The Extractive Industries and Society xxx (xxxx) xxx–xxx

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The Extractive Industries and Society

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Original article

The extractive industries in Central America

⁎
Graham A. Davisa, , Osmel Manzanob
a
Colorado School of Mines, 1500 Illinois St., Golden, CO, 80401, USA
b
Inter-American Development Bank, 1300 New York Ave., NW, Washington, DC, 20577, USA

A R T I C LE I N FO A B S T R A C T

Keywords: The large literature on mineral and energy extraction and society has skipped over Central America. While each
Extractive industries of the countries within the region is relatively small, as a whole the region holds large potential resource wealth.
Central America Each country has taken a unique view as to what is to be done with this wealth. Some, like Nicaragua and
Mining Panama, have embraced it. Others, like Costa Rica and El Salvador, view resource extraction as antithetical to
Oil and gas
the preservation of biodiversity. In this paper we provide a brief summary of the state of affairs and introduce the
four papers in this Special Issue on extractive industries in Central America.

1. Introduction are still feeling their way in these frontier addresses” (Harris, 2017).

Metal mining has been a part of Central America’s economy since
Spanish colonization, though never playing a dominant role. Nor has oil
and gas. This in contrast to the large role that mining and oil extraction
plays in Mexico’s economy, to the north, and in several Latin American
economies to the south. Is Central America simply not blessed with the
same mineral and energy endowments as its neighbors to the north and
south? Is this lack of activity a result of current policy? Of historical
politics?
Despite limited geological reconnaissance of the region, we have
reason to believe that Central America has considerable mineral and
energy potential. Differing acceptance of extractive industries within
the region would therefore appear to be at play. Nicaragua and Panama
host large deposits of gold and copper and have attracted well-backed
international mining companies to mine them. Panama’s Cobre Panama
copper deposit is one of the largest new copper projects in recent his-
tory and will soon be in production. Pueblo Viejo is a world class gold
mine in Dominican Republic, being operated by the world’s largest gold
mining company, Barrick Gold. Honduras and Guatemala are open for
business and appear to host rich natural resource deposits, but deep-
seated local opposition to new projects and a lack of rule of law has
stalled any extractive industry take-off. Costa Rica and El Salvador have
elected to protect their biodiversity and see extractive activity as anti-
thetical to that goal, though not without incident; Canada’s Infinito
Gold is seeking $300 million in compensation from Costa Rica for lost
access to the Las Crucitas gold mining concession (Replogle, 2016). A
recent cover story in the Mining Journal, the mining industry’s pre-
dominant weekly magazine, notes that “Companies and governments
2. The differing experiences with resource extraction in Central
America
Despite early work suggesting a “resource curse,” recent research
has largely confirmed that there is nothing explicitly growth-inhibiting
about an expanding domestic resource sector (Alexeev and Conrad,
2009; Davis, 2011; James, 2015; Ledeman and Malony, 2007; Nulle and
Davis, 2018; Smith, 2015). Indeed, the evidence suggests that growing
resource sectors on average lead to growth in the overall economy and
decreased poverty (Goderis and Malone, 2011; Davis and Vásquez
Cordano, 2013). At the local level, policies to increase local content
have had positive impacts in the vicinity of a mine (Aragón and Rud,
2013).
Given the presumption that a growing non-renewable resource
sector is in principle desirable, the design of appropriate institutions to
manage and regulate that sector is complex (Hogan and Sturzenegger,
2010; Humphreys et al., 2007; Richards, 2009). In the area of financial
institutions alone, countries must deal with: the design of the tax in-
strument; the exploration/exploitation contract; the auction of land use
rights; fiscal rules to manage revenues; and institutions to ensure a
transparent and accepted use of the revenues (Daniel et al., 2010). If we
also add the environmental challenges as well as local community
rights and involvement, we see that resource exploitation entails a
complex set of institutions.
In this regard, Central American countries face a tall task. First, in
general these are countries with relatively small states with little rev-
enue. In addition, the general regulatory framework in the region is

⁎
Corresponding author.
E-mail address: gdavis@mines.edu (G.A. Davis).

https://doi.org/10.1016/j.exis.2018.06.004
Received 4 January 2018; Received in revised form 4 June 2018; Accepted 5 June 2018
2214-790X/ © 2018 Elsevier Ltd. All rights reserved.

Please cite this article as: Davis, G.A., The Extractive Industries and Society (2018), https://doi.org/10.1016/j.exis.2018.06.004
G.A. Davis, O. Manzano
weak. Consequently, the beneficial exploitation of non-renewable re-
sources could become a challenge for these countries even if they have
positive geological prospective. The question is whether the benefits
that the extractive industry could contribute to these countries can
more than offset the full scope of its costs. However, when thinking
about the costs, it is not only the financial and environmental risks that
matter, but also whether it is possible to create the institutional struc-
tures needed to mitigate risks such as unproductive rent-seeking on the
part of entrepreneurs, government corruption and civil war. Therefore,
policy interventions are likely to require customization for regional
idiosyncrasies that reflect local governance capacity, the type of ex-
traction activity, and existing constitutional structures.
In addition, many Central American countries rank poorly on the
World Bank’s ease of doing business index. This is in large part to
regulatory instability. Perhaps no other region of the world has had
instances where mining and oil production have been disrupted for
regulatory reasons for such long periods. Honduras has a long history of
prohibiting mining activity. In the Dominican Republic, mining by
private entities was banned from 1974 to 1983. Though private con-
cessions were again granted beginning in 1984, it took extensive co-
ordination by the World Bank and Dominican officials to draw new
investment to the sector to revive and rebuild the by then bankrupt,
state-run Pueblo Viejo gold mine. The rebuilt mine achieved commer-
cial production in January 2013. Each mine in Dominican Republic is
subject to a “special license agreement” that appears to be unstable; the
original agreement at Pueblo Viejo was renegotiated only four months
after start-up. This is surely not conducive to attracting additional in-
vestment in the country. Nicaragua similarly prohibited outside in-
vestment in mining activity from 1979 to 1990. There are ongoing is-
sues over access to what was previously granted as private mineral
holdings, but which are now considered to be owned by the state. In
Panama, a new mining law enacted in 2011 was only in place for one
month before it was repealed pending revisions that would placate
indigenous groups.
Several nations in Central America also have a cohesive and vocal
population that is opposed to mining and oil extraction. Various surveys
have indicated that the majority of citizens in Honduras and Guatemala
are opposed to mining development within their country. Changes to a
mining law in Panama in 2011 were strongly protested by indigenous
groups, who are particularly affected by mining in the mineral-rich,
semi-autonomous, Ngäbe Buglé Comarca region. Only through massive
protests was that law repealed. While many Central American nations
have legislative mechanisms for resolving conflicts over land use, these
mechanisms are weak and do not for the most part lead to successful
outcomes. Oil production in Belize has been opposed by Mayan peoples.
Support for their claims by the Belize Supreme Court have not stopped
oil exploration in the Maya lands in Sarstoon Temash National Park.
A recurring theme in this volume is that institutional capacity is
weak in this region, with Honduras and Guatemala generally having the
lowest scores, and Panama and Belize having the highest. The more
established mining and oil companies, as a matter of maintaining their
“blue chip” status, tend to avoid investing in high risk regions. Junior
mining companies attract investors that are more amenable to high risk,
high payoff investments in developing countries. But they may not have
the capital to develop projects in a timely manner and replace reserves
as they are depleted through operations. Barrick Gold has invested
billions in its Pueblo Viejo gold mine in the Dominican Republic, where
mining regulations are reasonably well established and the country has
a positive attitude towards foreign investment. Nicaragua, which has
considerable mineral potential and is currently courting new interna-
tional investors, has attracted the substantive Canadian mid-tier mining
company B2Gold and the much smaller Canadian venture capital
company Golden Reign Resources. Yet it is not all smooth sailing.
Canadian gold mining major Goldcorp left Guatemala in 2017 after a
series of troubles, selling out to the more junior Bluestone Resources.
Bluestone does not have the financial resources to bring Goldcorp’s
2
The Extractive Industries and Society xxx (xxxx) xxx–xxx
flagship Cerro Blanco gold project into production. Guatemala’s Escobal
silver mine, the third largest in the world and operated by Canadian
major Tahoe Resources, remains closed due to a mining license dispute.
It would be troubling for Guatemala if Tahoe followed Goldcorp’s lead
and exited the country. Panama’s only operating mine closed in 2013 as
metal prices dropped. It was owned by Petaquilla, a small junior
Canadian gold mining company that delisted shortly afterwards and did
not bond sufficient funds to allow remediation of the abandoned mine
site. That task fell to the Panamanian government. The goal, ultimately,
would be to attract more majors to Central America since these op-
erators have a record of sound environmental controls, good practice
towards community and sustainability, and the resources to expand
operations over time and remediate the disturbed lands upon closure.
Yet once again we find that policy uncertainty is creating turmoil for
both majors and juniors operating in the region.
3. The papers in this Special issue
The large literature on mineral and energy extraction and society
has skipped over Central America. Our call for papers was therefore
warmly received, and the outstanding referees that helped us with this
issue unanimously welcomed the innovative focus of the papers they
reviewed. This Special Issue presents four original papers examining
selected details of extractive industries in Central America. Many of the
issues we have raised are touched on in these papers. In the first paper
in the series, Peña and Lizardo focus on mining in the Dominican
Republic, raising the usual concerns that the benefits from extracting
these scarce mineral resources be fully realized and shared given the
relatively weak institutional structures in place. Manzano and Vernon
continue the focus on lack of institutional capacity, this time in Belize
as its young oil sector collapses. Aguilar-González, Navas, Brun,
Aguilar-Umaña, and Cerdán examine the mining sector in Guatemala,
surely one of the most complex environments in the world in which to
conduct mining exploration and development. In the final paper Quiroz
and Vieyra provide an summary of the mineral potential and govern-
ance challenges in Belize, Dominican Republic, Guatemala, Honduras,
Nicaragua, and Panama. They conclude that increased transparency is
the key to an increase in extractive activity.
We wish to acknowledge the authors of three other papers, on
Honduras, Panama, and Guatemala, that did not make it into the special
issue. We also wish to thank the Inter-American Development Bank for
its support of this research effort and for sponsoring a meeting of
Central American extractive industry researchers at the Colorado
School of Mines in January of 2013.
4. Recommendations from the analysis
Going forward, a series of recommendations falls out of the analysis
and from our own participation in this project:
1 There is a strong need to set up a mining cadaster system in each
country, with regional integration such that geological formations
can be mapped across the region. This is especially important given
the small country size in Central America. The resource potential of
Central America has not been fully documented because of a lack of
public sector geological investigation. Exploration produces in-
formation externalities because any local drilling information on an
exploration lease creates broader information about regional geo-
logical structures. Private sector firms will therefore undertake too
little exploration. Firms on adjacent leases may also engage in a non-
cooperative timing game that delays exploration pending a first
move by the other firm that confirms whether or not there are re-
sources under the ground. For these reasons state-run geological
surveys are generally charged with early stage exploration. The
geological survey also becomes the custodian of geological data such
that duplication and overlap are avoided. Yet none of the countries
G.A. Davis, O. Manzano
in the region has a strong geological survey.
2 Transparency in land rights, land tenancy, fiscal systems, and reg-
ulatory systems could potentially reduce conflicts and generate
stable rules of the game. This would assist in the development of the
sector in two ways. First, the months and years of mining production
lost as a result of local protests, national protests, sudden revoca-
tions of licenses and permits, and deliberations over how to appease
various interest groups may come to an end once the rules of the
game are transparent. Minor modifications, rather than complete
overhauls, may become more likely. Second, firms are more willing
to invest in a country with transparent laws and regulations. Firms
are also in favor of transparent fiscal terms, as it then becomes clear
that they are paying substantial taxes and royalties to the state, who
can then be expected to undertake local and regional development.
In the absence of transparency local populations often put pressure
on the mining company to provide these services in the absence of
action from the state.
3 It is unlikely that mining and oil extraction will ever be dominant
sectors in most Central American countries. The environmental and
social impacts of mining and oil extraction require a type of reg-
ulatory skill and effort that goes beyond that for most other sectors.
For mining and oil to provide a net positive contribute to these
economies, cost-reducing mechanisms of shared regulation and
governance throughout Central America are likely to be required.
Also, given the small states these countries have and their relatively
weak institutional capacity, there is the need to think about alter-
native ways to reduce the burden:
a Create a regional geological survey. This recommendation is
motivated both by the economies of scale from coordinated ac-
tivity and by the fact that geological formations of interest in
Central America are likely to span several countries in the region
given their small geographical size.
b Use international benchmarks when formulating policies and
regulations. The International Bar Association Mining Law
Committee has produced a Model Mining Development
Agreement, or MMDA 1.0, for use as a template when forming
sound mining agreements between firms and host countries. The
International Institute for Sustainable Development provides
guidance on the document and its uses. The Extractive Industries
Transparency Initiative (EITI) provides guidelines on how to set
up transparent fiscal regimes. Honduras and Guatemala are al-
ready signatories, with Guatemala being EITI compliant. Perenco,
the largest tax payer in Guatemala’s oil and gas sector, provided
The Extractive Industries and Society xxx (xxxx) xxx–xxx
complete details over payments made to various government de-
partments. A reconciliation between Guatemala’s company re-
ports and reported government receipts agreed to within 1% of
total payments, limiting the prospect for corruption. Transparency
also limits expectations – Guatemala’s total fiscal receipts from
mining and oil and gas in 2010 amounted to only $15/person.
c This is clearly a case where regional institutions such as the IADB
have a central role to play in guiding coordinated policy making.
Policy surrounding extractive industries has been improved and
refined over the past few decades. Central America can adopt tried
and proven policy mechanisms, with the usual caveat that policy
must be customized to the specific challenges faced by each
country.
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