South America’s fourth most populous country, Peru, is looking forward to a positive economic period of trade. The mood is buoyed by a momentous free trade agreement with the US in 2006, which has already given a boost to one of the world’s poorest countries.

But Peru’s economic policy on trade has not always been so open and has included the expropriation of foreign companies alongside the creation of a large state-owned sector from the 1960s to the 1980s. The regime change to a liberalising government in the 1990s has been widely credited with returning economic stability to Peru after the removal of price controls, state ownership of enterprises and restrictions on FDI.

Advertisement

New approach

Peru’s current leadership welcomes foreign investment and regards it as a route to greater development, says vice-minister for foreign affairs Gonzalo Gutiérrez. And, although the IMF has projected a growth rate of 7% for 2008, development is sorely needed because more than half of the population lives below the national poverty line, according to World Bank statistics.

“Peru now has a very open economy with free movement of capital, and we are even considering special agreements in terms of tax breaks for investors coming from abroad, although these will be decided on an ad hoc basis,” Mr Gutiérrez tells fDi.

The country is in the process of building on the US trade agreement by negotiating investment protection agreements with a number of other countries, including Japan, where a recent presidential visit resulted in a bilateral investment protection agreement.

Peru has trade agreements with more than 30 countries, according to Mr Gutiérrez. He says that the country’s business community is keenly aware that FDI can be a catalyst for the country’s development. “Joint ventures are one way of receiving foreign investment, and many Peruvian enterprises are involved in joint ventures with foreign investors, especially in agri-businesses, and it is working very well,” he says.

In the mining industry, Peru’s biggest industrial sector, foreign firms are partnering with national companies, says Mr Gutiérrez: “Nowadays, there is a focus on corporate social responsibility, as we have learnt from the past. Companies investing in Peru are now aware of the social and environmental effects of their investments.”

Trade policies

Internal trade policies are as important as international agreements because one affects the other, says Mr Gutiérrez. The US trade agreement includes a competition policy chapter to promote competition on a small and medium-sized enterprise level. “One of the problems we have in Peru is the lack of formalisation of SMEs, so we are trying to focus on capturing those companies working outside the system,” he says.

Eliminating non-legal SME competition means eliminating tax evasion, in turn creating a better climate for the country’s major trade partners, which include the US, China, Brazil, and Chile, says Mr Gutiérrez.

“Peru has a big mining economy and that is where most of the outside investment is focused though there is some investment in agribusiness, and we are expanding our industry sectors and exploring biofuels and health services,” he says.

Alongside relative economic prosperity and increasing investment from abroad, another indicator that Peru is becoming a global player in world trade is the fact that it will host the APEC summit in November, which brings together the 21 economies of Asia Pacific Economic Co-operation. Mr Gutiérrez will be chairing the 2008 APEC senior official meetings at the event, which is set to increase Peru’s visibility on the world stage even further.