Economics of Peru

Economics of Peru

The focus of this work is examining Peru's economic state and to conduct an analysis which determines the optimal direction that Peru should take in country development in the near future to optimize the country's economy. This study reviews an extensive base of literature and states suggestions and indications for the country of Peru and the initiative to further develop support and boost the country's economy.

ECONOMICS of PERU

The objective of this work is to examine the economics of Peru and the challenges faced by this economy in terms of future current global economics and financial challenges. Ultimately, this work will state economic policy guidelines and describe alternative actions or solutions along with the implications of the economic situation of that country.

EXECUTIVE SUMMARY

This work examines the country of Peru in terms of its economical outlook and makes suggestions of what the research in this study indicates might be done to better support economic development and growth in the country. Findings in this study include those as follows:

Because Peru fell in ranking from DB08 to DB09 in all but one category, it is indicated in this analysis that Peru should focus on making doing business in and with Peru a more profitable experience with greater levels of ease;

Peru should also focus on making it easier to hire and fire workers in the country in order to stimulate business growth and economic development. There should be a resolution of the rigidity of hours for workers as well as relaxing of the requirements on worker pay; and Taxes should be better aligned and coordinated so that the time required preparing; filing and paying taxes could be reduced. Additionally required is that Peru simplify the process in terms of the time and number of documents required for export of products.

COUNTRY BACKGROUND

It is reported in a December 2008 news release that health indicators in Peru have improved "dramatically in recent years..." (Inter-American Development Bank, 2009) Stated is that maternal mortality "... estimated at 265 deaths per 100,000 live births in 1996, fell to 185 by the year 2000, whereas infant mortality dropped from 46 per 1,000 live births in 1996 to 26 in 2006." (Inter-American Development Bank, 2009) There are however, stated to still be "sharp inequities related to socioeconomic status, geographic region, urban/rural living, and ethnicity. For example, the national infant mortality rate in rural areas is double that of urban districts, while 40% of rural children under 5 are malnourished, compared to only 13% in the cities." (Inter-American Development Bank, 2009)

In January 2009, it was reported that the Inter-American Development Bank is supporting the creation of "new sustainable energy matrix in Peru."

It is related that these programs will provide support for "an integrated approach to developing conventional and renewable energy sources. Peru will develop a New Sustainable Energy Matrix that will encourage the growth of hydrocarbon and renewable energy markets in an environmentally and socially responsible framework, with financial and technical support from the Inter-American Development Bank."

This matrix is described as "the centerpiece in a package of energy-related measures Peru has agreed to carry out under a U.S.$150 million programmatic policy-based loan (PBL) approved by the IDB Board of Executive Directors on January 28."

This policy-based loan (PBL) is stated to be an instrument that is "fast-disbursing" and one that will provide the resources needed by Peru's Treasury for finance of the programs which have been designed as priority programs. The report states "...Under the sustainable energy matrix program, Peru has committed to implementing specific measures that will maximize the benefit derived from hydrocarbons and renewable energy resources, promote energy conservation and efficiency, and foster the application of environmental and social safeguards in projects."

This process is inclusive of: (1) studies; (2) setting strategies; (3) institution strengthening; and (4) development of standards and regulations.

The design as well as the implementation of the new program will have as its focus the integration of the primary energy sources of Peru along with development of renewable and nontraditional energy sources and bioenergy.

Also developed will be energy efficiency measures as well as standards and consumer labels for household appliances as well as other equipment. Additionally stated is that the program will be inclusive of a 'Strategic Environmental Assessment" as well as novel approaches for making sure that participation of citizens in preparing hydrocarbon-related projects takes place supporting "the implementation of social responsibility and citizen participation mechanisms in calls for proposals, preparation of environmental studies, and environmental monitoring of energy projects.

Peru along with the IDB makes the determination regarding the level of existing cohesion of Peru's goals with the development strategies of the bank for the region. Peru's Operational Strategy for the term 2007-2011 are stated to include key objectives of addressing the reduction of poverty and equity promotion "in the context of economic growth." (Inter-American Development Bank, 2009) This strategy has as its basis the belief that poverty reduction and equity goals must be "linked with the objectives that sustained investment growth and higher productivity in all aspects of production." (Inter-American Development Bank, 2009) it is related that the way to achieve this is "through systematic and coordinated activity in the priority areas of the IDB's institutional strategy, namely competitiveness, integration, social development and State modernization." (Inter-American Development Bank, 2009) T

Three primary objectives are stated to be those of:

1) Raising the economy's productivity and competitiveness, by removing institutional obstacles to increased productivity and investment, and making structural investments in human capital;

2) Improving the efficiency of social policy, while implementing measures to mitigate poverty and protect vulnerable groups; and 3) Creating a modern, decentralized and efficient State. (Inter-American Development Bank, 2009)

The work of Estevadeordal and Martincus (2007) entitled: "Trade Policy and Sectoral Specialization in Latin America" states that trade liberalization leads to significant changes in countries' economic structures. The implied variation in the level and nature of specialization has important consequences for liberalizing economies. It is therefore extremely relevant for those countries pursuing trade liberalization initiatives to know how their specialization profiles would look like under lower trade costs." (Estevadeordal and Martincus, 2007)

Estevadeordal and Martincus (2007) state that over the past twenty years Latin American countries have "implemented broad and comprehensive trade reform programs starting from relatively high tariff protection levels. Removing trade barriers with respect to the rest of the world has proven to have a significant impact on Latin American countries' overall degree of manufacturing specialization. Thus, most of these countries have become increasingly specialized." (Estevadeordal and Martincus, 2007)

Peru signed a trade agreement known as 'NAFTA' with the United States as well as did several other Latin American countries. The NAFTA trade arrangement was to effectively establish a Free Trade Area of the Americas (FTAA) which would result in a "substantial deepening of Latin American countries' opening to the world which might be expected to accentuate the aforementioned trends." (Estevadeordal and Martincus, 2007)

Estevadeordal and Martincus (2007) relate that "a large relative endowment of capital favors specialization in food products and machinery, while that of forest and woodland negatively affects the relative importance of textiles and basic metals.(Estevadeordal and Martincus, 2007) Relative abundance of workers with primary education is stated to be "...linked to specialization in food products, textiles, and machinery." (Estevadeordal and Martincus, 2007)

ECONOMIC CHARACTERISTICS of PERU

Peru is "relatively abundant...in forest and woodland." (Estevadeordal and Martincus, 2007) Declines have been noted in a decline in workers with primary education, arable land, pasture land and forest and woodland" in Latin American Countries over the past twenty years. It is related that the "share of workers with post-secondary education" grew in Peru and all other Latin American countries during the same period of time. The following chart shows the Percentage Share of GDP of various industries in the country of Peru for the year 2001 of the FTA.

Peru Percentage Share of GDP

Source: Estevadeordal and Martincus (2007)

The World Bank report on Latin American Countries and specifically regarding doing business in the country Peru states the findings which are listed in the following table labeled Figure 2.

Doing Business in Peru

Ease of Doing Business 2009 rank

Doing Business 2008 rank

Change in rank

Doing Business

Starting a Business

Dealing with Construction Permits

Employing Workers

Registering Property

Getting Credit

Protecting Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

Closing a Business

Source: The World Bank (2009)

The challenges of launching a business in the country of Peru are stated by the World Bank to include:

the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita. (the World Bank, 2009)

The following table lists the comparison of indicators in Peru, for the Region and for OECD countries.

Ease and Difficulty of Launching a Business in Peru

Indicator

Peru

Region

OECD

Procedures (number)

Duration (days)

Cost (% GNI per capita)

Paid in Min. Capital (% of GNI per capita)

Source: The World Bank (2009)

The following table shows the procedures time and costs involved in construction of a warehouse, obtaining the licenses and permits necessary and completion of the required notifications and inspections as well as obtaining utility connections.

Procedures and Costs Involved in Warehouse Construction

Indicator

Peru

Region

OECD

Procedures (number)

Duration (days)

Cost (% of income per capita)

Source: The World Bank (2009)

Peru is stated to rank 149 among other countries in the 2009 ranking for 'Employing Workers' and rates 151 among other countries in the 2008 ranking for 'Employing Workers'. This shows a two spot advance for Peru in this category. Stated to be the difficulties employers face in hiring and firing workers are stated to be those shown in the following table. The index value assigned is between 0 and 100 with higher values in representation of regulations that are more rigid. The 'Rigidity of Employment Index' shown is the average of the three indices.

Rigidity of Employment Index

Indicator

Peru

Region

OECD

Difficulty of Hiring Index

Rigidity of Hours Index

Difficulty of Firing Index

Rigidity of Employment Index

Firing costs (weeks of salary)

Source: The World Bank (2009)

Peru is stated to be ranked 41 among other countries in regards to ease of registration of property for 2009 however; Peru was ranked 36 among other countries in 2008 for ease of registration of property. The ease afforded a business in securing property rights is stated to include the following procedures, or number of steps as well as the time involved and associated costs required for property registration.

Ease or Difficulty in Registering Property

Indicator

Peru

Region

OECD

Procedures (number)

Duration (days)

Cost (% of property value)

Source: The World Bank (2009)

Peru was rated 12th among other countries in getting credit for 2009 and in 2008 Peru was ranked 13th among other countries. The measures on credit information sharing and borrowers and lenders rights are stated in the following table. Ranges of the Legal Rights Index are 0 to 10 and higher scores indicate that the laws are specifically designed for expansion to accessing credit. The Credit Information index is a measure of the "scope, access, and quality of credit information available through public registries or private bureaus. The Range of the Credit Information index is 0-6 with higher values indicating that additional credit information can be obtained from a public registry or private bureau.

Ease or Difficulty of Accessing Business Credit

Indicator

Peru

Region

OECD

Legal Rights Index

Credit Information Index

Public registry coverage (% adults)

Private bureau coverage (% adults)

Source: The World Bank (2009)

Protection of Investors ranking for DB09 shows Peru ranking 18th for protecting investors which is a lower ranking that the previously assigned ranking of 15. The following table lists the indicators of:

1) Disclosure;

2) Director liability;

3) Shareholder suits; and 4) Investor protection. (the World Bank, 2009)

The indexes range between 0 and 10 with higher values providing an indication of higher levels of disclosure, higher level of liability of directors, and higher levels of powers of shareholders in challenging the transaction as well as higher levels of investor protection.

Indicator

Peru

Region

OECD

Disclosure Index

Director Liability Index

Shareholder Suits Index

Investor Protection Index

Source: The World Bank (2009)

The ranking of Peru in regards to business taxes being paid is stated at 85 in DB09 falling from the previous 81 in DB08 ranking. The table below labeled Figure 11 in this study illustrates the tax paid or withheld by a company that is mid-sized in a year's time in addition to the burden of administration taxes. Measures shown include the number of payments that must be made, the time in hours spent in preparation of the taxes, filing the taxes and finally, paying the taxes as well as the profit percentages that must be paid in taxes.

Indicator

Peru

Region

OECD

Payments (number)

Time (hours)

Profit tax (%)

Labor tax and contributions (%)

Other taxes (%)

Total tax rate (% profit)

Source: The World Bank (2009)

Peru ranked 93 in DB09 ranking for ease of trading across borders which is down from the ranking of 75 in the DB08 ranking in this category. The following table labeled Figure 12 in this study illustrates the 'costs and procedures involved in the importation and exportation of a standardized shipment of goods. Each official procedure is stated from the contract agreed upon between the two parties to the ultimate delivery of the goods.

Indicator

Peru

Region

OECD

Documents for export (number)

Time for export (days)

Cost to export (U.S.$ per container)

Documents for import (number)

Time for import (days)

Cost to import (U.S.$ per container)

Source: The World Bank (2009)

Peru was ranked 119 for both DB09 and DB08 for the ease or difficulty of commercial contract enforcement. This determination is made by tracking the history of a payment dispute and through specifically tracking the time, cost, and number of procedures required from the filing of the lawsuit through to the actual payment. These indicators for Peru, the Region and the OECD countries are shown in the following table labeled Figure 13 in this study.