May 3, 2012
by Jaime Daremblum
Peru and Bolivia are neighboring Andean countries that have long been associated with poverty, drug trafficking, ethnic tensions, and political upheaval. Both experienced hyperinflation in the 1980s, and both saw presidents resign from office in the 2000s. Both nations also have abundant mineral wealth, giving them tremendous economic potential. Yet in recent years, their trajectories have diverged quite radically. Simply put: Peru has become more like Chile, while Bolivia has become more like Chávez.
Indeed, the Peruvian business climate has become increasingly friendly to private investment, while the Bolivian business climate has become increasingly hostile to it. Peru has strengthened the foundations of its democracy, while Bolivia has moved toward populist autocracy. As a result, Peru is now considered a rising star among developing economies, while Bolivia is considered a mini-Venezuela.
In the World Bank's 2012 Ease of Doing Business Index, Peru is second only to Chile among Latin American and Caribbean nations, ranking 41st overall, while Bolivia ranks a lowly 153rd, trailing such dictatorial countries as Iran, Tajikistan, Algeria, Gambia, and Burkina Faso. The only Latin American and Caribbean states that place lower than Bolivia are Suriname, Haiti, and Venezuela.
Again, it's important to remember that Bolivia is blessed with massive natural resources, including huge natural-gas reserves. But plentiful resources don't translate into favorable conditions for investment. In its 2012 survey of political risk in 25 of the world's leading mining countries, the consulting firm Samuel Dolbear ranks Bolivia as the second-riskiest for mining investment — even riskier than Kazakhstan and the war-torn Democratic Republic of Congo. Only Russia places lower. Peru, by comparison, ranks (along with Ghana) as the ninth-safest destination, and its total score is more than twice as high as Bolivia's, not to mention 20 percent higher than Argentina's.
Peru's strong showing in the Samuel Dolbear and World Bank surveys can be attributed in large part to the stabilizing, free-market economic policies adopted by Presidents Alejandro Toledo (2001–06) and Alan García (2006–11). Thanks to their efforts, a country once ravaged by hyperinflation and chronic economic disasters now has low inflation and a healthy banking sector. Its economy grew at Chinese levels in 2007 (8.9 percent) and 2008 (9.8 percent), maintained positive growth (0.9 percent) during the global financial crisis in 2009, and then roared back to 8.8 percent growth in 2010.
In January of that year, the Christian Science Monitor declared, "Peru has matured politically to the point where analysts — and investors — are beginning to talk about another regional powerhouse creeping up alongside Brazil." As Peru-based journalist Simeon Tegel points out, "No Latin American or Caribbean economy grew more than Peru during the decade to 2011, with an average annual GDP increase of around 5.75 percent." Peruvian growth slowed to 6.9 percent in 2011, and it is expected to be 5.5 percent this year — but that will be the fastest growth rate in the region, according to the International Monetary Fund.
Not only has economic growth been torrid, it has led to major gains for the Peruvian poor, along with a sense that the country's deeply entrenched social problems are finally being fixed. "Something extraordinary is happening in Peru," writes Mexican author Enrique Krauze, noting that the absolute national poverty rate has fallen from 53 percent to 31 percent over the last decade. "We're a China in miniature," Peruvian intellectual Alfredo Barnechea told Krauze.
Speaking of the Asian giant, it has been critical to Peru's recent growth spurt: China now receives about 15 percent of all Peruvian exports and is the country's biggest trading partner. China and Peru signed a formal free-trade agreement (FTA) in 2009, and bilateral trade increased by 46 percent in the twelve months after the FTA took effect. During the first quarter of 2012, Peruvian exports to China were up by 17 percent over the same period a year earlier. While China trade has made Peru a much richer country, it has also made Peru more vulnerable to a Chinese economic slowdown. Yet Peru still boasts sound fundamentals and enjoys greater stability than in years past.
The same cannot be said of Bolivia, which in the latest World Economic Forum Global Competitiveness Index ranks 136th (out of 142 countries and territories) for goods-market efficiency and 140th for labor-market efficiency. It remains the poorest nation in South America, although that didn't stop President Evo Morales, a Hugo Chávez disciple, from buying a $39 million presidential plane and a $300 million Chinese satellite. Since 2006, the year Morales took office, Bolivia's ranking in the Heritage Foundation/Wall Street Journal Index of Economic Freedom has plummeted from 67th to 146th. Peru ranks 42nd in the 2012 index, up from 63rd in 2006.
One of the first big economic decisions Morales made in 2006 was to nationalize Bolivia's natural-gas industry. The results were sadly predictable. "We have shrinking reserves," the president of the Bolivian Chamber of Hydrocarbons told the Financial Times in August 2010. "This is not due to geological reasons, but because there have not been any significant investments in the past five years." In fact, despite its vast natural endowment, Bolivia has become a net importer of hydrocarbons.
Is Bolivia (population: 10 million) a much smaller nation than Peru (29 million)? Yes. Does it suffer the disadvantage of being a landlocked country, whereas Peru sports a 1,500-mile coastline along the Pacific Ocean? Sure. But their divergent fortunes are chiefly a result of the disparate quality of policymaking in Lima and La Paz. Morales has governed in the mold of Chávez. His current Peruvian counterpart, President Ollanta Humala, a onetime radical who took office last July, has thus far governed like his two immediate predecessors, García and Toledo, both free-market centrists. Humala now realizes that the Chávez model is a path to economic and political ruin. If only Morales would take that lesson to heart.
(You can read this article in Spanish here.)
Ambassador Jaime Daremblum is a Hudson Institute Senior Fellow and directs the Center for Latin American Studies.
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