Davos 2013: circular economy offers opportunities for Latin America

Rich natural resources throw up particular sustainability challenges for Chile and Peru. A circular economy event at the World Economic Forum could offer solutions

Growth predictions for Chile and Peru are comparatively strong into 2013 (the IMF predicts 4.4% growth for Chile and close to 6% growth for Peru) so one might think more abstract ideas like the circular economy, where the economic system is designed to turn resources into parts and products and then back again, wouldn’t be of interest to the Latin American finance ministers attending Davos this year.

But Chile faces a major deforestation challenge as it grows its economy. According to WWF, Chile hosts the world’s second largest expanse of temperate rainforest, second only to that of British Columbia in Canada. Peru faces a similar problem. It hosts the fourth largest area of rainforest in the world, covering nearly 60% of its territory, but with a forest clearance rate of approximately 260,000 hectares a year as land is cleared for other economic activities. Related issues such as soil erosion, water pollution, localised air pollution and greenhouse gas emissions all result from these challenges.

And these resource pressures are putting strains on the economic, social and political outlook of these and other fast growing countries in the Latin American region and more globally.

Extractive industries currently make up 17% of Peru’s GDP – copper, gold and zinc are some of Peru’s biggest exports, contributing to 60% of Peru’s total exports in 2012. With more mineral resources discovered and commodity prices rising, Peru’s future economic growth aspirations hinge to a great extent on dividends from mining. Recoverable oil and natural gas resources are also present, as is a growing liquefied natural gas sector, which can be exported. Much of this requires forest clearance.

The economics of expanding resource development in countries like Chile and Peru are compelling. The OECD forecast a 250% increase in price for minerals and metals between 2005-2030 due to rising demands, especially from China. McKinsey & Company also forecasts that there will be a 25% increase in the scale of global resource extraction of biomass by 2020, and about a 30% increase in metal ore extraction over the same period.

Non-attributed economic costs

Yet such resource extraction comes with high non-attributed economic costs due to the resulting loss of ecosystems. The UNEP supported Economics of Ecosystems and Biodiversity study estimates that ecosystem services lost to deforestation in China alone cost their economy about $12bn (£7.5bn) annually between 1950 to 1998.

Cognisant of these challenges, governments, including in Latin America, are looking to see if there are other growth-orientated economic models that can be explored, to leap frog this “damage” to natural assets (with the resulting political and social consequences), and set a new course for growth.

Some, such as Ecuador are taking a unique approach to managing their fossil fuel reserves. Ecuador has more than 840m barrels of oil under the its Yasuni National Park. It has created a trust fund, administered by the UN Development Program, that invites donations to compensate Ecuador for not exploiting its Yasuni oil fields. The money will be used for clean energy and sustainable development activities. More than $300m (£189m) has been promised to date, and Ivonne Baki, Ecuador’s secretary of state and lead on the initiative, will be in Davos to explain the scheme further.

A circular economy in Latin America

There are other models too for Latin America. Including the idea of a more joined-up business ecosystem, which could hold the key to reducing pressure on natural resources in the region, while further stimulating (and modernising) economic activity and jobs.

This is the idea of the circular economy – an attempt to move away from our current ‘take and dispose’ approach to exploiting natural resources, which feeds an inefficient, linear model of resource consumption.

Could a new less linear, and more circular approach to economic growth be a smarter growth path for countries like Chile and Peru to follow? In this model, the economy is thought of as a system, where the soil fertility of land that had been cleared is restored through the use of bio-sourced nutrients that otherwise might have to be treated or disposed of as waste (such as sewage, animal waste, food waste), thereby lowering the costs of imported fertiliser and raising the potential for new domestic industries.

Or, the product design of goods that use rare earth metals could be re-imagined so that the future might include the recycling and re-use of precious metals contained within previous, now outdated products (like computers, mobile phones etc). In this way, a country like Chile or Peru might also capture higher-value production or circular economy processes, moving it away from a linear dependency on resource extraction.

The cost savings from less waste and environmental damage, combined with the added value from more innovative production processes offer a potentially large economic win. Further analysis by McKinsey & Company suggests that there is a global annual net material cost savings opportunity of up to $380bn, but only within a subset of European manufacturing sectors.

This thinking is at an early stage. But it is also attractive for business, as rising and fluctuating commodity prices combined with environmental stresses on resources starts to affect decision making and bottom line projections. A recent report on Resource Futures from Chatham House, for example, shows that in the decade 2000-10, the price volatility of major commodities increased by more than factor six. No business, investor or government likes increasing volatility in its input prices.

For these reasons, a circular approach could allow the newer wave of fast growing economies around the world to leapfrog the west’s historically inefficient approach to fuelling growth. This could offer a powerful weapon to Latin America’s finance ministers, alongside other innovative conservation initiatives, to grow the economy of the region while preserving its unique ecological assets.

Finance ministers from Chile and Peru will join more than 70 chief executives, experts, investors and technology specialists for a practical circular economy discussion in Davos this week. It may be that such discussions spur circular innovation hubs around the world, including in Latin America, to take these ideas forward and create a new reality of growth.

Dominic Waughray is senior director for environmental initiatives, World Economic Forum

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