Peru – A Rising Star?

Via flickr by Martin Garcia

photo by Martin Garcia

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Phoenix from the Ashes?

Peru formally gained democracy in 1980 but had endured much more violence in the years to come, mostly due to the rise of the infamous ‘Shining Path’ (Sendero Luminoso) insurgency. Shining Path suffered destructive blows during the presidency of Alberto Fujimori who used the army rather indiscriminately; government troops did not differentiate between civilians and insurgents. The bloody clashes between and insurgency and army pushed the country to the brink of civil war.

In face of growing instability Fujimori resigned and handed power over to a caretaker government that remained in charge until the 2001 elections which were won by Alejandro Toledo Manrique, who also happened to be first indigenous President and helped to move the country from its bloody past into a yet uncertain future.

The elections in 2006 produced Alan Garcia Perez as winner. Garcia Perez already ruled the country from 1985 – 1990 when he presided over a steep economic slump. In his second stint, however, he implemented reforms that would spark growth and introduced a higher degree of economic and political stability.

In 2011 the ex-army officer Ollanta Humala Tasso was voted President. He has been able to modify and thus entrench his predecessors’ reforms into the contemporary politico-economic environment, preparing Peru of economic take-off riding the wave of then-rising raw material prices with great skill. Although not his own effort Humala Tasso could claim a victory in a legal battle at the International Court of Justice. The ICJ ruled that Peru’s neighbour Chile’s claim to sea territory off the northern coast as a leftover from the Pacific War in 1879-1883 was invalid and the territory had to be returned to Peru. This verdict boosted Humala Tasso’s popularity, albeit without lasting effect—his approval dropped to 10 percent in June 2015. Yet, this slump does not affect overall government stability; Humala Tasso will most likely remain in power until the next elections.

Peru has around 30 million inhabitants and a relatively young and literate population. Given the country’s stability and ability to generate growth it has potential to overtake its next biggest rival Chile within the decade, perhaps sooner if Chile fails to clean up its massive corruption scandals and ideological toxicity within the political class.

Strong Economic Performance – Troubles Ahead

Economic data is rather optimistic for Peru. According to the World Bank, Peru grew 5.8 percent in 2013, largely untouched by the financial crisis still haunting major economies. Last year, however, Peru’s GDP collapsed to 2.4 percent amid deteriorating raw material prices – Peru will not be able to fully escape Latin America’s downward spiral. Still, the World Bank predicts growth resuming at a promising 4 – 5 percent for each of the next two years. This year 3.9 percent seem a realistic target. These rates are even more positive when compared to what is expected for Latin America on average – 2 percent next year and 2.8 percent in 2017.

These figures seem credible considering from Peru’s strong agricultural and industry sectors. Agriculture makes up 7.1 percent of the economy and produces goods like coffee, cocoa, and bananas which are forever in high demand. This will keep people employed and thus take pressure off the budget. Agricultural exports also link the country into the global economy and may result in other valuable trade deals.

Such deals would certainly benefit Peru’s overall GDP, as industrial production contributes 36.7 percent to it. The country’s prime industry is mining and mining refinery, main resources are gold and copper. The prices of these commodities then have huge influence of overall growth.

As reaction to downward pressure on mineral prices Peru offers generous tax cuts to the minging sector. This has created a favourable investment climate for the moment, but the high reliance of world market prices means that a complete turnover in the industry remains beyond the reach of the government.

Thus, even though the mining sector is stable for now, the ‘new normal’ of China’s 6 -8 percent growth spells trouble ahead, as demand will likely not rise to the levels of the recent past.

Peru enjoys excellent trade ties with the main economies such as China and the U.S. In 2014 China accounted for 18 percent of exports, while the U.S. share was 16 percent. Both the U.S. and China account for 21 percent of imports each. Peru also signed the recently concluded Trans-Pacific Partnership deal. Thus, Peru will become part of a vast Pacific trading zone to which it will certainly contribute greatly and gain even more from, further improving its socio-economic situation vis-à-vis other regional actors.

The Socio-Economic Situation

Some two years ago 23.9 percent of Peru’s population lived below the national poverty line, according to World Bank data. That is a sharp drop from 2009 when slightly more than one third of the population was considered extremely poor. Curiously, the fall in poverty occured in the midst of the period when all the major economies imploded. Poverty reduction in times of general crisis shows that the leadership is generally apt to steer the country through stormy waters.

More recently, first-quarter unemployment in the Lima Metropolitan region (the economic hub of the country) rose to 6.8 percent. This increase was accompanied by a general increase of the working population employed in relatively high paying jobs. Thus, universal education and an ever more sophisticated service economy seem to slowly bear fruit. A major threat to rising wealth, however, is inflation that rose to 4 percent in August up from 3.07 percent in January 2015. This figure presents the highest number in 18 months. Overall the rate has fluctuated in that same period between 2 and 3.8 percent. Similar ups and downs occurred in 2014, indicating that the inflation rate is quite unpredictable.

Going by the numbers, socio-economic inequality is at the same level in 2015 as was in 1986 (GINI coefficient of 45.3 percent). This is nonetheless much better than in 2000 when it was 56.6. Together with more high-paying jobs and the projected economic growth the tendency goes clearly downward despite occasional slight fluctuations, pointing to consumers increasingly possessing more wealth and thus potential.

This potential will be increasingly reflected in the market for, say, high-tech products. The population is generally tech-savvy (40 percent and counting use internet) and thus products like smartphones will remain in high demand. Sales of telecommunications equipment are further facilitated by a functioning telecommunications market with highly competitive prices and wide network accessibility.

The Weakest Spot—Security

Security woes occupy a high position on the policy-making agenda. Corruption, a reemerging Shining Path and drug trafficking dampen Peru’s outlook more than low commodity prices.

In August for example, security forces apprehended two Shining Path commanders in the wake of a series of offensives, showing that the insurgency still has the potential to wreak havoc. Currently the insurgency commands around 350 fighters and is rapidly evolving from a guerilla movement into a globally operating crime syndicate. Its activities now include money laundering, drug trafficking, and illegal gold-mining. The state counters such crime increasingly ruthless, arousing memories of the dark past, although violence at civil war levels is highly unlikely.

Drug smuggling takes place mainly via air routes between Peru and Bolivia, in which the the Apurimac and Ene River Valley plays a pivotal role. From Peru the drugs reach Colombia, the wealthy Chilean market, Buenos Aires in Argentina and from there are often shipped off to Europe. Peru’s geographic position makes it also a valuable hub for Asian crime syndicates.

In response to globally operating crime, and narco-crime in particular, the government passed a law that allows it to shoot down planes it deems suspicious. There is certainly a substantial risk to travelling through parts of the country.

Another worrying response to crime are the countless vigilante groups that spring up all over the country and spread their message via social media. Large parts or the population have lost faith in the authorities’ ability to persecute and punish criminals. Thus, in some places lynch mobs have formed that take punishment into their own hands.

Such a development may lead in the not so distant future to the creation of effectively lawless no-go areas if state authorities fail to keep a lid on these groups and do not mete out consequent persecution and punishment of crime.

Conclusion

Peru still deals with a lot of problems like corruption and organised crime. Nonetheless, the country deserves a top spot in the rising star category of the region.

Significant poverty reduction in times of global downturn and a rise of high-quality jobs, coupled with an educated population make for promising signs. Close relations with the world’s main markets, China and the USA, signal further positive development down the road, even though it may not advance at the same pace as it did hitherto.

Yet, this is unlikely to be of long-term concern. The recently concluded TPP deal further integrates Peru into the global economy and may serve to offset losses it endures as a result of a decelerating Chinese market and low raw material prices.

Tax cuts for the country’s key sector, mining, can do little to influence global prices, but keep the industry afloat until prices pick up again.

Peru’s biggest challenge is crime. A resurging Shining Path as well as drug smuggling via the Bolivian border bind much of the state’s resources and elevate corruption. In light of the state’s ineffectiveness in persecuting urban crime vigilante groups formed and challenge the law’s authority.

Peru’s best times are yet to come. The country has what it takes to compete internationally and if it succeeds to sort out its domestic problems is bound to grow at astonishing rates.

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