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Subnational Economic Nationalism? Thecontradictory effects of decentralization inPeruKent Eaton aa University of California, Santa Cruz

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To cite this article: Kent Eaton (2010): Subnational Economic Nationalism? The contradictory effects ofdecentralization in Peru, Third World Quarterly, 31:7, 1205-1222

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Subnational Economic Nationalism?The contradictory effects ofdecentralization in Peru

KENT EATON

ABSTRACT Across the third world, transnational corporations (TNCs) andsubnational governments (SNGs) are coming into new forms of contact as aresult of liberalization and decentralization. Despite scholarly expectations thatsubnational governments will respond by seeking out foreign direct investment, inmuch of Latin America these governments are confronting rather than courtingtransnational corporations. Conceptualizing this phenomenon as ‘subnationaleconomic nationalism’, the article explores both how subnational governments arechallenging neoliberalism and why these challenges often fail to subvert neoliberaloutcomes. By examining two struggles against transnational capital that haddifferent outcomes but that took place within a single subnational jurisdiction(Arequipa, Peru), the article argues that decentralization can work at crosspurposes. While voters are increasingly demanding that elected subnationalofficials adopt nationalist positions vis-a-vis TNCs, these same officials often seekfinancial support from TNCs so that they can compete successfully in thesubnational elections that have been introduced by political decentralization.

In the last several decades, liberalization and decentralization have expandedthe scope of interaction between two sets of actors who previously had littledirect contact in the third world: subnational governments (SNGs) andtransnational corporations (TNCs). Under the auspices of liberalization,national officials have relaxed foreign investment codes and relinquishedprior efforts to control and shape the behavior of TNCs. At roughly the sametime, thanks to the global trend of decentralization, TNCs now have to paygreater attention to subnational governments, which have been empoweredby transfers of political, fiscal and administrative authority from nationalgovernments. In scores of developing countries, SNGs are filling the politicalvacuum created by the retreat of the (central) state.Not only are SNGs and TNCs coming into contact in new ways, but the

stakes associated with these new interactions are quite significant. From theperspective of subnational officials, who after decentralization are more likely

Kent Eaton is professor and chair of politics at the University of California, Santa Cruz.

Email: keaton@ucsc.edu.

Third World Quarterly, Vol. 31, No. 7, 2010, pp 1205–1222

ISSN 0143-6597 print/ISSN 1360-2241 online/10/071205–18

� 2010 Third World Quarterly, www.thirdworldquarterly.com

DOI: 10.1080/01436597.2010.532612 1205

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to be elected and not appointed by higher levels of government, ensuring thatforeign direct investment benefits local communities may determine whetherthey can hold onto their newly-won offices. From the TNC perspective, howsubnational officials use their expanded authority can impact everything fromlocal hiring requirements and land use permits to predictability andprofitability. Despite these high stakes, the development literature has beenslow to conceptualize and theorize the new SNG–TNC nexus. SNGs are notprominent in the literature on foreign direct investment, and when they haveappeared they do so as actors whose pro-FDI orientation is mostly assumed.According to the logic of this assumption, just as competition betweendifferent countries for investment capital has intensified, so too has itintensified between subnational governments, which presumably must nowcourt and retain foreign capital in order to prosper.This literature, however, is unable to make sense of what we are seeing on

the ground in much of the developing world, and especially in Latin America.Even a casual survey of politics in this region yields numerous episodes inwhich subnational officials have confronted rather than courted transna-tional capital. In Argentina, for example, governors in the last decade haveadopted a series of changes at the provincial level that make the terms ofinvestment far less attractive for the TNCs that purchased privatized utilitiesin the 1990s, leading in turn to decisions by some these firms to divest fromthe country. In Mexico, municipal officials in the state of San Luıs Potosıused their powers over the granting of land use permits in the (ultimatelyunsuccessful) attempt to prevent the US-owned Metalclad corporation fromexpanding its operations in the municipality of Guadalcazar. In Ecuador,mayors and provincial officials in 2005 led strikes and participated in acts ofsabotage against oil wells in the (ultimately successful) attempt to evict theOccidental Petroleum Corporation from the country. In the words ofGuillermo Munoz, a mayor who led the mobilization against Occidental inthe Amazonian provinces of Orellana and Sucumbios, ‘our provinces aredefending the national sovereignty of Ecuador’.1 National authoritiesresponded by imprisoning Munoz for his role in the strike.These struggles against transnational capital by subnational governments

suggest that local communities, labour unions and social movements are notthe only important sources of opposition to the de-nationalizing outcomesthat neoliberalism has generated. In many cases, local governing officialshave not only joined but actually led movements against TNCs, using(subnational) government resources to sponsor protests, joining hungerstrikes, and even undergoing arrest by national authorities. Over the past fewdecades, a large body of scholarship has documented the resistance ofgrassroots actors negatively impacted by market reform.2 This literature hasilluminated the opportunity structures that enable social movements toadvance anti-FDI positions, as well as the challenges inherent in buildingtransnational networks with foreign NGOs that are designed to exertpressure on foreign investors.3 But the scholarship on anti-market mobiliza-tion remains incomplete unless and until we add subnational governmentsinto the mix. In other words, when mayors and governors strike oppositional

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stances vis-a-vis foreign capital, these stances confound not just the literatureon FDI, which assumes that they will court foreign capital, but the literatureon market reform as well, which tends to overlook subnational officialsaltogether.As a response to the inadequacy of existing theoretical approaches, I

propose in this article that we study contemporary conflicts between SNGsand TNCs as the result of a phenomenon that can be conceptualized as‘subnational economic nationalism’. At first glance, the term may appear tobe contradictory or oxymoronic—how can nationalism be subnational? Infact, subnational governments have become critical sites for advocates ofeconomic nationalism around the developing world, particularly whereneoliberal tenets continue to exert a nearly hegemonic control over nationalinstitutions. Unable to find a voice at the national level, economicnationalists understand that, thanks to decentralization, subnationalgovernments can now be enlisted in struggles against transnational capital.Decentralization has created political opportunities for those who have beenfrustrated by the stranglehold of neoliberal economics at the national level,but it would be a mistake to overstate the possibilities of subnationaleconomic nationalism. Indeed, as I show in this article, the pressuresgenerated by political decentralization can work at cross purposes: whilevoters are increasingly demanding that elected subnational officials adoptnationalist positions vis-a-vis TNCs, these same officials often seek financialsupport from TNCs so that they can compete successfully in the subnationalelections that have been introduced by decentralization. A focus ondecentralized governance thus helps explain not only why subnationaleconomic nationalism has emerged in so many developing countries, but whyit often fails to derail the broader neoliberal project.While examples of subnational economic nationalism can be found across

Latin America, this article focuses on Peru as the country where theseconflicts have become especially acute—in large part due to a mining boomthat has put the world’s most powerful extractive companies in direct contactwith marginalized communities.4 In the last decade, Peru has witnessed theproliferation of protests in which local authorities have aligned with localcommunities against TNCs and the national government. Increasingly,subnational officials in Peru are questioning the prominent role given totransnational capital in the country’s development model, organizing localreferenda on whether investment projects by TNCs should go forward, andasserting regional ownership over the state-owned enterprises that are locatedin their regions. As a measure of the significance of subnational economicnationalism in Peru, in July 2007 the national government passed an ‘anti-strike’ law forbidding the involvement of subnational officials in strikeactivity.5

Precisely because of the need to move beyond national capitals if we wantto study economic nationalism, this article focuses not on Lima but onArequipa, which is both Peru’s second largest city (after Lima) and the nameof one of its 25 regional governments. To illustrate the contradictory effectsof decentralization in Peru, I examine two different struggles against

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transnational capital in Arequipa that resulted in different outcomes. In thefirst of these struggles, which has since become known as the ‘Arequipazo’,the mayor of Arequipa successfully led a movement that forced PresidentAlejandro Toledo to reverse the 2002 privatization of local utilities.Considering that it froze all subsequent privatization efforts by Toledo, theArequipazo is Peru’s most significant episode of subnational economicnationalism and worthy of close study. In the second struggle, which tookplace several years later, many of the same individuals and groups whoparticipated in the Arequipazo sought but failed to enforce a more nationalistposture against the Cerro Verde mining company, Peru’s largest copperproducer. Based on interviews in Arequipa with participants on both sides ofthese struggles, I argue that the different outcomes of these two cases can helpto substantiate both the possibilities and the limitations of subnationaleconomic nationalism.

Dominant Perspectives on Subnational Governments

Subnational governments have not figured prominently in any of the majorstrains of the international political economy (IPE) literature. This is mostobviously the case in realist work that emphasizes relative power disparitiesbetween states in the international system, but it is also true of IPE work thatlooks within the state at unit-level variables. Perhaps the absence ofsubnational governments is not surprising in scholarship that explainsforeign economic policy as a result of sectoral dynamics, firm preferences, orfactors of production.6 Yet it is indeed surprising that even the institution-alists have overlooked the possible relevance of subnational governments.New institutionalists within the IPE literature have emphasized theimportance of political parties,7 inter-branch relationships,8 and labourinstitutions,9 but have very little to say about the design or strength ofsubnational institutions. Nor do the preferences of subnational governmentsmatter much in the classic two-level game posted by Robert Putnam, whoargued that foreign economic policies are shaped by domestic actors but whodid not include subnational governments within his set of relevant domesticactors.10 Notwithstanding important disagreements, the mainstream IPEliterature departs from a common set of assumptions about the national—and not subnational—location of important decisions affecting foreign directinvestment.11

Outside the mainstream IPE literature, more critical approaches have paidattention to the subnational realm by examining the impact that subnationalgovernments do have on capital flows and the functioning of the globaleconomy more generally. This literature challenges the assumption thatsubnational governments are irrelevant, but it shares an equally limitingassumption by only examining subnational governments whose behaviorspromote and facilitate the interests of TNCs. Borrowing from Gramsci, forexample, Robert Jessop criticizes the ‘local hegemonic projects’ that resultwhen transnational capital and its local allies link up with subnationalstates.12 As another example, Darel Paul conceives of the contemporary

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subnational state as an entity that is ‘involved in the promotion oftransnational liberal production and circulation’.13 Saskia Sassen’s workon global cities operates in a similar mode by describing the partnerships thathave developed between transnational capital and decision makers in thecities that host the world’s leading financial firms.14 Ultimately, there is littlespace in this literature for subnational governments that oppose transna-tional capital or that are using decentralized resources in ways that challengeTNCs.Even political economy scholars who are more grounded in the subfield of

comparative politics (i.e. the comparative political economy or CPEliterature) have attributed little importance to subnational governments. Inarguing forcefully against theories of global convergence, for example, thevarieties of capitalism literature has not seriously catalogued subnationalvariation, despite the likelihood that different national styles of capitalismassign different mixes of rights and responsibilities to subnational govern-ments.15 If Robert Wade is right and reports of the death of the nationaleconomy are premature, then this begs the question of how subnationalgovernments contribute to national differences, particularly considering theamount of decentralization that has occurred in the time since Wade wrote.16

Closer to Latin America, scholars who studied flows of capital from theperspective of dependency theory likewise tended to overlook subnationalgovernments. Even in Brazil, Latin America’s most decentralized polity,subnational governments were not understood to be significant actors withinthe state, one of the three key partners in Peter Evans’ influentialconceptualization of the ‘triple alliance’.17 So long as statist developmentmodels remained firmly in place, scholars focused almost exclusively onvariation in the capacity of national governments to regulate inflows offoreign capital.18

More recently, an extensive wave of decentralization has encouragedscholars in the CPE literature to move subnational officials from the marginsto the centre of their analyses. Rather than acknowledge and theorize therange of these officials’ policy preferences, however, scholars have tended toassume pro-FDI behaviors on the part of mayors and governors. Considerthe following two influential examples. According to Richard Doner and EricHershberg, as firms have adopted more flexible forms of export production tocompete in a post-Fordist global economy, they have consequently come todemand the types of policy support that subnational governments are betterat providing (i.e. they support decentralization).19 This model assumes thatsubnational officials are using their newly empowered offices in ways thataccommodate internationally-oriented producers. According to the ‘market-preserving federalism’ argument developed by Gabriela Montinola, YingyiQian and Barry Weingast, marketization in China has occurred becauseChinese provinces now compete with one another for domestic and foreigncapital, and as a result have built and guaranteed investor-friendly climates.20

Certainly subnational officials often try to attract foreign investors to theirregions, as these scholars suggest, but what about mayors and governors whouse their new powers to challenge rather than to woo foreign capital?

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Subnational Economic Nationalism

With the term ‘subnational economic nationalism’, I refer to attempts to usethe governing authority of subnational governments to defend and promotedomestically-owned economic enterprises and/or to increase the domesticbenefits derived from foreign-owned enterprises.21 ‘Domestic’ in thisformulation means national but it does not have to mean local. In otherwords, subnational economic nationalists do not believe that they arepromoting only local or subnational interests; rather they understandthemselves as providing a defense of national interests at a time when supinenational governments have failed to do so. Subnational economicnationalism can take a number of forms, including opposition to foreignownership of domestic industries, support for bidding processes that privilegedomestic buyers, and attempts to increase the payment of taxes and royaltiesfrom foreign-owned firms. In order to be considered subnational economicnationalism, however, my definition requires that these demands bearticulated by subnational officials and/or channeled through subnationaloffices.Traditionally, economic nationalism has been conceptualized as an

ideology that is espoused by national-level actors who use or seek to usenational-level policy instruments (e.g. tariffs, import quotas, subsidizedcredits from national development banks) to defend and promote domesticeconomic enterprises. From Friedrich List on, economic nationalism hasbeen most closely associated with state-led industrialization, but it is notrestricted to the manufacturing sector.22 Indeed, economic nationalists canfocus their attention on any sector, including utilities, banking, naturalresources, and agriculture (as in the restriction on how much land foreignerscan own and where they can own it). Given that national governments havegreater leverage than subnational governments in interactions with othernational governments, and given the greater range and power of the toolsthat come under the control of the national government, it is no wonder thateconomic nationalists have focused their efforts on influencing national-leveldecision making. Capturing subnational governments, for instance, typicallydoes not give nationalists control over tariffs, which they can use both toprotect domestic firms and to secure better access for domestic firms inforeign markets. Undeniably, national governments have been the mostimportant and most desirable platform for economic nationalists.And yet, subnational governments can also serve as important sites for the

expression of economic nationalism and as institutions whose policyauthority and legitimacy can be put to the service of nationalist objectives.Given the powerful pressures that make it difficult for national politicians topursue policies of economic nationalism in a world of global capital markets,subnational governments have come into focus as potentially usefulinstruments in the pursuit of less liberal and more nationalist positions.With respect to policy authority, depending on the extent of administrativeand fiscal decentralization, subnational governments wield a variety of policytools that can be used to promote and favor domestic capital and/or to

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penalize and limit foreign capital. Depending on the federal or unitary designof the country in question, these policy tools can be utilized by both local-level and intermediate-level governments.Local governments typically have the power to set property taxes and can

impose higher (or lower) tax rates on foreign capital; even more critically theyoften have the authority to grant or deny land use permits and controldecisions about the (re)zoning of land for various purposes (referred to asordenamiento territorial in Latin America). Intermediate-level governments(e.g. states, provinces, departments, regions) usually have greater fiscalauthority than local governments, which may take the form of revenues fromtax bases that have been devolved from the centre, or of revenue transfersfrom the national government. Intermediate-level governments can usenationalistic criteria when they decide how to spend these revenues; in somecases they have also established their own banks and state-owned enterprisesin ways that limit options for foreign capital. The key analytical point is thatthe decentralization of fiscal and administrative authority has expanded thepolicy tools under the control of subnational governments, which can be usedfor nationalistic ends just as easily as for liberal ones.Just as importantly, the decentralization of political authority via the

introduction of subnational elections has reinforced the perceived legitimacyof the officials who win these contests, including mayors and governors, butalso a broad array of municipal councillors and provincial legislators. Inmuch of the developing world, limited institutional capacity makes it difficultfor elected subnational officials to make effective use of their new policyattributes, but once they are elected weak capacity does not prevent themfrom using their positions to challenge the terms or the very presence of FDI.The ‘mere’ election of subnational officials—even when subnationalgovernments have limited policy tools or limited capacity to actually usetheir tools—can transform these officials into powerful advocates foreconomic nationalism, particularly when they fear that the net effects ofFDI are negative for their localities. Peru in the aftermath of AlbertoFujimori’s authoritarian regime (1990–2000) is a case in point. Due topolitical decentralization to a new regional level of government after the fallof Fujimori, elections are now held at three subnational levels, including forregional presidents (presidentes regionales), provincial mayors (alcaldesprovinciales) and district mayors (alcaldes distritales). Candidates andincumbents at each of these levels now face strong electoral pressures ifthey want to win and hold office, which can be particularly challenging giventhe absence of Peru equally significant transfers of fiscal or administrativeauthority.23

The mayor and the multinational: Peru’s 2002 Arequipazo

Political decentralization provides the key to understanding Peru’s mostimportant episode of subnational economic nationalism, which occurredwhen the provincial mayor of Arequipa led a broad mobilization thatultimately prevented the national government from privatizing two electricity

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companies. The story begins in the 2001 presidential campaign, whencandidate Alejandro Toledo pledged on a visit to Arequipa in May that if hewon the presidency he would not privatize Egasa and Egesur, which togetherprovide most of the electricity consumed in southern Peru. Rumours ofprivatization had surfaced in the 1990s, but both companies remained inpublic hands at the time of Fujimori’s resignation in 2000. Fearing thatToledo might not honour his pledge, local labour leader Luıs Saraya tookadvantage of a press conference to ask the candidate to sign a written actdeclaring his promise not to privatize.24 Although Toledo signed the pledge,less than six months after his electoral victory he reversed this position, facingIMF demands that he find revenues to close a $700 million budget shortfall.In the attempt to encourage interest in the purchase of the companies, Peru’sinvestment promotion agency released figures demonstrating that bothcompanies were profitable. On June 14 the agency accepted the bid ofTractebel, a Belgian subsidiary of the French utility giant Suez-Lyonnaise desEaux.When Toledo backtracked on his promise, opponents of privatization in

Arequipa turned to their mayor, Juan Manuel Guillen, who pursued anumber of strategies in his role as champion of the two state-ownedcompanies. First, when Toledo announced his plans to privatize Egasa,Guillen sought to stop him by filing an injunction with a local judge thatchallenged the right of the national government to unilaterally decide toprivatize an asset of the regional government. Guillen also aired accusationsthat Tractebel had offered a $10 million bribe to former President Fujimori inconnection with an earlier privatization deal elsewhere in Peru. Second, inresponse to charges that only ‘extremist elements’ opposed the privatizationof the two companies, Guillen demanded the holding of a referendum inArequipa that would demonstrate the extent of the opposition. Third, themayor provided logistical support for a campaign that collected 50,000signatures to petition the national congress for passage of a law that wouldexclude Egasa and Egesur from further privatizations. Fourth, Guillen usedhis preeminent position as provincial mayor of Arequipa to build an anti-privatization alliance with other district mayors within the province, bringingthem together as a united group to participate in the public meetings that hesolicited with representatives of Toledo’s cabinet.More important than any of these strategies, however, was the rhetorical,

material and symbolic support that Guillen offered to the five major strikesand protests in 2002 that took place against the privatization of thecompanies on 26–27 February, 21 March, 16–17 April, 14 May and 13–19June. Guillen supported the protests in a number of ways, ranging from hisdecision to personally hoist the flag of Arequipa in the Plaza de Armas on themorning of each strike day, to his delivery of strongly-worded speeches tothousands of assembled protestors. When a hunger strike began on the stepsof the Arequipa cathedral on 3 June, Guillen sent over mattresses for thestrikers until eventually deciding to join the strike himself by beginning tofast on 13 June, the day before the winner of the bidding process was to beannounced.

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Certainly the scale and impact of these protests would not have beenpossible without the mobilizing capacity of organized groups in civil society,including the Federation of Departmental Workers of Arequipa (FDTA), theAssociation of Popular Neighbourhoods of Arequipa (AUPA) and the localbranch of the national teachers’ union (SUTEP). Yet many in Arequipaquestioned the representativeness of these groups, most acutely in the case ofthe AUPA which had been infiltrated by the Fujimori regime and hencediscredited.25 As the only leader who could claim to represent Arequipa’sterritorial interests beyond class and sectoral divisions, Guillen’s support forthe protests brought out middle class professionals, church groups and smallbusiness owners who otherwise might not have participated.26 In this sensethe mayor’s leadership was critical in explaining the heterogeneous quality ofthe movement that emerged to fight Tractebel and that called itself the BroadCivic Front of Arequipa (Frente Amplio Cıvico de Arequipa or FACA).As the protests swelled under Guillen’s command in Arequipa in the first

half of 2002, the national government failed to provide a coherent response.In the beginning, the president promised that no workers would be fired forthe first 18 months after privatization, attempting to put a ‘human face’ onthe sale. After the success of the May protest, Toledo then offered to sharehalf of the anticipated proceeds of the sale directly with Arequipa ($85million), but this offer lacked credibility due to the urgency of his need toclose the national budget deficit. In any event, Guillen responded that the citycould not be bought (‘Arequipa no se vende’). Guillen was similarly criticalof Toledo’s decision to send his energy minister, Jaime Quijandrıa to meetwith Arequipa’s Chamber of Commerce in the attempt to secure its supportfor privatization and thereby to play up divisions within Arequipa. Whenthese measures failed, Toledo declared a state of siege, suspendedconstitutional guarantees in Arequipa and sent in troops to restore order.Interior Minister Fernando Rospigliosi accused Guillen of trying todestabilize the government and undermine democracy. After placingArequipa under military control, two university students were killed andhundreds injured. The use of force and the dismissive comments of nationalministers considerably aggravated the situation and broadened the protestsstill further.As the Arequipazo threatened to spiral out of control, Toledo agreed to

Guillen’s request for a blue-ribbon negotiating committee that would be sentto Arequipa to negotiate with the local government. Led by Catholic bishopFernando Ruiz de Somocurcio, this committee was made up of dovishcabinet ministers opposed to privatization, including education ministerNicolas Lynch and foreign minister Diego Garcıa and excluding economyminister Pedro-Pablo Kuzcinsky.27 On 19 June, the committee broughtprotests to a halt with the Declaration of Arequipa, which suspended theprivatization pending the ruling of a higher court, and which demanded thatRospigliosi apologize for his disparaging remarks against Guillen. Thou-sands of protestors celebrated by meeting to sing Peru’s national anthem inthe main square of Arequipa.28 Six months later, in January 2003, Tractebelannounced its decision to withdraw from the sale of both Egasa and Egesur,

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in advance of any higher court ruling on the legality of the contract, andToledo declined to propose further privatizations for the remaining fouryears of his administration. Arequipa had won.Having described Guillen’s role in this episode of subnational economic

nationalism, it remains to ask why the mayor provided such a vigorousdefense of Arequipa’s electricity companies. I argue that Peru’s experiencewith liberalization and decentralization hold the answers. Two aspects of theliberalization process in Peru deserve emphasis. First, unlike other countriesin the region where critics of neoliberal economics have come to power, Perustands out for the persistence with which its national government—despitethe tumultuous regime changes of the last two decades—has pursued liberaleconomic policies. Remarkably unable to advance their cause at the nationallevel, in contrast to their counterparts in such countries as Argentina, Bolivia,Ecuador and Venezuela, opponents of liberalization in Peru have set theirsights on subnational governments.Second, like other countries in the region, the costs and benefits of

liberalization have been very unevenly distributed in Peru, with Limabenefiting at the expense of the interior. According to Gonzales de Olarte,29

market reforms disproportionately benefited Lima relative to the peripherybecause it is the only region in Peru with functioning markets in labour,capital, and goods and services.30 Lima has also prospered due to fiscal lawsthat establish it as the tax home for TNCs with investments in the interior.31

As in other Latin American countries, liberalization curtailed the induce-ments that national governments had used in the 1970s and 80s to encourageindustrial investment outside of Lima, with the result that market reformshave led to the bankruptcy of industrial firms throughout Peru’s interior.Against this backdrop, the Arequipazo tapped into a deep-seated belief

that economic liberalization in the 1990s under Fujimori’s governmentbenefited Lima at Arequipa’s expense. Before liberalization, Arequipa hadsustained the most significant industrial base outside of Lima, including largesteel (Aceros Arequipa), cement (Cemento Yura), and textile companies (LaUnion)—all of which closed down under Fujimori. In terms of agro-processing, Arequipa was also home to La Gloria, the most importantproducer in Peru’s dairy industry, which relocated to Lima in the 1990s.According to Arequipa congressman Juan Carlos Eguren, neoliberal policieseliminated previously available tax incentives for investment in Arequipa,without which the region cannot prosper.32 As a result, Arequipa underFujimori was a hotbed of opposition to neoliberal policies. Arequipenos werenot shy about demonstrating this opposition, as evidenced most famouslywhen they whistled at Fujimori during his appearance at a soccer stadium in1995, preventing him from speaking.33 In this context, Toledo’s proposal toprivatize Egasa and Egesur was hugely unpopular in Arequipa, whoseresidents feared rate hikes and job losses subsequent to privatization, andwho resented the selling off of profitable companies to foreign investors inorder to balance the national budget.34

While the history of liberalization explains why so many residents ofArequipa opposed privatization, decentralization explains why Guillen

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listened to them. During the 10 years of Fujimori’s highly centralized rule,subnational officials in Peru had a difficult time challenging the nationalgovernment. In 1992, Fujimori replaced elected regional governments withpolitical appointees and kept elected mayors on a tight fiscal leash bymanipulating fiscal transfers to municipal governments.35 The collapse ofFujimori’s authoritarian rule in 2001 gave mayors like Guillen—who tookoffice in 1999—much greater scope to contest the centre. In a situationmarked by widespread frustration with the costs of liberalization and anational government that was deaf to these concerns, Guillen faced strongelectoral incentives to oppose privatization.Before his election as mayor, Guillen had been a popular rector of the local

university, a moderate who constructed partnerships with Arequipa’sbusiness community in general and with local mining companies inparticular. According to the head of Arequipa’s main business association,far from espousing a nationalist position Guillen as a candidate for mayorthe late 1990s had indicated in conversations with business leaders that hewould not oppose Egasa’s privatization.36 Only when the breadth of theopposition to privatization became manifest in 2002 did Guillen embrace thecause of the protesters, at which point he lost the confidence of the localbusiness community but gained a much broader base of support across thecity. In the words of one local journalist, ‘only with the Arequipazo didGuillen became the city’s undisputed leader.’37

If the institutional incentives created by political decentralization pushedGuillen in the direction of economic nationalism, the mayor’s leadership ofthe Arequipazo proved to be positive for his political career. In December2006, Guillen was elected president of the entire region of Arequipa. Theattention he earned nation-wide as the mayor who stood up to themultinational also fueled his rise as a leader within the new NationalAssociation of Regional Governments, a grouping of regional presidents whohave challenged the neoliberal policies of Toledo’s successor as PresidentAlan Garcıa.38 Subnational economic nationalism also boosted the career ofanother mayor in the region of Arequipa, Simon Balbuena, who joinedGuillen on the hunger strike in 2002 and who subsequently replaced him asprovincial mayor of Arequipa when Guillen became regional president.

The Struggle against Cerro Verde: Limits on Subnational Economic

Nationalism

In the Arequipazo, decentralization increased the mayor’s responsiveness tothe demands of his constituents and encouraged him to use his office to blockan attempt by the national government to sell profitable local companies to atransnational corporation. But decentralization can also work as a break onsubnational economic nationalism because it broadens the set of politicalopportunities available to TNCs as they seek to build cooperative relation-ships with subnational officials. In their attempt to divide and conquer theopposition that has emerged to FDI in many subnational jurisdictions, TNCscan use their significant financial resources to gain the allegiance of individual

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subnational officials. More specifically, as elections have become morecompetitive and expensive, candidates and incumbents have sought financingfor political campaigns from TNCs. The type of resources that TNCscontrol can prove to be critical in winning elections, though this strategy isalso risky given current levels of anti-TNC sentiment in much of Peru. Butin numerous cases, including the case of Cerro Verde discussed below,individual politicians have negotiated separate arrangements with TNCs,which allow them to claim that they have secured important revenues fromthese corporations to finance local projects (though they tend to keep quietabout whether and how TNCs have helped finance their own politicalcampaigns).Political decentralization has expanded the scope for partnerships between

TNCs and subnational officials by increasing two forms of politicalcompetition, horizontal and vertical. Horizontally, candidates for the samesubnational office can seek separate deals with TNCs to finance local works,and try to use such deals to distinguish them from their competition in theseraces. Vertically, because Peru now has three different levels of electedsubnational government (i.e. municipal, provincial and regional), officials atone of these levels can attempt to strike separate deals with TNCs that deliverspecial benefits for their particular level, to the exclusion of other levels ofgovernment. In Arequipa, both forms of competition are critical inunderstanding how decentralization has complicated the nationalist struggleagainst Cerro Verde that originated in the aftermath of the successfulArequipazo.Cerro Verde is the name of a copper mining company that was initially

established as a state-owned enterprise (e.g Yacimiento Minero de Peru)during the nationalist military government of Velasco Alvarado in the 1970s.After its privatization in 1996 by Fujimori, the company changed handsseveral times, having been purchased by Phelps Dodge in 1998 and Freeport-McMoRan in 2006. Like many other companies, when Cerro Verde wasprivatized Fujimori offered a tax stability contract (convenio de estabilidadtributaria or CET) to its new owner, which guaranteed that the companywould be protected from any future changes in tax policy. In 1999, CerroVerde proposed additional investments that would enable the expansion ofits copper mining into deeper, sulfuric beds rather than the shallower bedsthat it had mined since the 1970s. While the national government argued thatthe expansion of Cerro Verde’s operations should be considered a newproject (and therefore not governed by the existing CET), it ultimately agreedthat if the investments were completed by 2003, the company could continueto benefit from the more beneficial terms of the CET. As it happened, CerroVerde only began its proposed expansion in 2004, but the nationalgovernment has let it continue to pay taxes at the lower rate. Cerro Verdehas likewise used its CET to avoid paying the royalties on mining profits thatthe Peruvian Congress introduced in 2003. Considering the sharp increase incopper prices that occurred after 2003, one civil society analyst calculates thatCerro Verde owes the region of Arequipa approximately $14 million inroyalties and $74 million in taxes.39

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In response, residents of Arequipa began to mobilize after the Arequipazoto demand that Cerro Verde pay 10 per cent of its profits to the government,regardless of the terms of its tax stability contract. In contrast to theArequipazo, however, the struggle to force Cerro Verde to pay taxes androyalties has been mostly unsuccessful. Through a robust public relationscampaign, the company has been able to take advantage of the sharplycompetitive political environment in Arequipa that has been created bypolitical decentralization, particularly after the introduction of elections for anew regional level of government in late 2002. For example, although manymayors participate in the Committee to Fight Cerro Verde (Comite deLucha), Arequipa’s first regional president between 2002 and 2006 (DanielVera Ballon) pursued a much more sympathetic stance vis-a-vis Cerro Verde.According to the Arequipa vice president, Carlos Leyton, President Verastruck an independent deal with the company in 2006 and refused toparticipate in the Committee to Fight Cerro Verde.40 Unfortunately forCerro Verde, the political environment became more hostile with the electionof Juan Manuel Guillen as Vera’s successor as regional president inDecember 2006. As was the case with his support for the FACA in 2002,Guillen since 2006 has directly participated in the activities of the Committeeto Fight Cerro Verde.41

But when Cerro Verde in effect lost its ally in the regional governmentin 2006 as Guillen replaced Vera as regional president, the company thenbegan to look for allies at other levels of subnational government. Mostimportantly, after the 2006 elections, Cerro Verde struck an independentdeal with Simon Balbuena, the socialist mayor of the district of Hunterwho had joined the hunger strike against Tractebel in 2002 and whosubsequently won election as provincial mayor of Arequipa in 2006.Balbuena complained that other mayors on the Committee to Fight CertoVerde were only interested in increasing benefits for municipal districtsdirectly next to the mine, and that it was insufficiently attentive to theneeds of the city of Arequipa. Balbuena left the committee in 2007 afterannouncing a separate agreement with Cerro Verde that would allegedlyincrease direct payments to the city of Arequipa. Thus, rather thanconfront a unified cohort of subnational officials, Cerro Verde faced asympathetic regional president and a hostile mayor between 2002 and 2006and then a hostile regional president and a sympathetic mayor between2006 and 2010.These divisions among subnational politicians are important because

they contribute to the already considerable challenges facing theCommittee to Fight Cerro Verde, including factional struggles betweenthe union and non-union actors who form its core and recriminations overthe failure to capitalize on the Arequipazo victory in 2002. In contrast,Cerro Verde has been very adept in its management of the struggles thathave divided both civil and political society at the local level. From 2004to 2007, as an indicator of the care with which Cerro Verde approachesthese divisions, the company’s public relations unit grew from two totwenty staff members.42 In the attempt to avoid additional tax payments

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at a time of record prices for copper, Cerro Verde has heavily invested innew staff to manage the company’s relations with municipal, provincialand regional governments.If political decentralization has created new opportunities for Cerro Verde

by introducing multiple layers of subnational elections, the company has alsobeen able to take advantage of limited levels of fiscal and administrativedecentralization in Peru. That subnational governments in Peru have littleadministrative capacity and few fiscal resources makes them susceptible toattempts by TNCs to adopt new roles as direct service providers.43 Ratherthan pay taxes and royalties so that subnational governments in Arequipacan provide governmental services, Cerro Verde has increasingly sought to‘voluntarily’ provide these services itself. The effect is to deepen acrossArequipa the presence of the company, which uses its own technicians andsuppliers to build the type of local infrastructure projects that currentlyexceed the capacity of local governments themselves.In the attempt to forestall legitimate demands that it pay additional taxes

and royalties, Cerro Verde has found an important ally in Toledo’s successoras president, Alan Garcıa (2006–2011). In the 2006 presidential electionsagainst nationalist candidate Ollanta Humalla (who won 60 per cent of thevote in Arequipa), Garcıa promised that he would increase taxes on thewindfall profits that have been generated in Peru not by additionalinvestment but by record-high mineral prices (i.e. impuesto a las sobrega-nancias). Like Toledo before him, however, Garcıa backtracked on his pledgeafter winning the presidency, arguing that any such tax increases wouldthreaten the tax stability contracts that Fujimori had introduced in the 1990sand therefore drive away FDI. Rather than increase taxes, Garcıa proposedto negotiate ‘voluntary support’ (aportes voluntarios) from mining compa-nies. Thus in December 2006, under the auspices of the chief businessassociation for the mining industry (Sociedad Nacional Minera), forty of thelargest mining companies in Peru agreed to contribute three per cent of theirprofits to a Mining Fund (Fondo Minero) that would be controlled by aprivate entity with the participation of local governments (and that was madecontingent on the future trajectory of prices for copper, zinc, gold, silver,iron, tin and lead).When it became clear that President Garcıa would not push the tax on

windfall profits following his election in 2006, Cerro Verde entered intonegotiations with both national and subnational authorities over possiblecontributions that it could finance within Arequipa. On 2 August 2006,representatives of the company signed an agreement in Lima according towhich it would pay 100 per cent of the costs of building a water treatmentfacility (La Estrella) on the Rio Chili, in addition to financing a technicalstudy on the construction of a sewage treatment plant at La Tomilla.Subsequently it came to light that, rather than representing a commitmentof additional resources, Cerro Verde planned to deduct the cost of theseinfrastruture projects against its future payment of tax revenues. Bysigning this contract, the national government has invited Cerro Verde toplay the types of direct governing roles that over time may lead the

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residents of Arequipa to question the need for subnational governments atall.

Conclusion

In many Latin American countries, left-leaning presidents have taken powerin recent years, promising to replace the neoliberal economic models thathave dominated the region since the 1980s. The election of such leaders asHugo Chavez in Venezuela, Rafael Correa in Ecuador and Evo Morales inBolivia has indeed shifted economic policies in a nationalist direction, overthe opposition of national groups that remain committed to more liberalapproaches. These national-level struggles over the market are significant anddeserve the attention they are receiving from Latin Americanists, but in anera of decentralization it may be equally important to focus on the strugglesover economic models that are taking place between national andsubnational actors.In contrast to the ‘left turn’ taken by neighbouring countries, for two

decades now the national government in Peru has been consistently under thecontrol of economic liberals (i.e. Fujimori, Toledo and Garcıa). Yet a focuson the national level alone would greatly understate the amount of supportthat exists within Peru today for substantially more nationalistic positions.Ironically, for the reasons underscored in this article, subnational govern-ments have emerged as the more important arena for the expression ofeconomic nationalism. My research on Peru suggests that, if we want tobetter understand the phenomenon of subnational economic nationalism, weought to carefully study how the twin processes of liberalization anddecentralization have unfolded. With respect to liberalization, the costs andbenefits of neoliberalism in Peru have been unequally distributed alongregional lines. Furthermore, regional losers from the liberalization processsince 1990 have been unable to deviate the course of the national governmentaway from neoliberalism. Even worse, they are now routinely labelled asterrorists for expressing opposition to FDI by a president, Alan Garcıa, whohas aggressively sought to distance himself from the failures of his firstpresidency in the 1980s.Thanks to decentralization, voters who would prefer the less generous

treatment of TNCs—but who are ignored by the national government—canturn to elected subnational governments for redress. The Arequipazodemonstrates what can happen when elected mayors face clear signals thattheir jobs depend on faithfully representing their constituents’ policypreferences vis-a-vis the national government. Although Juan ManuelGuillen was not initially opposed to the privatization of Egasa and Egesur,the electoral incentives produced by decentralization transformed the mayorinto an aggressive and effective leader of the campaign to keep thesecompanies public and Peruvian. However, while decentralization cangenerate successful episodes of subnational economic nationalism, the caseof Arequipa also shows that it can serve as a break on this very samephenomenon. The competitive pressures unleashed by decentralization

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encourage subnational officials to negotiate individual deals with TNCs andto claim that their negotiations have secured much needed revenues forsubnational constituents. Meanwhile, the daunting challenges posed bylimited state capacity beyond Lima make subnational officials vulnerable toproposals that are effectively turning over to TNCs the very functions ofsubnational government (e.g. the construction of water treatment plants,sewerage and roads).Taken together, subnational officials in Peru are confronting a contra-

dictory set of pressures that are difficult for them to resolve. The incentivesthey face in the wake of decentralization simultaneously encourage them toadopt postures of economic nationalism and to distance themselves fromthese same postures. Far from being unusual or exceptional, the struggles inArequipa that are highlighted in this article represent the types of challengesthat subnational officials are increasingly facing not only in Peru, but in thethird world more generally.

Notes

1 ‘Ecuador: New Defense Minister Takes Hard Line with Protestors’, Inter Press Service, August 19,2005.

2 For representative examples see D Chalmers, ed., The New Politics of Inequality in Latin America,Oxford: Oxford University Press, 1997; and P Oxhorn and G Ducatenzeiler (eds.), What Kind ofDemocracy? What Kind of Market? Latin America in the Age of Neoliberalism, University Park: PennState University Press, 1998.

3 M Keck and K Sikkink, Activists beyond Borders: Advocacy Networks in International Politics, Ithaca:Cornell University Press, 1998.

4 M Arce, ‘The Politics of Regional Grievance in Peru’, paper prepared for the 2003 Annual Meeting ofthe American Political Science Association, 2003; M Arce, Market Reform in Society: Post-crisisPolitics and Economic Change in Authoritarian Peru, University Park, PA: Penn State University Press,2005; R Barrantes, P Zarate and A Durand, ‘Te quiero pero no’: minerıa, desarrollo y poblacioneslocales, Lima: Instituto de Estudios Peruanos, 2005; A Bebbington (ed.), Minerıa, MovimientosSociales y Respuestas Campesinas, Lima: Instituto de Estudios Peruanos, 2007; and J Bury,‘Transnational Corporations and Livelihood Transformations in the Peruvian Andes: An Actor-oriented Political Ecology’, Human Organization 67(3), 2008, pp 307–321.

5 President Alan Garcıa complained that regional presidents had required government employees toattend rallies and used government cars to help organize protests.

6 For classic examples, see P Gourevtich, Politics in Hard Times: Comparative Responses to InternationalEconomic Crises, Ithaca, NY: Cornell University Press, 1986; H Milner, Resisting Protectionism:Global Industries and the Politics of International Trade, Ithaca, NY: Cornell University Press,1989;and R Rogowski, Commerce and Coalitions, Princeton NJ: Princeton University Press, 1989.

7 G Garrett, Partisan Politics in the Global Economy, New York: Cambridge University Press, 1998.8 A Moravcsik, ‘Preferences and Power in the European Community: A Liberal IntergovernmentalistApproach’, Journal of Common Market Studies, 31(4) 1993, pp 473–524.

9 R Hollingsworth and R Boyer, eds., Contemporary Capitalism: The Embeddedness of Institutions, NewYork: Cambridge University Press, 2008.

10 R Putnam, ‘Diplomacy and Domestic Politics: The Logic of Two-Level Games’, InternationalOrganization 42(3), 1988, pp 427–460.

11 As Darel Paul observes, ‘a small literature did take up the ‘international relations of subnationalgovernments’ in the 1980s and early 1990s . . . (but) failed, however, to make any real impact in IPE’See D Paul, ‘Re-scaling IPE: Subnational States and the Regulation of the Global Political Economy’,Review of International Political Economy 9(3) 2002, p 467.

12 R Jessop, ‘A Neo-Gramscian Approach to the Regulation of Urban Regimes’, in M. Lauria (ed.),Reconstructing Urban Regime Theory: Regulating Urgan Politics in a Global Economy, Thousand OaksCA: SAGE Publications, 1997.

13 Paul, ‘Re-scaling IPE’, p 470.

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14 S Sassen, Globalization and its Discontents, New York: New Press, 1998.15 See for example S Berger, Convergence or Diversity?: National Models of Production and Distribution in

a Global Economy, Cambridge, MA: MIT Press, 1994; and P Hall and D Soskice, Varieties ofCapitalism: The Institutional Foundations of Comparative Advantage, New York: Oxford UniversityPress, 2001.

16 R Wade, ‘Globalization and Its Limits: Reports of the Death of the National Economy Are GreatlyExaggerated’, in S Berger and R Dore (eds.), National Diversity and Global Capitalism, Ithaca, NY:Cornell University Press, 1996.

17 P Evans, Dependent Development: The Alliance of Multinational, State and Local Capital in Brazil,Princeton, NJ: Princeton University Press, 1979. For an early study that did focus on subnationalstates in Brazil, see J Tendler, Electric Power in Brazil: Entrepreneurship in the Public Sector,Cambridge, MA: Harvard University Press, 1968.

18 For examples, see T Moran, Multinationals and the Politics of Dependence: Copper in Chile, Princeton,NJ: Princeton University Press, 1975; and L Goodman, Small Nations, Giant Firms, New York:Holmes & Meier, 1987.

19 R Doner and E Hershberg, ‘Flexible Production and Political Decentralization: Elective Affinities inPursuit of Competitiveness?’, Studies in Comparative International Development, 34(1), 1999, pp 45–82.

20 G Montinola, Y Qian and B Weingast, ‘Federalism, Chinese Style: The Political Basis for EconomicSuccess in China’, World Politics 48(1), 1995, pp 50–81.

21 These attempts may or may not be characterized as socialist, in contrast to the cases of ‘municipalsocialism’ examined in B Goldfrank and A Schrank, ‘Municipal Neoliberalism and MunicipalSocialism: Urban Political Economy in Latin America’, International Journal of Urban and RegionalResearch, 33(2), 2009, pp 443–62.

22 F List, The National System of Political Economy, London: Longman, Green and co., 1904.23 Interview with Carlos Casas, head of the Cabinet of Advisors in the Economics Ministry, 13 September

2007, Lima.24 Interview with Luıs Saraya, FACA leader, 20 September 2007, Arequipa. See also L Saraya, La gesta

de junio: testimonio de lucha, Arequipa: Universidad Nacional de San Agustin, 2006.25 Interview with Ana Herrera, FACA leader, 20 September 2007, Arequipa.26 Interview with Patricia Pinto, journalist at el Buyo, 18 September 2007, Arequipa.27 According to one national government representative, it was more of a capitulation than a negotiation.

Anonymous interview, Lima, September 2007.28 On 20 June, Rospigliosi resigned rather than apologise, and was joined in his resignation by the head of

Peru’s privatization agency Pro-Inversion. A major shake-up of the cabinet followed. Interview withCesar Dıaz, Director of Communications at Pro-Inversion, 10 September 2007, Lima.

29 E Gonzales de Olarte, Neocentralismo y neoliberalismo en el Peru, Lima: Instituto de EstudiosPeruanos, 2000, p 17.

30 Orlarte, Neocentralismo y neoliberalismo.31 Interview with Grover Pango, secretary of decentralization in the Council of Ministers, 12 September

2007, Lima.32 As Arequipa congressman Juan Carlos Eguren notes, industrial firms in Arequipa would have to pay

to transport imported inputs over 1000 kilometers from Callao, and then another 1000 kilometers backto Lima where the domestic market is concentrated. Author interview with Eguren, 12 September 2007,Lima.

33 Interview with Mercedes Cruz, Asociacion Humanidad Libre, 17 September 2007, Arequipa.34 Interview with Herrera.35 K Roberts, ‘Neoliberalism and the Transformation of Populism in Latin America: The Peruvian Case’,

World Politics, 48(1), 1996 and J Zas Friz, La insistencia de la voluntad: el actual proceso peruano dedescentralizacion polıtica, Lima: Defensoria del Pueblo, 2005.

36 Interview with Mauricio Chirinos, President of the Arequipa Chamber of Commerce, 18 September2007, Arequipa.

37 Interview with Pinto.38 Interview with Violeta Bermudez, PRODES, 21 September 2007, Lima.39 Interview with Cesar Acurio, Centro de Estudios Cristianos y Capacitacion Popular, 19 September

2007, Arequipa.40 Interview with Carlos Leyton, Vice President of the Region of Arequipa, 20 September 2007,

Arequipa.41 Interview with Humberto Olaechea, Secretary of the Comite de Lucha, 19 September 2007, Arequipa.42 Interview with Pablo Alcazar, Director of Public Affairs of the Cerro Verde Mining Company, 18

September 2007, Arequipa.43 J Arellano Yanaguas, ‘A Thoroughly Modern Resource Curse? The New National Resource Policy

Agenda and the Mining Revival in Peru’, Institute for Development Studies Working Paper 300, 2008.

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Acknowledgements

For helpful comments on this article, I’d like to thank Jeff Bury, ChristopherChambers-Ju, Annette Clear, Tyler Dickovick, Alicia Dolan, Adam French,Archon Fung, Maiah Jaskoski, Tim Norris, Eleonora Pasotti, RogerSchoenman and Aviva Sinervo. For financing my research in Peru I’mgrateful to the Committee on Research at UC Santa Cruz.

Notes on contributor

Kent Eaton is the author of Politicians and Economic Reform in NewDemocracies: Argentina and the Philippines in the 1990s (Penn StateUniversity Press, 2002) and Politics Beyond the Capital: The Design ofSubnational Institutions in South America (Stanford University Press, 2004).He has also co-authered and/or co-edited several recent monographs ondecentralization, including Making Decentralization Work: DemocracyDevelopment and Security (Lynne Rienner Press, 2010); The DemocraticDecentralization Programming Handbook (USAID, 2009); and The PoliticalEconomy of Decentralization Reforms: Implications for Aid Effectiveness (TheWorld Bank, 2010).

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