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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 A Strategy for Sustaining Growth and Prosperity for Peru
Transcript
Page 1: A Strategy for Sustaining Growth and Prosperity for Peru Files/2010-1112_Peru_CADE_Porter... · 13 2009: $20 billion Peru’s Export Composition by SITC categories 1962- 2009 * In

1 Copyright 2010 © Professor Michael E. Porter

Professor Michael E. PorterHarvard 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); CompetitiveAdvantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); “Strategy and the Internet” (Harvard BusinessReview, March 2001); and a forthcoming book. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. Additional information maybe found at the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu. Version: November 27, 2009

A Strategy for Sustaining Growthand Prosperity for Peru

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2 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

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3

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Peru’s Prosperity Performance1950-2009

Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database (June 2009)

GDP per Capita(in 1990 PPP US$)

CAGR:

+2.07%

CAGR:

+4.41%

CAGR:

- 0.73%

2009

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4

Prosperity PerformanceSelected Countries, 1999 to 2009

Source: EIU (2010), authors calculations

PPP-adjusted GDP per Capita, 2009 ($USD)

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

Argentina

Belize

Bolivia

Brazil

Canada ($37,840)

Chile

ColombiaCosta Rica Cuba

Dominican Republic

Ecuador

El Salvador

Guatemala

Haiti

Honduras

Jamaica

Mexico

Nicaragua

Panama

Paraguay

Peru

Trinidad & Tobago

United States ($46,460)

UruguayVenezuela

Cambodia

China

IndiaIndonesia

Laos

Malaysia

Philippines

Russia

Thailand

Vietnam

$ 0

$ 2,000

$ 4,000

$ 6,000

$ 8,000

$ 10,000

$ 12,000

$ 14,000

$ 16,000

$ 18,000

$ 20,000

0% 2% 4% 6% 8% 10% 12% 14%

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5 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 • Sound macroeconomic policies since the mid 1990s, trade opening and a supportive

international economic environment have allowed the country to prosper

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6

Export IntensitySelected CountriesExports as %

GDP, 2009

Source: EIU (2010)

Change of Exports as Share of GDP, 1999 to 2009

Argentina

Belize

Bolivia

Brazil

Canada

Chile

Colombia

Costa Rica

Cuba

Dominican Republic

Ecuador

El SalvadorGuatemala

Haiti

Honduras

Jamaica

Mexico

Nicaragua

Panama

Paraguay

Peru

Trinidad & Tobago

USA

Uruguay

Venezuela

Cambodia

Indonesia

ThailandVietnam

China

India

Russia

0%

10%

20%

30%

40%

50%

60%

70%

80%

-20% -15% -10% -5% 0% 5% 10% 15% 20% 25%

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7 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 • 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

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8

Unemployment PerformanceSelected CountriesUnemployment

Rate, 2009

Change of Unemployment Rate in Percentage Points, 1999-2009Source: EIU (2010)

DeterioratingImproving

Argentina Bolivia

Brazil

CanadaChile

Colombia

Costa Rica

Cuba

Dominican Republic

Ecuador

El Salvador

Honduras

Jamaica

Mexico

NicaraguaPanama

Paraguay

Peru

Trinidad & Tobago

United States

UruguayVenezuela

China

India

Indonesia

Malaysia

PhilippinesRussia

Thailand

Vietnam

0%

2%

4%

6%

8%

10%

12%

14%

16%

-10% -8% -6% -4% -2% 0% 2% 4% 6%

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9

Poverty RatesPeru, 2001 to 2009% of Population Under

the Poverty Line

0%

10%

20%

30%

40%

50%

60%

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

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10

Regional Poverty RatesPeru, 2004 to 2009

% of Population Under the

Poverty Line

0%

10%

20%

30%

40%

50%

60%

70%

2004 2005 2006 2007 2008 2009

Coast Sierra Lowlands

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

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11 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 • 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

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12

Export Intensity and SizeSelected Countries

Exports as %GDP, 2009

Source: World Bank (2010)GDP $Billions, 2009 (log scale)

ArgentinaBolivia

Brazil

Chile

Colombia

Costa Rica

Dominican Republic

Ecuador

El SalvadorGuatemala

Haiti

Honduras

Mexico

Panama

Paraguay

Trinidad and Tobago

Uruguay

Venezuela, RB

China

Malaysia

Indonesia

RussiaCanada

United States

India

-

20

40

60

80

100

120

140

1,00010 10,0001001

Peru

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13

2009: $20 billion

Peru’s Export Compositionby SITC categories 1962-2009

* In 2009 dollars. Note: Showing standard SITC rev. 1 categories, goods only.Source: UN Comtrade; authors’ analysis

1962: $4 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

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14

Peru’s Exports By Type of Industry

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Processed GoodsSemi-processed GoodsUnprocessed GoodsServicesTOTAL

World Export Market Share (current USD)

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.

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15 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 • 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

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16

Inbound Foreign InvestmentStocks and Flows, Selected Countries

Source: UNCTAD, World Investment Report (2009).

Inbound FDI Stocks as % of GDP,

Average 1998-2008

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

Argentina

Belize

Bolivia

Brazil

Canada

Chile

Colombia

Costa Rica

Cuba

Dominican Republic

Ecuador

El SalvadorGuatemala

Haiti

Honduras

Jamaica

Mexico

Nicaragua

Panama

ParaguayPeru

Trinidad and Tobago

United States

Uruguay

Venezuela

Cambodia

Indonesia

Laos

Malaysia

Philippines

Thailand

Vietnam

China

India

Russia

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

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17

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-30% -20% -10% 0% 10% 20% 30% 40%

Source: USPTO, World Bank

Average U.S. patents per million population,

2005 – 2009

CAGR of US-registered patents, 2005 – 2009

Innovative CapacityInnovation Output of Selected Countries

Saudi Arabia

RussiaPortugal

Turkey

India

Poland China

South Africa Greece

170 patents =

Argentina

Brazil

Croatia

Lithuania

PhilippinesEcuador

Chile

ThailandPeruVenezuela

Mexico

Colombia

Ukraine

Estonia

Costa Rica

Uruguay

KazakhstanKenyaEgypt

Latvia

United Arab Emirates

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18 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 • 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

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19

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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20

Structure of the ProjectAdvisory

Board

Joint Peruvian and

Boston Team

Macroeconomic Competitiveness

Group

Business Environment

Group

Cluster Development

Group

Organizational Structure

Group

•Tax Reform

•Security

•Health Reform

•Education•Financial •Innovation •Infrastructure•Labor •Energy•Water Resources•Ease of Doing Business

•Metal-MechanicCluster

•Institutional Strengthening

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Executive Opinion Survey

City Sample Size

Lima 160

Arequipa 80

Chiclayo 80

Cusco 80

Trujillo 80

Iquitos 71

TOTAL 551

• 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

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22 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

What is Competitiveness?

• 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

• 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

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23 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

Labor ProductivitySelected Countries, 1999 to 2009

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

Real GDP per employee (PPP adjusted US$), 2009

Source: authors calculation Groningen Growth and Development Centre (2010)

Argentina

Bolivia

Brazil

Canada

Chile Colombia

Ecuador

Mexico

Peru

UnitedStates

UruguayVenezuela

Cambodia

Indonesia

Malaysia

Philippines

Thailand

Vietnam

ChinaIndia

Russia

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

-2% 0% 2% 4% 6% 8% 10% 12%

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24 Copyright 2010 © Professor Michael E. Porter

Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the NationalBusiness

Environment

MacroeconomicPolicies

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

• 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

Determinants of Competitiveness

Endowments

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25

Peru's Endowments

Natural Resources

Geographic Location

Cultural Legacy

•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

•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

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26 Copyright 2010 © Professor Michael E. Porter

Macroeconomic Competitiveness

Microeconomic Competitiveness

Sophisticationof Company

Operations andStrategy

Quality of the NationalBusiness

Environment

MacroeconomicPolicies

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

• 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

Determinants of Competitiveness

Endowments

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27 Copyright 2010 © Professor Michael E. Porter

Macroeconomic Competitiveness

• Human development– Basic education– Health system

• Political institutions– Political freedom– 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

• Fiscal policy– Government surplus/deficit– Government debt

• Monetary policy– Inflation

Social Infrastructure and Political Institutions

Macroeconomic Policies

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28 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

Competitiveness and Poverty Reduction

Social Development

• There is a strong connection between economic and socialdevelopment

• Improving competitiveness and decreasing poverty requires improving the economic and social context simultaneously

Economic Development

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29 Copyright 2010 © Professor Michael E. Porter

Macroeconomic Competitiveness

Microeconomic CompetitivenessSophistication

of CompanyOperations and

Strategy

Quality of the NationalBusiness

Environment

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

Endowments

MacroeconomicPolicies

Determinants of Competitiveness

• The internal skills, capabilities, and management practices needed for companies to attain the highest level of productivity and innovation possible

Sophisticationof Company

Operations andStrategy

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30 Copyright 2010 © Professor Michael E. Porter

Determinants of Competitiveness

• The external business environment conditions that allow companies to reach high levels of productivity and innovation

Quality of the National Business

Environment Macroeconomic Competitiveness

Microeconomic CompetitivenessSophistication

of CompanyOperations and

Strategy

Quality of the NationalBusiness

Environment

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

Endowments

MacroeconomicPolicies

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31 Copyright 2010 © Professor Michael E. Porter

Quality of the National Business EnvironmentContext for

Firm Strategy

and Rivalry

Related and Supporting Industries

Factor(Input)

ConditionsDemand

Conditions

• Sophisticated and demanding local customers and needs

• 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

• Local rules and incentives that encourage investment and productivity

Open and vigorous local competition

• Access to high quality business inputs

• Availability of suppliers and supporting industries

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32 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

Determinants of Competitiveness

• A geographic concentration of firms, specialized assets, and institutions in particular fields.

State of Cluster Development

Macroeconomic Competitiveness

Microeconomic CompetitivenessSophistication

of CompanyOperations and

Strategy

Quality of the NationalBusiness

Environment

SocialInfrastructure and PoliticalInstitutions

State of Cluster Development

Endowments

MacroeconomicPolicies

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Accommodations (hotels, hostels, lodges)

Institutions for Collaboration

Educational and Research Institutions

Marketing Agencies

Banking Services / Foreign Exchange

Crafts

Restoration/conservation

Local retail and other services

(Internet cafes, etc.)

Maintenance Services

Food Suppliers

PropertyServices

Food Cluster

Hospitality equipment suppliers

Health Cluster

Source: Adapted from HBS student project, 2010“Peru Tourism Cluster”; Agung, Anand, Bhardan, Ilanos, Nosher

Cusco Tourism Cluster

Transport(land, air, rail and river)

RestaurantsAttractions and

activities (e.g. National Parks,

cultural shows)

Government Agencies

Related clusters

Travel Agents Tour Operators

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34 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt

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-oversacross firms and associated institutions in competition

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35 Copyright 2009 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt

FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products

Hospitality & TourismAgricultural

Products

Transportation & Logistics

Clusters and Economic DiversificationLinkages Across Clusters

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Entertainment

Information Tech.

Communi-cations

Equipment

Aerospace Engines

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology

Motor Driven Products

Mining & Metal Manufacturing

Jewelry & Precious Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

Note: Clusters with overlapping borders or identical shading have at least 20% overlap(by number of industries) in both directions.

Apparel

Leather & Related Products

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36 Copyright 2010 © Professor Michael E. PorterCompetitiveness Master - 2009-04-20.ppt

Stages of National Competitive DevelopmentShifting Policy Imperatives

Factor-Driven Economy

Investment-Driven Economy

Innovation-Driven Economy

Source: Porter, Michael E., The Competitive Advantage of Nations, Macmillan Press, 1990

Low Cost Inputs Productivity Unique Value

• Macro, political, and legal stability

• Improving human capital• Efficient basic

infrastructure• Lowering regulatory costs

of doing business

• Increasing local rivalry• Market opening• Advanced infrastructure• Incentives and rules

encouraging productivity• Cluster formation and

activation

• Advanced skills• Scientific and technological

institutions• Incentives and rules

encouraging innovation• Cluster upgrading

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37

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-dollarsBUT

• 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

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38

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

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39 Copyright 2010 © Professor Michael E. Porter

Corruption Perception Index, 2009

Note: Ranks only countries available in both years (131 countries total)Source: Global Corruption Report, 2009

Change in Rank, Global Corruption Report, 2009 versus 2003

Rank in Global Corruption Index,

2009

Deteriorating Improving

High corruption

Low corruption

Canada

USA

ChileUruguay

Cuba

Trinidad and Tobago

Costa Rica

Brazil

El Salvador

Peru, Colombia

MexicoPanama

Dominican Republic

Nicaragua

Argentina

Guatemala

Venezuela

Bolivia

Honduras

EcuadorParaguay

ChinaIndia

Russia

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40

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

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41

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: Peru’s Business Environment

Context for Firm

Strategy and Rivalry

Related and Supporting Industries

Factor(Input)

ConditionsDemand

Conditions

+ Improving consumer protection regulation± Improving sophistication of local buyers– Weak environmental standards enforcement

+ Openness to foreign investment, trade, capital flows

+ Improvements in investor protections± Efforts to strengthen competition

policy– Rigidity of employment – Difficulty in business formation– Low intensity of local competition– High Informality of the economy+ Abundant resources: mineral,

agricultural, fishing, and cultural+ Advantageous location+ Improving administrative infrastructure + Simplified customs procedures± Sound banking system, but high interest

spreads± Improving financial markets, but limited

venture capital availability– Poor physical infrastructure– Low skill levels in the labor force,

mismatch with demand– Weak university-industry research

collaboration– Few high-quality research and scientific

institutions

– Limited local suppliers and supporting industries

– Shallow clusters

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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

Factor(Input)

Conditions

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44 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

Peru: 36

Colombia: 39

Ecuador: 130

Venezuela: 172

Uruguay: 124

Brazil: 127

Argentina: 115

Chile: 43

Bolivia: 149

Paraguay: 106

Guyana: 100Suriname: 161

Ease of Doing BusinessSouth America, 2011

Source: The World Bank, Doing Business (2011), 183 countries

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45 Copyright 2010 © Professor Michael E. Porter20100915 – Peru.ppt

0

20

40

60

80

100

120

Ease of DoingBusiness

Getting Credit ProtectingInvestors

RegisteringProperty

TradingAcrossBorders

Starting aBusiness

Paying Taxes Closing aBusiness

Dealing withConstruction

Permits

EnforcingContracts

Ease of Doing BusinessPeru, 2011Ranking, 2011

(of 183 countries)

Source: The World Bank, Doing Business (2011), GDP rank on GDP per capita, ppp-adjusted

Favorable Unfavorable

Peru’s per capita GDP rank: 81

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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• Peru’s science and technology infrastructure is very weak.

Factor(Input)

Conditions

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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

Barriers to trade and investment have been reduced, but labor market efficiency and local rivalry remain limited

Context for Firm

Strategy and Rivalry

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Local demand sophisticationEconomic 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 standardsRegulations 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

Peruvian consumer sophistication is increasing. Consumer protection and environmental regulations are in place but not well enforced

Demand Conditions

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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

Availability of suppliers and supporting industries remains low, and Peruvian clusters are shallow

Related and Supporting Industries

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50 Copyright 2010 © Professor Michael E. Porter

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

-0.5% 0.0% 0.5% 1.0% 1.5%

Peru’s National Export Portfolio1997 to 2009

Change in Peru’s world export market share, 1997 to 2009Source: 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.

Peru

’s w

orld

exp

ort m

arke

t sha

re, 2

009

Change In Peru’s Overall World Export Share: +0.09%

Peru’s Average World Export Share: 0.22%

Exports of US$2 Billion =

Fishing and Fishing ProductsAgricultural

Products

CommunicationsServices

Jewelry and Precious Metals

Metal, Miningand Manufacturing

ApparelFinancialServices

Publishing and Printing

Hospitality and Tourism

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51 Copyright 2010 © Professor Michael E. Porter

0.00%

0.02%

0.04%

0.06%

0.08%

0.10%

0.12%

0.14%

-0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08%

Peru’s National Export Portfolio1997 to 2009

Change in Peru’s world export market share, 1997 to 2009Note: Showing clusters with greater than $10 mil exports.Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, HBS; Richard Bryden, Project Director.

Peru

’s w

orld

exp

ort m

arke

t sha

re, 2

009

Exports of US$2 Billion =

Oil and GasProducts and Services

Plastics

Transportation and Logistics

FurnitureTextiles

Construction Materials

Processed FoodChemical Products

Forest ProductsLeather and Related Products

Business Services Heavy Machinery

Prefabricated Enclosures and StructuresPower and Power Generation EquipmentFootwear

Motor Driven Products

Production TechnologyCommunications Equipment

Biopharmaceuticals

Building Fixtures and Equipment

Automotive

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52 Copyright 2010 © Professor Michael E. Porter

FurnitureBuilding Fixtures,

Equipment & Services

Fishing & Fishing Products Hospitality

& TourismAgricultural

ProductsTransportation

& Logistics

Share of World Exports by ClusterPeru, 2008

Plastics

Oil & Gas

Chemical Products

Biopharma-ceuticals

Power Generation

Aerospace Vehicles &

Defense

Lightning & ElectricalEquipment

Financial Services

Publishing & Printing

Information Tech.

Communi-cations

Equipment

Business Services

DistributionServices

Forest Products

Heavy Construction

Services

ConstructionMaterials

Prefabricated Enclosures

Apparel

Leather & Related Products

Jewelry & Precious

Metals

Textiles

Footwear

Processed Food

Tobacco

Medical Devices

Analytical InstrumentsEducation &

Knowledge Creation

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

Marine Equipment

Aerospace Engines

Heavy Machinery

Sporting & Recreation

Goods

Automotive

Production Technology

Motor Driven Products

Mining & Metal Manufacturing

0.2% - 0.5%

0.5% - 1.0%

0.95% - 1.9%

Enter-tainment

World Market Share

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53

Specialization in Peru’s RegionsSelected Examples

La Libertad (El Porvenir, Trujillo)Leather, Footwear

Lima (La Victoria)Apparel

Puno and ArequipaApparel from Alpaca

CuzcoTourism

Cajamarca (Bambamarca)Dairy, Processed Foods

Ancash (Chimbote)Fishing and Fish Products

IcaWine

Lima (Infantas, Los Olivos)Metal Manufacturing, Metal Furniture

PiuraAgricultural Products: Mangoes, Lemons, Brown Sugar Syrup

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54 Copyright 2010 © Professor Michael E. Porter

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 clustersconsisting 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

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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 andinternational 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

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56 Copyright 2010 © Professor Michael E. Porter

National Value Proposition

Creating and Economic Strategy

Developing Unique Strengths Achieving and Maintaining Parity with Peers

• What elements of the business environment can be unique strengths relative to peers/neighbors?

• What existing and emerging clustersrepresent local strengths?

• What weaknesses must be addressed to remove key constraints and achieve parity with peer countries?

• 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?

• Priorities and sequencing are necessity in economic development

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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

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58 Copyright 2010 © Professor Michael E. Porter

Peru's Competitiveness Strategy

National Value Proposition

Implementation Plan

Goals

Action Agenda

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59 Copyright 2010 © Professor Michael E. Porter

What is Unique about Peru?

Towards a Peruvian Value Proposition

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

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Towards a Peruvian Value Proposition

Enhanced the Sophistication of Endowment

Related Exports

A hub for trade between Latin

America, Asia, and North America

Dynamic regional

development with vibrant

clusters

A secure, neutral and

peaceful country

Improve Cross-Cutting Policies

Preserving Natural and Cultural Resources

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National Value Proposition: A secure, neutral and peaceful country

Reduce corruption to fight informality and inequality

Empower security institutions and foster links with local communities

Break the cycle of drug trafficking and insurgency

Develop regional clusters to generate a stronger link between the growth process and new employment

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.

A secure, neutral and

peaceful country

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Enhanced the Sophistication of Endowment

Related Exports

•Provide highly efficient infrastructure and anefficient regulatory environment to make Peru one ofthe most productive locations for accessing naturalresources

•Ensure that regulatory conditions enable endowmentsto be used in ways that are ecologically and culturallysustainable

•Upgrade and deepen clusters drawing on Peru'sendowments and develop suppliers, services andrelated clusters

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.

National Value Proposition: Utilizing Endowments

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National Value Proposition: A Trade Hub

Maintain and extend low trade barriers

Improve the efficiency and quality of trade enabling regulation and infrastructure.

Mobilize and develop clusters of trade related services including logistics and finance

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

A hub for trade between Latin

America, Asia, and North America

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National Value Proposition: Decentralization

Build unique regional economies based on local strengths.

Upgrade key weaknesses including regional education, regulatory conditions, and infrastructure

Strengthen regions through upgrading regional institutions

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.

Dynamic regional development with vibrant

clusters

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MoldsFinancial

AgricultureElectricity companies

Foundries

Lima metalworking cluster: Example of a Cluster Development Initiative

Plastics

Design shops

Metals

Paints and chemicals

Services(lab, etc)

Software / IT

Technology transfer

Plastics MiningAutomotive

Restaurants Appliances

Logistics

Packaging

Advisory services

Security

Equipment(electrical, mining,

etc)

Tools

Recycling

Parts(isolators, etc)

Custom services

Government Institutions

Educational Institutions

Business Institutions

Multilateral Institutions

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Action Agenda

A secure, neutral and peaceful country

POLICIES

•Sustain the security improvements against old and new threats

• 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

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67 Copyright 2010 © Professor Michael E. Porter

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

• 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.

Specific Recommendations

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68 Copyright 2010 © Professor Michael E. Porter

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

• 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

Specific Recommendations

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69 Copyright 2010 © Professor Michael E. Porter

Action Agenda

A hub for trade between Latin

America, Asia and North America

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• 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

CLUSTERSTransportation and Logistics

Financial Services

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70 Copyright 2010 © Professor Michael E. Porter

Action Agenda

Enhanced the Sophistication of

Endowment Related Exports

POLICIES

•Transform endowment-based industries into broad clusters

• Launch an ambitious cluster development program

•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

CLUSTERSMetal Mining and Manufacturing

Hospitality and TourismBiodiversity

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Action Agenda

Dynamic regionalized

development with vibrant clusters

POLICIES

• Design a modern policy for regional development

• Devise a strategy for each region based on its unique attributes and strengths

• 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

CLUSTERSMetalworking

ApparelLeather

Fishing and Fishing ProductsFootwear

Agricultural ProductsWine

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72 Copyright 2010 © Professor Michael E. Porter

•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

Improve Cross Cutting Policies

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73 Copyright 2010 © Professor Michael E. Porter

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 thecountries 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

Eleven Goals for 2021

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74 Copyright 2010 © Professor Michael E. Porter

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021

Peru will be in the upper tier of middle-income countries with an income per capita of $10,000

Note: PPP using Geary Khamis calculation methodology. Source: Groningen Growth and Development Centre, Total Economy Database

GDP per Capita(in 1990 PPP US$)

PAST PRESENT

GOAL

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% of Population Under the Poverty Line

Source: Compendio Estadístico, Instituto Nacional de Estadistica e Informatica (INEI), 2010; own projections

PAST PRESENT

Peru will reduce its poverty level to 20 percent

GOAL

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Total trade (USD millions)

PAST PRESENT

Peru will be one of the top two South American countries in volume of trade with Asia

GOAL

Source: Trade Map from official sources (http://trademap.org) ; own projections

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FDI Inflows (USD millions)

Source: UNCTADSTAT (http://unctadstat.unctad.org); own projections

PAST PRESENT

Peru will be the first-ranked recipient of foreign direct investment among the countries along the South American Pacific coast

GOAL

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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

Eleven Goals for 2021

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0%

20%

40%

60%

80%

100%

120%

2000 2014 2018 2021

Peru will pass from the third to the second tier in the evaluation made by the OECD Program for International Student Assessment (PISA)

Source: OECD Program for International Student Assessment (PISA) 2000. Authors calculations

% of top countries (out of 65 countries)

PASTGOAL

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0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2014 2018 2021

Peru will pass from "mid-level" to "low-level" for corruption in the region, as measured by Transparency International's Corruption Perceptions Index

Source: Transparency Report. 2010 Corruption Perception Index. Authors calculations

% of less corrupted countries (out of 180 countries)

PAST TODAY GOAL

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Implementation Strategy: Sequencing of Policies

• Financial system• Science and Technology

• Maintain Government Policy Programs

• Security• Anticorruption• Physical Infrastructure• Skills

• Regional Development

• Education and Health Care• Regional Development• Cluster Development

PriorityImmediate Long term

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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)

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Summary• Peru has made significant progress towards becoming a prosperous

economy and a better society

• Peru has many assets, and already made important policy choicestowards 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 participatedin 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 needs to continue


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