With a population over 30 million people, Peru is the 4th biggest country in Latin America
and one of the richest countries in terms of natural resources and biodiversity in the
world.
In this vast Andean country we can find, among many other resources, the biggest silver reserves,
the third biggest zinc and copper reserves, and the sixth biggest gold reserves in the
world.
In this video, we’ll talk about Peru.
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Peru is still a poor country, and there is still a great deal of development to be done
when it comes to its institutional framework.
But despite this, Peru stands out among its Latin American neighbours as a positive example
of good reforms.
And some even say that, if this process continues, we will soon be talking about Peru as a great
Latin American power.
Lima, its capital city, has already a bigger GDP than Bolivia.
Economic Evolution
Peru has recorded in the last decade the second biggest growth rate in all of Latin America.
In the same period, its GDP has more than doubled; the investment rate has gone from
13% of GDP to more than 20%; and the poverty rate, this is the percentage of people who
can't afford basic things (food, clothes, education and health care) has dropped from
rates of over 50% in 2000 to 22% today.
Which is less than half.
Not bad at all.
And hey!
Peru is one of the least indebted countries in Latin America and even worldwide!
Due to a strong determination to use public funds responsibility, an achievement reached
though the work of the previous governments of Oyanta Humala, Alan Garcia and Alejandro
Toledo- the public debt has been reduced to less than 50% since 2000.
And today, it represents little more than 20% of GDP.
But, how did Peru's prosperity begin?
Or better still, how did it reach such political consensus which maintains stability with the
government's budget while making pro-market policies?
This is probably one of the most interesting things
about Peru, and also where it can teach others a valuable lesson.
Recently, we’ve made a video talking about Venezuela…
Interestingly Peru’s economical situation in the 80’s was even worse than Venezuela’s!
So let’s see what happened.
80’s crisis
In the 70s at the beginning of the 80s, the Peruvian government bet on boosting the economy
through public investment, replacing imports, and restricting the purchase of foreign products.
To achieve this, they had to borrow money, which shot up the public debt.
The results were so bad that when the oil crisis happened in 1979 and their economic
growth slowed down, Peru’s government started to have so many problems that, in 1983 they
had suspend payments to their debtors.
In other words, they failed to pay their debts because they ran out of money.
The Peruvian government collapsed!
From that moment things went from bad to worse, and when Alan Garcia came to power in 1985,
the country was almost a complete disaster.
The government started to intervene on a massive scale fixing prices, and in the labour market
they reinforced the import replacement policies limiting the number of products to available
to buy, and setting an average tariff which reached, an amazing 66%!
The public deficit went through the roof and the
informal economy became the norm.
So, even though there were more than a hundred taxes, the State couldn’t manage to collect
them.
And since the government had collapsed and nobody wanted to lend them money, they were
in a bad position.
So, what did they do?
Well, they started to print more and more money, transforming the Inti [*pronunciation:
een-tee], - the Peruvian currency, into something with about the same value as Monopoly money.
As if this were not enough, the narco-traffic and terrorist actions of groups as Sendero
Luminoso and the MRTA spread out over the country causing tens of thousands of deaths.
The result?
At the end of the decade the GDP had dropped by 25%; GDP per capita was similar to 1960’s,
annual inflation exceeded 7,500% and the World Bank recognised Peru as one of the poorest
countries of the world.
The situation was so grave that the World Bank estimates, if it hadn’t happened, Peru’s
GDP and purchasing power parity would today be similar to Italy’s, Spain’s or South
Korea’s.
No more, no less.
In many ways the Peruvian crisis was very similar to the one which is facing Venezuela
today: a lot of public spending, a lot of taxes, plenty of printing money, combined
with violence and a drop in commodity prices.
When we released our video about Venezuela’s crisis many of you asked us what we wiykd
do to solve it.
Well, let’s see what Peru did.
A WAY TO PROSPERITY
In 1990 a strong plan of reforms and economic stabilization began.
That same plan still practically persists today.
It passed through these stages:
In order to slow down inflation, the Inti, the national currency, was replaced with a
new one, the New Sol and the “dollarization” (the use of US dollars in their economy) was
allowed in practice.
From that moment, monetary stability became a national priority.
The tax system was changed and simplified, removing 64 taxes.
The pension system was restructured, taking, as a model, the Chilean system of capitalisation,
but introducing many improvements.
(We’re actually going to talk in depth about this controversial topic in a future video).
Further, an ambitious program to attract investments and privatise public utilities was set into
motion.
Soon, companies such as Aeroperu, Electrolima and the Peruvian Telephone Company were privatised.
A “trade openness strategy” was approved which has led to a reduction of the average
tariff from the unbelievable 66%, to figures close to 1,5%, while at the same time numerous
free trade deals were been signed: including important ones with the US and European Union.
In 2002 a gradual decentralization of power started, which resulted in today most of the
public investment spending belonging to regions and municipalities.
And, finally, probably the most important point, was their commitment to budgetary stability,
something that every government since has respected.
Actually, in 1999 a law was approved called the ‘Fiscal Transparency and Prudence Law’
which restricts the discretionary power of the governments to spend more than they receive
- including corrective elements for public deficit situations.
Many experts assert that this is the most important law in the history of Peru.
It’s not all roses though, don’t think that we’ve forgotten Peru’s darkside - the
1990s and Alberto Fujimori’s authoritarianism, a President that today is in jail serving
a 25 year sentence for crimes against humanity and corruption.
As you can see, and I’m here talking specially to our friends from Venezuela, it doesn’t
matter how bad things are.
There’s always a way out.
PERU TODAY AND TOMORROW
So, why is Peru still a poor country today?
As we said at the beginning of this video, the institutional shortfalls and challenges
that this nation are facing are many.
Among them, we can’t stress enough the high degree of corruption and legal uncertainty,
something that we can clearly see with the “Death Squads case” - Where, under Oyanta
Humala's government, from 2011 to 2015, a group of policemen killed innocent people
for money.
This group included even a general and a major from Peru's National Police".
Further, the extremely high levels of crime and the risk that the mining industry could
entail the same rentier problems that today Chile suffers.
Not to mention the sharp contrast in the living standards among different regions.
On the 5th June, 2016, the second round of presidential elections was held where Pedro
Pablo Kuczynski was elected as the new President of the Republic of Peru.
These elections were the closest in Peru’s history and Kuczynski beat out his adversary,
Keiko Fujimori, Alberto Fujimori’s daughter, by little more than 40,000 votes.
The policies announced by Kuczynski include to keep working on the agenda of pushing competitiveness
and trade openness.
In this regard, he has pledged to reduce tax to 10% for SMEs (small or medium enterprises),
as well as to battle against bureaucracy, remove unnecessary regulations; and to pursue
regional economic integrations, similar to the TPP or the RCEP led by China.
If Kuczynski gets to remain at the helm and fight all the problems which affect Peru,
despite his relative political weakness in a not very friendly congress, I’m sure that
the growth of this Andean nation will continue, and will remain the leader for growth in Latin
America.
And maybe, in a few years, Peru (a young nation with a median age of barely 27) may emulate
the development of the Asian Dragons and get transformed into a major global power.
So, what do you think?
Will Peru manage to leave poverty behind and turn into an economic powerhouse?
Is Kuczynski the ideal person to achieve this?
Feel free to leave your opinion in the comments and subscribe to the channel by clicking here
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See you!
Or as we’d say in quechua, TUPANAMCHISKAMA