sustainability of basic medical necessities are available at the local levels and (Cordano and Balistreri, 2010) reflecting reductions in mortality and morbidity causations due to adequate supplies of medical needs. Standardization of Canon policies, mandated allocations and goals for programs such as public health will lead to better transparency and accountability of these funds. Once the “transparent” Canon funds are distributed to local municipalities, the community can have a role in evaluating measures to alleviate poverty-stricken sectors within their region. Policymakers should consider that not only does this method fulfill Canon law obligation of community poverty reduction initiatives, but could also implement standards in disease prevention. In other words, funds used for basic public health programs and resources would result in the reduction of certain morbidity rates within natural resource extraction communities. Furthermore, policies can be established to ensure that Peru’s central government is more accountable for guaranteeing Canon funds are appropriately collected and distributed to local municipalities, while public health goals are measured, validated and achieved. Discussion A country’s political economy is a primary factor that influences a nation’s health care (Amick, 1995). Throughout the developing world it is quite common for public health systems to lack some of the basic provisions needed to provide local communities with adequate health care due to various economic factors. For instance, since the extraction of natural resources typically generates large profits for a country, the priority often becomes the natural resource while focus is lessened on stabilizing the sectors of the economy needed for populations’ wellbeing (Slack, 2004). Moreover, there is a lack of incentives for mining companies to negotiate with the public, unless the debate concerns access to more land or water (Arellano-Yanguas, 2011). Peru implemented public policy to position its natural resource industry to improve public health and reduce poverty. However, within the natural resource communities, significant health and socioeconomic disparities continues to exist while the public health system faces disparity-related conditions. The transparency of Canon fund transfers is considered extremely poor and it remains uncertain if these revenues are used to fund the public health system within Peru’s Canon eligible communities (Lopez-Calix et al., 2002). This lack of transparency, in addition to the government decreasing it’s funding to natural resource extraction communities, is believed to have resulted in similar poverty conditions to those areas that are not Canon funded. Moreover, the lack of transparency with Peru’s decentralized Canon system and the reallocation of government funds away from natural resource extraction communities have contributed to substandard public health and living conditions within these communities. Further limitations in this paper are due to a lack of data and research as the linkage between money and programs is too often about “soft” critique and not about factual sources and uses of limited resources. However, the limited secondary


397

IJSSP 34,5/6


398

data available to include in this paper also serves to signify the need for further qualitative research attention, such as interviews with policymakers, on funding allocation protocols related to programs and resources. Poverty and its effect on public health are problematic throughout Peru, however, Canon funding streams can more effectively be used to improve the health of the population. Public policy that focusses on improving the management and transparency of the Canon system are likely to have positive effects on Peru’s current economic inequalities and poverty conditions at the local level. Policies could then be developed to effectively plan, budget and target Canon funds toward more adequately resourcing Peru’s public health system sector and reducing community-specific disparities. This type of policy implementation could eventually result in an improved Canon funded public health system whose effectiveness could be clearly measured in cohort studies, improved morbidity rates and preventative medical practices. For example, Talara represents a population of just over 108,000 residents and is responsible for a significant amount of Peru’s oil (Ministerio de Economia y Finanzas). Talara’s refineries produce over 35 percent of Peru’s oil and therefore a Canon recipient (Ministerio de Economia y Finanzas). If public policy were introduced to improve the transparency of Talara’s Canon system, revenues could then be budgeted, allocated and audited for direct transfers to Talara’s local municipal budgets such as the MINSA. However, Talara is characterized by significant public health disparities and data are not readily available to determine how Canon funds are used to improve its public health system. Conclusion This analysis is important to policymakers because it identifies the severe lack of funding of Peru’s public health system both within and outside of its mineral rich communities. This analysis further identifies the lack of transparency and understanding of Peru’s Canon system and its possible linkage with its public health system. Therefore, while this analysis provides important insight for policymakers to develop policy between Peru’s Canon and public health systems; further research is needed. The centralized control of Peru’s natural resource economy and Canon profits appear to create inequalities within the natural resource economies and welfare distribution. The public health system’s struggle to allocate funds for facility construction or expansion projects versus supplies and utility maintenance appear to require further attention, however, information at this level is either inaccessible or not available. Through strategic awareness and policy pressure on natural resource expenditure allocation, it is possible for policymakers to develop policies that standardize the collection and reporting of Canon funds. Targets for funding the public health system of natural extraction communities should be established. The development of effective public health policy will help ensure available funds are used to improve the health care system for Peru’s citizens and can result in a much healthier population. Notes 1. For the purposes of this paper, a “developing country” is one in which the majority lives on far less money and fewer basic public services than the population in highly industrialized countries (http://web.worldbank.org/WBSITE/EXTERNAL/EXTSITETOOLS/0,,content MDK:20147486BmenuPK:344190BpagePK:98400BpiPK:98424BtheSitePK:95474,00.html)

2. The literature on the local impact of extractive industries has largely focused on the interaction of local communities directly affected by mining and oil companies, and the state.


3. According to the World Bank, the Poverty Gap at $2.00 a day is the mean shortfall from the poverty line (counting the nonpoor as having zero shortfall), expressed as a percentage of the poverty line. This measure reflects the depth of poverty as well as its incidence (http:// data.worldbank.org/indicator/SI.POV.GAP2/countries/PE?display ¼ graph)


4. MINSA is the acronym for Ministerio de Salud, Peru’s national Ministry of Health. References Amick, B.C. (1995), “Political economy of health”, in Brenner, M. (Ed.), Society and Health, Oxford University Press, New York, NY, pp. 3-17. Arellano-Yanguas, J. (2011), “Aggravating the resource curse: decentralization, mining and conflict in Peru”, Journal of Developing Studies, Vol. 47 No. 4, pp. 617-638. Bureau of Western Hemisphere Affairs (2010), Background Note, US Department of State, Peru. Bureau of Western Hemisphere Affairs (2011), Background Note, US Department of State, Bolivia. Carillo, E. (1988), “Distribution of health care facilities”, in Zschock, D. (Ed.), Health Care In Peru Resources and Policy, Westview Press, Boulder, CO, pp. 101-132. Central Intelligence Agency (CIA) 2007, “The World Factbook: Latin America: Peru”, available at: www.cia.gov/library/publications/the-world-factbook/geos/pe.html (accessed 2011). Central Reserve Bank of Peru (2010), “Annual historic tables of the Peruvian economic activity”, available at: www.brcp.gob.pe/estadisticas/cuadros-anuales-historicos.html (accessed in 2010). Cordano, A.L. and Balistreri, E.J. (2010), “The marginal cost of public funds of mineral and energy taxes in Peru”, Resources Policy, Vol. 35 No. 4, pp. 257-264. Dietsche, E., Stevens, P., Elliot, D. and Jiwanji, M. (2007), Peru: Country Case Study. The Challenge of Mineral Wealth: Using Resource Endowments to Foster Sustainable Development, International Council on Mining and Metals, London. Gobierno del Peru (2005), “Peru’s law of ‘Canon’”, available at: www.revenuewatch.org/training/ resource_center/perus-law-canon (accessed in 2014). Gyorkos, T.W., Joseph, S.A. and Casapia, M. (2009), “Progress towards the millennium development goals in a community of extreme poverty: local vs national disparities”, Tropical Medicine and International Health, Vol. 14 No. 6, pp. 645-652. Haley, D.R., Khlaifa, A., Beg, S. and Sobh, N. (2010), “Globalization and the ethical implications for the Egyptian healthcare system”, World Hospital and Health Services, Vol. 42 No. 2, pp. 8-11. Inter Press Service (2008), “Seeking ways to remedy unequal distribution of mining taxes”, Peru, available at: http://ipsnews.net/news.asp?idnews ¼ 43414 (accessed in 2011). Lopez-Calix, J.R., Alcazar, L. and Wachtenheim, E. (2002), “Improving the efficiency of public spending in Peru”, available at: http://info.worldbank.org/etools/docs/library/78802/Fall% 202002/elearning/fall2002/readings/pdfpapers/peru.pdf (accessed in 2010). Martinez-Vazquez, J. and Sepulveda, C. (2011), “International transfers in Latin America: a policy reform perspective”, International Studies Program Working Paper No. 11-08, Andrew Young School of Policy Studies, Georgia State University, in press. Ministerio de Economia y Finanzas. “Situacion y problematica actual del petroleo en el mercado domestico”, Report No. 35, available at: www.mef.gob.pe/DGAES/btfiscal/ N20BTFInforme.pdf (accessed July 17, 2009).

399

IJSSP 34,5/6


400

Ministerio de Economia y Financias. “Direccion general de asuntos economicos y sociales: Informe situacion, perspectivas y canon en la mineria. Boletin De Transparencia Fiscal-Informe Especial”, Report No. 40, DE TRANSPARENCIA FISCAL – INFORME ESPEC, available at: www.mef.gob.pe/DGAES/btfiscal/N15BTFInforme.pdf (accessed July 15, 2009). Ministerio de Salud (2006), Diagnostico hospital fisico funcional de infraestructura, equipamiento y mantinamento: Plan hospitalario integral, Ministerio de Salud, Peru. Morgan, L.M. (1987), “Dependency theory in the political economy of health: an anthropological critique”, Medical Anthropology Quarterly, Vol. 1 No. 2, pp. 131-154. Slack, K. (2004), “Sharing the riches of the earth: democratizing natural resource-led development”, Ethics & International Affairs, Vol. 18 No. 1, pp. 47-62. Tebaldi, E. and Mohan, R. (2010), “Institutions and poverty”, Journal of Developmental Studies, Vol. 46 No. 6, pp. 1047-1066. US Geological Survey (2010), Mineral Commodity Summaries, US Geological Survey, Washington, DC. Von Haldenwang, C. (2010), “Taxation, fiscal decentralization and legitimacy: the role of semi-autonomous tax agencies in Peru”, Developmental Policy Review, Vol. 28 No. 6, pp. 643-667. World Bank and Inter-American Development Bank (2002), Peru: Restoring Fiscal Discipline for Poverty Reduction: A Public Expenditure Review, World Bank, Washington, DC, p. 14. Further reading Partnership for Health Reform (1999), Targeting Public Health Expenditures in Peru, Partnership for Health Reform, Bethesda, MD. About the authors Mark Fafard is a Research Coordinator at the University of Florida’s Center for Health Equity and Quality Research. He received a Masters in Public Health and Bachelor degrees in History and Anthropology from the University of North Florida. His research is focussed on domestic and global health disparities experienced by rural underserved populations. Dr Rob Haley is an Assistant Professor at the University of North Florida’s Brooks College of Health’s Health Administration Program. His research is focussed on the delivery and financing of healthcare services in a rapidly changing and global economy. He received his PhD in Health Policy and Administration from the University of North Carolina at Chapel Hill’s Gillings School of Public Health, MBA from the University of Florida’s Warrington College of Business and MHS from the University of Florida’s College of Public Health and Health Professions. Dr Haley is a J. William Fulbright Senior Specialist in Global and Public Health.

To purchase reprints of this article please e-mail: [email protected] Or visit our web site for further details: www.emeraldinsight.com/reprints