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2010 1112 peru-cade_porter 2010 1112 peru-cade_porter Presentation Transcript

  • A Strategy for Sustaining Growth and Prosperity for Peru Professor Michael E. Porter Harvard Business School Urubamba, Peru November 12, 2010 This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard Business Review, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information may be found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009 1 Copyright 2010 © Professor Michael E. Porter
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers 2 Copyright 2010 © Professor Michael E. Porter
  • Peru’s Prosperity Performance GDP per Capita 1950-2009 (in 1990 PPP US$) CAGR: CAGR: CAGR: $6,000 +2.07% - 0.73% +4.41% $5,000 $4,000 $3,000 $2,000 $1,000 $0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009 Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009) 3
  • Prosperity Performance Selected Countries, 1999 to 2009 PPP-adjusted GDP per Capita, 2009 ($USD) $ 20,000 United States ($46,460) Canada ($37,840) $ 18,000 $ 16,000 Panama Russia Mexico Chile Argentina $ 14,000 Malaysia Trinidad & Tobago Uruguay Venezuela $ 12,000 Brazil Dominican Republic $ 10,000 Cuba Costa Rica Guatemala Colombia $ 8,000 Belize Thailand Peru Ecuador China $ 6,000 El Salvador Jamaica Bolivia $ 4,000 Paraguay Honduras Indonesia Philippines India Nicaragua Vietnam Laos $ 2,000 Haiti Cambodia $0 0% 2% 4% 6% 8% 10% 12% 14% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009 Source: EIU (2010), authors calculations 4
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper 5 Copyright 2010 © Professor Michael E. Porter
  • Export Intensity Exports as % Selected Countries GDP, 2009 80% Trinidad & Tobago 70% Panama Thailand Vietnam 60% Belize 50% Paraguay Honduras Cambodia Chile 40% Costa Rica Bolivia Nicaragua Jamaica Ecuador China 30% Canada Russia Uruguay Mexico Peru Indonesia Guatemala 20% Dominican Republic El Salvador Argentina Venezuela India Colombia Cuba 10% Haiti Brazil USA 0% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Change of Exports as Share of GDP, 1999 to 2009 Source: EIU (2010) 6
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper • Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER • Growth has been highly heterogeneous across different segments of society and different parts of the country 7 Copyright 2010 © Professor Michael E. Porter
  • Unemployment Performance Unemployment Selected Countries Rate, 2009 16% Improving Deteriorating Dominican Republic 14% Jamaica 12% Colombia India 10% United States Chile China Canada Ecuador Argentina Peru Bolivia Russia 8% Venezuela Uruguay Philippines Costa Rica Brazil Nicaragua El Salvador ParaguayIndonesia Panama Vietnam 6% Mexico Trinidad & Tobago 4% Malaysia Honduras 2% Thailand Cuba 0% -10% -8% -6% -4% -2% 0% 2% 4% 6% Change of Unemployment Rate in Percentage Points, 1999-2009 Source: EIU (2010) 8
  • Poverty Rates % of Population Under Peru, 2001 to 2009 the Poverty Line 60% 50% 40% 30% 20% 10% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010 9
  • Regional Poverty Rates Peru, 2004 to 2009 % of Population Under the Poverty Line Coast Sierra Lowlands 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010 10
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper • Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER • Growth has been highly heterogeneous across different segments of society and different parts of the country • Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility 11 Copyright 2010 © Professor Michael E. Porter
  • Exports as % GDP, 2009 Export Intensity and Size 140 Selected Countries Malaysia 120 100 80 Trinidad and Tobago 60 Panama Paraguay Costa Rica 40 Chile Honduras Canada Bolivia Ecuador Mexico Russia Uruguay Peru Argentina India China El Salvador 20 Guatemala Venezuela, RB Dominican Republic Indonesia Haiti Colombia Brazil United States - 1 10 100 1,000 10,000 GDP $Billions, 2009 (log scale) Source: World Bank (2010) 12
  • Peru’s Export Composition by SITC categories 1962-2009 1962: $4 billion* 2009: $20 billion Crude materials, inedible, except fuels Food and live animals Manufact goods classified chiefly by material Mineral fuels, lubricants and related materials Manufactured articles Chemicals Machinery and transport equipment Animal and vegetable oils and fats * In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only. Source: UN Comtrade; authors’ analysis 13
  • Peru’s Exports By Type of Industry World Export Market Share (current USD) Processed Goods 0.90% Semi-processed Goods Unprocessed Goods 0.80% Services TOTAL 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 14
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper • Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER • Growth has been highly heterogeneous across different segments of society and different parts of the country • Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility • Sustained growth will depend on broad microeconomic and institutional improvement 15 Copyright 2010 © Professor Michael E. Porter
  • Inbound Foreign Investment Inbound FDI Stocks Stocks and Flows, Selected Countries as % of GDP, Average 1998-2008 90% Trinidad and Tobago 80% 70% Panama Vietnam 60% Jamaica Chile Bolivia 50% Belize Nicaragua Malaysia Cambodia 40% Thailand Laos 30% Venezuela Canada Ecuador Argentina Honduras Costa Rica Guatemala Mexico El Salvador 20% Peru Brazil Paraguay Russia Uruguay Philippines Colombia Indonesia China Dominican Republic 10% United States India Haiti Cuba 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008 Source: UNCTAD, World Investment Report (2009). 16
  • Innovative Capacity Average U.S. patents Innovation Output of Selected Countries per million population, 2005 – 2009 3.5 Croatia 3.0 Estonia 2.5 South Africa 2.0 Greece Lithuania 1.5 Russia United Arab Emirates Portugal Costa Rica Chile 1.0 Poland Argentina Saudi Latvia China Arabia Uruguay Mexico Brazil India 0.5 Ukraine Venezuela Kazakhstan Philippines Peru Colombia Thailand Turkey Egypt Kenya Ecuador 0.0 -30% -20% -10% 0% 10% 20% 30% 40% CAGR of US-registered patents, 2005 – 2009 170 patents = Source: USPTO, World Bank 17
  • Recent Performance of the Peruvian Economy • Peru has been one of the most remarkable economic growth stories of the last decade, both compared to its own historic record and to its peers • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive international economic environment have allowed the country to prosper • Improvements in basic security and political stability provided an important pre- condition for these achievements HOWEVER • Growth has been highly heterogeneous across different segments of society and different parts of the country • Lack of diversification and dependence on global commodity markets for natural resources is exposing Peru to high levels of volatility • Sustained growth will depend on broad microeconomic and institutional improvement • Among the biggest challenges for the country are complacency after years of solid growth and the relatively mild impact of the global economic crisis • Sustaining economic growth of 8 to 9% is possible only if Peru can substantially improve competitiveness • Peru will need an ambitious economic and social strategy, building on the country’s unique competitive advantages 18 Copyright 2010 © Professor Michael E. Porter
  • The Need for a Peruvian Economic Strategy • Strategy means focus: Peru can not improve everything at the same time but need to prioritize the most pressing issues • Strategy means choice: Peru can not be good at everything but needs to define how existing strengths are to be deepened and broadened to provide specific value to businesses • Strategy means action: Peru does not need another plan but an action agenda that drives change through a process and institutional structure focused on implementation • Peru needs to build a broad consensus on its strengths across society 19
  • Structure of the Project Advisory Board Joint Peruvian and Boston Team Macroeconomic Business Cluster Organizational Competitiveness Environment Development Structure Group Group Group Group •Tax Reform •Education •Metal-Mechanic •Institutional •Financial Cluster Strengthening •Security •Innovation •Health Reform •Infrastructure •Labor •Energy •Water Resources •Ease of Doing Business 20
  • Executive Opinion Survey • Survey conducted between May 18 and July 8, 2010 • Surveyed senior executives including presidents, CEOs and other C-level managers • Lima companies above $1 million in sales • Other cities companies above $500,000 in sales City Sample Size Lima 160 Arequipa 80 Chiclayo 80 Cusco 80 Trujillo 80 Iquitos 71 TOTAL 551
  • What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries • Only competitive businesses can create wealth and jobs • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy 20100915 – Peru.ppt 22 Copyright 2010 © Professor Michael E. Porter
  • Labor Productivity Selected Countries, 1999 to 2009 Real GDP per employee (PPP adjusted US$), 2009 $120,000 UnitedStates $100,000 $80,000 Canada $60,000 Mexico $40,000 Malaysia Russia Argentina Venezuela Uruguay Chile Colombia Peru $20,000 Brazil Ecuador Thailand China Bolivia Indonesia India Philippines Vietnam Cambodia $0 -2% 0% 2% 4% 6% 8% 10% 12% Growth of real GDP per employee (PPP-adjusted), 1999 to 2009 Source: authors calculation Groningen Growth and Development Centre (2010) 20100915 – Peru.ppt 23 Copyright 2010 © Professor Michael E. Porter
  • Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Endowments • Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 24 Copyright 2010 © Professor Michael E. Porter
  • Peru's Endowments •Rich endowment of minerals, fishing resources, forest resources, and fertile land •Unique environment for fishing resources Natural •One of the largest concentrations of tropical rainforests in the world •70 percent of the world's biodiversity Resources •The Amazon region represents an untapped treasure •Location in the central zone of South America, on the Pacific coast •Shares a border with Brazil, the largest market in South America. Geographic •Access to the Pacific Ocean and to the Atlantic Ocean through the Amazon River •Long coastline that extends 1,914 miles along the Pacific Ocean Location •Natural conditions to develop large and efficient ports •Deep historical roots with ancient cultures •Rich ethnic and cultural diversity Cultural •Great variety of archeological sites. Machu Picchu is recognized as one of the wonders of the world Legacy •Commitment to work, creativity, and entrepreneurial spirit of Peruvians 25
  • Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Endowments • Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition 26 Copyright 2010 © Professor Michael E. Porter
  • Macroeconomic Competitiveness Social Infrastructure and Macroeconomic Political Institutions Policies • • • Human development • Fiscal policy – Basic education – Government surplus/deficit – Health system – Government debt • Political institutions • Monetary policy – Political freedom – Inflation – Voice and accountability – Political stability – Government effectiveness – Centralization of economic policymaking • Rule of law – Security – Judicial independence – Efficiency of legal framework – Business costs of corruption – Civil rights 27 Copyright 2010 © Professor Michael E. Porter
  • Competitiveness and Poverty Reduction Economic Social Development Development • There is a strong connection between economic and social development • Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously 20100915 – Peru.ppt 28 Copyright 2010 © Professor Michael E. Porter
  • Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Sophistication Environment Strategy of Company Operations and Macroeconomic Competitiveness Strategy Social Infrastructure Macroeconomic • The internal skills, and Political Policies capabilities, and management Institutions practices needed for companies to attain the highest level of productivity Endowments and innovation possible 29 Copyright 2010 © Professor Michael E. Porter
  • Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Quality of the Environment Strategy National Business Environment Macroeconomic Competitiveness Social • The external business Infrastructure Macroeconomic environment conditions that and Political Policies Institutions allow companies to reach high levels of productivity and innovation Endowments 30 Copyright 2010 © Professor Michael E. Porter
  • Quality of the National Business Environment Context for Firm Strategy and Rivalry • Local rules and incentives that encourage investment and productivity  Open and vigorous local competition Factor Demand (Input) Conditions Conditions • Access to high quality business • Sophisticated and demanding local inputs customers and needs Related and Supporting Industries • Availability of suppliers and supporting industries • Many things matter for competitiveness • Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing 31 Copyright 2010 © Professor Michael E. Porter
  • Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic State of Cluster and Political Policies Development Institutions • A geographic concentration of Endowments firms, specialized assets, and institutions in particular fields. 20100915 – Peru.ppt 32 Copyright 2010 © Professor Michael E. Porter
  • Cusco Tourism Cluster Institutions for Collaboration Local retail and Travel Agents Tour Operators other services Marketing (Internet cafes, etc.) Agencies Food Restoration/ Suppliers Attractions and conservation Restaurants activities (e.g. National Parks, Property cultural shows) Crafts Services Banking Services / Maintenance Accommodations Transport Foreign Exchange Services (hotels, hostels, lodges) (land, air, rail and river) Hospitality equipment Related clusters suppliers Food Educational and Cluster Government Agencies Research Institutions Health Cluster Source: Adapted from HBS student project, 2010 “Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher
  • Clusters and Competitiveness • Clusters increase productivity and operational efficiency • Clusters stimulate and enable innovations • Clusters facilitate commercialization and new business formation • Clusters reflect the fundamental influence of linkages and spill-overs across firms and associated institutions in competition Competitiveness Master - 2009-04-20.ppt 34 Copyright 2009 © Professor Michael E. Porter
  • Clusters and Economic Diversification Linkages Across Clusters Fishing & Fishing Products Textiles Entertainment Prefabricated Hospitality Agricultural Enclosures & Tourism Products Processed Food Transportation Furniture & Logistics Building Aerospace Fixtures, Construction Vehicles & Equipment & Materials Distribution Information Defense Services Jewelry & Tech. Precious Services Heavy Lightning & Metals Electrical Construction Business Analytical Equipment Services Services Education & Instruments Knowledge Power Forest Medical Products Creation Generation Devices Communi- Publishing cations Financial & Printing Biopharma- Equipment Services Heavy ceuticals Machinery Motor Driven Production Chemical Products Technology Products Tobacco Oil & Apparel Gas Mining & Metal Automotive Plastics Aerospace Manufacturing Engines Footwear Leather & Related Sporting Products & Recreation Goods Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. Competitiveness Master - 2009-04-20.ppt 35 Copyright 2009 © Professor Michael E. Porter
  • Stages of National Competitive Development Shifting Policy Imperatives Factor-Driven Investment- Innovation- Economy Driven Economy Driven Economy Low Cost Inputs Productivity Unique Value • Macro, political, and legal • Increasing local rivalry • Advanced skills stability • Market opening • Scientific and technological • Improving human capital • Advanced infrastructure institutions • Efficient basic • Incentives and rules • Incentives and rules infrastructure encouraging productivity encouraging innovation • Lowering regulatory costs • Cluster formation and • Cluster upgrading of doing business activation Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990 Competitiveness Master - 2009-04-20.ppt 36 Copyright 2010 © Professor Michael E. Porter
  • Macroeconomic Policy: Assessment • Sound policies have allowed Peru’s fundamental macroeconomic stability to steadily improve over the past decade • The implementation of the inflation-targeting framework has been successful in reducing inflation • Peru's fiscal stabilization fund provided stability and allowed effective stimulus during the global crisis • The economy continues to be highly dollarized with most credits denominated in dollars – About half of the banking system is currently dollarized and most commodity exports are priced in US-dollars BUT • Peru’s public finances remain overly dependent on commodities, with as much as one third of tax revenues coming from commodity-related sources • Peruvian tax rates are high relative to peers • Peru must set policies that ensured the responsible use of credit 37
  • Political Institutions: Assessment Corruption • One of critical weaknesses constraining Peruvian development • High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests • Corruption cases are usually not reported to authorities • The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutions 38
  • Rank in Global Corruption Perception Index, 2009 Corruption Index, 2009 Canada Deteriorating Improving Low USA corruption Uruguay Chile Costa Rica Cuba Brazil Peru, Colombia Trinidad and Tobago China El Salvador India Panama Guatemala Mexico Dominican Republic Argentina Bolivia Nicaragua High Honduras corruption Russia Ecuador Venezuela Paraguay Change in Rank, Global Corruption Report, 2009 versus 2003 Note: Ranks only countries available in both years (131 countries total) Source: Global Corruption Report, 2009 39 Copyright 2010 © Professor Michael E. Porter
  • Political Institutions: Assessment Corruption • One of critical weaknesses constraining Peruvian development • High corruption is due to weak institutions, poor governance practices and the excessive influence of private interests • Corruption cases are usually not reported to authorities • The institutions perceived to be most corrupt are Congress, the political parties, the national police, and judicial institutions Security • There has been a deterioration of the security situation, mainly due to the organized crime, illegal drug trade, terrorism and a general decline in public safety • The influence of drug traffickers is starting to penetrate institutions and the political system • Social unrest occurs most often in places where government institutions are weak 40
  • Social Infrastructure: Assessment Education • High formal enrollment but low quality • Weak infrastructure in the public school system • Curriculum is poorly structured, and one teacher must cover multiple grades Health • The health system continues to be characterized by generally low quality and high disparities in quality, particularly affecting the poor • “Poverty diseases” such as tuberculosis are still more prevalent than in peer countries • Health care spending in Peru remains the lowest among its Latin American peers • There is a mismatch between the supply and demand for health professionals 41
  • Assessment: Peru’s Business Environment Context for Firm Strategy and Rivalry + Openness to foreign investment, trade, capital flows + Improvements in investor protections Factor ± Efforts to strengthen competition Demand (Input) policy Conditions Conditions – Rigidity of employment – Difficulty in business formation – Low intensity of local competition + Abundant resources: mineral, – High Informality of the economy + Improving consumer protection agricultural, fishing, and cultural regulation + Advantageous location ± Improving sophistication of local buyers + Improving administrative infrastructure – Weak environmental standards Related and enforcement + Simplified customs procedures Supporting ± Sound banking system, but high interest spreads Industries ± Improving financial markets, but limited venture capital availability – Limited local suppliers and – Poor physical infrastructure supporting industries – Low skill levels in the labor force, – Shallow clusters mismatch with demand – Weak university-industry research collaboration – Few high-quality research and scientific institutions
  • Factor Factor input conditions in Peru lag regional peers, particularly in (Input) physical infrastructure. Conditions Administrative infrastructure • Peru has made important reforms in simplifying administrative procedures
  • Ease of Doing Business South America, 2011 Venezuela: 172 Guyana: 100 Colombia: 39 Suriname: 161 Ecuador: 130 Peru: 36 Brazil: 127 Bolivia: 149 Paraguay: 106 Chile: 43 Uruguay: 124 Argentina: 115 Source: The World Bank, Doing Business (2011), 183 countries 20100915 – Peru.ppt 44 Copyright 2010 © Professor Michael E. Porter
  • Ease of Doing Business Ranking, 2011 (of 183 countries) Peru, 2011 120 Favorable Unfavorable 100 Peru’s per capita GDP rank: 81 80 60 40 20 0 Ease of Doing Getting Credit Protecting Registering Trading Starting a Paying Taxes Closing a Dealing with Enforcing Business Investors Property Across Business Business Construction Contracts Borders Permits Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted 20100915 – Peru.ppt 45 Copyright 2010 © Professor Michael E. Porter
  • Factor Factor input conditions in Peru lag regional peers, particularly in (Input) physical infrastructure. Conditions Administrative infrastructure • Peru has made important reforms in simplifying administrative procedures Physical infrastructure • While Peru has increased infrastructure investment in recent years, it lags in electrical generation capacity, telephone lines, and paved roads relative to its Latin American peers. Infrastructure services remain expensive Education and workforce skills • The education system produces comparatively few graduates in technical areas, engineering, and physical sciences • Peru is last in spending on education among its peers Financial system • Financial assets are highly concentrated. Four banks hold 83% of all bank loans –Borrowing costs are high –The Peruvian pension fund system is characterized by low participation Science and technology infrastructure • Peru’s science and technology infrastructure is very weak.
  • Context for Barriers to trade and investment have been reduced, but labor Firm market efficiency and local rivalry remain limited Strategy and Rivalry Foreign trade and investment policy • Since the early 1990s, Peru’s foreign trade and investment policy has been aimed at a process of deregulation and liberalization of the trade regime • Peru has signed a significant number of free trade agreements with several countries, such as the United States and China • However, investment flows (in and out) remain low in comparison with its neighbors Anti-trust policy • Peru has an advanced regulatory framework for antitrust. But, implementation is weak • Peru's domestic industries are highly concentrated, with evidence of oligopolistic practices and cartels • A high level of informality in the economy eases counterfeiting and money laundering Labor market • Peru’s labor market is highly rigid, ranked by the World Bank as 149 out of 181 economies. There is no unified labor code in Peru • High non-wage labor costs deter formal job creation
  • Demand Peruvian consumer sophistication is increasing. Consumer Conditions protection and environmental regulations are in place but not well enforced Local demand sophistication Economic growth has led to the emergence of a new middle class that has access to consumer credit, has become aware of new products and brands, and demands quality Quality and environmental standards Regulations exist to protect quality, health, safety, and environmental standards, but there is no mechanism to enforce these regulations or the consumer code. And, in practice, the large informal sector operates outside of these protections
  • Related and Availability of suppliers and supporting industries remains low, Supporting and Peruvian clusters are shallow Industries Export industries • Peru’s exports are highly concentrated on natural resource-based products. These activities are not well integrated into the local economy and have not generated local upstream and downstream industrial activities Presence of suppliers • There is a lack of local suppliers of machinery, equipment and services. Most e products and services are imported • Local production of inputs and machinery is in its infancy and cannot support advanced export-oriented companies Cluster Development • Nascent clusters are present, but there are few cluster initiatives.. • There is a poor tradition of collaboration between the government and the private sector in the area of cluster development
  • Peru’s National Export Portfolio 1997 to 2009 2.5% Change In Peru’s Overall World Export Share: +0.09% Jewelry and Precious Metals 2.0% Peru’s world export market share, 2009 1.5% Metal, Mining and Manufacturing 1.0% Fishing and Agricultural Fishing Products Products 0.5% Financial Apparel Peru’s Average World Services Export Share: 0.22% Hospitality and Tourism Communications Publishing and Printing Services 0.0% -0.5% 0.0% 0.5% 1.0% 1.5% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. 50 Copyright 2010 © Professor Michael E. Porter
  • Peru’s National Export Portfolio 1997 to 2009 0.14% Transportation Oil and Gas and Logistics Products and Services 0.12% Peru’s world export market share, 2009 Furniture Textiles 0.10% Construction Materials Chemical Products Processed Food 0.08% Plastics 0.06% Leather and Related Products Forest Products 0.04% Business Services Heavy Machinery Motor Driven Biopharmaceuticals Products Footwear 0.02% Power and Power Generation Equipment Building Fixtures Prefabricated Enclosures and Structures and Equipment Production Technology Communications Equipment Automotive 0.00% -0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08% Change in Peru’s world export market share, 1997 to 2009 Exports of US$2 Billion = Note: Showing clusters with greater than $10 mil exports. 51 Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, HBS; Richard Bryden, Project Director. Copyright 2010 © Professor Michael E. Porter
  • Share of World Exports by Cluster World Market Share Peru, 2008 0.2% - 0.5% 0.5% - 1.0% Fishing & Enter- Textiles Fishing tainment Prefabricated 0.95% - 1.9% Products Hospitality Enclosures & Tourism Agricultural Products Transportation Furniture Processed & Logistics Building Food Aerospace Fixtures, Construction Vehicles & Equipment & Materials Distribution Information Defense Services Jewelry & Services Tech. Precious Lightning & Heavy Metals Electrical Construction Business Analytical Services Education & Instruments Equipment Services Power Forest Knowledge Medical Products Creation Generation Devices Communi- Publishing cations & Printing Biopharma- Equipment Financial Heavy ceuticals Machinery Services Motor Driven Production Chemical Products Technology Products Tobacco Oil & Automotive Gas Aerospace Mining & Metal Plastics Engines Manufacturing Apparel Leather & Footwear Related Sporting Marine Products & Recreation Equipment Goods Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions. 52 Copyright 2010 © Professor Michael E. Porter
  • Specialization in Peru’s Regions Selected Examples Piura Agricultural Products: Mangoes, Lemons, Brown Sugar Syrup Cajamarca (Bambamarca) Dairy, Processed Foods La Libertad (El Porvenir, Trujillo) Leather, Footwear Ancash (Chimbote) Fishing and Fish Products Lima (Infantas, Los Olivos) Metal Manufacturing, Metal Furniture Lima (La Victoria) Apparel Ica Wine Cuzco Tourism Puno and Arequipa Apparel from Alpaca 53
  • Assessment: Peruvian Clusters • Peru’s current clusters are based heavily on natural endowments, and have much room for further upgrading • Regions such as the Cajamarca, Arequipa, and Moquegua have concentrations in mining, but the clusters are mostly shallow with weak linkages between firms and local suppliers and experiencing significant technological bottlenecks • In the main cities of Peru there are some emerging clusters consisting largely of small firms • Peru’s clusters have weak suppliers and few supporting institutions • There is a weak institutional capacity in the regions hampering the development of clusters • There is a limited tradition of collaboration among actors for regional development 54 Copyright 2010 © Professor Michael E. Porter
  • Cluster Development Programs in Peru • There are some encouraging programs, such as the CITEs • Support programs for cluster development have limited resources and scope, and have been directed toward SMEs • Cluster development have been supported primarily multilaterals and international cooperation agencies • Programs were driven centrally without building capacity at the regional level • Programs have failed to create permanent institutions and sustainable processes of collaboration amongst key actors such as local governments, academic institutions, training centers, private sector and relevant institutions for collaboration 55 Copyright 2010 © Professor Michael E. Porter
  • Creating and Economic Strategy National Value Proposition • What is the distinctive competitive position of Peru given its location, legacy, existing strengths, and potential strengths? – What unique value as a business location? – For what types of activities and clusters? – And what roles with neighbors, the region, and the broader world? Achieving and Maintaining Parity Developing Unique Strengths with Peers • What elements of the business • What weaknesses must be addressed to environment can be unique strengths remove key constraints and achieve parity relative to peers/neighbors? with peer countries? • What existing and emerging clusters represent local strengths? • Priorities and sequencing are necessity in economic development 56 Copyright 2010 © Professor Michael E. Porter
  • Role of a National Value Proposition • The value proposition should be an inspiration to the Peruvian population • The value proposition is a signal to companies from abroad and at home about what assets and conditions can expect to find in Peru • The value proposition is a signal to policy makers in Peru of what type of improvements are most critical in order to make the value proposition a reality 57 Copyright 2010 © Professor Michael E. Porter
  • Peru's Competitiveness Strategy National Value Proposition Goals Action Agenda Implementation Plan 58 Copyright 2010 © Professor Michael E. Porter
  • Towards a Peruvian Value Proposition What is Unique about Peru? ENDOWMENTS BUSINESS ENVIRONMENT PEOPLE AND CULTURE • Abundant natural resources • Privileged access to foreign • Rich culture and history markets • Central location in South • Creative and entrepreneurial America • Open to FDI and capital flows population • Vast biodiversity and • Young, hardworking population ecosystems • Legacy of domestic cooperation to overcome obstacles 59 Copyright 2010 © Professor Michael E. Porter
  • Towards a Peruvian Value Proposition A secure, neutral and peaceful country Enhanced the Dynamic Sophistication regional of Endowment Preserving Natural and development Related Cultural Resources with vibrant Exports clusters A hub for trade between Latin America, Asia, and North America Improve Cross-Cutting Policies 60 Copyright 2010 © Professor Michael E. Porter
  • National Value Proposition: A secure, neutral and peaceful country Peace and neutrality in Peru have been crucial to the good economic performance of the last two decades, but Peru remains at risk of deteriorating security. Reduce corruption to fight informality and inequality Empower security institutions and foster links with local communities A secure, neutral and Break the cycle of drug trafficking and insurgency peaceful Develop regional clusters to generate a stronger link country between the growth process and new employment 61 Copyright 2010 © Professor Michael E. Porter
  • National Value Proposition: Utilizing Endowments Peru’s endowments have attracted significant interest from foreign and domestic investors already in the past. Peru must create higher value from its endowments driven clusters. •Provide highly efficient infrastructure and an efficient regulatory environment to make Peru one of the most productive locations for accessing natural Enhanced the resources Sophistication of Endowment Related Exports •Ensure that regulatory conditions enable endowments to be used in ways that are ecologically and culturally sustainable •Upgrade and deepen clusters drawing on Peru's endowments and develop suppliers, services and related clusters 62 Copyright 2010 © Professor Michael E. Porter
  • National Value Proposition: A Trade Hub Peru’s geographic location, its array of free trade agreements, and its macroeconomic and political stability make it a natural hub for trade between Latin America, North America, and Asia Maintain and extend low trade barriers A hub for trade Improve the efficiency and quality of trade enabling between Latin regulation and infrastructure. America, Asia, and North America Mobilize and develop clusters of trade related services including logistics and finance 63 Copyright 2010 © Professor Michael E. Porter
  • National Value Proposition: Decentralization Peru’s development remains highly heterogeneous across different parts of the country. The emergence of a larger middle class remains limited to a few regions in the country. Sustained growth can only be achieved if all subnational regions develop by upgrading their competitiveness. Build unique regional economies based on local strengths. Dynamic regional Upgrade key weaknesses including regional development education, regulatory conditions, and infrastructure with vibrant clusters Strengthen regions through upgrading regional institutions 64 Copyright 2010 © Professor Michael E. Porter
  • Lima metalworking cluster: Example of a Cluster Development Initiative Agriculture Automotive Foundries Electricity Plastics Mining companies Restaurants Appliances Plastics Design shops Financial Equipment Metals Molds (electrical, mining, etc) Logistics Paints and chemicals Tools Parts (isolators, etc) Services Packaging (lab, etc) Custom Advisory Recycling Software / IT services services Technology Security transfer Government Educational Business Multilateral Institutions Institutions Institutions Institutions
  • Action Agenda POLICIES •Sustain the security improvements against old and new threats • Maintain improvements achieved in security and prevent a pronounced A secure, neutral and increased in organized crime an violence • Empower security institutions and foster peaceful country links with the community •Systematically reduce corruption • Simplify rules and regulations to reduce the cases in which corruption can occur • Promote a new governance ethic in political and business leaders 66 Copyright 2010 © Professor Michael E. Porter
  • Secure, Neutral and Peaceful: Action Agenda Sustain the security improvements against old and new threats Action Areas Specific Recommendations • Public safety is critical to becoming a trading • Frame an institutional setting where a single institution hub concentrates efforts to fight drug trafficking and terrorist activities • Maintain improvements - Support market-based income-substitution programs, achieved in security control of chemical inputs for coca transformation, drug interdiction, and anti-money laundering efforts and prevent a pronounced increased • Reform the police force considering labor regime, in crime an violence salary and equipment and needs • Empower security • Strengthen the powers of local mayors as presidents of institutions and foster local public safety committees in coordination with the links with the police community • Engage local communities to prevent social unrest • Support comprehensive policies - covering crime prevention, crime investigation, the judicial system, the jail system, and re-insertion programs. 67 Copyright 2010 © Professor Michael E. Porter
  • Secure, Neutral and Peaceful: Action Agenda Systematically reduce corruption Action Areas Specific Recommendations • Reduce corruption to thrust domestic economic activity and • Launch a systematic campaign to reduce corruption take advantage of and investigate corruption cases opportunities created • Simplify rules and regulations to reduce the cases in through open trade which corruption can occur policy • Foster clean governance in political and business • Generate a strong leaders track record of fighting against corruption • Improve the quality of the civil service. Support meritocracy, responsibility, accountability, training and • Consider its effects on adequate compensation. informality and inequality • Key public officials should be appointed in a process with the consent of the Congress 68 Copyright 2010 © Professor Michael E. Porter
  • Action Agenda POLICIES •Focus efforts on becoming the springboard for South American firms seeking access to U.S. and Asian markets •Deepen free trade policies • Intensify policy of negotiating free trade agreements A hub for trade • Eliminate remaining domestic barriers to between Latin trade and investment: tariffs, non-tariff measures and export subsidies America, Asia and North America •Improve physical connections with other countries • Transportation • Energy and Water CLUSTERS Transportation and Logistics Financial Services 69 Copyright 2010 © Professor Michael E. Porter
  • Action Agenda POLICIES •Transform endowment-based industries into broad clusters • Launch an ambitious cluster development program •Build organizational processes in which Enhanced the all actors, particularly private sector representatives, collaborate in building a Sophistication of common vision for each cluster Endowment Related Exports •Diversify the economy by developing related clusters CLUSTERS Metal Mining and Manufacturing Hospitality and Tourism Biodiversity 70 Copyright 2010 © Professor Michael E. Porter
  • Action Agenda POLICIES • Design a modern policy for regional development • Devise a strategy for each region based on its unique attributes and strengths Dynamic • Enhance education and workforce skill development regionalized • Focus on education as a central enabling development with condition for productivity • Align education supply with needs through vibrant clusters collaboration with clusters CLUSTERS Metalworking Apparel Leather Fishing and Fishing Products Footwear Agricultural Products Wine 71 Copyright 2010 © Professor Michael E. Porter
  • Improve Cross Cutting Policies •Sustain path of sound macroeconomic policy •Ensure adequate basic education and health care •Focus basic education on enforcing quality standards •Improve basic education services with the vision to reduce inequality and foster social inclusion •Reform healthcare system to increase coverage and provide better value •Focus on preventive care to reduce costs •Concentrate on vulnerable segments of the population •Reduce the cost of doing business through better rules and regulations: •Rules of the judiciary system •Taxes •Labor market regulations •Strengthen access to capital •Increase financial-sector competition and access to capital •Encourage the development of new financial instruments •Develop science and technology capabilities •Expand university-business collaboration •Encourage industry to absorb and improve foreign technology •Involve talented expatriate professionals •Improve innovation infrastructure •Improve the effectiveness of the government 72 Copyright 2010 © Professor Michael E. Porter
  • Eleven Goals for 2021 Income and Inclusion • Peru will be in the upper tier of middle-income countries with an income per capita of $10,000 • Peru will reduce its poverty level to 20 percent • Peru will reduce rates of malnutrition to less than 10 percent International • Peru will be one of the top two South American countries in volume of trade with Asia • Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coast Regional development • Peru will have at least seven regional centers of development across the coastal, highlands and Amazon regions 73 Copyright 2010 © Professor Michael E. Porter
  • Peru will be in the upper tier of middle-income countries with an GDP per Capita income per capita of $10,000 (in 1990 PPP US$) $12,000 GOAL $10,000 $8,000 $6,000 $4,000 $2,000 PAST PRESENT $0 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 Note: PPP using Geary Khamis calculation methodology. 74 Copyright 2010 © Professor Michael E. Porter Source: Groningen Growth and Development Centre, Total Economy Database
  • Peru will reduce its poverty level to 20 percent % of Population Under the Poverty Line GOAL PAST PRESENT Source: Compendio Estadístico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections 75 Copyright 2010 © Professor Michael E. Porter
  • Peru will be one of the top two South American countries in volume Total trade (USD of trade with Asia millions) PAST PRESENT GOAL Source: Trade Map from official sources (http://trademap.org) ; own projections 76 Copyright 2010 © Professor Michael E. Porter
  • Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coast FDI Inflows (USD millions) GOAL PAST PRESENT Source: UNCTADSTAT (http://unctadstat.unctad.org); own projections 77 Copyright 2010 © Professor Michael E. Porter
  • Eleven Goals for 2021 Education • Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA) • All high school graduates will be proficient in the English language Corruption • The country will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index Cluster Development • Peru will adopt a cluster-based strategy for development • Peru will upgrade and develop well-established clusters in mining, tourism/gastronomy, fishing, agribusiness, and manufacturing 78 Copyright 2010 © Professor Michael E. Porter
  • Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA) % of top countries (out of 65 countries) 120% 100% 80% 60% 40% 20% PAST GOAL 0% 2000 2014 2018 2021 Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations 79 Copyright 2010 © Professor Michael E. Porter
  • Peru will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index % of less corrupted countries (out of 180 countries) 70% 60% 50% 40% 30% 20% 10% PAST TODAY GOAL 0% 2006 2007 2008 2009 2010 2014 2018 2021 Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations 80 Copyright 2010 © Professor Michael E. Porter
  • Implementation Strategy: Sequencing of Policies • Financial system • Science and Technology • Education and Health Care • Regional Development • Cluster Development • Regional Development • Security • Anticorruption • Physical Infrastructure • Skills • Maintain Government Policy Programs Immediate Long term Priority 81 Copyright 2010 © Professor Michael E. Porter
  • Implementation Peru's Economic Strategy: Organizational Structure • Reinvigorate the Peruvian National Competitiveness Council (NCC) to coordinate economic strategy and implementation – Chaired by the Prime Minister – Set within the Prime Minister's office – Membership by all involved ministers and government officials – Secretariat responsible for agenda and accountability • The NCC should have an appropriate budget and a well-trained and qualified staff for technical support • Representative university and civil society leaders should be formal members in the NCC • Private sector participation in economic policy should be coordinated by a Peruvian Private Competiveness Council (PPCC) 82 Copyright 2010 © Professor Michael E. Porter
  • Summary • Peru has made significant progress towards becoming a prosperous economy and a better society • Peru has many assets, and already made important policy choices towards a better future. The results over the last few years are a clear validation of this course BUT • There is much more to do – Many parts of society and regions of the country have not fully participated in the country’s recent growth – Many dimensions of competitiveness remain weak and have to be improved • The proposed strategy outlined here offers an ambitious but realistic plan forward It defines clear priorities, identifies concrete action steps, and sets measurable objectives • Change will occur only if consensus builds within Peru • The process 83needs to continue Copyright 2010 © Professor Michael E. Porter