Leadership and Democracy LabWestern Social Science

Peru and the Impacts of its Cocaine Industry on Energy Resource Investment

Rebecca Yang: Primary Article Contributor and Analyst following Peru

Alexa Bran: Primary Article Contributor, Editor and Team Leader following Peru

Mehek Noorani: Article Researcher following Peru  

Marshall Dupuy: Article Researcher following Peru

Roann Enriquez: Article Researcher following Peru  

Key words: drugs, drug trafficking, coca, coca production, Peru, Colombia, drug cartels, energy resources, Amazon, Andes 

As a result of  the coca boom from the 1970s to the 1990s, Peru has become one of the primary players in the global cocaine trade. Peru’s historically lenient drug policy and its less-regulated rural regions have created a climate that has allowed cocaine production and trade to become a daily feature of Peru’s political and economic environment.

The large size of the cocaine industry should make it one of Peru’s leading concerns. Peru’s Labour Ministry estimated that 68% of the labour market was comprised of informal market activities including drug cultivation and trafficking. Additionally, earnings from the cocaine industry in Peru are said to have represent an estimated 4% to 5% of the country’s Gross Domestic Product (GDP).

Although most earnings from narco-trafficking are put towards operating expenditures, there is a concern that seemingly legitimate businesses may be money laundering operations in actuality. The laundering of narco-dollars and the generally unreported nature of narco-dollars is a serious concern, as it erodes Peru’s tax base and contributes to corruption. The influence of narco-dollars has most recently led to a scandal involving a presidential candidate, and it is known to impact police corruption. Corruption is also seen in the military, as military officials are bribed with narco-dollars to transport drugs in planes, one of the primary avenues for coca transportation in the region.

Foreign investors should take note of the high levels of violence and corruption that have arisen in Peru as a consequence of the cocaine industry. Notoriously, the Shining Path guerrillas still control Peru’s Apurimac, Ene and Mantaro River Valleys (VRAEM) and contribute to the trafficking of approximately 200 tons of cocaine produced in the VRAEM each year. It is estimated that 44% of all coca production occurs in the VRAEM. The arability of the VRAEM and the lack of regulation and policing in these rural regions have fostered the production of coca. Consequently, these favourable conditions have attracted the attention of cartels wishing to produce coca.

As of Summer 2016, Peru was ranked the largest producer of coca in the world, though this infamy often alternates between Peru and its Andean neighbor Columbia. Unlike Columbia, Peru’s drug policies are less stringent. This creates a “balloon effect” in which the drug industry changes from Columbia to Peru in an attempt to avoid prosecution.

Drug trafficking directly impacts the viability of energy resource investment in Peru. Drug trafficking endangers operations in remote areas of the country, where clandestine coca production or transportation operations can exist without police interference.

The implications of the drug trade on energy resource investment are significant. Drug trafficking can adversely affect security, making otherwise profitable investments unattractive. Projects like the Inambari Dam are its victims. The Inambari Dam would have produced twice the wattage of Peru’s biggest dam, the Mantaro, and would have set the ball rolling for exporting energy to Brazil. However, this project was cancelled after being suspended in a state of limbo for several years.

Drug trafficking operations are also widespread. Coca transportation and cartel presence in the Amazon is of particular concern because the Amazon is also the location of various energy resources. For example, projects on the Amazon river near the Peru-Brazil border could generate upwards of 20,000 megawats. However, the increased violence that inevitably accompanies drug trafficking and production makes these types of investments perilous.

It must be mentioned that the Peruvian government has not succumbed to the desires of the drug cartels. For example, Law no. 28054 and Executive Decree no. 013-2005-EM both encourage private investment to help in the development of rural areas and minimize coca production. Peru’s policies in recent years have taken on a more progressive character, with a $566 million (US) investment into the VRAEM to convert coca leaf plantations other crops. Both the United States and the European Union have prioritized this issue.

The coca eradication policy beginning in 2014 bore fruit in the territory of Loreto, among others. Loreto is particularly important because Peru’s most profitable oil fields are in this remote, sparsely populated region. This case study indicates that the impacts of drug trafficking and production can be mitigated so as to benefit foreign investment. However, the realization of such efforts on a grander scale are still to be seen and investors should proceed with caution with regard to considerations such as the regional placement of their investments in Peru.