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American investment is highly diversified in the country

Interview - June 2, 2015

The CEO of AMCHAM about how they were involved in the multilateral negociations for the FTA with United States, the developement of the trade and investment relations between both countries or the peruvian mentality of doing business

ALDO R. DEFILIPPI, CEO OF AMCHAM
ALDO R. DEFILIPPI | CEO OF AMCHAM

Christine Lagarde has described the Peruvian economy as one of the most dynamic in the continent and the world. The hosting of the summit of Governors of the World Bank and the IMF shows the global repositioning of a country which had not hosted this event for almost half a century. However, this growth shouldn't be analysed from an internal perspective, we must analyse the contribution of the country which has so far been the main partner of Peru: the United States. How did the United States, their governments and companies, promoted and contributed to the Peru's dynamic growth?

I think the first thing to consider is that Peru have been witnessing some very interesting phenomena which have driven this growth, and that were absent from Latin America in past decades. I am talking specifically about, first, macroeconomic stability, and second, economic opening. For an entrepreneur to invest anywhere, it is essential to have a planning horizon, and when economies are impossible to predict investment retracts significantly. In Peru we've had a significant macroeconomic restructuring, which meant reducing the exceptionally high inflation rates we've had in the past, the big fiscal deficit, or the serious problems in trade balance. This macroeconomic restructuring created a very positive atmosphere for this planning horizon I was talking about. In this sense, tidying up the macroeconomic numbers has been the main contribution of the decades of the '90s onwards. Another important factor has been the economic opening. Latin America has been used to protect its economy in a significant way, actually at some points in time times even doing a total ban on imports. Nowadays it is completely absurd to think that a country can be autonomous, self-sufficient, and consuming exclusively what it produces. What matters is the efficiency in the production of certain goods and services, which will generate the wealth necessary to import those other goods that the country doesn't produce itself. This is why in the '90s, Peru started a significant economic opening which has reduced rates and, therefore, made cheaper products for the consumers, but also for the producers who required raw materials from other countries in order to have a production process that could eventually lead, not only to supply the local market, but also to export. Since the late '90s or early 2000s we started to talk about the Free Trade Agreements (FTAs) because the multilateral negotiations were stalled. So Peru insisted on negotiating an FTA with the United States, which is the model for the rest of the FTAs that the US made with other countries. However, it is important to mention that prior to the FTA with the United States, Peru already had a tariff concession that the government of the United States had granted to the Andean countries, which also included Bolivia, Ecuador and Colombia. The ATPA and ATPDEA allowed the introduction of some duty-free products that could come as substitution of coca crops. However, these were unilateral exemption from the United States to our countries. Obviously, the FTAs considered the particular situation of each country and of each product, therefore, although most of the products were freed from day one, other products entered a process of annual tariff reduction until they reached zero. It was during this project that Peru started the signing of a series of FTAs which subsequently lead to others with Canada, the European Union, EFTA, Asian countries including China and Japan, and now Peru is part of the TPP negotiations, which already includes some other countries in the Pacific Rim.

However, this growth and economic stability is now being affected by external factors, such as the falling price of oil and minerals, and there have also increased the export of non-traditional products because of domestic political and institutional factors affecting foreign investment. What other measures should Peru implement to consolidate its growth, give confidence to the investors looking very closely at the actions of the government, and continue to grow faster than its neighbours in Latin America?

These are two different aspects, some positive, and some negative or that still remain to be implemented. Let's focus on the positive first. The rapid growth has generated a virtuous circle that allowed for other changes in the Peruvian economy, with a growing middle class, an improvement in the quality of local production thanks to competition, the coming of foreign investment, and the establishment of a series of innovative companies in Peru. Because of all these factors, when the international economy slows down its growth, the external sector that originally caused the growth is replaced by another one: the domestic demand. That is, domestic demand starts to take effect when in other countries, especially in the First World, it begins to show problems. So in Peru we see the recovery of sectors such as construction, domestic trade, and a whole series of activities that allow the Peruvian economy to continue growing. That, in turn, feeds back to the middle class and increases consumption and investment. That is the virtuous circle which has allowed us to have a good performance compared to other countries. However, all these reforms and factors, which have been positive, have lived together with a number of elements that Peru still needs to change or improve. First of all, the infrastructure, which is now a bottleneck for investment and growth. Also our very poor level in education. There is also the excessive paperwork and permits required by the state bureaucracy, which results in informality, delays or unnecessary paperwork and duplicates. Additionally, corruption still exists in many activities, and sometimes is actually caused precisely by all that excessive paperwork. Overall, I think that while it is true that the economy has modernized considerably and the private sector has learned to be more competitive, the state has not yet gone through the necessary series of transformation processes to continue supporting this growth. These issues end up being not only a quantitative problem, but also qualitative, which impairs the country's growth. Hopefully in the next few years Peru will be able to solve them.

At the end of the day, governments come and go, but the private sector companies are the ones who linger and eventually generate true wealth over the passing time. However, there must be real communication between these two sectors. How has AmCham adapted to this climate of political change, and how  were you able to provide a sense of security to the members of your organization?

First of all, while it is true that the private sector continues to adapt, we must ensure that the public sector is also modernized at the same pace. The state policy in all aspects must keep up with the private sector. Regardless of who is the government of the day, they can't change the rules every time there's an election, otherwise we take away the planning horizon I mentioned earlier from the country, from its citizens, and from the private sector. I'm not talking exclusively about the national government, but also ans especially at the level of regional governors, mayors, and other authorities of lower level.

Regarding the AmCham, the American Chamber of Commerce of Peru is an institution that has been here for 47 years, and it's very active all across the country. It has 5,000 representatives from 580 companies, a third of them are from the US, the rest are foreign or Peruvian. Interestingly, the represented companies are not all from a single sector, unlike other associations which group companies from one particular activity. The companies associated in AmCham are virtually from every sector in the country, and again, from several different national origins. So the Chamber has had to adapt, not only to different cultural aspects, which vary accordingly to the different sectors and nationalities, but also to the processes of transformation that these sectors go through. For example, by the time of the opening of the economy and the FTA negotiation, AmCham was very active locally in training small entrepreneurs and spreading the benefits of the FTA, but also in the United States, convincing the American authorities on the benefits of approving an FTA with Peru. AmCham Peru carried out 18 missions to the United States Congress, talking to 365 congressmen, senators and representatives in 18 months. Each month it took five CEOs of American companies established in Peru, to talk to their congressmen and explain to them that the FTA was good for their country, for the companies from their states operating in Peru, and that it was good for Peruvians as well. In that sense, that work of information dissemination contributed to the success of the efforts made by the Peruvian government itself for achieving the FTA before other countries, despite having started negotiations at the same time as Colombia and Ecuador. But once the FTA was approved we had to go through the whole process of implementing it, and while in the US this process is very simple, in Peru it took 101 laws to do it. It was a long process of adaptation, writing the laws, and getting them voted in Congress, so that the laws approved were actually the same that had been agreed in the treaty. During this period of time, the Chamber had to adapt to serve as an interlocutor between the parties, in order to find a position that was reasonable and convenient. But after the implementation, there came the whole process of making it useful for improving the welfare of all Peruvians. Then it was no longer enough to disseminate information and train people, we had to produce to take advantage of the export and import. And we continue to do so. We send and receive trading missions, especially regarding SMEs. Last year we took nine of these missions to the United States and in turn have received five here.

The United States has been present in Peru in sectors like mining, infrastructure, or finance. From your point of view, how have the American companies in these sectors added value when establishing in Peru? How was the demand increased for these services to the United States in these sectors?

The United States is one of the main investors and trading partners of Peru. I'm not sure if it's the number one, because a lot of American investment doesn't come directly from the United States but from companies incorporated in Cayman Islands, the Isle of Man, Luxembourg, Panama, or wherever, so this actually underestimates the real amount of the American investment. The truth is that American companies have a very important place in the overall trade and investment, and it has been like that for years. This country is very much oriented towards the United States, unlike probably countries like Argentina or Brazil, which are more oriented towards Europe. The Peruvians who plan to travel abroad, they always want to know Miami first. If they are considering to have savings abroad, they think of an American bank. If they are looking to graduate from a foreign school, they will think of a university in the United States. Obviously, the horizons have broadened and different opportunities appear all the time, not only Europe, but also in places like Australia or New Zealand. But Peru have always had a very close relationship with the United States, and for years the US has been its main trade partner. In recent years it's become the second trading partner though, right after China, obviously as a result of the growth of China and the economic recession in the United States. However, the quality of the trade between Peru and the United States is still very important, not only in terms of the diversification of exports and the number of tariff headings exported to the United States, but also because of the quality of trade measured in terms of added value, the number of companies and, above all, the SMEs participating in this. Trade with the United States remains very important, and actually in terms of imports, the United States is still the main supplier of capital goods: Caterpillar is the largest supplier of capital goods to Peru. So the business relationship is still very important, and I think it will regain its former levels now that the American economy is recovering faster than others, and because of the devaluation of the Peruvian currency, the Nuevo Sol. As the Nuevo Sol is loses its value, Peruvian products become cheaper and therefore Peru will tend to export more. The American economy's drive and capacity for recovery is huge, also its innovation and technological progress, and therefore it offers great opportunities for the Peruvian market. American investment is highly diversified in the country.

AmCham educates and trains, cooperates and provides a bridge between the two countries, contributing directly or indirectly to the growth of the productive sector of Peru, its SMEs. As a Peruvian and a man familiar with both nations, and connoisseur of the Peruvian mentality and way of doing business,  how do you communicate the advantages of coming to Peru?

Communicating is just like making friends. You have to build trust, to must get to really know the other party, and that doesn't happen overnight, you have to work in the market. The Chamber has to maintain a continuity, it can't participate in a mission or in a fair and then never revisiting its potential markets or customers. It has to worry about the people who are representing it in these missions, otherwise the image of the Chamber is harmed. There are many different aspects to be considered in building that trust.

A question for our audience, what is the key to success in dealing with a Peruvian businessman?

You have to know the people. As in all parts of the world, some are good, some bad, some are more demanding and others less demanding but I think the same idea applies here: you must build trust, build a relationship. Of course, as in any business you have to take precautions and be as well informed as possible, but all in all I think in general terms Peruvians are friendly, warm, welcoming, and very open to foreigners. Moreover, in Peru you can have a good time, the food is great, it's a country that's never suspicious of foreigners. I think in recent years there came about 17,000 Spanish people to work in the country, and I'm sure very few have felt rejected, on the contrary, they are welcome because they are people who bring new work practices, knowledge, they train others, so they're welcome into Peru.

Finally, I will ask you for something you have probably not been asked before. If you had to do my job, if you had to choose the title of this interview, what would it be?

It should be something referring to the opportunities that Peru still offers. This morning I was coming to the office, listening to the news, and they were talking about how France had achieved a growth of 0.4% in March, and that the French people were so happy about it. In Italy and in Spain they have also seen positive figures for the first time after several years of recession. I mean, the whole world is facing serious trouble, and we can't be an exception to that. We could have probably had more growth if some things had been done better, but on the other hand we have to be aware that in other countries they are also facing the same problems, and of course these affect us as well. We are in a very complex neighbourhood, the problems of Argentina, Brazil, Venezuela, Bolivia, Ecuador, are all very serious. Even Chile, which has been the example in the region, is also having problems. Of course we shouldn't compare ourselves to our neighbours, we must analyse the countries that are doing better and try to imitate them. Only this way we will overcome the problems that we have yet to resolve, and strengthen the aspects that have allowed Peru to grow and reduce poverty as it has done so far.

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