Abstract
This Selected Issues paper focuses on policies to promote high, sustainable growth in Peru, the risks posed by dollarization, and key medium-term fiscal issues of decentralization and social security reform. The paper identifies the main impediments to output and employment growth and proposes steps to remove them. It uses a balance sheet approach to analyze Peru’s highly dollarized economy, and finds that the factors explaining Peru’s relatively low international trade levels are related to the impediments to growth. The paper also looks at the main impediments to high, sustainable output, and employment growth in Peru.
IV. Why are trade levels low in Peru?30
Main Findings and Recommendations:
Peru’s trade is relatively low according to a range of indicators. Higher trade can support Peru’s broader objectives of sustained growth and job creation.
The concentration of exports in capital-intensive sectors, often associated with weakness in other tradable sectors, presents an important but not insurmountable challenge for Peru: However, experience suggests that countries can capitalize on their natural resources to foster broad-based growth by creating a strong enabling environment.
Institutional and regulatory shortcomings, as well as infrastructure gaps are important constraints to robust trade. In contrast, Peru’s trade regime and exchange rate do not appear to be key factors driving low trade levels.
Stronger and more diversified trade will depend upon:
continuing efforts to liberalize trade policies;
fostering public and private investment in trade related infrastructure;
reducing regulatory uncertainties and strengthening legal protection for investment;
increasing flexibility of labor policies; and,
strengthening conditions for technology transfer and effective R&D.
A. Introduction
64. Despite substantial progress in efforts to liberalize trade, Peru’s trade levels are low relative to most other developing countries, including those with similar trade policies, and to levels predicted by theoretical models. This paper examines why this is the case and proposes steps the Peruvian authorities might consider in response. Higher trade can benefit the Peruvian economy through more durable growth and job creation while helping to reinforce the resiliency of the economy to external shocks (Box 1).
Benefits to Higher Trade Levels for Peru
Trade as driver of growth. Berg and Krueger (2003) point to empirical evidence that the level of trade is a significant explanatory variable for the rate of growth and real GDP per capita, with changes in the level of trade positively correlated with changes in income per capita. Recent studies also stress the benefits of import competition in spurring innovation, reducing scope for rent seeking, and fostering the diffusion of knowledge thereby increasing the productivity of exporters, which is particularly important for countries like Peru with relatively small domestic markets.
Trade as driver of job creation. Higher trade can have a positive impact on employment, though this would depend on the composition of exports. A high share of labor-intensive exports, including in manufacturing, would increase such gains.
Insulation from external shocks. The 2002 WEO notes that Latin American economies, including Peru, have a relatively high degree of financial integration with the world economy, but are more closed in terms of the level of trade. The report finds that countries with higher trade are more resilient to external debt and currency crises. Higher trade levels allow the current account to respond more vigorously to an exchange rate or income shock, buffering the effects of capital account shocks. Higher trade provides an important hedge against currency risk associated with borrowing in foreign currency, and a more diversified export base can mitigate the potential impact of cycles in the demand for any given product. In the case of Peru, low trade levels result in relatively high ratios of external debt and debt service to trade, often cited by international rating agencies as a major impediment to Peru’s achieving an investment grade rating.
65. Peru’s natural resource endowment creates special challenges to growth in other tradable sectors, but can also serve as a catalyst for higher and more diversified trade. However, such gains require a strong enabling environment for trade-related investment. The chapter is organized as follows: Section B compares Peru’s historical trade performance with that of other countries. Section C points to possible explanations for the relatively low level of trade. Section D concludes with actions that can support higher levels of trade in Peru.
B. Peru’s Trade History
Trade since 1980
66. Trade levels have recovered slowly from their low levels in the early 1990s. 31 The low level of trade is in part a legacy of the economic dislocations in the second half of the 1980s, when trade in merchandise and services fell sharply. Stabilization of the economy and liberalization of trade and balance of payment rules during the 1990s has led to a slow recovery in recent years, driven by merchandise exports. However, trade remains relatively low and concentrated in primary sectors.
Trade in Goods and Services 1980-2003P
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Trade in Goods and Services 1980-2003P
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Trade in Goods and Services 1980-2003P
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Changes in Export and Import Levels
as a Percent of GDP
Changes in Export and Import Levels
as a Percent of GDP
| 1980-2003 | 1980-1992 | 1992-2003 | |
|---|---|---|---|
| Imports of goods | 1.7 | -3.8 | 2.1 |
| Imports of services | -5.5 | -5.7 | 0.2 |
| Export of goods | -4.8 | -8.8 | 4.0 |
| Exports of services | -1.9 | -11 | 0.3 |
Changes in Export and Import Levels
as a Percent of GDP
| 1980-2003 | 1980-1992 | 1992-2003 | |
|---|---|---|---|
| Imports of goods | 1.7 | -3.8 | 2.1 |
| Imports of services | -5.5 | -5.7 | 0.2 |
| Export of goods | -4.8 | -8.8 | 4.0 |
| Exports of services | -1.9 | -11 | 0.3 |
International comparison of Peru’s trade levels
67. Peru’s trade is low relative to a range of comparator countries. This was not always the case. Indeed, in the early 1980’s trade represented 44 percent of GDP, which was in line with other developing countries and above average for those in the Western Hemisphere. However, the decline in trade beginning in the late 1980s and the moderate increase since the mid-1990s have translated into trade levels that are now well below the average for developing countries, including most countries in the Western Hemisphere. Peru’s level of trade is now about a quarter of that of East Asian economies.
68. Peru’s trade is also relatively low compared to countries with similar, relatively open, trade policies32. Peru’s trade was relatively high versus those comparator countries at the beginning of the 1980s, but is now much lower.
Openness: Exports and Imports of Goods and Services as a Percent of GDP
Five year averages used to smooth polential volatility in single year data
Excludes US and Canada
Using the IMFs index of overall trade regime restrictiveness (IMF, 1998.)
Openness: Exports and Imports of Goods and Services as a Percent of GDP
| Period (5 Year Averages)1 | 1980-1984 | 1990-1994 | 1998-2002 | Increase 1980-84 to 1998-2002 | Increase 1980-84 to 1998-2002 | |
|---|---|---|---|---|---|---|
| Peru | 44.1 | 27.9 | 33.4 | -10.8 | 5.5 | |
| All Countries | 38.8 | 38.5 | 47.6 | 8.8 | 9.1 | |
| Developing Countries | 42.8 | 42.6 | 52.9 | 10.1 | 10.3 | |
| Western Hemisphere2 | 31.2 | 28.2 | 36.8 | 5.6 | 8.7 | |
| South America | ||||||
| Argentina | 14.0 | 16.0 | 26.S | 11.8 | 10-8 | |
| Bolivia | 46.1 | 40.6 | 45.1 | -1.1 | 4.4 | |
| Brazil | 29.6 | 15.5 | 24-0 | -5.6 | 8.5 | |
| Chile | 38.2 | 52.9 | 59.8 | 21.6 | 6.9 | |
| Colombia | 36.6 | 36.1 | 36.6 | 0.0 | 0.5 | |
| Ecuador | 38.7 | 49.7 | 55.8 | 17.0 | -0.1 | |
| Uruguay | 41.0 | 38.6 | 38.5 | -2.5 | -0.1 | |
| Other Western Hamisphere | ||||||
| Cosla Rica | 76.6 | 76.7 | 92.4 | 15.9 | 15.7 | |
| Mexico | 25.3. | 32.0 | 40.8 | 15.6 | 8.9 | |
| East Asia | 89.8 | 105.7 | 136.4 | 46.6 | 30.7 | |
| Countries w/similar trade policies3 | 39.2 | 39.4 | 49.4 | 10.1 | 9.9 | |
Five year averages used to smooth polential volatility in single year data
Excludes US and Canada
Using the IMFs index of overall trade regime restrictiveness (IMF, 1998.)
Openness: Exports and Imports of Goods and Services as a Percent of GDP
| Period (5 Year Averages)1 | 1980-1984 | 1990-1994 | 1998-2002 | Increase 1980-84 to 1998-2002 | Increase 1980-84 to 1998-2002 | |
|---|---|---|---|---|---|---|
| Peru | 44.1 | 27.9 | 33.4 | -10.8 | 5.5 | |
| All Countries | 38.8 | 38.5 | 47.6 | 8.8 | 9.1 | |
| Developing Countries | 42.8 | 42.6 | 52.9 | 10.1 | 10.3 | |
| Western Hemisphere2 | 31.2 | 28.2 | 36.8 | 5.6 | 8.7 | |
| South America | ||||||
| Argentina | 14.0 | 16.0 | 26.S | 11.8 | 10-8 | |
| Bolivia | 46.1 | 40.6 | 45.1 | -1.1 | 4.4 | |
| Brazil | 29.6 | 15.5 | 24-0 | -5.6 | 8.5 | |
| Chile | 38.2 | 52.9 | 59.8 | 21.6 | 6.9 | |
| Colombia | 36.6 | 36.1 | 36.6 | 0.0 | 0.5 | |
| Ecuador | 38.7 | 49.7 | 55.8 | 17.0 | -0.1 | |
| Uruguay | 41.0 | 38.6 | 38.5 | -2.5 | -0.1 | |
| Other Western Hamisphere | ||||||
| Cosla Rica | 76.6 | 76.7 | 92.4 | 15.9 | 15.7 | |
| Mexico | 25.3. | 32.0 | 40.8 | 15.6 | 8.9 | |
| East Asia | 89.8 | 105.7 | 136.4 | 46.6 | 30.7 | |
| Countries w/similar trade policies3 | 39.2 | 39.4 | 49.4 | 10.1 | 9.9 | |
Five year averages used to smooth polential volatility in single year data
Excludes US and Canada
Using the IMFs index of overall trade regime restrictiveness (IMF, 1998.)
Predicted trade level for Peru using a standard gravity model33
69. Peru’s actual level of trade is lower than its expected trade using a standard gravity model (Box 2). Peru’s size, wealth, and distance from trading partners imply a higher level of trade, which suggests the existence of broader institutional and/or policy barriers to trade. In contrast, East Asian countries have consistently “over-traded” compared to predicted trade levels, with the degree of over-trading rising over time. Peru does, however, “over-trade” with other Latin American economies, which may reflect regional trade agreements, as well as the fact that Peru’s oil imports come almost exclusively from regional partners.
Gravity Models
Gravity models of international trade provide benchmarks for assessing trade performance. Gravity models postulate that the scale of trade flows between two countries relates positively to their joint size (GDP) and income (GDP per capita) and negatively to their distance (due to the effect of transportation costs).
A country “under-trades” if actual trade is below expected trade and “over-trades” if it is higher. Under-trading suggests the existence of barriers to trade outside the model’s parameters, which could derive from a range of policy and institutional constraints, including—but not limited to—trade policies.
70. The degree of under-trading in Peru is estimated to be even higher when its relatively open trade and payment regime policies are considered. The average difference between actual and predicted trade increases from 13 to 35 percent when variables for trade and financial restrictiveness are added to the standard gravity model.34
Degree of Undertrading 1995-1999, Average Difference between Actual and Predicted Tirade, in logarithm?1
Based on a gravity equation estimated far the WEO (2002) with data averaged over the period
Degree of Undertrading 1995-1999, Average Difference between Actual and Predicted Tirade, in logarithm?1
| Extraregional Trade | |||||
|---|---|---|---|---|---|
| All Trade | Intraregional Trade | Total | Developing Country | Industrial Country | |
| Peru | -0.13 | 0.32 | -0.18 | 0.13 | -0.34 |
| South America | -0.11 | 0.44 | -0.15 | -0.34 | 0.18 |
| East Asia | 0.45 | 0.96 | 0.42 | 0.40 | 0.45 |
Based on a gravity equation estimated far the WEO (2002) with data averaged over the period
Degree of Undertrading 1995-1999, Average Difference between Actual and Predicted Tirade, in logarithm?1
| Extraregional Trade | |||||
|---|---|---|---|---|---|
| All Trade | Intraregional Trade | Total | Developing Country | Industrial Country | |
| Peru | -0.13 | 0.32 | -0.18 | 0.13 | -0.34 |
| South America | -0.11 | 0.44 | -0.15 | -0.34 | 0.18 |
| East Asia | 0.45 | 0.96 | 0.42 | 0.40 | 0.45 |
Based on a gravity equation estimated far the WEO (2002) with data averaged over the period
C. Possible Factors Behind Low Trade in Peru
Concentration of trade in capital-intensive sectors?
71. Although recent research suggests that capital-intensive exports can be a springboard to broader-based growth, a substantial body of literature suggests that concentration of exports in primary sectors can hamper export sectors and constrain overall growth. The possible adverse effect of strong primary exports reflects the sometimes limited diffusion of technology and productivity enhancements to other sectors, the long-term decline in commodity prices relative to those for manufacturers, and, in some cases, “Dutch disease.” However, recent studies (including by the World Bank, 2002) point to successful growth experiences in countries such as Finland, Australia and Sweden, which have been able to capitalize on their natural resources to foster broad-based growth and job creation (Box 3). While it is unclear whether the high concentration of Peru’s exports in primary sectors has constrained growth of its non-traditional exports, the country has been unable to capitalize on these resources as a catalyst for growth in non-traditional sectors and employment.
Empirical Studies of the Impact of Trade Concentration in Primary Sectors
Sachs and Warner (1995) found a negative correlation between exports of raw materials as a share of GDP and growth in developing economies during the 1970s and 1980s. While they do not conclude that natural resource endowments necessarily stifle broader growth in tradable sectors, they highlight the challenges that such endowments have created in many countries. The findings are consistent with earlier studies that associate the negative effects on growth with factors such as the long-term deterioration of commodity prices relative to imported manufactured goods prices, limited opportunities for technical progress, productivity gains and sustained job creation in natural resource-based sectors, and the potential appreciation effects of natural resource exports on the real exchange rate, as well as distortionary rent-seeking behavior that are often associated with natural resource sectors.47 The import substitution model adopted by many Latin American countries in the 1960s and 1970s sought to address these issues through diversification of production for the domestic market, but led to misallocation of resources and a diminution of competitiveness over time.
Trade concentration in primary sectors may also reflect broader macroeconomic and structural constraints to investment outside of high-return, resource-based sectors. The causalities may also run in the opposite direction, with natural resource price or yield volatility contributing to macroeconomic instability. A recent BCRP study highlights the fact that, while Peru’s exports are highly concentrated, the diversified base of mineral exports and the limited correlation of their prices has insulated Peru from the adverse affects of price volatility (De la Cuba and Ormeño, 2003).
De Ferranti et al (2002) point to the experience in a number of resource-based economies which shows that the curse of natural resource riches can be avoided. They find that successful resource-abundant countries, such as Finland, Australia and Sweden were able to grow fast and generate high-quality jobs by: (i) fostering openness to trade, market access, and FDI flows; and (ii) investing in human capital, better institutions, and public infrastructure that support higher productivity and competitiveness in natural resource sectors with positive spill-over into other sectors. They emphasize the importance of not rejecting comparative advantage based on natural resources, but capitalizing on it. Mining is noted, for example, to have been the main driver of growth and industrialization in the United States and Australia over more than a century. They find that with supporting policies and structural conditions, resource-based industries can prompt and benefit from advanced “knowledge systems” and can be associated with high productivity, technology spillovers, and forward and backward linkages that drive growth and job creation. Chile has successfully leveraged natural resources to support increased productivity and diversification of the export base (Villafuerte, 2003).
72. The low share of labor-intensive exports, including in manufacturing sectors, may also contribute to its relatively low levels of trade. 35 Increased fragmentation of production processes in recent years, particularly in manufacturing sectors, has supported increases in trade between industrialized countries and developing countries. Although there are some opportunities for intra-industry trade and vertical integration in raw material sectors, such opportunities are more limited. East Asian economies have been the main beneficiaries of this linkage given their concentration in labor intensive manufacturing sectors.36 Looking at the experience of East Asia, Radelet and Sachs (1997) point to the important contribution that labor-intensive manufactured exports has on total trade, technology transfer, economic growth, and job creation.37
Restrictive trade policies?
73. Although some impediments remain, Peru’s trade regime is relatively open and does not appear to be a key factor behind the country’s low levels of trade. Peru has liberalized its trade policy substantially over the past decade, supporting some expansion in non-traditional sectors. The average tariff has been reduced to 10.4 percent at end-2003, from 26 percent in 1990.38 Peru’s participation in a number of free-trade arrangements means that some goods enter duty-free, and almost all non-tariff measures have been eliminated.
74. Peru is currently benefiting from preferential access to the United States, its largest trading partner. The Andean Trade Promotion and Drug Eradication Act (ATPDEA) is supporting rapid expansion in non-traditional exports. Spurred by these preferences, Peru’s Central Bank (BCRP) estimates that textile exports, mainly to the U.S., grew by 18 percent in 2003 and will grow by over 20 percent a year through 2006, increasing their share of overall exports from 8.8 percent in 2002 to a projected 12.7 percent in 2006. However, Peru will face renewed competition with the elimination of quotas under the Multilateral Fiber Arrangement beginning in 2005 from countries with lower cost structures, such as India, Pakistan, and China.
Misaligned prices?
75. It does not appear that exchange rate effects have been a key factor constraining trade levels in Peru. Recent studies have suggested that overvaluation has contributed to under-trading in Latin America over time (Soloanga and Winters, 1999). However, basic measures of competitiveness do not present obvious evidence of overvaluation of the Peruvian currency during the 1990s. The real effective exchange rate is currently at its level a decade ago (though there were periods of appreciation of up to 15 percent over this period). The current account deficit has declined substantially to less than 2 percent of GDP, and exports have grown steadily, including in the non-traditional sector. At the same time, comparisons with third countries do not point to a loss in competitiveness of the Peruvian currency over the past decade. For example, an index of Peru’s real exchange rate against the dollar shows that its current levels relative to a decade ago are comparable to Mexico’s, slightly more appreciated than that of Colombia and Chile, and more depreciated than that of China. At the same time, Peru accounts for a slightly higher percentage of U.S. imports than 10 years ago (0.18 percent in the first three quarters of 2003, up from 0.13 percent a decade ago).
Real Exchange Rate (NC/$ Dec 1993 = 100)
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Source: WEO. Upward movement indicates real depreciation. Data set to cover past decade.Real Exchange Rate (NC/$ Dec 1993 = 100)
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Source: WEO. Upward movement indicates real depreciation. Data set to cover past decade.Real Exchange Rate (NC/$ Dec 1993 = 100)
Citation: IMF Staff Country Reports 2004, 156; 10.5089/9781451831047.002.A004
Source: WEO. Upward movement indicates real depreciation. Data set to cover past decade.76. While available data suggests that Peru’s unit labor costs remain relatively low versus regional comparators, they compare less favorably with Asian competitors39. For example, a recent BCRP analysis found that the cost of producing a garment in Peru is about 50 percent higher than in China (with labor costs 125 percent higher). At the same time, declines in labor productivity and rigidities in labor laws present important challenges for the future. ILO data indicates that labor productivity in Peru declined by an average of 1.4 percent between 1980 and 1998 (De Ferranti, et al, 2002). Regarding labor regulations, Peru scores a 73 in a World Bank index for regulation of hiring and firing, compared with a regional average of 61 and an OECD average of 45 (with 100 representing the highest level of regulation).
Policy and institutional factors?
77. Structural impediments appear to be a major constraint to increased trade. These impediments have resulted in limited investment outside of the mining and gas sectors, restricting the scope for higher and more diversified trade.40 Political uncertainty, legal and regulatory unpredictability, high internal transportation costs, as well as limited access to and high cost of credit are factors that affect production by Peruvian businesses for both domestic and external markets.41 In the 2003-04 Global Competitiveness Report Peru ranks 57 out of 102 countries in growth competitiveness and 79 out of 95 countries in business competitiveness.42
78. Peruvian exports are impeded by high logistical costs and transportation-related problems. The World Bank estimates that Peruvian firms spend on average around 30 percent of their revenues on logistics costs, roughly twice the amount spent by firms in Chile.43 Poor port infrastructure is a critical constraint with low past investment having left the ports without the machinery to facilitate cargo transfers to ships. Overall, Peru is ranked 66 by the Global Competitiveness Report on port administration, behind Mexico (55) and Ecuador (57), but ahead of Colombia (71).44 The World Bank estimates that improvements in port administration to half of the APEC average would generate an estimated US$2.7 billion (4.7 percent of GDP) in additional trade.
79. Investment in technology is low in Peru. De Ferranti et al (2003) find that fast-growing economies are able to foster high levels of innovation by facilitating adoption and adaptation of foreign technology through investments in education and focused research and development efforts. Peru, like most other Latin American economies, does not have a good track record in technological innovation. Investment in research and development is the lowest in the region and is not geared to the needs of the private sector (World Bank, 2003). Although progress has been made in educational achievement, this is not generating improvements in technological innovation.45 One issue may be the quality of education, with Peru generally ranking lowest among a number of Latin American countries in standardized testing by UNESCO of third- and fourth-graders.
D. Conclusions
80. Expanding and diversifying trade will be important for Peru’s broader objectives of sustained growth and job creation. The impressive progress that has been achieved in the past decade in stabilizing macroeconomic conditions and liberalizing the trade and payments regimes provides an important foundation, but more needs to be done to address the impediments to higher trade. Building the institutional, physical, and policy infrastructure to ensure that Peru’s strong natural resource sectors catalyze growth in nontraditional sectors will be a critical challenge in the coming years.
81. Ongoing development of the gas sector will support expanded trade in coming years. The Camisea gas project, directed to supply energy to the domestic market, has supported intermediate and capital imports in recent years. A second phase, expected to be launched soon, will be directed to export markets. However, development of this sector, while supportive of overall growth, will not be a major source of job-creation. Thus, it will also be important to continue to achieve diversification of trade by nurturing growth in nontraditional sectors.
82. Continuing efforts to liberalize trade policy will help diversify and expand trade further. Peru is actively participating in discussions toward a Free Trade Agreement of the Americas and is pursuing bilateral free trade agreements (FTAs) with a range of countries, including the United States. An FTA with the United States could provide important benefits in making permanent the temporary provisions under the ATPDEA and in serving as a catalyst for broader trade-reinforcing reforms.46 In August 2003, Peru joined Chile and Bolivia as an associate member of Mercosur, providing the basis for a gradual reduction in tariffs through bilateral agreements, with an immediate reduction of tariffs on “non-sensitive” items.
83. Increasing the dynamism of non-traditional exports will require addressing key impediments to productivity and investment, including through:
Increasing flexibility of labor policies to reverse the declining trend in labor productivity and improve the conditions for formal employment.
Reducing regulatory uncertainties and strengthen legal protection to reduce the cost of doing business, strengthen the investment climate, and expand access to affordable credit.
Increasing public and private investment in trade-related infrastructure to address the high logistical and transportation costs.
Achieving conditions for effective R&D and adoption of technology, which will require strengthening the foundations for strong investment, including from foreign sources, improving access to and the quality of education, and targeting R&D funding more effectively.
References
AT Kearney/Foreign Policy, January/February 2003, “Globalization Index”, Foreign Policy.
Berg, Andrew, and Anne Krueger, 2003, “Trade, Growth and Poverty: A Selective Survey,” IMF Working Paper 03/03 (Washington: International Monetary Fund).
Banco Central De Reserva Del Peru, Annual Report 2002.
De Ferranti, David, Guillermo E. Perry, Daniel Lederman, and William F. Maloney, “From Natural Resources to the Knowledge Economy: Trade and Job Quality,” Latin American and Caribbean Studies, World Bank, 2002.
De Ferranti, David, et al, “Closing the Gap in Education and Technology” Latin American and Caribbean Studies, World Bank, 2003.
De la Cuba, Mauricio and Arturo Ormeño, “La Volatilidad del Sector Primario Exportador: Una Aproximación al Caso Peruano,” BCRP Estudios Económicos, No.9, March 2003.
International Monetary Fund, 2002, World Economic Outlook, September 2002: Trade and Financial Integration, Trade and Finance (Washington).
International Monetary Fund, 1998, World Economic and Financial Surveys, 1998: Trade Liberalization in Fund-Supported Programs (Washington).
Ministerio De Comercio Exterior y Turismo Del Peru, “Plan Estratégico Nacional Exportador 2003-2013,” March 2003.
Mody, Ashoka, and Antu Panin Murshid, “Growing Up with Capital Flows,” IMF Working Paper 02/75 (Washington: International Monetary Fund).
Radelet, Steven, Jeffrey Sachs, and Jong-Wha Lee, “Economic Growth in Asia,” Development Discussion Paper No. 609, Harvard Institute of International Development, November, 1997.
Sachs, Jeffrey, and Andrew M. Warner, 1995, “Natural Resources and Economic Growth,” National Bureau of Economic Research Working Paper.
Soloanga, Isodro and L. Alan Winters, “Regionalism in the 1990s, What Effect on Trade?” CEPR DP 2183, June 1999.
Villafuerte, Mauricio, 2003, Chile—Export Specialization And Economic Growth In Chile IMF Country Report No. 03/312 (Washington: International Monetary Fund).
World Bank, “Peru: Microeconomic Constraints to Growth, the Evidence from the Manufacturing Sector,” October 2003.
World Bank, Doing Business, http://rru.worldbank.org/doingbusiness.
World Economic Forum, “Global Competitiveness Report 2003/2004,” September 2003.
Prepared by Michele Shannon (PDR).
Trade is measured as total exports and imports as a share of GDP. Alternative methodologies, including export values or volumes, yield roughly similar results.
Peru ranks a “2” on a 1 to 10 scale in the IMF’s index of overall trade regime restrictiveness, which is based on average import tariffs and non-tariff barriers (IMF, 1998). While the index suffers from measurement problems, it provides a rough gauge of openness. Peru does maintain specific protective measures for certain sectors, leading to some degree of tariff dispersion, particularly related to agriculture, though even this sector is relatively open versus the protection given to agriculture in most countries.
This section is based on gravity models estimated by Thomas Helbling for the September 2002 World Economic Outlook (Chapter III).
In general, financial and trade restrietiveness have significantly negative effects on expected bilateral trade flows. Restrietiveness is measured by current and financial account openness, the existence of multiple exchange rate regimes for financial account transactions and the stringency of surrender and repatriation requirements (Mody and Murshid 2002). The 2002 WEO suggests that a one-point increase in trade or balance of payments restrietiveness reduces trade volumes by 5 percent.
Only about 20 percent of Peru’s merchandise exports are in manufacturing sectors.
This study focuses on the importance of a strong enabling environment, including to promote labor-intensive manufactures. The authors argue that duty-free access to inputs and capital goods are particularly important to export-based sectors.
More than 65 percent of items imported to Peru carry a 12-percent rate; 20 percent carry a 4-percent rate, and the majority of the remainder carry a 20-percent rate. Peru maintains temporary surcharges on certain sensitive agricultural products, including corn, rice, sugar and powered milk, with rates of up to 25 percent.
A comparative analysis of real exchange rate movements based on unit labor costs is difficult due to limitations in labor cost data.
For example, foreign investment in non-mining tradable sectors during the 1990s concentrated in purchases of state owned enterprises, with little new investment in sectors such as fisheries, manufacturing, or forestry.
See Chapter II for a broader discussion of Peru’s investment climate.
In a similar study by AT Kearney, which measures global integration, Peru ranks 59 in a 62-country sample.
Freight costs for Peruvian exporters are 20 to 35 percent higher than those of their Chilean counterparts.
Peru ranks 65 in the Report’s index of air transport infrastructure quality, behind Mexico (44), Colombia (48) and Ecuador (63).
The average years of education in Peru has increased to over seven, on par with Chile and Spain, and the percent of the population with secondary and tertiary education is higher than would be expected for its level of GDP.
The United States purchases almost three-fourths of all clothing exports of Peru. The FTA is critical to clarifying future access arrangements and, thereby, supporting the investment in new capacity needed to support continued growth in the sector.
Recent research based on longer series show no relative gain in manufacturing prices, suggesting that the Sachs/Warner findings may be unique to the specific period covered (see De Ferranti et al, 2002, for a summary of these studies).
