Nobody misses what they have until they lose it, by Claudia Cooper

By: Claudia Cooper

Peru has excelled in Latin America in economic growth and poverty reduction.

This result has not been gratuitous. It was based on the implementation of structural changes embodied in a new economic contract developed under the umbrella of the 1993 Constitution, whose pillars are represented in macroeconomic stability, private investment, and financial and commercial openness.

At the beginning of the 90s, the first reforms were enacted: the autonomy of the BCRP and the SBS, a tax reform (based on simplification), a solid investment protection legislation based on international integration and finally the creation of the pension system and mutual funds (which created the basis for the growth of savings in Peru).

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However, the 1997 crises (Asian and Brazilian) reached Peru amplified and weakened not only the financial position of the State, but especially of companies and individuals and with them the banks that lent them. We came to an abrupt halt in an expansive cycle that we think will last.

It took us more than 5 years to get back on track. The target inflation scheme and a new prudential regulation to the financial system (based on a new risk regulation) were introduced.

Additionally, one of the most successful fiscal institutional frameworks was designed and implemented globally: the fiscal responsibility law, the reform of the public pension system and new tax mechanisms aimed at reducing informality (withholdings, deductions, etc.).

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The proliferation of DU in fiscal management that the Executive has been resorting to in recent years is nothing more than the surrender to the all-important political negotiation of fiscal rules and the national budget, giving way to a dangerous dismantling of fiscal stability and budget transparency.

Macroeconomic reforms were joined by others aimed at raising competitiveness. The development of agro-export and the commercial opening started with the signing of the TLC with EEUU (and later expanded to many countries) did not arrive by inertia, but were the result of an enormous effort not only technical, but above all political. Both allowed the diversification of the foreign investment portfolio and with it the financing of the balance of payments, contributing not only to productive growth, but also to exchange and price stability.

Price stability is the basis for growth in consumption, while access to low interest rates that fiscal strength allows makes it possible for the public and private sectors to sustainably finance projects aimed at closing infrastructure and housing gaps.

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The political priority when it comes to infrastructure development has leaned in recent years to loosening controls, rather than improving public processes and the portfolio of private construction companies. We already know the result.

Thus, thanks to corruption and complacency, Peru’s potential growth projections have dropped substantially, and today we run the risk of losing leadership in the region.

The debate on the sustainability of growth has been going on for decades in Peru. For many, the Peruvian economy is excessively dependent on natural resources, impeding the productive development of the country.

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The extractive sectors (mining, oil and fishing) represent 15% of the PBI, while the other services, manufacturing and trade sectors constitute more than 2/3, the size of manufacturing being high compared to other countries in the region.

It is then worth asking if the important issue of productive diversification should be raised less as a matter of dependence on mining and more as a problem of business structure.

In our ecosystem of “formality” (where the entire public policy framework is designed to encourage less productive activities), people and companies choose informality because it is financially and rationally profitable. For a citizen who has the alternative of a RUS of 20 soles, access to health with a free SIS and a future non-contributory pension of P65, the logical thing is to stay small and on the margin of formality.

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The reforms aimed at the minority formal sector only widen the distance between the institutions and the majority of citizens.

Eliminate the business growth tax by homogenizing regimes, link tax formality to benefits such as health protection, mass use of technologies to streamline processes, detect elusive practices and minimize bureaucratic discretion These are aspects that we should demand in any tax reform.

The transformation of our regulations from a single sanctioning position to one of balance between incentives and sanctions is imperative. We live obsessed with auditing those we have in sight without making an effective effort to detect those who are not, and who seek to remain anonymous.

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And it is that the economic reality underlying our disconnected legality ends up being a tide that has been exponentially weakening any attempt to build institutions and progress in Peru.