Can Mining Produce Development in Central America?

The mining boom in Central America (2000-2011) elicited starkly different responses from various Central American nations. These responses reflect a vibrant and unresolved debate in the region around whether mining is good for development. Certain conditions would have to be in place, however, for the region to leverage its mining sector for inclusive development. While mining can hypothetically serve development, Central America’s low institutional capacity—both in terms of its formal governance structures and its civil society—means that mining is unlikely to bolster development in the foreseeable future. On October 14, 2016, the International Centre for the Settlement of Investment Disputes (ISCID) of the World Bank Group issued its verdict on the Pac Rim Cayman vs. El Salvador case, which involved the Pacific Rim Mining Corporation suing the government of El Salvador for its 2007 decision to deny the company a mining license. The ISCID decided in El Salvador’s favor, bringing an end to seven years of expense and uncertainty for the country. In 2011, Costa Rica made a similar decision, passing legislation to prohibit open-pit metal mining. This dissolved Canadian producer Infinito Gold’s Las Crucitas project permits, leading to Infinito Gold’s 2014 decision to sue the Costa Rican government. This arbitration is ongoing.

In contrast to El Salvador’s and Costa Rica’s decisions, Guatemala and Honduras have courted mining investment over the past fifteen years, disregarding the opposition of both rural and urban civil society, who see mining as threatening the environment and not contributing meaningfully to development. Between 2002 and 2011 mineral rents as a percentage of GDP increased in Guatemala and Honduras by 338% and 585%, respectively. While Guatemala and Honduras have avoided foreign investor dispute arbitration, their embrace of mining has led to intense and violent conflicts between communities, companies, and the state. By one count, recent mining conflicts in Guatemala have led to 12 deaths, 89 injuries, and 11 sexual assaults. Guatemala, per this accounting, leads Latin America in mining-related violence. Further, growth in mining has had little effect on development, owing to state failure to invest mining revenue and the poor quality of jobs produced.

These distinct moves by otherwise similar states highlight the roles of civil society and governance institutions in determining an economy's development trajectory. For mining to be an engine of equitable development in Central America, states must possess the capacity to optimize national development impacts, and communities must have both the opportunity and capacity to govern local mineral development.

Central American states must possess the capacity and will to negotiate favorable deals with multinational mining companies and must be willing to walk away if the deal’s terms are not optimal. Although licensing agreements, where the state sells wholesale extraction rights to firms, are the most common type of deal and the path of least resistance for states with little technical expertise, these deals limit state revenue, decision-making, and learning and technology spillovers. Central American states must instead look towards production-sharing or revenue-sharing agreements, which include equity arrangements between states and companies. Although they require more work and investment from the state, production-sharing agreements are a superior choice because they promote development by increasing state revenue without exposing it to production-related risk, and they ensure state investment in the project’s long-run viability.

Beyond maximizing revenue, Central American states must also have the capacity and will to invest mine revenue effectively. They must view mine revenue as principal, rather than profit, and spend it exclusively on public goods like health care, education, and infrastructure. States must further distribute these investments evenly across the country rather than concentrating them in urban centers. Finally, states must find ways to keep mine infrastructure (roads, electricity, sewers, etc.) productive after mine closure by networking it into larger infrastructure grids. This promotes development by democratizing access to state services in rural areas.

After state revenue, job creation is the most important metric of an industry’s development impact. Most mine employment in Central America is short-term, highly vulnerable contract work with no benefits. This flexibility serves the interests of a high-risk industry characterized by market volatility, but it reduces worker earning capacity and limits on-the-job learning. In turn, this drains financial and human capital stocks in host communities and keeps workers vulnerable and unable to organize. For the gains of mining to outweigh the costs, companies must replace contract work with full time, pay-rolled work with benefits and invest in their employees over the long-term through training and promotion opportunities. Finally, since labor unions protect workers and, thus, enhance local development, mining companies must also negotiate in good faith with labor and provide space and support for labor to organize.

For mining to result in development, impacted communities need the power, manifested in a right enshrined in national law, to a binding exercise of Free Prior Informed consent (FPIC) that includes a veto option. FPIC is the right of a community to cede or withhold consent for externally-driven projects within community territory. Enshrining FPIC in national law moves it from a voluntary ideal to a binding, enforceable rule. Such an option would force companies to work in good faith to obtain broad, consensus-based community approval. Host communities most often organize FPIC with support from private organizations, but states should instead establish independent ombudspersons to support FPIC, thus improving decision-making integrity. FPIC empowers communities to make their own decisions, thereby building local capacity. Empowerment and community autonomy are essential for inclusive development.

Industry norms dictate that companies conduct environmental and social impact assessments, but these assessments are rife with conflicts of interest. Therefore, communities must have the opportunity, capacity, and resources—bolstered by state-sponsored, independent logistical and financial support—to carry out community-controlled impact assessments (CCIA). CCIA reduces the possibility of conflict by helping to ensure that impact assessments serve the community’s interests and hold the company to high environmental and labor standards, while building community capacity to govern and use local mineral development for their benefit.

Central American states need stronger political institutions to negotiate deals with mining firms and to monitor and regulate the industry. They need the will to invest revenue wisely over the long term and to legislate opportunities for host communities to build and exercise their capacities in the forms of FPIC, CCIAs, and organized labor. Recognizing the economic value of political stability in the long-run will help states develop this will. The first step to accomplishing this is to uproot corruption in the state. For the foreseeable future, though, these are all incomplete, hypothetical, and ideal conditions.

Had these conditions been in place earlier, El Salvador and Costa Rica might have prevented their uncertain and expensive dispute arbitration experiences, and Guatemala and Honduras might have avoided their violent and wrenching conflicts. Although mining has served as an engine for broad-based development in cases, such as in Chile and Botswana, it currently produces more conflict and mistrust than it does development in Central America. When these states can maximize revenue, invest that revenue in public goods, and empower communities to govern local mineral development, then the gains from mining may outweigh its costs.

Macartan Humphreys, Jeffrey Sachs, and Joseph Stiglitz wrote that if states are unwilling to take “bold and difficult steps…then the best solution may well be to leave the oil and gas in the ground.” Central American nations are not yet ready to use their mineral stocks for inclusive development. For the short term, the minerals should remain buried.