1. General Policy Framework

The inauguration of President Alberto Fujimori on July 28, 1990 began a period of stabilization and liberalization of the Peruvian economy. The new government inherited a country without international reserves and shunned by the international financial community. The economy was in deep recession, inflation was accelerating alarmingly, and the infrastructure had deteriorated over the previous ten years. The government was supporting a diverse portfolio of unprofitable public sector companies.

On August 8, 1990, the Fujimori administration eliminated price controls on basic food items and raised fuel and energy prices by as much as three thousand percent in an effort to have prices reflect production costs. The end of subsidized public services, such as mass transit, was part of the anti-inflationary effort, combined with the realignment of key relative prices. Under the previous government, fiscal revenues had fallen to four percent of gross domestic product, while government expenditures continued at much higher levels. August 1990 inflation reached an historic high of almost 400 percent, but has since fallen to below 5 percent monthly. Since September 1990, the government has imposed tough fiscal austerity policies, requiring current spending to be paid out of (and not exceed) current revenues. The slight fiscal deficit is due to capital expenditure and external debt payments. The key fiscal priority is tax reform to boost revenues. Government revenues are currently inadequate to fund basic health, education, law enforcement, and defense. The government has proposed a simplified system of taxes on income, wealth, sales, and imports, but the desperate need for revenues has led to "special", "temporary", and "extraordinary" taxes. A tax administration reform, initiated in early 1991, has already restored much public trust in the tax system and doubled Government of Peru revenues to 8 percent of GDP. The lack of external credit, and the size of the fiscal deficit, drove monetary policy in earlier governments. The Central Bank's key challenge now is to allow enough liquidity to financial markets so that economic growth can resume, but not so much as to contribute to a surge of inflation. Open market operations are used frequently to inject liquidity into the system. The Central Bank has eliminated interest rate ceilings and lowered reserve requirements. As of July 1, 1991, Peru's domestic currency is the New Sol.

The improved fiscal situation, lower household purchasing power, and the continued lack of liquidity led to a severe depression in late 1990. The first half of 1991 saw some recovery, with real growth of close to 3 percent expected for the year. U.S. exports to Peru have benefited from significantly liberalized trade and investment regimes and from the overvalued Peruvian currency.

2. Exchange Rate Policy

The Fujimori Government has liberalized the exchange rate regime, eliminating multiple rates, licensing requirements and other cumbersome mechanisms. The exchange rate is determined by market forces, subject to Central Bank intervention. No restrictions exist on the purchase, use or remittance of foreign exchange. Exporters are no longer required to channel foreign exchange earnings through the Central Reserve Bank (BCR), nor are importers required to obtain foreign exchange from the BCR. Currency transactions are conducted freely by exporters and importers on the open market.

The Central Bank has intervened frequently in the market, usually in an effort to keep devaluation of the New Sol on a gradual course. On the basis of purchasing power parity, the New Sol remains at least 30 percent overvalued, according to the most conservative estimate. The government's overriding concern, however, is to avoid a resurgence of inflation, which many fear would be the inevitable result of too abrupt a devaluation.

3. Structural Policies

Deep structural reforms are underway in Peru, although much remains to be done. One of the most fundamental measures taken so far was the elimination of subsidized prices for the goods and services provided by government enterprises and the removal of subsidies. Other important measures have been taken to liberalize the trade, exchange rate, financial system, and labor regimes.

The government of Peru has announced its intention to privatize or liquidate many of its parastatals. This would eliminate the government's responsibility for continuing losses and should increase efficiency. The terms of a proposed Inter-American Development Bank loan for financial sector adjustment commit Peru to combine its four development banks into one and to privatize other state-held banking interests.

4. Debt Management Policies

In September 1991, the IMF agreed to an arrangement to clear Peru's nearly $900 million in arrears to that institution by the end of 1992, and approved Peru's economic stabilization and adjustment program. Peru's roughly US$ 400 million in debts to the Inter-American Development Bank were paid. An agreement to clear Peru's $900 million in arrears to the World Bank is expected soon. Also during September, the Paris Club agreed to reschedule Peru's debts to official creditors under. Negotiations with the commercial banks' steering committee are expected to begin in early 1992.

5. Significant Barriers to U.S. Exports

The key barriers to U.S. exports to Peru have been systematically dismantled by the Fujimori Government over the past year. Import licensing requirements, the list of banned imports, and nearly all quantitative import restrictions have been eliminated. Import tariff surcharges remain, however, on dairy products and some agricultural commodities. Although almost all Peru's imports have a uniform 15 or 25 percent ad valorem duty, a tariff surcharge is levied on 10-18 key farm commodities to protect local producers. This surcharge is a variable import levy, based on a "band of prices" determined weekly by the Minister of Agriculture. Imposed in May 1991, the Government of Peru describes these surtaxes as anti-dumping duties to protect Peruvian farmers from subsidized international competition. The surcharge regime effectively limits U.S. farm products access to the Peruvian market.

The Peruvian Government has eliminated the government monopoly on reinsurance and on providing insurance to state entities. There are no longer any restrictions on foreign investment in financial services, mass communication, or transport. Foreign investment in Peru is guaranteed treatment equal to that provided to national investment under the 1979 Constitution. A prohibition on foreign investment remains in areas considered essential for national security. All restrictions on remittances of profits, royalties and capital have been eliminated.

The 1985 expropriation of the assets of Belco, a U.S. oil producer, was resolved in December 1991. The Government of Peru and American International Group (AIG), Belco's insurer, signed a framework agreement for the Government of Peru to pay AIG $185 million in compensation.

Government procurement is ordinarily handled by public international tender. Exceptions are permitted for government entities declared in a state of emergency. The state of emergency determination has been used in the past to avoid tender requirements.

Peru has simplified import tariffs to two rates: 15 and 25 percent ad valorem. The average tariff rate is 17 percent, down from 80 percent at the end of the previous government. Tariffs may be lowered further, either in the Andean Pact context or unilaterally. In an effort to improve export performance, the Fujimori government has taken a number of steps to liberalize port and shipping operations, including elimination of cargo preference requirements. In recent years, the country's main port of Callao has been the most expensive on the west coast of South America.

6. Export Subsidies Policies

The Fujimori government has eliminated the CERTEX program of financial incentives to exporters of nontraditional products. Peru no longer has any export subsidies.

7. Protection of U.S. Intellectual Property

The Andean Pact has adopted Decision 311, which revises Decision 85 governing intellectual property rights (IPR) in the region. At present, Peru has scattered, uncodified laws protecting some expressions of intellectual endeavor, although they vary greatly in effectiveness. Enforcement of the laws of the few protected intellectual property areas is of low official priority. Protecting intellectual property through the civil courts is laborious, expensive, and time-consuming, and cases are rarely brought. The 1991 Penal Code includes a section protecting property in certain trademarks, patents, and copyrights, but criminal actions are rarely pursued. Protection of computer software is not specifically mentioned in the penal code.

Patent protection does not exist for pharmaceuticals. In addition, patented products and processes must be used or employed in the Andean Pact region within three years of registration or the patent is lost. The term of patents and trademarks is only five years, renewable for another five years if proof is shown of sufficient use within Peru. Import restrictions are not considered legal justification for failing to use a registered trademark in the time allowed. Foreign trademarks to be registered in Peru must not impede the sale or export of previously trademarked products, nor require the use of the trademark holder's materials, equipment, or personnel to be produced. A trademark holder in Peru is not protected against the import of an identically trademarked product from another Andean Pact country, even if the good is counterfeit.

Copyright law provides apparent broad coverage, but violations are quite common. The inventories of nearly all Lima video rental outlets are composed primarily of pirated copies of original creative works or copies of a perhaps legally acquired original. Bootlegged versions of any music whose recording medium was originally tape, cassette or compact disk makes up the stock of many merchants. Pirated computer software also is widely available. With the widespread availability of pirated copies, legally imported computer software or video and audio cassettes face a particularly weak market. Piracy by television broadcasters is apparently rare, although there have been a few cases which reportedly were subsequently resolved.

The losses to U.S. business due to inadequate intellectual property protection are difficult to quantify. U.S. pharmaceutical companies clearly have suffered negative effects from Peru's refusal to patent pharmaceuticals. The total pharmaceutical market is believed to be around $150 million per year shared among 100 laboratories. Large-scale investment in Peru by any U.S. company which would use locally its U.S.-protected creative assets is highly unlikely until Peru, alone or within the Andean Pact, provides adequate and effective IPR protection.

8. Worker Rights

a. The Right of Association

The Constitution guarantees the right of workers to peacefully assemble and associate and to form labor unions without previous authorization. The only exception is for workers in the judiciary, the police, the military, and the military parastatals. Unions must register with the Ministry of Labor. Private and public sector unions of workers performing the same type of work cannot join together as aconfederation at any level. Only 15 percent of the labor force is organized, but these workers are in industries responsible for 70 percent of Peru's licit gross national product. The Constitution guarantees the right to strike " according to law," but there is no law explicitly defining what constitutes a legal strike. The Government can intervene in the negotiation process under the President's executive decree powers. Violence against labor activists and members continued in 1991. There were allegations of arbitrary detention, kidnapping and murder of union organizers by authorities during the year.

In 1991, the International Labor Organization (ILO) acknowledged some improvement in Peru's laws and practice relating to freedom of association, but several complaints are still pending.

b. The Right to Organize and Bargain Collectively

The right to bargain collectively is guaranteed by the Constitution, but there are restrictions on what can be negotiated. In the public sector, for example, only working conditions can be negotiated, and then only if the changes do not involve expenses greater than the funds already budgeted. In the private sector, collective bargaining can cover both working conditions and pay. By law, employers cannot discriminate against union members or organizers. In practice, however, union activists are sometimes harassed by employers who threaten firing. Others are paid off to leave the enterprise. Workers can appeal cases of mistreatment through the Ministry of Labor in the first instance, and then through the civil courts if both parties are still unsatisfied.

c. Prohibition on Forced or Compulsory Labor

The Constitution prohibits compulsory labor, and this prohibition is usually respected in practice. There have been a few, unverified reports of compulsory labor on plantations in remote areas of the country where law enforcement is all but nonexistent. The Shining Path (Sendero Luminoso) has also been accused of forcibly recruiting peasants to either join its ranks or render support services. There were also credible complaints that the military used coercion to recruit peasants to join self-defense militias.

d. Minimum Age for Employment of Children

The law prohibits the employment of children under the age of 14. Confirmed instances of slavery-like child labor abuses have occurred in areas where gold mining is done. Physical brutality toward these children has been corroborated. In the formal, regulated sector of the economy, the law allows for the employment of some older children in some jobs, for a limited period of time, and for a curtailed work week at full pay. According to a 1987 Senate report, however, 1.1 million children of 6 to 14 years of age do work, mostly in the informal sector. Unofficial sources estimate that about half a million children work in the Lima area alone.

e. Acceptable Conditions of Work

The administratively set minimum wage was last increased by the Government in January 1991. It continues to lag behind inflation. The Government implicitly recognized the inadequacy of wages paid to government workers, often below the minimum wage, when it reduced the required work week to 24 hours in order to allow government workers, including police and military, to seek secondary employment to supplement their incomes. However, many Peruvians are paid more than the minimum wage and many others supplement their income through multiple jobs or subsistence farming or both.

The Labor Code provides for an 8-hour day and an official 48 hour work week for men, and a 45 hour work week for women, but its provisions concerning conditions of work are routinely ignored by most employers. All workers are legally entitled to 30 days paid annual vacation. In an economy where unemployment and underemployment total an estimated 80 percent, however, vacation benefits and other conditions of work are readily sacrificed in exchange for steady or even temporary employment.

There are government standards for industrial health and safety, but these are rarely enforced, either by the employer or the Government (which has no inspectors). Accidents are common, and there is usually no emphasis on prevention; once accidents occur, employers normally make voluntary compensation, however, minimal.

f. Rights in Sectors with U.S. Investment

Labor laws and regulations are to apply uniformly throughout the country. Thus, legal rights accorded workers in industries with U.S. investment would be the same as workers rights in other industries.

Source: National Trade Data Bank, Agency: U.S. Department of State