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How Do We Measure Economic Freedom? See page 447 for an explanation of the methodology

or visit the Index Web site at heritage.org/index.2009 data unless otherwise noted.Data compiled as of September 2010.

PERU

World Rank: 41 Regional Rank: 5

Peru’s economic freedom score is 68.6, making its econ-omy the 41st freest in the 2011 Index. Its score is 1 point

better than last year, reflecting improvements that include a notable gain in business freedom. Peru is ranked 5th out of 29 countries in the South and Central America/Caribbean region, and its overall score is above the world and regional averages.

Despite the challenging global economic environment, Peru has achieved average growth of close to 7 percent over the past five years. Business formation has been streamlined, and labor regulations have become more flexible. The gov-ernment has entered into trade pacts with Canada, Chile, China, Singapore, and the United States since early 2009. Peru also signed trade agreements with the European Free Trade Association in mid-2009 and the European Union in May 2010.

Institutional weaknesses include inadequate protection of property rights, an inefficient judicial system, and a lack of political will to tackle corruption. Freedom from corruption and property rights are the only economic freedom compo-nents in which Peru scores considerably below the world average.

Background:Peru has emerged from its political instabil-ity of the late 20th century. Former President Alberto Fuji-mori (1990–2000) has been convicted and jailed for offenses during a decade of autocratic rule that included a successful campaign against the Shining Path and other insurgents. President Alan Garcia, who served one term in the 1980s and was re-elected in 2006, has earned a reputation as the market-friendly regional alternative to Venezuela’s Hugo Chávez by maintaining the trend toward economic liberal-ism, trade liberalization, and fiscal and monetary stability. Significant natural resources include gold, copper, and sil-ver. More than 40 percent of Peru’s people live below the poverty line, but economic growth is well above the Latin American average.

Quick Facts Population: 29.1 milliongdP(PPP): $251.4 billion 0.9% growth in 2009 6.8% 5-year compound annual growth $8,638 per capitaunemployment: 8.1%Inflation(cPI): 2.9%FdIInflow: $4.8 billion

Economic Freedom Score

Country’s Score Over Time

Country Comparisons

Least Mostfree free

5025 75

0 100

68.6

1995 ’97 ’99 ’01 ’03 ’05 ’07 ’09 2011

40

50

60

70

80

0

20

40

60

80

100

68.6

Country

59.7

Worldaverage

60.2

Regionalaverage

84.1

Freeeconomies

332 2011 Index of Economic Freedom

PERU (continued)

THE TEN EcoNomic FREEdoms

Business Freedom No. 65Trade Freedom No. 41Fiscal Freedom No. 81Government Spending No. 10Monetary Freedom No. 14

Investment Freedom No. 38Financial Freedom No. 38Property Rights No. 73Freedom from Corruption No. 75Labor Freedom No. 66

coUNTRy’s WoRLd RaNkiNGsBUsiNEss FREEdom: 71.9 + 6.1Despite notable progress in enhancing the overall regula-tory environment, government inefficiency stemming from bureaucratic red tape persists. Recently legislated reforms have dismantled some barriers to launching private enter-prises, but the formation and operation of private busi-nesses can still be cumbersome and costly, with problems exacerbated by petty corruption.

TRadE FREEdom: 86 + 1.0Peru’s weighted average tariff rate was 2 percent in 2009. Some import restrictions, services market access restric-tions, export taxes, price bands for sensitive agricultural products, restrictive labeling, sanitary and phytosanitary regulations, domestic preference in government procure-ment, and improving but still weak enforcement of intel-lectual property rights add to the cost of trade. Ten points were deducted from Peru’s trade freedom score to account for non-tariff barriers.

FiscaL FREEdom: 79.4 – 0.1Peru has moderate income tax rates. Both the flat income tax rate and the top corporate tax rate are 30 percent. Other taxes include a value-added tax (VAT), a property transfer tax, and a financial transactions tax. Fuel subsidies have been eliminated, but excise taxes on selected domestic fuel prices have been increased. In the most recent year, overall tax revenue as a percentage of GDP was 16 percent.

GoVERNmENT sPENdiNG: 91 – 1.3In the most recent year, total government expenditures, including consumption and transfer payments, increased slightly to 17.3 percent of GDP. A fiscal stimulus measur-ing 2.5 percent of GDP provided support for employment, infrastructure, investment, and poverty-reduction spend-ing. Authorities are pursuing fiscal consolidation under the Fiscal Responsibility and Transparency Law. The govern-ment has restructured the privatization agency to focus on large enterprises.

moNETaRy FREEdom: 83.1 + 1.5Inflation has been relatively low, averaging 3.5 percent between 2007 and 2009. With the economy growing by an annual rate of 8 percent in the first six months of 2010, the government has been challenged to prevent inflationary pressures from erupting. Most prices are set in the market, but the government influences prices through regulation, state-owned enterprises, and utilities, and a special gov-ernment fund is used to stabilize changes in fuel prices. Five points were deducted from Peru’s monetary freedom score to account for measures that distort domestic prices.

iNVEsTmENT FREEdom: 70 no changePeru provides national treatment to foreign investors. For most sectors of the economy, Peru does not screen new investments. Deterrents to investment include unpredict-

able and weak enforcement of contracts, non-transparent and burdensome bureaucracy, some restrictive labor regu-lations, and corruption. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transfers, or repatriation of prof-its. Capital transactions face minimal restrictions. Foreign investors generally may not acquire property within 50 kilometers of Peru’s borders.

FiNaNciaL FREEdom: 60 no changePeru’s evolving financial sector provides a wide range of financial services. The banking sector has been trans-formed through consolidation. Four of the country’s large commercial banks account for over 80 percent of total loans. Foreign ownership is substantial, and two of the largest commercial banks are majority foreign-owned. Credit to the private sector has increased steadily. The government has strengthened prudential standards and disclosure requirements. There is a small stock market. The impact of the global financial crisis on the banking sector has been limited. Banks remain well capitalized, and non-performing loans are around 3 percent of total loans.

PRoPERTy RiGHTs: 40 no changeThe judicial system is slow to hear cases and issue deci-sions. Allegations of corruption and outside interference are common. Copyright piracy is extensive, and enforce-ment of intellectual property rights laws is inadequate. Peruvian law does not provide for protection of patents or protection from parallel imports.

FREEdom FRom coRRUPTioN: 37 + 1.0Corruption is perceived as significant. Peru ranks 75th out of 180 countries in Transparency International’s Corrup-tion Perceptions Index for 2009. Government corruption is viewed as widespread. In October 2008, a kickback scan-dal involving a member of the ruling party and a foreign oil company led to the replacement of the prime minister, although investigators have not established that he was involved in the scandal.

LaBoR FREEdom: 67.7 + 1.6Peru’s labor regulations continue to evolve, with more flex-ibility gradually being introduced into the labor market. The non-salary cost of employing a worker has become less burdensome as mandatory paid annual leave and sever-ance payments have been reduced. Regulations on work hours remain relatively inflexible.