Competitiveness of the Economy
In the 1970s two military governments led by Juan Velazco Alvarado and Francisco Morales Bermudez nationalized a big portion of the economy making them inefficient and uncompetitive. A period of hyperinflation and terrorism followed weakening the economy even further. But since 1990 the Peruvian economy has been growing rapidly. Alberto Fujimori’s government was corrupt and authoritarian but he created a competitive business environment. His government nationalized many industries and opened the economy to new investment and to market forces and as a result many business groups have emerged.
The informal economy provides opportunities for employment
Today too many businesses in Peru are still uncompetitive. According to the Inter-American Development Bank, the country as well as the whole region lags behind in total factor productivity compared to Asia. The total factor productivity is the efficiency with which it combines capital, technology and labor. Privatizations in the early 1990s by the government of Fujimori did increase productivity but it has not continued in the following years. The only area where the country has improved its productivity is in the area of agriculture where the government has put a conscious effort to industrialize and market agricultural products in the international market.
A street vendor in Lima, part of the large informal economy.
Some of the reasons why the Peruvian economy remains relatively inefficient are structural: the informal economy, lack of infrastructure, high payroll taxes, lack of access to credit, badly designed taxes and lack of competition. All these mean that businesses have less need to innovate.
Peru has a massive informal economy, according to Hernando de Soto, a Peruvian economist, it includes more than half the urban labor force in retail, services and industrial production. Its rapid growth started at the end of the 1960s when the military governments imposed higher taxes and regulations on businesses and as a result productivity and innovation deteriorated. High payroll taxes penalize the formal economy and generous labor laws discourage the creation of new formal job positions. The informal economy may be in part to avoid taxes and regulations but it provides opportunities for immigrants with little or no opportunity of employment and as a means of survival for those with little or no skills. People working in the informal market are not subject to safety or health regulations and are not part of the tax base needed to support public services.
Poor infrastructure could hold back Peru’s economic growth. Clogged airports and ports is a common occurrence in the country as well as the lack of road and railroad networks. But perhaps the biggest hurdle that small companies face is the lack of credit that would allow them to expand and modernize. This situation is starting to change due to the macroeconomic stability the country has achieved in the last 15 years. Consumer loans and small business loans are becoming more common and so are mortgages. Capital markets are expanding too due to the privatization of pension funds in the early 1990s becoming the first institutional investors in the country.
Peru has a market oriented economy. Its economy is driven by services which account for 53.2% of its GDP, followed by industry 26.2% and agriculture 8.7%.
Much of the economy depends on the international price of its main commodities, its main export is copper. Its main market is the United States which accounts for 23.6% of its total exports.
Peru follows the same economic trend as many other countries in Latin America basically, periods of economic recovery followed by periods of bad policy, political instability and economic decline.
Interesting facts about Peru