The Great Peruvian Guano Bonanza: Rise, Fall, and Legacy
This analysis was prepared by COHA Research Associate Trevor Cohen
Few other Latin American countries have fallen prey to a commodity bonanza quite like Peru. While other nations have historically suffered from speculative oil, agricultural, and metal export booms, it is only in Peru that we find an epoch of Gold and Silver juxtaposed with an Age of Manure[i].
Peru emerged from colonialism a nation in tatters – its infrastructure destroyed, people divided, and political system "as unstable as water.[ii]" While most of Colonial Spanish America had raised arms against centuries of oppression, Peru remained a loyalist stronghold that had to be pressured from the North and South by the liberating armies of Bolívar and San Martín. In the process, Peru became heavily indebted to British bankers who had financed the revolution. Yet in 1840, amidst deep pessimism, the nation stumbled upon what appeared to be instant salvation, a windfall unlike any other. The world’s largest supply of bird excrement known as guano lay caked in mounds, more than 150 feet high, on the Chincha Islands off its southern Pacific coast.[iii]
For the next four decades, Peru controlled the entire world fertilizer industry. Before the invention of synthetic fertilizer derived from petroleum, guano enriched the soils of Europe and the U.S. with its high concentrations of nitrogen and phosphorous. It was a prosperous time, marked by decadence and the revival of the urban elite. However, the Peruvian government ultimately failed to capitalize on the bonanza.[iv] By the end of the boom in 1883, Peru was almost exactly where it had started. Indebted to British bankers, politically unstable, and with even less territory than when it began, Peru slowly started to recover from the disintegration of its guano industry. Given Peru’s contemporary economic success, one can only hope that the nation has learned from the catastrophe and its haunting legacy.
The conditions were just right
The Inca, the first civilization to harvest guano as fertilizer, placed special importance on the commodity, forbidding anyone to hunt the seabirds on penalty of death. Through strict regulation, the Inca were able to maintain a renewable supply of the natural fertilizer and feed its extensive empire. Yet, guano was of little interest to the Spaniards who lusted after the shiny silver of Potosí and exploited the mines of its Peruvian Viceroyalty in modern day Bolivia. Peru, the gem of the Spanish Empire during the early period of colonialism, propelled Spain to a position of global power while causing currency inflation throughout the rest of Europe.[v] By the mid-eighteenth century, however, overwork and disease had killed off most of the native labor force and the colonial Peruvian economy had lost relevance to Rio de la Plata.[vi]
After gaining its independence in 1821, Peru struggled to find a stable product to export that would allow it to develop its economy. In the post-colonial era, many Latin American countries engaged in a phenomenon known as the "commodity lottery," in which each respective nation chose its most profitable and easily extractable natural resource for export as the primary focus of its economy.[vii] Peru attempted to revive its mines that had been destroyed during the wars of independence, but doing so required large amounts of capital investment. The political system reeled in the wake of economic stagnation, and from 1821 to 1845, the nation saw 50 presidents and five separate constitutions.[viii] There seemed to be no good product that would drive the Peruvian economy out of the chaos of the post-revolutionary era.
Fortunately for Peru, German chemist Justus Von Leibig reaffirmed Peruvian guano to be a useful fertilizer in his 1840 study on organic chemistry. The British were ecstatic and heavily supported Leibig’s research. By the following year, merchants from Antony Gibbs and Son had formed a joint venture with the Peruvian government to extract the deposits. From 1840 to 1870, Peru exported 12 million tons of guano valued at USD 500 million.[ix] In an effort to maximize state revenue and better control the flow of trade, the Peruvian government nationalized the Guano Islands in 1861. As gold poured into Peruvian coffers, the government succeeded in repaying its loans to the British and was ready to begin development projects in an effort to modernize the nation. New public works began every day, including an ambitious plan to build a railroad through the Andes. President Ramón Castilla, the most powerful in a long line of caudillos from the previous era, pioneered a series of reforms that abolished slavery, eliminated the head tax on indigenous Peruvians, and started a public education system.[x] As English and Irish entrepreneurs, followed by Chinese immigrant laborers flooded the capital, Lima became a cosmopolitan city, bustling with culture and business from around the world.[xi]
But everything went so wrong
Unlike populist movements that swept Latin America during the 20th century, which nationalized industries with the intention of sharing a nation’s bounty with a larger portion of the population, the "nationalization" of the guano deposits was purely mercantilist. With a virtual monopoly over an entire world commodity market, the Peruvian Government artificially overvalued the price per ton through manipulating the amount sold on consignment to British Merchants. Most state revenues were directly siphoned by a small collection of wealthy limeños and a growing class of bureaucrats and pensioners. The regions of the Sierra and Amazon remained desperately poor and unconnected to the coastal clamor.
Wealth concentration within Lima revived the urban plutocracy, which exercised control over the political system with the sole intention of preserving its own interests. In the post-independence era, 1821-1840, it was the provincial landed elite (primarily from Arequipa and Trujillo) and the caudillos they sponsored who jockeyed for control of the capital. After capturing Lima, these caudillos and their supporters received the benefits of the nation’s economy.[xv] Since the state received the majority of the guano revenue, the spoils were handsomely distributed among associates of the president. This politically well-connected class evolved into the urban elite. In addition, as a coastal activity, guano shifted the economic center away from the countryside and towards the capital and nearby ports. This power shift backfired on the steady stream of provincial caudillos from this era who found it increasingly difficult to oppose the growing power of the urban plutocracy. By 1872, the urban elite had established its hegemony with the "popular election" of José Simón Pardo, in which only 1.5 percent of the population voted.[xvi] However, even Pardo’s austerity measures were unable to prevent the inevitable collapse of Peru’s guano industry.[xvii]
The euphoria of the Guano Era was abruptly shattered by a disastrous mix of resource exhaustion, global recession, and military defeat. Peru had imprudently used its supply of guano as a guarantee for its British loans. The government was dangerously close to running out of the manna that had sustained its decadence for years. By the 1870s there was little left to extract, the fumes of an already empty tank used up.[xviii] Concurrent with the rapid pace of exhaustion was a global recession that caused the price of guano to sink. Known in Europe as the Long Depression, this distant crisis was brought on by Otto von Bismarck’s decision to discontinue minting silver in favor of the gold that Germany had just acquired from France as tribute for its victory in the Franco-Prussian war. Subsequently, a panic in the U.S. banking system caused a railroad bubble to burst, which in turn reduced investment in the already waning guano industry.[xix] Peruvian state revenue quickly plummeted, and in 1876, the government was forced to default on its British loans, which at the time totaled more than USD 32 million.[xx] Pardo attempted to cut government expenditures and to reduce a growing trade gap, but his efforts failed to avert an economic catastrophe – an event that would resurrect nostalgia for the caudillo "man on horseback."
After only three years in power, the "democratically" elected Pardo was toppled in 1876, by Mariano Ignacio Prado. A consonant may have been rearranged and an era of republican elite power sharing averted, but that was where the hope of salvation ended. Prado would lead Peru into a disasterous war with Chile, in defense of Bolivian nitrate fields. Used as an ingredient in explosives, the nitrate deposits of the then-Peruvian controlled Atacama provided a viable alternative export to compensate for the demise of guano.[xxi] Unfortunately, the resulting war, known as the War of the Pacific ended in the devastating defeat of Peru and Bolivia. After only one year of fighting, Chile had seized the Atacama and now occupied Lima as guerilla campaigns continued to resist Chilean occupation until 1884. By the war’s end, Peru had lost all of its nitrate resources along with much of its pride.
Similarities and differences in Peru today
Yet much unlike the guano-based boom, Peru’s economy today resembles a balanced commodity burrito stuffed with gold, copper, fishmeal, petroleum, zinc, textiles, apparel, asparagus, and coffee, among others. And while Peru still struggles to expand its manufacturing export industry, it has made significant progress in diversifying its export bundle over the past year, during which non-traditional exports rose by 38.4 percent. [xxv] The rise has continued through 2011, as April showed a continued growth of 27.6 percent.[xxvi]
In addition to the diversification of its economy, Peru has made great strides in development and poverty reduction. According to the Peruvian government, poverty has fallen by 14.5 percent from 44.5 percent in 2006.[xxvii] By the same token, extreme poverty has fallen from 16.1 to 13.7 percent between 2005 and 2008. However, it is important to accept these figures with caution in light of accusations of data fabrication. The Peruvian government allegedly changed 2005 poverty statistics from 44.5 to 48 percent to indicate a larger drop, and omitted population growth as a factor in its measurements. Additionally, most of these supposed gains have been concentrated in coastal cities, while well over 60 percent of the Andean Sierra population still lives in poverty.[xxviii]
In stark contrast to the guano industry of the 19th century, modern-day guano is a cheap non-traditional specialty export. Extraction is heavily managed and regulated to prevent exhaustion, the laborers are of primarily Quechua heritage, and the birds and the fish they eat are protected from poachers and fishermen. Workers make around USD 600 a month, about three times the average wage in the highlands. High petroleum prices have now placed guano-based fertilizer at about USD 250 per ton, a relatively cheap alternative to synthetics that cost upwards of USD 600 per ton.[xxix] Guano is sold as a natural fertilizer for organic farmers around the world and much of it is used domestically as well. Ironically, when compared with most sectors of the Peruvian economy, it is the guano industry that least resembles the Guano Era.
References: The Great Peruvian Guano Bonanza: Rise, Fall, and Legacy
[i] A.J. Duffield Peru in the Guano Age; Being a Short Account of a Recent Visit to the Guano Deposits, with Some Reflections on the Money They Have Produced and the Uses to Which It Has Been Applied (London: R. Bentley and Son, 1877)
[ii] Ibid, 9
[iii] Simon Romero. "Peru Guards Its Guano as Demand Soars." The New York Times. 30 May 2008
[iv] Shane J. Hunt "Growth and Guano in Nineteenth Century Per." Research Program in Economic Development 34 (1973): 1-123, P. 5.
[v] Phillip Arestis and Peter Howells. "The 1520-1640 "Great Inflation": An Early Case of Controversy on the Nature of Money." Journal of Post Keynesian Economics Winter 24.2 (2001): 181-203, P. 199.
[vi] The History Files "American Colonies - Peru." 10 Dec. 2008.
[vii] V. Bulmer-Thomas. The Economic History of Latin America since Independence. (Cambridge, U.K.: Cambridge UP, 2003.) P. 19.
[viii] Catalina Vizcarra. "Guano, Credible Commitments, and State Finances in Nineteenth-Century Peru." (2006): 1-50. UCLA Center for Economic History. P. 7.
[ix] U.S. Country Studies, "Peru - THE GUANO ERA."
[x] John P Olinger. "The Guano Age in Peru." History Today June 1980.
[xi] Juan C Calligros. "REINVENTING THE CITY OF THE KINGS: POSTCOLONIAL MODERNIZATIONS OF LIMA, 1845-1930." (2007) Diss. University of Florida, FCLA. P. 59.
[xiii] Jean Piel. "The Place of The Peasantry In The National Life Of Peru In The Nineteenth Century." Past and Present 46.1 (1970): 108-33, P. 20.
[xiv] Stephen M Gorman. "The State, Elite, and Export in Nineteenth Century Peru: Toward an Alternative Reinterpretation of Political Change." Journal of Interamerican Studies and World Affairs 21.3 (1979): 395-418, P. 401.
[xv] Ibid, 396
[xvi] Ibid, 406
[xvii] Jesus Chavarria. "Crisis of Modern Peruvian Nationalism." Hispanic American Historical Review 50.2 (1970): 257-78, P. 259.
[xviii] Pete Lesher. "A Load of Guano: Baltimore and the Fertilizer Trade in." The Northern Mariner 18.3-4 (2008): 121-28, P. 125
[xix] Graciela L Kaminsky. "Two Hundred Years of Financial Integration:Latin America since Independence." George Washington and NBER (2009), P. 5.
[xxi] Hunt, 42
[xxii] "Peru GDP Growth Rate." TradingEconomics.com - Free Indicators for 231 Countries..
[xxiii] Rick Vecchio. "China Overtakes U.S. as Peru’s Top Destination for Exports in Jan-Feb." Peruvian Times Online English. Peruvian Times, 4 Apr. 2011.
[xxiv] Trading Economics
[xxv] "Peru's Non-traditional Exports Grew 38.4% in January." Andina. Agencia Peruana De Noticias, 13 Mar. 2011.
[xxvi] "Peru's Non-traditional Exports Jumped 27.6% to US$751mln. in April." Andina. Agencia Peruana De Noticias, 5 June 2011.
[xxvii] "Poverty Decreases in Peru but Still Affects One Third of Population." Living in Peru : Peru News and Peru Travel. 19 May 2011.
[xxviii] Salazar Milagros. "PERU: Upbeat Poverty Stats Questioned - IPS Ipsnews.net." IPS Inter Press Service. 29 May 2008.