In recent years, Peru has had one of the best performing economies in South America, however, this has not always been the case. For most of the last thirty years, Peru faced stagnant economic growth, high unemployment and high levels of poverty. In 2006, the Government decided to implement a series of fiscal management policy measures to arrest the situation, stabilize the economy and promote growth. A key part of this development was achieved by means of external borrowing from the World Bank; and then using these funds to stimulate economic recovery through various public work programs and promoting foreign investment, especially in the natural resources sector.
Foreign Investment in Peru – Obstacles in Peruvian Economic Development
Some key obstacles that Peru had to overcome in order to promote economic development included:
- Lack of human capital
- High transportation costs
- The government bureaucracy that was inconsistent with promoting foreign investment
There were problems to be resolved in regards to inadequately trained human capital and the lack of research both in the scientific and technological fronts, which directly affected local production and business growth. In addition, there were challenges regarding high transportation costs and cumbersome business regulations that were not healthy for business.
World Bank Assistance
The Peruvian Government reached out to the World Bank for assistance, who encouraged them to borrow externally. The World Bank provided lending instruments with programmatic structures, allowing flexibility in choosing the preferred means of borrowing. However, before receiving funds, the Government had to enact internal reforms and adopt fiscal management policies to ensure that the funds would be well utilized. The Government improved budgetary accounting, strengthened fiscal rules and implemented efficient performance based accounting to demonstrate its’ commitment to the economic reform.
Upon implementation of these measures, results begun to be realized. International trade increased and Peru was able to export products to the divergent international markets; producing an enhanced national income. There was also noticeable increased equity in intergovernmental transfers and transparency in fiscal policy. The private sector benefited from these economic reforms since there was a reduction in transaction costs improving efficiency within businesses.
Now, the challenge that has to be faced by the Peruvian Government is to ensure sustainable economic growth. Also, it is important to consider the transforming of the available human and natural resources into sustainable development. Increased social spending clearly indicates that Peru is on the right path and has turned into an example to be followed by other countries in the region.