Peru's "Look to Asia" Strategy Pays off

Peru is again on pace to end the year as one of the world's fastest-growing economies, due in no small measure to its ambitious strategy of economic diversification. In 2010, it finalized four new free-trade agreements (FTAs) -- three with Asian partners -- and launched the test phase of a joint stock exchange, Mercados Integrados Latinoamericanos (Integrated Latin American Markets, or MILA), with Colombia and Chile. Peru's global and regional trade diplomacy has resulted in more domestic investment and a larger network of export markets for Peruvian goods.

Peru's open-market policies can also be partially credited with the country's rapid recovery from the world economic crisis. Peru's economy is forecast to grow by 8.6 percent in 2010 -- a quick rebound to pre-crisis levels, which included 9.8 percent growth in 2008. In addition, Peru's capital, Lima, recently earned the distinction of being the third-fastest among 150 global metropolitan areas to recover from the crisis, trailing only Istanbul, Turkey, and Shenzhen, China.

The decreased vulnerability to international shocks through a diversified international market has been key to Peru's success.

Since the 2001-2006 presidency of Alejandro Toledo, Peru has embarked on an ambitious path of solidifying FTAs with the world's most-powerful economies -- a strategy that gained greater importance since President Alan García took office in 2006. The first step was the entry into force of the U.S.-Peru Trade Promotion Agreement in February 2009, which made permanent the duty-free status that Peruvian exports to the U.S. had been enjoying under the Andean Trade Preferences and Drug Eradication Act. As of 2009, the U.S. was Peru's largest trading partner, representing approximately 18.4 percent of its overall commercial relations.

But the U.S. agreement was just one step in a larger global strategy of diversification, with an emphasis on trade and investment opportunities in Asia. As a member of the Asia-Pacific Economic Cooperation group since 1998 -- and as host of the 21-member summit in 2008 -- Peru has laid out a coordinated, focused strategy of seeking out Asian trade partners that offer new markets for its primary goods as well as interest in investing in the Peruvian economy. The result has been to double and often triple its trade capacity while bringing in the necessary investments to build domestic capacity. Simultaneously, as GDP per capita increased from $2,044 in 2001 to $4,345 in 2009, Peruvians have looked to Asia for new sources of affordable consumer goods.

The Peru-Singapore FTA, which went into effect in August 2009, gave Peru an entry into Asia and opened the door for high-tech and infrastructure investments from Singapore. In March 2010 came the all-important entry into force of Peru's FTA with China. The Asian giant is now Peru's second-biggest trading market, with two-way trade increasing 3.8 percent from 2007 to 2009, and representing 15.2 percent of total Peruvian trade. With the FTA, this number is sure to increase in the coming years.

In 2010, FTAs were also finalized with Japan, South Korea and Thailand in addition to an agreement with the European Free Trade Association, made up of Iceland, Norway, Switzerland and Liechtenstein. Along with the Chile, Mercosur and Canada FTAs, these agreements will allow 95 percent of Peruvian exports to reach their final markets with substantially reduced tariffs. The Peru-Thailand FTA, to be implemented in March 2011, will immediately slash duties on approximately 4,000 items and will eliminate the remainder of tariffs within five years. Peru's vice minister of foreign trade, Carlos Posada, has estimated that bilateral trade should increase ten-fold, to $2 billion, in the next five years.

Agreements with South Korea and Japan -- both to be implemented in the first half of 2011 -- will also open complementary markets. Within 10 years, the Japan FTA will eliminate tariffs on more than 99 percent of the value of goods traded. Only 749 products are excluded from the agreement, making it a better deal than what Chile or Mexico received in their negotiations with Japan. In addition, the Peru-Korea FTA could lead to a five-fold increase in bilateral trade, which should reach $7 billion by 2016, according to Peru's ambassador in South Korea.

President García is also embarking on new initiatives with his neighbors. The November launch of the MILA is expected to create the region's second-largest stock market, with daily trading volumes reaching $300 million. Consolidating the 560 firms listed on the three exchanges into one market will increase liquidity for Peruvian businesses while enhancing human and capital investment. At the same time, it will incentivize businesses not currently listed on domestic exchanges to formalize their operations and reap the benefits of a more-robust market.

Peru's trade activism has been mirrored on the diplomatic front, where relations with Chile -- frozen during the administration of Chile's former President Michelle Bachelet -- are improving, as symbolized by Chilean President Sebastián Piñera's visit to Lima last month. Despite the countries' ongoing maritime-border dispute before the International Court of Justice, Piñera and García signed agreements on energy, mining and extradition. García praised his counterpart's visit, which sparked an outcry from Chile's opposition legislators, as an "act of political courage." Just one month before, Peru also relaunched its relationship with Bolivia, giving the land-locked Andean country a 99-year deal to access Peru's port facilities, among other perks.

For Peru, the next challenge is making sure that growth also improves socio-economic equality nationwide. Life expectancy, literacy, education and family income have all generally improved, but significant differences remain between the advances in Lima and what is seen across the rest of the country, especially in the highlands and the Amazon, where many basic government services -- including education, sanitation and health care -- simply do not reach.

Peruvians will elect a new president in April 2011, and Alejandro Toledo is currently the front-runner, according to a Dec. 6 poll by Datum Internacional. But whether he or the other two top challengers -- Congresswoman Keiko Fujimori or former Lima Mayor Luis Castañeda -- are elected, one thing is certain: Peru's economic advances are on solid, and diverse, foundations.

Read the article at World Politics Review.