Statement of the Research Problem

In the early 90s, due to the high level of an interventionist policy leaded by President Alan Garcia, the Peruvian economy was left as one with highest inflation rate in the region, over 7000%. Peru was also embedded in the most extended recession, isolated from the international system due to the external debt crisis with impairment of financial intermediation. Besides, the country experienced high unemployment rates with fiscal imbalances.¹

1 Alberto Pascó-Font and Jaime Saavedra. "Reformas Estructurales y Bienestar: Una mirada al Perú de los noventa". Grupo de Análisis para el Desarrollo-GRADE (2001):30-34

11

Under this catastrophic context left by the Alan Garcia first administration, a figure little known in the political environment won the presidential elections of 1990². In July 28^th, 1990 the President Alberto Fujimori started his first administration and it was then when the Peruvian economy started to align to the path of a more open and market driven economy.

During the first year of the new administration, the government led several radical reform policies to control the hyperinflation. It went from 7481%, at the end of Alan Garcia’s first administration, to around 3.76% at the end of Alberto Fujimori second administration in the year 2000. The reforms also aimed to control the social problems such as terrorism and drug trafficking, and promote trade liberalization, privatization, and national capital repatriation.³ From Figure 1.1, we can realize that the trend of low inflation rates kept continuing even during the President Alejandro Toledo administration (2001-2006), where in average Peru had 2.34% of inflation rate. During the second administration of President Alan Garcia (2007-2011) there was a slight increase in the inflation rate to 3.08%.

Figure 1. 1 Peruvian inflation rate and consumer prices (annual %)

2 Peruvian presidential elections are held every five years, where the president takes officially its position on July 28^th, during a commemoration ceremony of Peruvians’ national day.

3 Oscar Dancourt, “Reformas Estructurales y Politica Macroeconomica en el Peru: 1990-96,"

Consorcio de Investigacion Economica (1997): 9-11.

Alan Garcia

First Administration Alberto Fujimori

First and Second Administration

Alejandro Toledo Administration

Alan Garcia

Second Administration

Source: World Bank

12

From Figure 1.2, we can see that Peruvian economic growth during 1990-2011, represented by GDP growth rate, reflects a cyclic behavior which starts at the end of the 90s.

This shows that from 2001-2008 the Peruvian economic growth was almost sustainable.

There were two slowdowns, the first in 2001 due to the political instability due to presidential elections, and in 2009 due to the financial crisis, but this last with a fast recover during 2011.

Figure 1. 2 GDP real growth rate (%) according to the different presidential administration period

In a much stable economic environment, Peru could be reintegrated to the international marketplace. With a more open foreign policy, Peru could strengthen its economic relation with its neighboring countries, international organizations, and with Asian economies. These made possible that by 2011, according to statistics published by the Peruvian Central Bank comparing indicators such as GDP growth, inflation rate and Net International Reserves, Peru had a better performance⁴. The economic prosperity experienced may be a result of favorable changes in the international scenario derived from big opportunities from better economic integration among countries. This is measure by the

4 For the year 2011 the GDP for some Latin American countries was: Mexico (1.6%), Brazil (4.2%), Colombia (4.2%), Chile (3.7%), and Peru (5.9%). The Inflation rate for the same countries was: Mexico (3.7%), Brazil (5.1%), Colombia (3.3%), Chile (3.3%), and Peru (3.1%). And the Net International Reserves (%GDP) were: Mexico (12.3%), Brazil (14.1%), Colombia (12.3%), Chile (16.9%), and Peru (27.6%).

Ollanta Humala First Administration

Alan Garcia Second Administration Valentín Paniagua

Transitory Administration

Alejandro Toledo First Administration Alberto Fujimori

First and Second Administration

Alan Garcia First Administration

Source: Central Bank of Peru (BCRP)-2012

13

several number of Free Trade Agreements (FTA) signed. Another reason is the emergence of new economic powers such as China.

Over the past several decades, we have been witnesses of how the world has been experiencing changes in the economic map, where China has reemerged as a global power and thus becoming the main character of the new economic era⁵. Under these new circumstances, Peru is in a better position to take advantage of China’s economic approach to the Latin American region. China, as the main player in the economic environment, is not only attracting more and more foreign business looking forward to establish their branches in China, but also is causing that the global demand of production inputs increase beyond measures. This fact has been prompting China to look beyond its borders in order to meet its increasing demand. The spread of Chinese trade out of the Asian region has reached the limits of the Latin American region as a source of more affordable production inputs for their industrialization process.⁶

For some countries such as Mexico and Brazil, which have achieved a moderate industrialization stage and are, by far away, more developed than the rest of the countries in the region, the shift of China’s interest in the region has caused struggles and destabilization in their trade policies towards their main trading partners.⁷ On contrary, for the other group of countries, like Peru, the huge demand of commodities represented by the rise of China, has led to a platform of opportunities to increase the amount of export of traditional and

5 We use the term “reemergence” because by the early 1078, China was the world’s major producer of steel, world’s leader in technical innovations in the textile manufacturing sector. China was also the leader in trading with other nations due its outstanding navigation system, and China’s agricultural revolution and productivity had surpassed the West by the 18th century. Thus, China’s last century rise is actually a renascence rather than a new event.

6Gustavo Bittencourt, "El impacto de China en América Latina: comercio e inversiones," Red Mercosur de Investigaciones Económicas (2012): 50.

7 Lidoy Blázquez et al., “¿Á ngel o demonio? Los efectos del comercio chino," Revista de la CEPAL 90 ( 2006): 20-22.

14

traditional products, products with more value added, more technology transfer, and the attraction of more foreign investment.⁸

After a general idea provided, we are able to have a better understanding about the scenario that will enable us to research “China’s Economic Growth Impact in Latin America and the Caribbean Region: The Peruvian Case (1990-2011)”

1.4 Formulation of the Research Problem