Question 19M.2.SL.TZ0.4a.ii

Chinese investment helps Peru to develop

1. Over the past decade, Peru has been one of South America’s fastest-growing economies, with an average economic growth rate of 5.9 % and low average annual inflation of 2.9 %. This has been mostly due to a favourable external environment, sensible macroeconomic policies and reforms of environmental regulations designed to increase investment in Peru’s profitable mining sector. However, the deregulation in the mining sector has been opposed by environmental groups and trade unions, fearing increased pollution and poorer working conditions.
   
   
2. Strong growth in employment and income has dramatically reduced poverty rates. Absolute poverty fell from 27.6 % in 2005 to 9 % in 2015.
   
   
3. Gross domestic product (GDP) growth continued to accelerate in 2016, very much helped by higher mining export output as several new large mining projects entered into production and reached full capacity. Peru mines and exports many commodities, including copper, gold, lead, zinc, tin, iron ore, silver, and oil and petroleum products.
   
   
4. China is Peru’s main trading partner, taking 22.1 % of Peru’s exports and supplying 22.7 % of their imports in 2016. Chinese companies are also significant suppliers of foreign direct investment (FDI) to Peru, recently investing over US$2 billion to purchase a hydroelectric power plant. The second main trading partner is the United States (US), taking 15.2 % of Peru’s exports and supplying 20.7 % of their imports in 2016.
   
   
5. Peru’s current account deficit declined significantly from 4.9 % to 2.8 % of GDP in 2016, owing to increasing export growth and lower imports. Peru’s government continues to support a free trade policy; since 2006, Peru has signed trade deals with 17 different countries including the US, Canada, China and Japan. In addition, a trade deal has also been signed with the European Union.
   
   
6. Real GDP growth is expected to slow slightly in 2017 due to an anticipated lower growth rate in the mining sector and weak private investment. To support the economy as mining production slows, the government is expected to increase public investment in 2017.
   
   
7. Growth projections may not be achieved if any, or a combination, of the following occur: external shocks in commodities prices, a further deceleration of China’s economic growth, unpredictability in world capital markets and the threat of tight monetary policy in the US. Raising economic growth requires structural and fiscal reforms to improve productivity, reduce the size of the informal sector and improve the efficiency of public services.

[Source: adapted from “The World Bank Country Overview: Peru”, http://www.worldbank.org/en/country/peru/overview, 17 April
2017; and “The World Factbook”, https://www.cia.gov/library/publications/the-world-factbook/geos/pe.html, 6 September 2017]