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PolicySeptember 1 2009

Luis Carranza

Peru's finance minister talks about his commitment to a market-led economy and discusses the policies which he believes will transform the country into a major player on the world stage. Writer Jason Mitchell
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Luis Carranza

Luis Carranza, Peru's finance minister, is set on the country becoming one of the most dynamic in Latin America - and quickly.

"We want Peru to be the next Chile," says Mr Carranza. "We want it to be among the top 25 countries in the world in terms of business-friendliness within the next two years.

"The country suffered from terrible hyperinflation 20 years ago. All Peruvians understand the damage that inflation causes and support the central bank's policy of inflation-targeting. An entrepreneurial culture has taken root in the country and it is here to stay."

Mr Carranza refers to the World Bank's Doing Business Report, which currently ranks Peru in 62nd place among 181 countries worldwide in terms of the level of business regulations and red tape. For Peru to achieve a top 25 ranking, it would involve moving up to the level of Switzerland, Germany and South Korea. Chile, seen by many people as the most business-friendly country in Latin America, is ranked 40th.

However, some analysts criticise the Doing Business Report because it does not take into account a country's security situation and macroeconomic stability (Brazil comes in at 125th place in the report, for example).

"The quality of macroeconomic policy is very high in Peru," says Peter Hakim, president of the Inter-American Dialogue, a think tank focusing on Latin America. "But I think the Doing Business Report is pretty subjective. How is it possible that the Latin American country that attracts the most foreign direct investment - Brazil - is ranked so lowly in the report?"

Flexible labour market

When it comes to policy on labour markets, Mr Carranza has a different perspective from some other governments in Latin America. For example, in June, at the meeting of the International Labour Organisation in Geneva, Switzerland, Cristina Fernández de Kirchner, the president of Argentina, strongly attacked flexible labour markets and said that their past application in the country had precipitated excessive unemployment.

Mr Carranza says: "I believe that labour markets must be sufficiently flexible to avoid any negative shocks; you don't want to see businesses collapsing because of rigidities in the markets. On the other hand, it is important to have a minimum level of protection in place for people who become unemployed."

Some analysts believe that Peru's next presidential elections in 2011 are crucial because if a business-friendly president is elected, the country would have reached a point of no return. However, Mr Carranza is convinced that Peru has already reached this stage. "No, the country cannot change," he says. "The institutions are very solid; there has been an independent central bank since 1993 and a fiscal responsibility law since 1999."

He believes that the Pacific Rim is becoming more and more important for Peru (China has free-trade agreements with only two Latin American countries, Chile and Peru).

"The global axis is shifting from the Western world to the Pacific basin," he says. "The Pacific is the future."

He believes that improvements in public education and infrastructure are key priorities for the country. For example, Peru is one of only a handful of countries in the world taking part in the One Laptop per Child scheme.

Mr Carranza is committed to the belief that a bigger economy will eventually lead wealth to cascade throughout Peruvian society, and that it is not difficult to explain to the poor the benefits of a market-friendly economy.

He says: "All Peruvians, including poor ones, understand that inflation undermines economic growth and leads to unemployment. They understand the importance of combating inflation and having fiscal discipline."

Furthermore, he rejects criticism that Peru has sold some of its prized assets, including important copper mines, to Chinese investors at prices that are too low. "We have taxes of 30% on their profits," he says. "That contributes to the country's finances."

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