21 June 2007
Copyright 2007, Comtex News Network. All Rights Reserved. Jun 21, 2007 (DJCS via Comtex) -- By Robert Kozak Of DOW JONES NEWSWIRES LIMA (Dow Jones)--After years of watching Chile progress, Peruvians are hoping to improve their nation's image and match the economic and social developments of their southern neighbor. Peru wants to lower sharply poverty levels, obtain an investment grade debt rating and a free trade deal with the United States, all of which Chile, which Peru has at times considered a rival, has done. The World Bank's regional director for the Andean region, Marcelo Giugale, said this week Peru has a chance to become the next success story in Latin America. "The public policy decisions that are taken in the next five years could place Peru in a development path similar to that Chile, Costa Rica and Spain have followed in the last two decades," Giugale said in a speech at the central bank building in Lima. Chile's economic growth, which averaged 7% between 1990 and 1998, helped cement conditions that led to sharply reduced levels of poverty there. Economists say the success was due in part to an opening of the economy to trade, reduced public debt, an expanded domestic capital market, and tax increases that allowed for expanded social spending. Peru, meanwhile, suffered through the 1980s as different governments fumbled policies and terrorist attacks by the Maoist Shining Path group choked off investments. The economy took some steps forward in the 1990s but corruption and mismanagement in the government of ex-President Alberto Fujimori hurt progress. The economy has grown solidly since the turn of the decade, however, with the return of stable democratic governments and rising commodity prices. Banco BBVA Continental said in a recent report that including 2007, "there will be seven years of consecutive growth above the historical average of the last 55 years - 6.0% versus 3.8%." That bank's chief economist, Hugo Perea, said at a recent press conference that increased investments in Peru have helped bumped up production and consumption, which is in turn leading to more investments. "This is a little of what we are seeing now, a virtuous cycle," Perea said. Government Wants To Emulate Neighbor Many Peruvians still look at Chile with suspicion and envy, following years of territorial conflicts. One candidate in the 2006 presidential vote ran on a blatantly anti-Chilean platform. But the victor, Alan Garcia, has instead decided to treat Chile as a nation to be emulated. "We can't look at China nor at Chile with envy," Garcia said recently after awarding a private sector company a concession for a large copper deposit. He added that Peru, the world's third-largest copper producer, hoped to close the gap with Chile, the world's largest copper producer. Peru hopes to catch up to Chile in other areas. While Chile received investment grade ratings in the early 1990s, Peruvian officials hope to reach that level by next year or the following. Rating agencies Standard & Poor's and Fitch have Peru one step below investment grade, while Moody's has it two steps below. Moody's, however, put Peru's rating on review in early March, and a decision may be taken shortly. Economists say that continual fiscal surpluses, the strong gross domestic product growth and moves to improve Peru's debt structure are helping improve its credit picture. Peru has also built a thriving domestic capital market and copied Chile in starting a system of private pension funds that have amassed large amounts of savings. Peru's Congress, meanwhile, has approved a free trade deal with the U.S., although the pact still awaits approval in the U.S. Congress. Chile received a free trade deal with the United States in 2003. Chile's efforts have also reduced sharply its levels of poverty, from 38.6% of the population some 17 years ago to 13.7% in 2006, according to government statistics. That is also a key aim of the Garcia government, as about half of Peruvians live in poverty. The government wants to reduce that to 40% or less by 2011. "Increased spending on infrastructure and social programs - by reducing the country's high poverty rate - should make Peru a politically more stable country in the medium term," Credit Suisse said in a report this week. Roadblocks To Progress In Peru Remain There are roadblocks, though. Analysts say Peru needs to continue to reduce the dollarization of its economy, become less dependent on mining exports, and to strengthen its institutions, particularly the judicial system. Former Central Reserve Bank of Peru president Richard Webb wrote in a recent column in newspaper El Comercio that Peru's education system also needs a drastic overhaul. "With our education policies, how are we going to overcome Chile's development, a goal that has been set out by President Garcia?" Webb asked. © 2006 Dow Jones Reuters Business Interactive LLC (trading as Factiva). All rights reserved.
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