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Peruvian Economy

Peruvian Economy

Economic History & Economy in Peru Today

The Peruvian economy is an emerging, social market economy highly dependent on foreign trade and classified as an upper middle income economy by the World Bank. The country has among other smaller sectors rich deposits of natural resources, huge agricultural potential, good fishing grounds, a traditional textile industry and enormous tourism capacities.

Introduction

Peru is located in the central part of South America and borders on the north with Ecuador and Colombia, on the east with Brazil and Bolivia, on the south with Chile and on the west with the Pacific Ocean. Peru is the third largest country in South America after Brazil and Argentina and ranks among the 20 largest countries in the world. The country's location facilitates the access to markets in Asia and North America.

The Peruvian territory covers an area of 1,285,216 square kilometers and can geographically be divided into three regions:

  • The Coast, or Costa, is a narrow desert strip along the Pacific Ocean approximately 3,080 km long, and accounts for only 10.7% of Peru's territory, but is home to 58.8% of Peru's population (approximately 19.3 million citizens). The political and financial capital of Lima and the rich fishing grounds and agricultural cultivation areas are in this region.
  • The Peruvian Highlands, or Sierra, is the area of the Andean Mountains, covering 31.8% of national territory and serving as home to 27% of the country's population (approximately 9 million citizens). This region contains the country's major mineral deposits.
  • The Amazon Rainforest, or Selva, is with 57.5% of the country's territory the largest region, but only 14.2% of the Peru's population (approximately 4.7 million citizens) live here. The area is rich in petroleum, gas and forestry resources.

Economic History of Peru in a nutshell

The Peruvian economy is historically based on the country's geographical conditions. The different climate zones facilitate widespread agriculture; the Andes mountains rich in mineral resources allow mining; and the Pacific Ocean with its - thanks to the Humboldt current - fish-rich waters make commercial fishing possible.

Already ancient civilizations used the existing resources wisely and skillfully, developing a highly complex and effective economic organization while using the vast natural resources in harmony with the environment. Farming, trade and small-scale mining were the backbone of their economy. The Incas, for example, built a vast empire with no markets and money just with a system based on trade and services. The well-organized state relied on the clever management and refinement of agricultural and mining productivity, a brilliant infrastructure, collective community work and a well-fed labor force.

With the Spanish conquest of Latin America in the 16th century, the social and economic structures of the Incas were eliminated. New technologies, European crops and animals, as well as the usage of money, were introduced. While farming, trade and services had to take a backseat, the large-scale exploitation of Peru’s rich mineral resources, and here especially silver, were systematically organized and on the back and at the expense of the enslaved local population pushed forward. The blossoming mining industry not only made the Spanish noblesse within Peru and back home rich, but the Viceroyalty of Peru the most important, most powerful, and wealthiest overseas territory of the Spanish Empire.

Spanish rule in Peru (1533 - 1824)

Political History of Peru
After the Italian explorer and navigator Christopher Columbus on its way to find a new route to India and the Spice Islands set foot on the Caribbe...

After declaring its independence in 1821, Peru had a hard time with the transition from the feudal society imposed by the Spanish Viceroyalty to a self-governed Republic; (civil) wars, border conflicts, a lack of economic resources and trade resulted in an empty treasury. However, when in the mid-19th century the prices for guano (droppings of seabirds - an effective fertilizer and gunpowder ingredient) skyrocketed on the world markets, the exploitation of enormous deposits along the Peruvian coast and offshore islands led to an economic boom. For decades taxes on this industry were the principal source of government revenue, allowing a modernization of Peru. The costly internal development programs such as the construction of a railroad system across the Andes mountains and the establishment of a primary, secondary and higher education system combined with internal rebellions, territorial disputes with neighboring countries and last Spanish attempts to regain power however not only disrupted the economic development once more but also drained Peru’s treasury heavily.

After independence Peru had a hard time with the transition from the feudal society imposed by the Spanish Viceroyalty to a self-governed democrati...

The lost War of the Pacific (1879-1894), which arose from a dispute between Chile and Bolivia over valuable mineral deposits in the Atacama Desert and in which Peru as Bolivia's ally was heavily involved, left the country devastated and without its mineral rich southern provinces.

War of the Pacific (1879 - 1884)

Political History of Peru
The War of the Pacific, also known as Saltpeter War or Ten Cents War, arose from a dispute between Chile and Bolivia over valuable mineral deposits...

After the war, the government initiated several administrative and economic reforms leading to an export boom, a diversification in the national economy, and an emerging local manufacturing sector. However, just when Peru saw solid growth rates and a stable economy, falling export prices and the Great Depression in the 1930s set the country back once again.

At this time drastic demographic changes started. Over the next decades, until the end of the century, the population not only tripled, but the country experienced a dramatic migration into cities, especially to Lima. While in the 1930s around two-thirds of the population lived in rural areas and only one-third in larger cities, today over 80% of Peru's population calls urban areas home. The lack of an adequate infrastructure in all areas and the absence of proper urban planning and regulations encouraged, among many other problems, the development of slums and the emergence of a huge informal sector which to this day challenges the country.

With the alternation between civil governments and military regimes in the 20th century, Peru embraced anything from free-market policies to economic nationalism; the latter bringing Peru financially, economically and socially to its knees in the late 1970s and resulting in a time of political instability, a collapsed economy, hyperinflation, social unrest, poverty and terrorism in the late 1980s. Peru lay in ruins.

As we have seen so far, since independence Peru’s political scene was characterized by presidents, civilian governments and parties reflecting the ...

Instability in Peru from 1980 to 1990

Political History of Peru
After General Francisco Morales moved the Velasco's revolution into a more conservative "second phase" reviving the country's economy by denational...

President Alberto Fujimori's election in 1990 introduced a decade with a dramatic turnaround in the economy and significant progress in ending terrorism. He implemented drastic, but extremely successful economic reforms and austerity measures and embraced neoliberal economic policies privatizing state-owned companies, removing investment barriers and significantly improving public finances. While his policies led to a rapid recovery of the Peruvian economy, his dictatorial regime including corruption, embezzlement and human rights abuses aren't forgotten to this day.

In the 1990 elections, voters concerned about the disastrous economic situation, inflation, the increasing threat from Peru's terror groups, drug t...

The Toledo government successfully consolidated Peru's return to democracy. His strong economic management and promotion of foreign investments, including the signing of free trade agreements, and implementing various investment projects in infrastructure and human development, led to an impressive economic boom in the country which laid the foundation of Peru's future success.

The presidential election of 2006 saw the return of Alan Garcia who, after a disappointing presidential term from 1985 to 1990, returned to the presidency. While many in Peru and abroad had strong doubts at the beginning of Garcia's presidency, they were surprised later. Garcia embraced free markets and free trade, making Peru one of Latin America's top destinations for foreign investment. Despite the global economic and financial crisis foreign investment in Peru increased, the economic status of the country improved, public debt dropped, and foreign reserves went up.

In June 2006 Alan Garcia, candidate of the Popular Revolutionary Alliance (APRA) was elected president once again. After a really disastrous presid...

And even President Ollanta Humala, feared as a socialist and left-wing nationalist who promised the "poor and disenfranchised" Peruvians a fair share of the wealth from Peru's key natural resources, in the end embraced neoliberal policies. And while the economy continued to boom during the first two years of his term in office, by 2014 the decline in international demand for Peru’s natural resources slowed the country’s economy.

Additionally, a huge corruption scandal surrounding Brazilian construction company Odebrecht which had carried out numerous major infrastructure projects in Peru and lots of other bigger and smaller projects and had admitted to having paid more or less US$ 29 million to Peruvian officials between the early 2000s and 2014, and other irregularities that emerged during investigations rattled Peru’s political establishment badly. And while President Kuczynski and President Vizcarra, both continuing Peru's neoliberal economic policies, were removed from office, the country was among the world’s twenty emerging market economies and was considered one of the best-performing countries in the region with a stable economy and excellent uninterrupted growth rates.

 At least until Covid...

Peru's Economy Today

As it has been already centuries ago, Peru's economy today reflects its varied geography; the different climate zones facilitate widespread agriculture; the Andes mountains rich in mineral resources allow mining; and the Pacific Ocean with its - thanks to the Humboldt current - fish-rich waters make commercial fishing possible. Additionally, Peru's geographical regions (coast, mountains and jungle) with their rich flora and fauna, as well as the country's cultural and historical heritage attract an increasing number of tourists.

Today Peru's economy still heavily relies on exports making the country's economy vulnerable to fluctuation in world market prices and to world economic policies and decisions. While implementing favorable macroeconomic policies and environments, following aggressive free trade strategies and promoting foreign investments made Peru one of the world's fastest growing economies in the 2010s with a dynamic GDP growth rate, a stable currency exchange rate, a low inflation rate and promising prospects for the coming years, exactly these policies also promoted corruption as well as social inequity and unrest as many Peruvians still don't benefit from the economic growth and increasing wealth.

In March 2020, the Corona virus arrived in Peru. Taking the spreading of the virus, chaotic states in hospitals and deaths in other countries, the state of the public Peruvian healthcare sector, which already under normal circumstances might be considered disastrous, and the fragile health of many Peruvians into account, President Martin Vizcarra introduced some of the strictest and longest anti-Corona measures in Latin America declaring a Public Health Emergency and a State of Emergency including closing all borders and suspending all international and national travel, suspending all work in the public and private sector, implementing strict quarantine regulations and prolonged curfews. While these measures couldn't prevent extremely high infection and death rates, Peru's economy suffered immensely; with foreign trade restricted, national economic activities paralyzed and tourism non-existent, the GDP plummeted by over 11% while poverty increased by 10%. However, due to extensive aid and economic stimulus packages, analysts are certain that Peru can maintain its economic stability, tackle the crisis and might already by the end of 2021 or in 2022 see promising growth rates again.

GDP

After politically and economically devastating times in the second half of the 20th century, since the beginning of the new millennium Peru’s neoliberal policies resulted in an economic boom - with a few minor hick-ups.

From 2000 to 2010 the country had one of the highest GDP growth rates in Latin America and the world. Even though growth slowed down a bit over the past few years and saw a hefty drop due to Covid in 2020, Peru is still considered one of the best-performing countries in the region with a stable economy and one of the top emerging market economies. Analysts are certain that Peru will recover from the Covid crisis quickly and predict a promising future with good to excellent growth rates and lots of business and investment opportunities.

Inflation

Because of a good economic management over the past years, Peru remains one of the Latin America countries with the lowest inflation rate enabling the country to refine favorable conditions for free-markets, foreign investment and economic growth, as well as to further put emphasis on for Peru non-traditional sectors.

 Inflation rate Peru 2007 - 2020
Inflation rate of Peru from 2007 to 2020 (data source: INEI)

Poverty & Extreme Poverty in Peru

For decades poverty affects large parts of the Peruvian population. However, thanks to continuous economic growth over the past 20 years, the increase of public services, especially in rural areas, and the implementation of numerous social programs Peru could significantly reduce poverty and extreme poverty.

Although an increasing number of Peruvians benefitted from the country's good economic standing in the last two decades, inequality persists and the distribution of the growing wealth to all Peruvians seems difficult. Especially in rural areas the situation remains alarming.

And with the Covid crisis poverty reduction efforts experienced an enormous setback; poverty increased by nearly 10% to 30.1% and extreme poverty by 2.2% to 5.1%.

Labor market & Employment

Despite Peru’s political stability, exceptional economic performance, and improvements on the labor market over the past two decades, the country still struggles with three major problems which the Covid crisis even further exacerbated:

Underemployment: As of March 2021, only about half of employed Peruvians were adequately employed, while the other half was underemployed. Peru differentiates between “underemployed by hours”, people who work less than 35 hours per week and want to work more (about 30% of underemployed people) and “underemployed by income”, so people who work more than 35 hours per week but earn less than the minimum reference income (nearly 70% of all underemployed).

Informal Employment: For many decades Peru tries to get a grip on the informal employment; in vain. In Peru the informal sector not only includes dodgy illegal activities such as drug cultivation and trafficking or illegal mining but also a large number of individuals and businesses working in a wide range of areas such as agriculture, manufacture, services, sales, etc. to make ends need but without registration, without any kind of social security, without financial protection and without paying taxes. Nationwide about three-quarter of the economically active population earns their living as informal workers; in rural areas even over 95%.

Wages: Since 2018 the minimum wage in Peru is S/ 930 per month (less than US$ 250). Even though the average monthly income increased continuously over the past years, in rural areas it’s still less than the minimum wage, and in urban areas can hardly offset rising prices.

Trade Balance - Imports and Exports

Since Spanish rule, Peru’s economy is driven by the exploitation of the country’s rich mineral resources and heavily relies on their exports. Today about a quarter of Peru’s GDP is generated by exports making the economy not only susceptible to turbulences in the world markets and declining international demand for Peru’s resources, but also to fluctuations in commodity prices.

Over the past 20 years, Peru’s export sector registered exceptional growth rates - except a few hiccups during the world economic crisis in 2009 and during the financial crisis around 2015. The Corona crisis in 2020 once more showed Peru’s dependency on exports which due to restricted foreign trade, a decline in international demand and paralyzed national economic activities declined by nearly 15%.

Peru’s main export trading partners in 2020 were China (28.3% of exports), the US (16.1%), Canada (6.2%), South Korea (5.8%) and Japan (4.4%). Top exported goods in 2020 included ores (34.1% of exported goods) and here especially copper ores (over 70%), zinc ores and lead ores, precious metal such as gold and silver (17.2%), fruits (9.9%), copper (5.8%) and petroleum (3.8%).

With a growing economy, Peru's imports increased over the past two decade as well. However, in 2020 plummeted by nearly 20%. As already in 2019 Peru’s main import trading partners in 2020 were China, the US, Brazil, Mexico and Argentina; main imported goods included petroleum, machinery, vehicles and iron and steel.

Economic Sectors

For centuries Peru’s economy heavily relies on mining and the fishing sector, with the potential of the agricultural sector, which already in pre-Hispanic times played an important role, being rediscovered over the past 20 years and other sectors such as the energy and hydrocarbon sectors, the financial and insurances sector and the tourism sector only gaining importance in the past two decades.

Mining

Peru belongs to the countries with the largest variety of minerals in the world which are exploited on a large scale since Spanish rule in the 16th century. Since then mining is the sector driving the country’s economy and - due to an increase in mining activities - contributing to a large extent to Peru’s development in the past decades and to the country’s revenue. And investments in mining, the extension of existing mines and the construction of new ones are further promoted.

Today the most important international mining companies operate in Peru and the country has some of the largest precious metal and base metal mines worldwide. In 2020, Peru was the world’s second largest silver and copper producing country, the third largest zinc producing country, the fourth largest molybdenum, lead and tin producing country, the 8th largest gold and cadmium producing country, and the 10th largest selenium producing country.

Non-metal minerals are mostly used nationally in the construction industry, ceramics industry, and in a lesser degree the fertilizer and chemicals industry. Among the non-metal minerals with greater potential are diatomite, bentonite and borates, and phosphates.

Fishing

Since ancient times fishery plays a key role in Peru’s economy. Today Peru is one of the world’s leading fishing countries, among the top largest fisheries by catch volume and the world’s leading fishmeal producer making the fishing industry the second highest source of foreign income (after the mining sector).

The country has nearly 2500 km (1500 miles) of coastline and thanks to the cold-water, rich in nutrients Humboldt Current, Peru's maritime territory is home to a great diversity of fish, mollusk, squid, crustacean, echinoderm, and algae species.

Around 50 saltwater fish species including anchovetas, jumbo flying squid, bonito, black skipjack tuna, mackerel, hake and mahi-mahi are caught commercially. While only a quarter of catches are intended for direct human consumption (fresh, frozen, canned or cured), the fishing industry in Peru is driven by the export of fishmeal made from Peruvian anchovetas, a fish species of the anchovy family rich in proteins, vitamins and essential fatty acids, which is used as animal feed and fertilizer around the globe.

Additionally, over the past two decades Peru established a steadily growing aquaculture sector with prawns and scallops farmed along the Peruvian coast, trout in the Andean highlands, and tilapia, paiche and other Amazon fish in the jungle regions.

Agriculture

Well before our time agriculture was the key to the development and thriving of ancient civilizations and later highly sophisticated cultures in today’s Peru. Studies suggest that as early as 10,000 to 12,000 years ago, potatoes and squash, later peanuts, grains such as quinoa and amaranth, other crops and cotton were domesticated not only feeding a growing population but also allowing a flourishing trade. With the Spanish conquest agriculture took a backseat and only was rediscovered as an expandable and lucrative part of the country’s (export) economy three decades ago.

Peru is a mega diverse country comprising 84 of the 104 life zones acknowledged in the world in its 11 natural eco-regions. This broad variety of climates allows growing practically any crop, some even all year round. Over the past 20 years the growth in the agricultural sector was impressive, making Peru one of the top players in world markets for several (organic) agricultural products and making agriculture increasingly important to the country’s export economy.

However, this growth was mainly driven by large-scale farms operating in the fertile valleys and dry desert areas along the Peruvian coast. Agriculture in the Andean highlands and the Amazon jungle regions didn’t see large improvements and is mostly in the hands of small-scale farmers which battle with a lack of resources, infrastructure, and networks as well as a lack of access to national and international markets; nevertheless, the potential there is huge.

While coffee and sugarcane have been Peru’s traditional agricultural export hits in the 20th century, today a number of Peruvian fruits and vegetables are sought after in international markets. Peru belongs to the top asparagus, quinoa, blueberry, avocado, artichoke, grape, tangerine, garlic and onion exporters and is among the world’s leading organic coffee, organic cacao, organic banana, and organic mango producers.

Additionally, Peru has a vast variety of native cereals, (tropical) fruits and vegetables, herbs and other plants used traditionally as food, as (natural) medicine and for cosmetic and personal care that are mostly unknown to the world and offer a huge potential.

Tourism

After years of political unrest and economic difficulties in the 1980s and 1990s, Peru's tourism sector steadily gained ground over the past two decades. While in 2000 just 800,000 foreign tourists came to Peru, in 2010 already 2.3 million visited the country and in 2019 nearly 4.4 million.

No wonder. A rich cultural and historical heritage, amazing archaeological sites, a great biodiversity (coast, highlands, and jungle) and an internationally recognized gastronomy combined with excellent promotion campaigns and improvements in tourism infrastructure attracted an increasing number of tourists from around the globe; at least until Covid hit in 2020 and the country was shut down completely for months leaving Peru and its people with an 80% drop in tourists and foreign currency income generated by tourism.

Nevertheless, while still most foreign tourists primarily come to Peru to visit the famous Machu Picchu, and on their way there or back might visit a few other attractions along the classic southern tourist route such as Arequipa, Titicaca Lake with its islands and Colca Valley, Cusco and Sacred Valley, a few increasingly take an interest in the countless other amazing sights Peru has to offer which include but surely aren’t restricted to the Sacred City of Caral, the Paracas National Reserve, the Kuelap Fortress, the Nazca Lines, the Gocta Waterfall, Manu National Park and so many more. And being crowned the Gastronomic Capital of Latin America the “ugly duckling” Lima with its beautiful historical city center, many museums, pre-Inca archaeological sites and excellent hotels, restaurants, bars, cafes and entertainment which for years most foreign visitors only regarded as unavoidable must on their way to other attractions in Peru, established itself as a destination.

Textiles

Even though the Peruvian textile industry is only a minor sector, it’s worth mentioning as it has its origin in the ancient cultivation of cotton and extraordinary textile dyeing and weaving techniques developed by pre-Colombian cultures. Today Peru is recognized for producing one of the finest cottons in the world, the Pima Cotton, which provides an exceptionally long fiber renowned for its strength, luster, and softness.

Additionally, Peruvian alpaca, baby alpaca and vicuña fibers are sought after internationally as they are not only extremely soft, durable and silky but also warmer than other wools, naturally hypoallergenic, and highly breathable. While much of the production is still in the hands of small-scale farmers and manufacturers, over the past two decades large factories equipped with state-of-the-art technology established themselves along the Peruvian coast.

Energy

Historically, Peru generated its electricity in large parts from hydroelectric power, being low on carbon emissions. At the end of the 20th century, the share of hydroelectric production was on average around 80%. However, with a growing economy, the country’s energy demand increased immensely and over the past two decades the energy matrix changed. Especially thermal electricity production mainly from natural gas became progressively more important, contributing today to Peru’s energy production with around 35% to 40%. However, while the share of electricity generated by conventional water sources may have decreased in the past 20 years, in absolute numbers, the energy generated by hydroelectric plants further increased as the total electricity production grew substantially.

With Peru’s commitment to decrease its carbon emissions, to promote green energy production in the country and by 2030 generate 15% of its total electricity production based on renewable energy resources, over the past 5 years huge investments were made in solar plants and wind farms.

Today there are 7 solar plants with photovoltaic technology in the southern Peruvian regions of Moquegua, Arequipa and Tacna, with - at least for now - Rubi in Moquegua being the largest one in the country.

Due to its geography, Peru as well has an excellent usable wind power potential, mainly along the northern coastline and mountains areas of the Piura, Lambayeque, La Libertad, Cajamarca and Ancash regions and the southern Ica and Arequipa regions. Since January 2021, the Duna and Huambos Wind Power Plants, both located in the Chota province of Cajamarca on 2,400 m (7,800 feet) above sea level, are the largest wind park in Peru, followed by Wayra I located in Marcona, Ica.

 

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