Travelers exploring Peru are sure to be struck by its incredible diversity in every sense of the word. The coast, the Andes, and the Amazon vary greatly in their climates, cultures, and industries; however, their economic situation shares one major characteristic in common. Large swathes of the working population, about seventy-three percent according to one study, remain in the informal economy. The informal economy represents roughly 19% of the nation’s GDP, and is projected to be a significant part of the nation’s economy until at least 2050. Despite Peru’s above average growth in GDP over the last decade, reductions in the size of its informal economy have not kept pace with other comparable Latin American countries.  This large informal sector is a significant problem for the nation not only for economic reasons, but also because it limits the ability of the Peruvian government to properly and effectively govern.
One example of the government’s inability to govern properly and effectively is in the area of illegal and informal gold mining. Over the last ten years the Madre de Dios region of Peru has experienced a massive gold rush. Miners have immigrated to the area from all over Peru and from neighboring countries. Previously, Madre de Dios was largely undeveloped and mainly consisted of rainforest and small communities. Due to the increase in the global demand for gold and the large influx of miners to the region, mining has become an extremely lucrative sector of the Madre de Dios economy. However, since the overwhelming majority of miners in this region are either informal or illegal, most of this revenue is completely outside of the formal economy. Additionally, informal and illegal mining bring other businesses in their wake. Entire towns have sprung up around the gold mining industry. These towns exist outside the control of any government, but are quickly developing. For example, I recently traveled to La Pampa, which is one of the largest gold mining towns and is right off of the Interoceanic Highway between Brazil and Peru. As our group drove through the town, we were able to see dentist offices, doctors’ offices, drugstores, hotels, and churches, all within a few feet of the highway. Since these towns are outside the formal structure of Peru, many of these businesses likely are outside the formal economy as well.
One of the key reasons that the size and nature of Peru’s informal economy limits its ability to properly and effectively do its job is that the lack of government oversight of the informal economy allows other problems to emerge and flourish. While the mining industry and related businesses are lucrative sources of income and employment for the Peruvians involved in them, these ungoverned and unregulated towns are also home to serious social, environmental, and security problems. These towns are havens for sex trafficking and labor trafficking. In addition, mining is an incredibly hazardous occupation, and in these places, there are essentially no protections in place for workers. Environmentally, mining activity is destroying large sections of the Amazon rainforest, including in protected areas, and releasing harmful quantities of mercury into the rivers of the rainforest. These activities raise problems on the security side as well because these towns are ungoverned by the formal authorities and must resort to other means of settling disputes. This provides the potential for violent and dangerous activities such as inhumane executions and other forms of “justice.”
This lack of oversight is compounded by the potential tax revenue generated by the informal sector that is not collected by the government. Lack of resources is a critical problem for enforcement of existing laws against illegal mining, human trafficking, and environmental protections, particularly in the Madre de Dios region where large segments of the region are remote and difficult and expensive to access. This vicious cycle of lack of oversight leading to a lack of potential resources leading to an increased lack of oversight and an increased loss of potential resources appears likely to continue into the future of the Madre de Dios region.
In their 2014 review of the literature on informal economies, La Porta and Shleifer argue convincingly that “structural policies designed to promote formality should be introduced with caution.” They continue by saying that the value of these types of policies depends on “whether they encourage formalization, or discourage informal activity,” and reach the conclusion that the “cure for informality is economic growth” combined with “educated entrepreneurs.” In the case of other parts of Peru’s informal economy, such as some forms of tourism, street vendors, etc., their advice should prove useful. However, given the complex set of problems in the area of informal and illegal gold mining, more creative policy approaches will be necessary.
By Nate Frierson
 CEPLAN. “The Informal Economy in Peru: Current Situation and Perspectives,” 1st ed. Lima, Peru. March 2016, https://perureports.com/wp-content/uploads/2016/08/Economia-informal-en-Peru-situacion-actual-perspectivas-15-03-2016.pdf.
 CEPLAN. “The Informal Economy in Peru: Current Situation and Perspectives.”
 NOTE: This terminology can get confusing when talking about the topic of the informal economy. The informal economy refers to unregistered economic activities that contribute to GDP and generate unreported income through the production of legal goods and services. In Peru, a distinction is made between informal and illegal mining. “Informal” mining is mining that is conducted without completing the proper government formalization process. “Illegal” mining is conducted without the government formalization process and is conducted in areas where mining is prohibited. Neither of these activities are part of the formal economy.
 Rafael La Porta and Andrei Shleifer, “Informality and Development,” Journal of Economic Perspectives, Volume 28, Number 3, Summer 2014, 109–126, https://scholar.harvard.edu/files/shleifer/files/informality_may27_abstract.pdf.