The Great Peruvian Guano Bonanza: Rise, Fall, and Legacy

July 13, 2011July 15, 2011 COHA

The sale of guano (bird droppings) used as fertilizer, helped propel Peru out of the initial chaos of the country’s post-independence era
The Boom, which lasted from 1840 to 1870 saw the extraction of 12 million tons of guano valued at USD 500 million, as British and North American interests clamored for fertilizer
Ultimately the government failed to capitalize on the windfall and Peru had little to show for its bonanza
Peru’s modern economy still harbors some similarities with the 19^th century commodity boom, but has made very significant progress in the diversification of its economy and in the reduction of poverty

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 Humboldt Current carries cold, nutrient rich Antarctic waters up the Peruvian coast, providing for a vibrant aquatic ecosystem. Teaming schools of anchoveta, a relative of the anchovy, are preyed upon by millions of cormorants, pelicans, and boobies. For millennia, these seabirds discharged their fishy droppings on a chain of coastal islands, whose extremely dry climate preserved millions of tons of the accumulating bird feces.

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

According to economist Jonathan Levin, growth during the guano boom was contained within an “enclave,” hermetically sealed off from the rest of the economy.[xii] At its height, throughout the 1850s and 1860s, the spike in guano exports was accompanied by stagnation in almost every other economic sector.[xiii] The mining industry, which had rebounded during the late 18^th century, did not receive enough investment to sustain any meaningful level of economic growth. Production throughout the countryside came to a standstill, as the metropolis eclipsed its post-independence prestige. Rising wealth was not accompanied by effective reinvestment in diversifying the economy. While some urban plutocrats funneled money into sugar plantations as an alternative industry, it was simply not enough to counteract the fall of guano. The enclave was so tightly concentrated that it was as if the vast majority of the population had become a novelty to the increasingly powerful Lima plutocracy.[xiv]

Unlike populist movements that swept Latin America during the 20^th 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

Despite 130 years of Peruvian history and fundamental economic differences in today’s globalization, there still exist many underlying commonalties with the former bonanza days. Since 2006, Peru’s economy has expanded at an average of around 9 percent annually (with the exception of 2009), a rate eerily similar to the growth at the height of the guano boom.[xxii] Additionally, this recent boom is directly connected to rising global commodity prices, a result of increased demand from the ravenous appetite of the ‘Asian Tigers.’ Throughout January and February of this year, Peruvian exports to China rose by 12 percent, reaching USD 926 million and overtaking exports to the U.S, which totaled USD 889 million. More startling still, in the same period, exports to South Korea and India have increased by 245 and 238 percent, respectively.[xxiii] While British and U.S. export demands have been eclipsed by those of eastern nations, they still exert great pressures on the Peruvian economy. Indeed, economic euphoria during the boom years from 2006 to 2008 was still precariously tied to foreign markets in the face of a global recession. Amid falling demand in 2009, Peru’s GDP contracted briefly by 0.9 percent, but quickly rebounded in 2010 at a growth of 10 percent, directly following a recovery in China and its Asian neighbors.[xxiv] Chinese indentured servants have been replaced by Chinese capitalists, but the chain of commodity volatility remains securely shackled.

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 19^th 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.

Conclusion

The Guano era in Peruvian history was largely a developmental charade that left the nation confused and disoriented as it searched in vain for some semblance of progress to show for its boom time euphoria. As Peru struggled to piece its battered nation back together, Great Britain and the U.S. were able to walk away from the crisis with fertile fields rich in nitrogen and a hefty debt yet to be collected. The urban plutocracy, a class created from suckling on the pap of the bonanza, had invested some of its earnings in the coastal sugar industry, which started to expand as result. Meanwhile, mining began to recover some its former prominence, but the Sierra still remained underdeveloped; unfinished was the railway meant to incorporate it into the economic and political hub along the Pacific. Instability would continue to plague the Peruvian Government into the 20^th Century, a direct result of economic and political uncertainty. Another strongman, Augusto B. Leguía, would preside over Peru for fifteen years from 1908 to 1912 and 1919 to 1930, in a dictatorial attempt to preserve order before the Great Depression would force him from power. From a colonial silver boom to a guano bonanza, the Peruvian economy resembles a two-humped Bactrian camel pacing forward with an uneven gait. However, there is hope that modern Peru will be able to sustain meaningful progress into the new century and that the similarities with its shaky past prove only skin deep.

References for this article can be found here.