2010-1112 Peru CADE Porter

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 Porters 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 meanselectronic, mechanical, photocopying, recording, or otherwisewithout 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
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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
Perus Prosperity Performance

GDP per Capita (in 1990 PPP US$)
1950-2009
CAGR: CAGR: - 0.73% CAGR: +4.41%
$6,000
+2.07%
$5,000
$4,000
$3,000
$2,000
$1,000
$0
1950 1955 1960 1965 1970 1975
3
1980
1985
1990
1995
2000
2005
2009
Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)
Prosperity Performance
PPP-adjusted GDP per Capita, 2009 ($USD) $ 20,000 $ 18,000 $ 16,000 $ 14,000 $ 12,000
Brazil Mexico Malaysia Chile Panama Russia Argentina Uruguay
Selected Countries, 1999 to 2009
United States ($46,460) Canada ($37,840)
Trinidad & Tobago Venezuela Dominican Republic
$ 10,000 $ 8,000 $ 6,000

Jamaica
Costa Rica Belize
Guatemala Colombia Thailand Ecuador
Cuba
Peru
China
El Salvador Bolivia Paraguay Nicaragua Honduras Philippines Indonesia Laos India Vietnam Cambodia
$ 4,000 $ 2,000 $0 0% 2%
Haiti
4%
6%
8%
10%
12%
14%
Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009

Source: EIU (2010), authors calculations
4

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
Export Intensity
Exports as % GDP, 2009 80%
Trinidad & Tobago
Selected Countries
70%
Panama
Thailand Vietnam
60%
Belize
50%
Honduras Costa Rica Cambodia Chile
Paraguay
40%
Bolivia Nicaragua
30%
Canada Russia
Jamaica
Ecuador Mexico
China Uruguay
Peru
Guatemala Colombia Cuba Brazil India Argentina
20%
Dominican Republic
Indonesia
El Salvador Venezuela
10%
Haiti
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

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 precondition for these achievements HOWEVER Growth has been highly heterogeneous across different segments of society and different parts of the country
Unemployment Performance
Unemployment Rate, 2009 16%
Selected Countries
Improving Deteriorating
Dominican Republic Jamaica
14%
12%
Colombia India
10%
Ecuador Venezuela Brazil Russia Uruguay Nicaragua Panama Trinidad & Tobago
Chile Argentina Philippines
China
United States
Peru
Canada Bolivia
8%
6%
Costa Rica Indonesia El Salvador Paraguay Vietnam Mexico
4%
Honduras
Malaysia
2%
Cuba
Thailand
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 the Poverty Line
Peru, 2001 to 2009
60%
50%
40%
30%
20%
10%
0% 1997
1998
1999
2000
2001
2002
2003
9
2004
2005
2006
2007
2008
2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010
Regional Poverty Rates

Peru, 2004 to 2009
Coast
Sierra
Lowlands
70%
60%
50%
40%
30%
20%
10%
0% 2004 2005 2006 2007

10
2008
2009
Source: Informacion Socio Demografica, from El Instituto Nacional de Estadistica e Informatica (INEI), 2010

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 precondition 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
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Exports as % GDP, 2009 140
Export Intensity and Size

Selected Countries
Malaysia
120
100
80
Trinidad and Tobago
60
Panama Paraguay Costa Rica Honduras Bolivia Ecuador Uruguay El Salvador Guatemala Haiti Dominican Republic
40
Chile Mexico Argentina Canada Russia India
Peru
China
20
Venezuela, RB Indonesia Colombia
Brazil
United States
1
Source: World Bank (2010)
10
100
12
1,000
10,000
GDP $Billions, 2009 (log scale)
Perus Export Composition

by SITC categories 1962-2009
1962: $4 billion*
Crude materials, inedible, except fuels Food and live animals
2009: $20 billion
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. 13 Source: UN Comtrade; authors analysis
Perus Exports By Type of Industry

World Export Market Share (current USD)
0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1997
Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL
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

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 precondition 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
Inbound Foreign Investment

Inbound FDI Stocks as % of GDP, Average 1998-2008 90%
Trinidad and Tobago
Stocks and Flows, Selected Countries
80% 70% 60% 50% 40% 30% 20% 10% 0% 0%

Cuba India Haiti Venezuela Ecuador Guatemala Paraguay Indonesia China Mexico Malaysia Thailand Laos Argentina Nicaragua Cambodia Vietnam Panama Jamaica Chile Bolivia Belize
Canada Honduras Costa Rica El Salvador Brazil Uruguay Dominican Republic
Russia Philippines
Peru
Colombia
United States
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).
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Innovative Capacity
Average U.S. patents per million population, 2005 2009
Innovation Output of Selected Countries
3.5
Croatia
3.0
Estonia
2.5
2.0
Lithuania
South Africa
Greece
1.5
Russia
United Arab Emirates Portugal Argentina Chile Latvia Uruguay China Costa Rica
1.0
Mexico
Saudi Arabia
Poland Brazil
India
0.5
Peru
0.0 -30%
Source: USPTO, World Bank
Ukraine Venezuela Kazakhstan Philippines Colombia Egypt Ecuador Kenya
Thailand
Turkey
-20%
-10%
0%
17
10%
20%
CAGR of US-registered patents, 2005 2009
30% 40% 170 patents =

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 precondition 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 countrys unique competitive advantages
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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
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Structure of the Project

Advisory Board Joint Peruvian and Boston Team Macroeconomic Competitiveness Group
Tax Reform Security Health Reform
Business Environment Group

Education Financial Innovation Infrastructure Labor Energy Water Resources
Cluster Development Group

Metal-Mechanic Cluster
Organizational Structure Group

Institutional Strengthening
Ease of Doing Business
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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 $500,000 in sales City Lima Arequipa Chiclayo Cusco Trujillo Iquitos TOTAL Sample Size 160 80 80 80 80 71 551
What is Competitiveness?
Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources.
Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries Productivity in a national economy arises from a combination of domestic and foreign firms The productivity of local or domestic industries is fundamental to competitiveness, not just that of export industries
Only competitive businesses can create wealth and jobs Nations compete to offer the most productive environment for business The public and private sectors play different but interrelated roles in creating a productive economy
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Labor Productivity
Selected Countries, 1999 to 2009
Real GDP per employee (PPP adjusted US$), 2009 $120,000
UnitedStates
$100,000
$80,000
Canada
$60,000
Mexico
$40,000
Argentina Uruguay Chile Brazil Bolivia Philippines Colombia
Malaysia Venezuela
Russia
Peru
Indonesia China
$20,000
Ecuador Thailand
$0 -2%
India Vietnam Cambodia
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)
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Determinants of Competitiveness
Microeconomic Competitiveness
Quality of the National Business Environment State of Cluster Development Sophistication of Company Operations and Strategy
Macroeconomic Competitiveness
Social Infrastructure and Political Institutions Macroeconomic Policies
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
Peru's Endowments
Natural Resources
Rich endowment of minerals, fishing resources, forest resources, and fertile land Unique environment for fishing resources One of the largest concentrations of tropical rainforests in the world 70 percent of the world's biodiversity 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. 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 Natural conditions to develop large and efficient ports
Geographic Location
Cultural Legacy
Deep historical roots with ancient cultures Rich ethnic and cultural diversity Great variety of archeological sites. Machu Picchu is recognized as one of the wonders of the world Commitment to work, creativity, and entrepreneurial spirit of Peruvians
25
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
Social Infrastructure and Political Institutions
Human development
Basic education Health system
Macroeconomic Policies
Fiscal policy
Government surplus/deficit Government debt
Political institutions
Political freedom Voice and accountability Political stability Government effectiveness Centralization of economic policymaking
Monetary policy
Inflation
Rule of law
Security Judicial independence Efficiency of legal framework Business costs of corruption Civil rights
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Competitiveness and Poverty Reduction
Economic Development
Social Development
There is a strong connection between economic and social development Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously
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Sophistication of Company Operations and Strategy

The internal skills, capabilities, and management practices needed for companies to attain the highest level of productivity and innovation possible
Endowments
29
Quality of the National Business Environment

The external business environment conditions that allow companies to reach high levels of productivity and innovation
Endowments
30
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 (Input) Conditions

Access to high quality business inputs
Demand Conditions
Sophisticated and demanding local 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
Macroeconomic Competitiveness State of Cluster Development

A geographic concentration of firms, specialized assets, and institutions in particular fields.
Endowments
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Cusco Tourism Cluster

Institutions for Collaboration
Travel Agents
Marketing Agencies Food Suppliers
Tour Operators
Local retail and other services (Internet cafes, etc.)
Restaurants
Property Services
Attractions and activities

(e.g. National Parks, cultural shows)
Restoration/ conservation
Crafts
Maintenance Services Hospitality equipment suppliers
Accommodations
Transport
(hotels, hostels, lodges) (land, air, rail and river)
Banking Services / Foreign Exchange
Related clusters Food Cluster
Government Agencies
Educational and 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
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Clusters and Economic Diversification

Linkages Across Clusters
Fishing & Fishing Products Agricultural Products Processed Food Hospitality & Tourism Entertainment Textiles Prefabricated Enclosures
Transportation & Logistics
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Heavy Construction Services Forest Products Construction Materials
Jewelry & Precious Metals
Distribution Services Business Services
Aerospace Vehicles & Information Defense Tech.
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products
Heavy Machinery Motor Driven Products Production Technology
Tobacco Mining & Metal Automotive Aerospace Manufacturing Engines Sporting & Recreation Goods
Apparel
Oil & Gas Plastics
Footwear
Leather & Related Products
Note: Clusters with overlapping borders or identical shading have at least 20% overlap 35 Competitiveness Master - 2009-04-20.ppt (by number of industries) in both directions.
Stages of National Competitive Development

Shifting Policy Imperatives
Factor-Driven Economy
InvestmentDriven Economy
InnovationDriven Economy
Low Cost Inputs

Macro, political, and legal stability Improving human capital Efficient basic infrastructure Lowering regulatory costs of doing business
Productivity
Increasing local rivalry Market opening Advanced infrastructure Incentives and rules encouraging productivity Cluster formation and activation
Unique Value
Advanced skills Scientific and technological institutions Incentives and rules encouraging innovation Cluster upgrading
Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990
Competitiveness Master - 2009-04-20.ppt
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Macroeconomic Policy: Assessment

Sound policies have allowed Perus 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 Perus 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 Index, 2009
Corruption Perception Index, 2009

Canada
Low corruption
Deteriorating
USA Chile Uruguay
Improving
Costa Rica
Cuba Brazil Trinidad and Tobago El Salvador Mexico
Peru, Colombia
China Panama India Guatemala
Dominican Republic Argentina Bolivia
High corruption
Nicaragua
Honduras
Russia Venezuela
Ecuador 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
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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
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Assessment: Perus Business Environment

+ 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 High Informality of the economy + Improving consumer protection Abundant resources: mineral, regulation agricultural, fishing, and cultural Improving sophistication of local buyers Advantageous location Weak environmental standards Improving administrative infrastructure Related and enforcement Simplified customs procedures Supporting Sound banking system, but high interest Industries spreads 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 input conditions in Peru lag regional peers, particularly in physical infrastructure.
Administrative infrastructure Peru has made important reforms in simplifying administrative procedures

South America, 2011
Venezuela: 172 Guyana: 100 Suriname: 161
Colombia: 39
Ecuador: 130
Peru: 36
Bolivia: 149
Brazil: 127
Paraguay: 106 Chile: 43 Uruguay: 124
Argentina: 115
Source: The World Bank, Doing Business (2011), 183 countries

20100915 Peru.ppt
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Ranking, 2011 (of 183 countries)
Peru, 2011
Favorable Unfavorable
120
100
Perus per capita GDP rank: 81
80
60
40
20
0
Ease of Doing Getting Credit Business Protecting Investors Registering Property Trading Across Borders Starting a Business Paying Taxes Closing a Business Dealing with Construction Permits Enforcing Contracts
Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted
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Factor input conditions in Peru lag regional peers, particularly in physical infrastructure.
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 Perus science and technology infrastructure is very weak.
Barriers to trade and investment have been reduced, but labor market efficiency and local rivalry remain limited
Foreign trade and investment policy Since the early 1990s, Perus 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 Perus 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 Conditions
Peruvian consumer sophistication is increasing. Consumer 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 Supporting Industries
Availability of suppliers and supporting industries remains low, and Peruvian clusters are shallow
Export industries
Perus 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
Perus National Export Portfolio

1997 to 2009
2.5%
Change In Perus Overall World Export Share: +0.09%
Jewelry and Precious Metals
2.0%
Perus world export market share, 2009
1.5%
Metal, Mining and Manufacturing
1.0%
Agricultural Products
Fishing and Fishing Products
0.5%
Financial Services Communications Services Apparel Hospitality and Tourism Publishing and Printing Perus Average World Export Share: 0.22%
0.0% -0.5%
0.0%
0.5%
1.0%
1.5%
Exports of US$2 Billion =
Change in Perus world export market share, 1997 to 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. 50
Perus National Export Portfolio

1997 to 2009
0.14%
Transportation and Logistics Oil and Gas Products and Services
0.12%
Perus world export market share, 2009
Furniture Textiles
0.10%
Chemical Products
Construction Materials Processed Food
0.08%
Plastics
0.06%
Leather and Related Products
Forest Products
0.04%
Business Services Biopharmaceuticals Building Fixtures and Equipment Motor Driven Products Heavy Machinery
0.02%
Footwear Power and Power Generation Equipment Prefabricated Enclosures and Structures 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 Perus 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.
Share of World Exports by Cluster

World Market Share 0.2% - 0.5% 0.5% - 1.0% 0.95% - 1.9%
Fishing & Fishing Products Entertainment Textiles Prefabricated Enclosures
Peru, 2008
Hospitality & Tourism Agricultural Products Transportation & Logistics Aerospace Vehicles & Information Defense Tech.
Furniture Building Fixtures, Equipment & Services Lightning & Electrical Equipment Power Generation Construction Materials Heavy Construction Services Forest Products
Processed Food Jewelry & Precious Metals Business Services
Distribution Services
Financial Services
Analytical Education & Instruments Knowledge Medical Creation Devices Communications Publishing Equipment & Printing Biopharmaceuticals Chemical Products Oil & Gas
Motor Driven Products Tobacco
Heavy Machinery
Production Technology Automotive
Apparel Leather & Related Products
Plastics
Aerospace Mining & Metal Engines Manufacturing
Footwear
Sporting & Recreation Goods

52
Marine Equipment
Note: Clusters with overlapping borders have at least 20% overlap (by number of industries) in both directions.
Specialization in Perus 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

Perus 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 Perus 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
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
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?
Developing Unique Strengths

What elements of the business environment can be unique strengths relative to peers/neighbors? What existing and emerging clusters represent local strengths?
Achieving and Maintaining Parity with Peers

What weaknesses must be addressed to remove key constraints and achieve parity with peer countries?
Priorities and sequencing are necessity in economic development

56
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
Peru's Competitiveness Strategy
National Value Proposition
Goals
Action Agenda
Implementation Plan
58
Towards a Peruvian Value Proposition
What is Unique about Peru?
ENDOWMENTS
Abundant natural resources Central location in South America Vast biodiversity and ecosystems
BUSINESS ENVIRONMENT
Privileged access to foreign markets Open to FDI and capital flows
PEOPLE AND CULTURE

Rich culture and history Creative and entrepreneurial population Young, hardworking population Legacy of domestic cooperation to overcome obstacles
59
Towards a Peruvian Value Proposition
A secure, neutral and peaceful country Enhanced the Sophistication of Endowment Related Exports Dynamic regional development with vibrant clusters
Preserving Natural and Cultural Resources
A hub for trade between Latin America, Asia, and North America
Improve Cross-Cutting Policies

60
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 peaceful country
Break the cycle of drug trafficking and insurgency Develop regional clusters to generate a stronger link between the growth process and new employment
61
National Value Proposition: Utilizing Endowments

Perus 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 resources 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
Enhanced the Sophistication of Endowment Related Exports
62
National Value Proposition: A Trade Hub

Perus 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 between Latin America, Asia, and North America
Improve the efficiency and quality of trade enabling regulation and infrastructure. Mobilize and develop clusters of trade related services including logistics and finance
63
National Value Proposition: Decentralization

Perus 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 development with vibrant clusters
Upgrade key weaknesses including regional education, regulatory conditions, and infrastructure Strengthen regions through upgrading regional institutions
64
Lima metalworking cluster: Example of a Cluster Development Initiative

Foundries Plastics Design shops Metals Paints and chemicals Services
(lab, etc)
Agriculture
Automotive Appliances
Electricity
companies
Plastics
Mining
Restaurants
Molds Tools Recycling
Equipment
(electrical, mining, etc)
Financial Logistics Packaging Advisory services Security
Parts
(isolators, etc)
Software / IT Technology transfer
Custom services
Government Institutions
Educational Institutions
Business Institutions
Multilateral Institutions
Action Agenda
POLICIES Sustain the security improvements against old and new threats
A secure, neutral and peaceful country
Maintain improvements achieved in security and prevent a pronounced increased in organized crime an violence Empower security institutions and foster 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
Secure, Neutral and Peaceful: Action Agenda

Sustain the security improvements against old and new threats
Action Areas
Public safety is critical to becoming a trading hub Maintain improvements achieved in security and prevent a pronounced increased in crime an violence Empower security institutions and foster links with the community
Specific Recommendations
Frame an institutional setting where a single institution concentrates efforts to fight drug trafficking and terrorist activities
Support market-based income-substitution programs, control of chemical inputs for coca transformation, drug interdiction, and anti-money laundering efforts
Reform the police force considering labor regime, salary and equipment and needs Strengthen the powers of local mayors as presidents of local public safety committees in coordination with the police 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
Secure, Neutral and Peaceful: Action Agenda

Systematically reduce corruption
Action Areas
Reduce corruption to thrust domestic economic activity and take advantage of opportunities created through open trade policy Generate a strong track record of fighting against corruption Consider its effects on informality and inequality
Specific Recommendations
Launch a systematic campaign to reduce corruption and investigate corruption cases Simplify rules and regulations to reduce the cases in which corruption can occur Foster clean governance in political and business leaders Improve the quality of the civil service. Support meritocracy, responsibility, accountability, training and adequate compensation. Key public officials should be appointed in a process with the consent of the Congress
68
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
A hub for trade between Latin America, Asia and North America
Intensify policy of negotiating free trade agreements Eliminate remaining domestic barriers to trade and investment: tariffs, non-tariff measures and export subsidies
Improve physical connections with other countries

Transportation Energy and Water
CLUSTERS Transportation and Logistics Financial Services
69
Action Agenda
POLICIES Transform endowment-based industries into broad clusters
Launch an ambitious cluster development program
Enhanced the Sophistication of Endowment Related Exports
Build organizational processes in which all actors, particularly private sector representatives, collaborate in building a common vision for each cluster Diversify the economy by developing related clusters
CLUSTERS Metal Mining and Manufacturing Hospitality and Tourism Biodiversity
70
Action Agenda
POLICIES Design a modern policy for regional development
Devise a strategy for each region based on its unique attributes and strengths
Dynamic regionalized development with vibrant clusters
Enhance education and workforce skill development

Focus on education as a central enabling condition for productivity Align education supply with needs through collaboration with clusters
CLUSTERS Metalworking Apparel Leather Fishing and Fishing Products Footwear Agricultural Products Wine
71
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
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
Peru will be in the upper tier of middle-income countries with an income per capita of $10,000 GDP per Capita
(in 1990 PPP US$)
$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 Source: Groningen Growth and Development Centre, Total Economy Database
Peru will reduce its poverty level to 20 percent

GOAL PAST PRESENT
Source: Compendio Estadstico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections
75
Peru will be one of the top two South American countries in volume of trade with Asia Total trade (USD
millions)
PAST
PRESENT
GOAL
Source: Trade Map from official sources (http://trademap.org) ; own projections

76
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
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
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
79
2018
2021
Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations
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
80
2010
2014
2018
2021
Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations
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
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
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 countrys 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 83 needs to continue

2010-1112 Peru CADE Porter

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A Strategy for Sustaining Growth and Prosperity for Peru

Recent Performance of the Peruvian Economy

Copyright 2010 Professor Michael E. Porter

Perus Prosperity Performance

Selected Countries, 1999 to 2009

United States ($46,460) Canada ($37,840)

Trinidad & Tobago Venezuela Dominican Republic

$ 10,000 $ 8,000 $ 6,000

Costa Rica Belize

Guatemala Colombia Thailand Ecuador

Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1999 to 2009

Recent Performance of the Peruvian Economy

Copyright 2010 Professor Michael E. Porter

Change of Exports as Share of GDP, 1999 to 2009

Recent Performance of the Peruvian Economy

Copyright 2010 Professor Michael E. Porter

Chile Argentina Philippines

Costa Rica Indonesia El Salvador Paraguay Vietnam Mexico

Change of Unemployment Rate in Percentage Points, 1999-2009

Peru, 2001 to 2009

Regional Poverty Rates

0% 2004 2005 2006 2007

Recent Performance of the Peruvian Economy

Copyright 2010 Professor Michael E. Porter

Exports as % GDP, 2009 140

Export Intensity and Size

Chile Mexico Argentina Canada Russia India

Venezuela, RB Indonesia Colombia

GDP $Billions, 2009 (log scale)

Perus Export Composition

2009: $20 billion

Perus Exports By Type of Industry

Processed Goods Semi-processed Goods Unprocessed Goods Services TOTAL

Recent Performance of the Peruvian Economy

Copyright 2010 Professor Michael E. Porter

Inbound Foreign Investment

Stocks and Flows, Selected Countries

80% 70% 60% 50% 40% 30% 20% 10% 0% 0%

Canada Honduras Costa Rica El Salvador Brazil Uruguay Dominican Republic

FDI Inflows as % of Gross Fixed Capital Formation, Average 1998 - 2008

Innovation Output of Selected Countries

Ukraine Venezuela Kazakhstan Philippines Colombia Egypt Ecuador Kenya

CAGR of US-registered patents, 2005 2009

30% 40% 170 patents =

Recent Performance of the Peruvian Economy

The Need for a Peruvian Economic Strategy

Peru needs to build a broad consensus on its strengths across society

Structure of the Project

Business Environment Group

Cluster Development Group

Organizational Structure Group

Ease of Doing Business

Executive Opinion Survey

Copyright 2010 Professor Michael E. Porter

India Vietnam Cambodia

Growth of real GDP per employee (PPP-adjusted), 1999 to 2009

Copyright 2010 Professor Michael E. Porter

Copyright 2010 Professor Michael E. Porter

Competitiveness and Poverty Reduction

Copyright 2010 Professor Michael E. Porter