The Peruvian economy relies heavily on its natural resources approximately 15% of its GDP depends on it. Its main source of income comes from mining; Peru is one of the largest producers of cooper, gold and zinc in the world. It has large deposits of oil and is a producer of crude petroleum and petroleum products, coffee, potatoes, mangoes, asparagus, textiles and fishmeal. Its main market is the United States which accounts for 23.6% of its total exports followed by the European Union with 18.9%, China 11%, Chile 7.7% and Canada 5.5%.*
Looking for gold
Peru’s main imports are intermediate, capital and consumer goods such as petroleum and petroleum products, plastics, machinery, vehicles, iron and steel, wheat and paper. Most of the country’s imports come from the United States which account for 21.6%, followed by Brazil with 8.7%, Ecuador with 8.1% and China with 7.5%.*
Principal Exports $bn fob Principal Imports $bn fob
Copper 6.1 Intermediate goods 8.0
Gold 4.0 Capital goods 4.1
Zinc 2.0 Consumer goods 3.2
Fishmeal 1.3 Other goods 0.1
Total including others 23.8 Total including others 14.9
Source: The Economist World in Figures 2009 edition.
Much of the economy depends on the international price of its main commodities. Between 2007 and 2008 the economy grew 9% a year due to higher world prices for mineral and metals. In 2009 growth decelerated to 1% brought by world recession, lower demand in industrialized countries and lower prices of commodities. The decrease in world prices did not last very long thanks to Asia’s economic strength, Peruvian commodity prices regained ground in 2010. Over the past decade the country had benefited from the foreign exchange that high commodities prices bring in turning its balance of payments into surplus.
Economic dependence on raw material is not enough to sustain a thriving economy in the long term. There is nothing wrong with producing raw materials but relying on it brings a number of risks. The first one is volatility; the prices of commodities fluctuate heavily in an uncertain economy. Second, high prices can appreciate the currency making its manufactured products and non commodity exports more expensive. And third, are the depletion and environmental damage that producing non-renewable commodities bring to the environment.
Salt mine in Peru. Peru’s trade is dependent on natural resources.
The agro industry and textile sectors have made significant efforts to diversify and add value to its export base. However, the bulk of the country’s trade is concentrated in three main products: gold, copper and fishmeal which represent 50% of the value of total exports. There are many reasons that explain the backwardness in the development of the country’s exportation base. Many years of macroeconomic, political and institutional instability brought low investment in different sectors of the economy. Low access to credit, which has improved in the last years, has been a hurdle for small companies. The competitiveness of local companies in international markets, as well as the adoption of new technologies that add value to commodities lagged behind for decades but it is currently improving at an accelerating rate backed by government programs. Low investment in research and development has been historically low compared to Asia.
The export sector is most affected by the lack of infrastructure, especially in transportation. The country’s opening to foreign trade in the 80s and 90s brought fewer benefits than it should have brought because of its poor transportation network. Clogged ports and airports and high freight costs are part of the lack of investment in infrastructure that affect the export sector.
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%.
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.
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.