Not All in One Basket

Over the past decade, Peru’s economy has experienced remarkable economic growth, riding the wave of high commodity prices and demand from China, and outpacing most of its Latin American neighbors in terms of GDP growth, poverty reduction, low inflation, and low public debt. From 2004 to 2013, Peru’s average growth rate was 6.6%, the second highest in the region. In the same period, average inflation was just 2.9%, the lowest among its neighbors. Between 2004 and 2012, the country achieved a 32.9% reduction in poverty rates—again, the highest in the region.

In 2011, however, the end of a decade-long boom in global commodity prices led to a rapid deceleration in Peruvian growth rates, from 8.5% in 2010 to a projected 4% in 2015. This in turn has brought about re-evaluation of the structural challenges facing the Peruvian economy in terms of productivity, diversification, and informality. Compared to other countries in the region, Peru suffers from high levels of heterogeneity in its economy; much of the country’s economic activity is concentrated in a few wealthy regions and large companies. The country also has high levels of informality in the economy, with around 70% of urban workers employed informally. Finally, the country’s export basket has changed very little since the 1970s, remaining highly concentrated on commodities, of which 75% comprise exports. As a result, the IMF has said that Peru is likely to be the most affected country in the region by the current trend towards falling commodity prices.

In order to overcome these challenges and promote long-term sustainable growth, the government in 2014 launched the Plan Nacional de Diversificación Productiva (PNDP – National Productive Diversification Plan), which aims to develop “new engines of growth,“ according to Minister of Production Piero Ghezzi. Specifically, the plain aims to: achieve long-term sustainable growth rates, reduce economic dependence on natural resources extraction, reduce regional productivity gaps, and increase the level of quality formal employment.

The program is divided into three axes: diversification of the country’s export basket, improvement of the regulatory environment for doing business, and increasing domestic productivity and reducing gaps between regions, segments, and sectors.

The first axis of the plan, diversifying the country’s export basket, focuses on correcting market failures in sectors where the country has significant export potential, particularly those where innovation and technology can help the country take advantage of global value chains. In order to achieve this, the country is taking steps to promote innovation and entrepreneurship. One major step will be the program Start-Up Perú, set to finance 268 entrepreneurs and 20 small-business incubators. The country also plans to improve the regulatory environment to facilitate angel investors, and create a program to assist small businesses in obtaining patents more easily. In addition, in 2016, the government will create the Instituto Nacional de Calidad (INCAL — National Quality Institute), which will facilitate the accreditation of laboratories and business processes.

The second axis of the plan, improving the regulatory environment, focuses on reviewing simplifying regulations to ensure that they do not unnecessarily prevent investors from having profitable businesses in Peru. The Ministry of Production will play a leading role in this axis of the plan, reviewing existing regulations and monitoring the production of new regulations to look for ways of improving them. The Ministry will also commit to simplifying its own systems, and has already committed to reducing by 50% the time it will take to evaluate environmental impact studies (EIAs). The plan also aims to make it easier for Peruvians to pay taxes and request information from the government.

The third axis of the plan, the expansion of domestic productivity, aims to reduce the gaps in productivity rates between different regions of the country, sectors of the economy, and between small and large businesses. In order to support the growth of small businesses, the government will launch a number of programs to provide access to technology, consulting services, service providers, and financing.