INSIGHT: Key elements of Peru’s ‘economic miracle’ still missing

LIMA (ICIS)–Despite political instability being the norm, sources in Peru’s chemicals industry, and outside of it, agreed on one thing: the economy has managed to plough ahead.

They all spoke of the Peruvian “economic miracle”. Despite a failed coup attempt and several ex-presidents imprisoned on corruption charges, the economy has enjoyed reasonable stability.

However, the country still carries a heavy burden: 70% of Peruvian workers are employed in the informal economy and that, obviously, puts a brake on its desire to leave the emerging economy tag behind.

Like most Latin American countries, 1 May was a public holiday in Peru, observing Workers Day. But most analysts agree that, for the majority of Peruvians, celebrating was not an option: duty called, like it calls most days of the year.

“Most of our compatriots today [1 May] do not celebrate Workers Day because if that job is not a job with rights, decent, safe, they do not have anything to celebrate. Those who can celebrate it are the minority of workers, that 30% who are formally employed,” labour lawyer Cesar Puntriano Rosas told the Peruvian daily El Peruano.

GROWTH, DESPITE ALL  
Peru’s economy took off during the 2000s under Alberto Fujimori’s term, with GDP growing during that decade in the high-single digits.

Political instability was more prominent in the 2010s, but GDP still managed to grow in the low-single digits. In total, the country accumulated 21 years with its economy expanding.

The pandemic-induced downturn hit GDP hard, down 10.95% in 2020, but the recovery was even sharper, with growth in 2021 at 13.35%. In 2022, growth stood at 2.7%.

The head of sales at chemicals producer Proquinsa, Diego Docarmo, showed surprise at how the economy had held up over the past few years, although said the December coup and high inflation have both contributed to lower confidence.

“The effect of high inflation is denting consumers’ purchasing power and they can feel it their daily lives: before the inflation crisis, I would spend around [Peruvian soles] Ns200 [$53.90] per week on food: that has now gone up to around Ns280/week,” he said in an interview with ICIS.

Peru’s minimum wage – for those employed formally – stood in 2022 at Ns1,025/month.

Politically, things got complicated from 2021. Left-leaning Pedro Castillo was elected President that year under the promise to renew politics and the country; he sold an image of a teacher from the provinces who came to represent the un-represented.

Disenchanted with most politicians, voters trusted him with the highest office.

His term was unstable, and he proved to be a poor leader of the executive. To round things up, in December 2022 he attempted a coup, which luckily lacked support from every social stratum and lasted just a few hours.

Despite being from Castillo’s party, the new President Dina Boluarte – the first woman to hold the highest office – has had to seek alliances in Congress, and that has moderated the tone.

In fact, chemicals sources in Peru sounded surprised and relieved explaining how Boluarte chose “very well prepared and pragmatic” people for key ministries such as economy or transport, according to the CEO of fibres producer Sudamericana de Fibras, Percy Muente, in an interview with ICIS.

Muente, as well as the country’s trade group for the textile sector, is hopeful this industry could expand greatly in coming years as the US seeks to lower its dependence on Chinese manufactured goods.

Peru’s natural fibres are renowned globally, and its textile reputation regionally indisputable. But if the country is to become the tailor for the Americas – a real possibility as the geopolitics of trade shift – this expansion could only come from greater petrochemicals usage.

The head for textiles at trade group Sociedad Nacional de Industrias (SNI), Martin Reaño, said in an interview with ICIS that the sector requires a specific law emulating that of the agricultural industry to allow it to more than double its exports.

The lobbying to the current government may bear fruit, given the indisputable argument: in 2001, Peru passed the Law for the Promotion of the Agricultural Sector (LPA, in its Spanish acronym), which made the sector boom.

According to official figures cited by Reaño, Peru’s agricultural exports shot up from $400m in 2001 to $8.0bn in 2022, thanks to the tax breaks and other incentives implemented by the LPA.

Agricultural exports would thus represent 3.5% of Peru’s GDP, which stood in 2021 – the latest data available – at $223.0bn.

For comparison, the country’s textile exports stood in 2001 at $600m; in 2022, they totalled $1.86bn.

“That is a good example of how the right regulation can help an economic sector which would also help the Peruvian state through higher tax receipts and by employing more people in the formal economy,” said Reaño.

To achieve higher, more productive growth, Peru must also improve its infrastructure, however. Peruvians’ anger at politicians is reflected on this point clearly: so much corruption has stopped or derailed several key infrastructure developments, holding growth back.

In an interview with ICIS, the head for chemicals at SNI, Rosa Maria del Castillo, was intolerant of corrupt politicians and highlighted how a well-intended decentralisation may have not worked favourably for infrastructure, something Boluarte’s cabinet would also be mulling to mend.

“The country clearly needs better infrastructure for chemicals and the wider manufacturing to thrive. The Callao port has practically become obsolete because of bad planning and lack of maintenance. We need to re-think how the country does infrastructure,” said Del Castillo.

“After each region was allocated their budgets for infrastructure spending, instead of focusing on that, they started building sport stadiums or bullfighting rings, to mention a few examples. While building those unproductive assets, they could also steal funds. Many of them have been imprisoned because of that, rightly so.”

This was something all sources also concurred on: the judiciary in Peru is working. New, younger judges and public prosecutors are fearing no pressure from parties or economic groups and are ploughing ahead with investigations.

Having three ex-presidents in prison is a sad picture, but it is also a sign that Peru’s state of law has strengthened.

Barbadillo, a prison just outside Lima, is the place where Alberto Fujimori (1990-2000), Alejandro Toledo (2001-2006, just extradited last week from the US), and Pedro Castillo (2021-2022) are imprisoned.

A fourth president, Alan Garcia (1985-1990 and 2006-2011), committed suicide when he was about to be charged with corruption allegations.

INSTABLE WORK: LESS CONSUMPTION 
Peruvian newspapers were full on Monday, Workers Day, of articles highlighting the same thing: with 70% of workers employed in the informal economy, the country’s economy is still facing a daunting task, the most daunting of all.

Informal work means basic needs are never secured, and that of course stops personal and entrepreneurial projects coming to fruition. It stops youngsters pursuing qualified and higher education, as many are forced to work to chip in at home.

Informal work means abuses from employers and fewer tax receipts to the state. Informal work being turned into formal work is the key to unleash Peru’s laborious population potential.

Propping up the textile sector could be a good start, but many other sectors would also need the attention of politicians. As the judiciary moved on, a new generation of Peruvian policymakers may see that more clearly.

Many visitors to Lima will stay at its fancy Miraflores, San Isidro or Barranco districts. Clean and green, they could be forgiven to think they are in a rich country’s capital.

But only around 200,000 Limenos live in those three districts. Real life in the sprawling 10-million people metropolis goes on elsewhere, much of it in the ‘cerros’, the hills: some sort of Peruvian favelas.

Bringing better and more secure work conditions for the less well-off Limenos and those living in rural areas, enabling them to take part in the economy with more confidence, is Peru’s daunting challenge.

Peru’s population stood in 2022 at 34m.

($1 = Ns3.71)

Insight by Jonathan Lopez