Tag Archives: Peru

Peru: potential growth hindered by politics

Politics and Economics are often grouped together by those who don’t particularly interest themselves in these subjects. As Economics students, we know that they are two very different things. But we often forget the significance of their coexistence. The world is witnessing so many cases where poor governance inhibits economic growth. Countries like Venezuela, which has the potential to be a significantly wealthy country, are held back (and destroyed, in Venezuela’s case) by incompetent and corrupt governments. The result is not only slow/negative growth, but also the lack of ability to grow because those who have wealth are too afraid to invest it in their own country. In the United States, this is not even considered because the US is perhaps the best/safest place to invest in the world. Whether or not this is actually true, what matters is that it is in fact the general belief worldwide.

Peru is a country that falls into this trend, though not to the degree seen in Venezuela. I will say, for purposes of reliability, that I am Peruvian and know a lot of information first-hand (especially about people’s views). It should also be noted that Peru is a country very much divided by socio-economic status and race (though this is improving). The current president of Peru, Ollanta Humala, initially ran for president in 2006 as a supporter of Venezuela’s Hugo Chávez; he lost that election and in 2011 reinvented himself as a “pro-Brazilian social democrat.” When Humala won the election, people feared that he would turn the country into Chavez’s Venezuela or Castro’s Cuba. Like in those countries, his supporters were mostly lower-class. But to many people’s surprise, and relief, Humala “opted to stick with the free-market policies that have brought a decade of strong growth.”

Peru had been growing significantly before 2011:

perupercap

Gross domestic product per capita nearly tripled from 2000 to 2010.

And real GDP nearly doubled from 2002 to 2011:

perugdp

Peru became an important emerging market by 2009, and recognized for its steady growth. Though growth has slowed since 2009, last year the country experienced a 5.6% expansion. Peru’s main exports are copper, gold and silver. As has been discussed by other students on this blog, China’s slow-down has had many repercussions worldwide. The decreased demand for copper, is largely the cause for this slow-down in growth. As for inflation, economists have raised their inflation projection to 2.8 percent from 2.6 percent for this year and maintained their 2.5 percent estimate for 2015. As well as a 5.7% growth estimate for 2014.

So the economy in Peru is doing well. Investment is significant, but it largely from foreigners. Though Humala’s government has done decently on the economic side, people are very distrustful of the government (and not just the current one). In Peru, a common joke among citizens is to compare stupid, incompetent, or corrupt people to those in Congress. Basically, the government has little credibility and this is influencing those with the power to invest in Peru’s financial markets. With this growth, there is an immense amount of money flowing into pockets. While I was there in December, a family friend (a very wealthy one) explained to me that there are so many people with millions that don’t know where to invest them. Since they fear the government’s instability, corruption, and dishonesty, they don’t want to invest their money in the country. And, like you probably guessed, most invest in the United States; the current fad is to invest in real estate (mostly Miami).

Thus, Peru is growing steadily and is looking at a bright future. However, the political situation is still holding back potential growth. If Peruvians saw Peru’s market as a safe investment, there would be a considerable effect on the economy. But the fact that the country has a very long history of corrupt and unstable governments (my own grandfather led a military coup), makes it difficult for people’s fears to subside anytime soon. Before that can even be considered, though, there have to be major changes in the Peruvian government — and that doesn’t seem likely in the near future. Although Peruvians are discontent with the government system, they are accustomed to it.