PerusTourismCluster

MicroeconomicsofCompetitivenessGroupAssignment

WidharmikaAgung|MalikaAnand|SonnyBhardan|DaniellaIlanos|AteeqNosher

ExecutiveSummary Inthispaper,weexaminePeruscompetitiveness,bothatthenationalandtourism clusterlevels.Wedrawonseveraldatasources,includingglobalcomparativestudies, academicliteratureanddetailedPeruvianreports.Wesupplementthiswithover15expert interviews,includingtheViceMinistersofCommerceandTourism,theDirectorofthe PeruvianNationalTourismObservatoryandthePresidentoftheHotelsAssociation. Atthenationallevel,weshowthatPeruisheavilyreliantonendowmentbasedclusters, andthatitsrecentimpressivegrowthhasbeendrivenbyminingwithdisproportionally littlebenefitforPeruvians.Wefindstrongmacroeconomicpoliciesbutweakersocial infrastructure.Inthenationalbusinessenvironment,wehighlightstrengthsinthecontext forfirmstrategyandrivalrybutsignificantweaknessesinotherareas.Ouroverarching proposalisforPerutodiversifyitsexportbasket,whichwerecommenditdoesby(i) promotingclusterdevelopment(ii)investinginhealthandeducation(iii)tackling corruptionand(iv)securingafairrevenuestreamfromminingcompanies. Forthetourismcluster,wefindthatPeruhaspostedimpressiverecentgrowthinboth numberoftouristsandrevenues,butthatthisisgrowthfromaverylowbase.Wefindthat Peruhasawealthofhighqualitynaturalandculturalendowments,butthattheclusteris overlyreliantonasinglesiteandtypeoftourist.Weidentifysignificantpotentialrelatedto thegastronomicboomintherelatedfoodcluster,butnotecriticalweaknessesintransport infrastructureandinstitutionsforcollaboration.Ourstrategyfortourismistodiversify awayfromMachuPicchuandattractbothmoreandhighervalueaddtouristsby(i) initiatinganationaltourismstrategy(ii)developingnewtourismproducts(iii)upgrading thetransportinfrastructureand(iv)strengtheningtheinstitutionsforcollaboration.

I. PeruCountryAnalysis PeruisaSpanishspeakingSouthAmericancountrywithapopulationof29.8million1 andaGDPpercapitaof$8,7222.Ithas3,362kilometersofPacificcoastline3,andshares borderswithEcuador,Colombia,Brazil,Bolivia,andChile. 1. OverallEconomicPerformance 1.1. EconomicHistory WithGDPgrowingatarateof9.2%,PeruwasthefastestgrowingcountryinLatin Americaandthe14thfastestgrowingcountryintheworldin20084.In2009,Peru continuedtoshowimpressiveresults,posting1%growthwhilemostcountriesfaced shrinkingeconomies5. Thisimpressivegrowthfollowsalmost twodecadesoflostprogress.Likemany LatinAmericancountries,Peru experiencedadisruptivemilitaryrule duringthemiddleofthecenturyandthena periodofdamagingimportsubstitution policiesintheeighties.In1983,Peruwas adverselyaffectedbytheElNinoweatherphenomenon,whichcausedfloodinginsome areasanddroughtsinothers.Followingthisepisode,commoditypricesdroppedtotheir lowestlevelssincetheGreatDepressionandtheterroristgroupsShiningPathandTupac
3INEI.http://www.inei.gob.pe 4CIAFactbook.http://www.cia.gov/library/publications/theworldfactbook/geos/pe.html 5ibid

1INEI.Per:Poblacinestimadayproyectada,segndepartamentos,19902015. 2PPPadjustedfiguretakenfromIMF.2009.2009WorldEconomicOutlook

AmaruRevolutionaryMovementgainedprominence,inpartfundedbynarcotraffickers whohadgainedastrongholdintheAndeanregion6. Theninetiesweresignificantlybetterundertheauthoritarianadministrationof AlbertoFujimori.Fujimoriopenedthecountrytoforeigninvestmentbyreducingthe averageMFNtariffsfrom16.0%to13.6%between1993and1999,causingFDItoincrease 5foldbetween1993and2000(EIU2008,WTO2000).Fujimorialsosucceededin dismantlingtheShiningPath,thoughusingrepressiveandviolencemeanstodoso(WTO 2000).Moreover,hiscorruptgovernmentstolealmost$600millionwhileinpower (TransparencyInternational,2004). MovingfromGDP/capitatooneofitskey determinants,laborproductivitylevels($22,800 perpersonemployed)arecurrentlyinlinewith othercountriesofPerusincomelevel7,though therehasbeenpoorgrowthinrecentdecades, consistentwiththeaveragetrendinLatinAmerica. Thislacklustergrowthinproductivitypalesin comparisonwithcountrieslikeIndonesia,whichis aleadingexporterofcopper,muchlikePeru. 1.2. Recentgrowth:theimportanceandconsequencesofmininginPeru Thepoliticalstabilityofthe2000sandrisingcommoditypriceshavejointlycontributed tosignificantgrowthofGDPinPeru.Inparticular,thisgrowthhasbeendrivenbythe

6UnitedStateDepartmentofState.http://www.state.gov/r/pa/ei/bgn/35762.htm

http://www.conferenceboard.org/economics/database.cfm

7PPPadjustedfiguretakenfromTheConferenceBoardTotalEconomyDatabase,January2010,

miningsector,whichhasgrownfrom$0.2billiontoover$31billioninthepast60years, andnowrepresents59%ofexports8. In2006,miningcompaniesaccounted forover50%ofmarketcapitalizationofthe Limastockexchange(foratotalof$30 billion)andwererankedhighestfor profitability9.TheCentralReserveBankof Perupredictsminingwilldominate investmentgoingforward,accountingfor 58%ofprivateinvestmentoverthenext3years10. Unfortunately,thisimpressiveminingdrivengrowthinGDPhasnotresultedin improvedincomesforPeruspopulation,duetothehighlycapitalintensivenatureof mining,whichemploysonly1%ofthepopulationwhilegenerating6%ofGDP11. Miningcompaniescurrently benefitfromhighlyfavorable contracts.TheseLegalStability Agreementswereawardedunderthe Fujimoriadministrationand guaranteethestabilityofthelegal frameworkinplaceatthetimethe investmentwasmade,includinglabor,tax,andincomepolicy(UnitedNations,2000).Asa
8CentralBankofPeruhttp://estadisticas.bcrp.gob.pe/ 9LimaStockExchange.2006.InformeBursatil.http://www.bvl.com.pe/pubdif/infmen/M2006_04.pdf 10CentralBankofPeruhttp://estadisticas.bcrp.gob.pe/ 11CentralReserveBankofPeru.http://www.bcrp.gob.pe

result,25ofthe27topminingcompaniescurrentlypaynoroyalties,eventhoughcurrent lawswouldrequireroyaltiesofbetween13%ofrevenues12.Hadroyaltiesbeencollected inthefiscalyear20067,Peruwouldhavecollectedanadditional$2.7billionintaxes13. 1.3. CompositionoftheEconomy Moregenerally,thePeruvianeconomyhascometorelyheavilyonendowmentbased industriessuchasmining,oilandgas,goldandsilverjewelry,andagriculture.Thelargest oftheseindustriesarestillgrowing,agoodsignforPeruseconomy.However,somewhat worrisomeisthesparsenessoftheclustermap;therearefewclustersandevenfewerthat qualifyashighvalueadded.Onepromisingcluster,tourism,wewilldiscusslater.Another isthenontraditionalsubcomponentoftheagriculturecluster,asectorthanhasrecently shownpromisinggrowth.Exportsofasparagusandartichoke,whichgrew33%and19% in2007,respectively,havereceivedpositiveattentioninthepressandfromdonorsfor theirinclusivesupplychains (Shimizu,2006)14. Perusrelianceonendowments isnotsurprisinggiventhe abundanceandhighqualityof theseresources.Peruisthethird largestcountryinLatinAmerica andboaststhreediverseclimates
12AccordingtotheMinistryofEnergyandMinesasquotedinSalazar,Milagros.GovernmentGenerosity SwellsMiningCompanyProfits.IPSNewsService4February2009. http://ipsnews.net/news.asp?idnews=41061 13Ibid 14PROMPERU.2008.TendenciasdelaAgroExportacion.http://www.siicex.gob.pe/siicex/resources/ sectoresproductivos/d92ddd0cf3ae4d16b5287e046ef0a7b3.pdf

coastal,Amazon,andAndeanhighlands.ThisdiversityinclimatesprovidesPeruwith extremebiodiversity.Asoneoftheworlds10megadiversecountriesPeruisfirstinthe numberoffishspecies;secondinbirdfauna;thirdinamphibians;andthirdinthenumber ofmammals15.Thisabundanceextendstotherealmofminerals.Today,Peruistheleading producerofsilver,secondincopper,andthirdinbismuth,tin,andzinc16. 2. MacroeconomicFactors 2.1. Strongmacroeconomicpolicy17 ThePeruviangovernmenthas pursuedprudentfiscaland monetarypolicy.Afteralongperiod ofhyperinflation,(from1984to 1990wheninflationsurpassed 7000%)recentadministrations havebeenabletobringinflation undercontrolandmaintainastable realexchangerate.Thismonetarydisciplinehasbeenmirroredbyfiscaldiscipline.Peru wasabletopostafiscalsurplusoverthepastfewyears(e.g.,2.1%ofGDPin2008)andhas halveditsdebtbalance.In2009,thebudgetwentbackintodeficit(1.9%ofGDP),asthe governmentengineeredafiscalexpansionaspartofacountercyclicalpolicyresponseto theeconomicdownturn.Ingeneral,globalmarketshaverecognizedthisdiscipline.Perus

15TheEarthdayNetworkhttp://www.earthday.org/countries/peru 16CIAFactbook.https://www.cia.gov/library/publications/theworldfactbook/geos/pe.html 17Unlessotherwisenoted,thissectiondrawsondataprovidedbythestatisticsbureauoftheCentralBankof

Peru.http://estadisticas.bcrp.gob.pe/

emergingbondmarketindexshowsasmallerspreadthantheLatinAmericanaverageand in2008,Peruwasawardedinvestmentgradestatusbyleadingratingagencies18. 2.2. Weaksocialinfrastructureandpoliticalinstitutions Thisfiscalrestraintmayhavecomeatthecostofsocialpolicypriorities.Perushows concerningeducationandhealthoutcomes.Whileschoolattendanceandyearscompleted haveincreased19,thequalityofeducationispoor.PeruhasthelowestProgramfor InternationalStudentAssessment(PISA)scoreforallLatinAmericancountries,andthe highestinternalinequalityofPISAscores(WorldBank,2007).In2006,investmentin educationwasonly2.5%ofGDP,puttingit157thoutof182countries20.Similarly, investmentinhealthistroubling;at4.3%ofGDP,Peruvianinvestmenthealthisthelowest inLatinAmerica21.TheWorldHealthOrganizationranksPerushealthsystempoorly, 129thoutof190countries(WorldHealth Organization,2000). Despite,strongeconomicgrowth,Peru continuestofacesignificantpovertywith36% ofthepopulationunderthepovertylinein 200822.Someprogressagainstpovertyhas beenmadesince,in2003,52%ofPeruvians livedunderthepovertyline.Similarly, extremepovertyhasbeenreducedfrom21%
18http://www.reuters.com/article/idUSN0246026220080403

19TeamAnalysisofENAHOHouseholdsurvey2008,e.g,todays615yearoldswillreceiveoverelevenyears ofeducationcomparedtojustsevenyears,thelevelattainedbytodays5665yearolds. 20CIAFactbook.http://www.cia.gov/library/publications/theworldfactbook/geos/pe.html 21WHO2006numbers.http://www.who.int/countries/per/en/ 22INEI.2009.LaPobrezaenPeruenel2008.

in2003to14%in2008.However,mostofthisimprovementhasbeenconcentratedin Cusco,Limaandothercoastalareas,givingrisetoseveregeographicinequalitiesand contributingtoaGinicoefficientincreasefrom46.2in1996to52.0in200823. CorruptionhasalsobeenaprobleminPeru.In2009,Peruranked75outof180 countriesonTransparencyInternationalsCorruptionPerceptionsIndex,farbehindChile, whichcameinat2524.Asrecentlyas2009,theMinisteroftheInteriorwasaccusedof negotiatinganovervaluedcontractforpolicecarsinwhichtwomilliondollarsmayhave beenembezzled.SimilarscandalshaveeruptedoverChinesearmytanks,ambulances,a handfulofinfrastructurecontracts,andthenationaloilcompany,Perupetro. 3. NationalBusinessEnvironment

WiththesemacrofoundationswecometoPerusnationalbusinessenvironment,which showsparticularstrengthsinthecontextforfirmrivalrybutsignificantweaknessesinthe othermajorcategories. 3.1. FactorConditions25 Peruwillsoonbenefitfrom ademographicwindowof opportunity.Overthe nextfewgenerations,as todays1014yearolds becomeadults,the

24TransparencyInternational

23WorldBank.WorldDevelopmentIndicators.http://data.worldbank.org/

http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi_2009_table 25Unlessotherwisenoted,thissectiondrawsonTeamAnalysisofENAHOHouseholdsurvey2008

proportionofworkingagePeruvianswillgrowastheburdenofdependentgenerations (elderlyandyouth)shrink,thusboostingtheproductivepotentialoftheeconomy. Furthermore,laborforceparticipationrateshavebeenimproving,reachingalmost75%in 2008. However,innovationinfrastructureisaclearweaknessforPeru,ranked105outof133 countriesontheGlobalCompetivenessIndex(GCI).Thisresultsinapoorpatentoutputas showninthefigurebelow.Underlyingthispoorperformanceisthepooroveralleducation, particularlyinmathandscience,ranked130thinGCI. AfurtherissueforPeruis thatbulkofthepopulation worksintheinformalsector. Shareofinformalemployment intheeconomyhasbeensteady ataround70.1%since1997, thusexcludingmanyPeruvians fromstrongformalsector growth. 3.2. ContextforFirmStrategyandRivalry PeruperformswellontheDoingBusinessreport,movingup9placesfromlastyear toreceiveanoverallrankingof56outof183countriesin2010.Whilethereareareasthat needparticularfocussuchasconstructionpermitsandclosingbusinessesasshowninthe figurebelow,only4countriesconductedmorereformsthanPeru26.Recentreformsinclude

26WorldBankDoingBusinessReport2010.http://www.doingbusiness.org/features/Reformers2010.aspx

improvementinlandtitling,simplerlaborregulationforsmallbusinesses,onlineservices forenforcingcontractsandfilingtaxes,and additionalequipmentattheportstoexpedite transittimes. MovingtoFDI,PeruranksbetterthanIndia, China,andBrazilintermsofFDIopenness accordingtoOECD27rankings,andalsoearnsa highrankingof20onGCIforbusinessimpactof rulesonFDIand14foropennesstocapital flows.ForeignerscaninvestinPeruunderthe sametermsasdomesticinvestorswithveryfewexceptions(restrictionsonlyapplynear theborder).Theyareabletoremitprofitsanddividendswithoutlimit,andhavetheright tousethemostfavorableexchangerateonthemarket(UnitedNations,2000).Asaresult, theprevalenceofforeignownershipinPeruishigh,ranking16intheworldaccordingto theGCI. In addition, Peru has initiated a number of trade reforms. Peru has free trade agreements with MERCOSUR members, Chile, US, Canada, Singapore, Thailand and China, andisseekingdealswithSouthKorea,EFTA,Mexico,Australia,NewZealand,andtheEU28. MFN tariffs have dropped even further, from 13% under Fujimori to 8.2% in 200729. In 2008, the government created a single window for foreign trade paperwork. In addition, Peruhasnineindustrialandcommercialfreetradezones.
27OECD(2006).OECD'sFDIRegulatoryRestrictivenessIndex:RevisionAndExtensionToMoreEconomies.

http://www.oecd.org/dataoecd/4/36/37818075.pdf 28EconomistIntelligenceUnit.2008.Peru:CountryProfile. 29Ibid

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However,bothDoingBusinessandtheWorldCompetitivenessreportsfindthatlabor regulationsareasignificantweaknessinthebusinessenvironment.IntheDoingBusiness report,PerusworstrankingisintheEmployingworkerscategorywherePerucomesin at149outof181countries30.TheGCIalsoidentifieslaborrigidityasaproblem,ranking Peru102outof133countries.However,ourresearchshowsthatthelabormarketis actuallyquitecompetitive.LaborcostperhourisnotunusualgivenPerusGDPandis lowerthancountrieswithsimilarproductivitylevelssuchasBrazilandColombia31. Furthermore,firingcostsandsocialsecuritycostsarebothextremelylowgivenPerusGDP percapitalevels32.Overall,itseemsthatPeruslabormarketisquiteunrestricted. 3.3. RelatedandSupportingIndustries ThoughPeruappearstoperformingrelativelywellonbothquantityandqualityof suppliers,ithasaclearweaknessintheextentofclusterpolicy,ranked103th.Thisisin partduetothepoorresourcingandlackofcoordinatingpowerofPerusinstitutionsfor collaboration(IFCs).PeruCompite,theNationalCompetitivenessCouncil,isstaffedbyonly sixpeopleandhasanannualbudgetofonlyUS$0.3million(Tello,MarioDeetal,2010).. Furthermore,clusterdevelopmentinitiativeshave,untilnow,beenasubsetofSMEpolicy, ratherthanastandaloneinitiative(Tello,MarioDeetal,2010).Assuch,clusterstrategy hasonlybeenappliedtosectorsdominatedbysmallandmediumenterprises,ratherthan thefastgrowthsectorssuchasagribusinessandtourism,whicharedominatedbylarger firms.Ultimately,firmsratePerushandfulofIFCsasonlyacceptable,ratingthem3ona

30DoingBusinessReport.http://www.doingbusiness.org/ExploreEconomies/?economyid=152 31TeamanalysisofEIUDatabase2008 32TeamanalysisofEIUDatabase2008,andHeckmanandPages2003

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scaleof5(Tello,MarioDeetal,2010).GCIrankingshaverecognizedtheseweaknesses, rankingPeruonly65fortheextentofclusterdevelopment. 3.4. DemandConditions EventhoughtaxrevenuesasapercentageofGDPreachedonly13.8%in200933,many governmentinstitutionsdonothavethecapacitytousetheselimitedresources.For instance,in2008,localgovernmentsusedonly55%ofresourcesbudgetedfor investment34.Governmentdoesnotactassophisticatedbuyerwithgovernment procurementofadvancedtechnologyproductsandsuccessinICTpromotionranking verypoorly,95and99respectivelyonGCI. Demandconditionsamongthepopulationareimproving,butareunremarkable.Wages havebeenstagnantforoveradecade.Privateconsumptionhasgrown7%annuallyinthe pastfiveyearsbutprimarilyinconsumptioncreditandexpendituresinretailstores.This improvementisalsoevidentintheGCIrankingsinwhichPeruranks45outof74countries forimprovingdemandsophisticationasaresultofanemergingmiddleclass.Accordingto PeruvianAssociationofMarketResearchFirms,themiddleclassinLimagrewfrom14.0% to16.5%between2003and2009(as%oftotalsocioeconomiclevels)35. 4. NationalRecommendations WhilePeruhasshownimpressivegrowth,tobesttakeadvantageofthisgrowthandto sustainitgoingforward,Peruneedstodiversifyitsexportbasket,andreduceitsreliance onmining.Thecountrysgrowthiscurrentlylargelydeterminedbycommodityprices,and

33CentralReserveBankofPeru.www.bcrp.gob.pe

http://elcomercio.pe/impresa/notas/gobiernoslocalesbajaejecucionpresupuestal/20090511/284993 35El16.5%delosLimenosyaesdeclasemediaGivonio,Sonia.February2010,Gestion. http://gestion.pe/noticia/413012/165limenosyaclasemedia

34GobiernosLocalesconbajaejecucionpresupuestalinElComercio,May2009.

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isthusatthewhimofexternal,andoftenvolatilefactors.Furthermore,thehighlycapital intensivenatureandlowtaxrevenuegeneratedbythissectorresultsinlimited employmentorfinancialbenefitfromminingforPeruvians.Thegovernmentisfacing decreasingapprovalratesandasurgeinriotsinthefaceofrisingdomesticinequalityand limitedwagegrowth,soatimelyresponseisneeded. Whilestrongendowmentshavebeenastrongbaseforgrowth,Peruneedstoexpandits nationalvaluepropositiontootherarenas.Withastrongfinancialsector,politicalstability, andgrowingneighbors(Colombia,BrazilandChile),Peruhastheopportunitytodevelop newclustersthatarelessreliantoncommodities.Ingeneral,thegovernmentmustfinda waytomovePerufromafactordriventoinvestmentdriveneconomy.Weoutlinefour mainrecommendationsforthePeruviangovernment,privatesector,andcivilsociety organizationstopursuewiththisgoalinmind. 4.1. PromoteclusterdevelopmentthrougharestructuredPeruCompite Perushouldapplytheclusterdevelopmentframeworkasanoverarchingnational policyinitiative,ratherthanembeditasasubsetofSMEdevelopment,whichlimitsthe scopeofpotentialopportunities.PeruCompitewouldtaketheleadcoordinatingroleand wouldbetaskedwithidentifyingemergingclusterswithsomedemonstratedlevelof competitiveness,forupgrading.PeruCompitewouldfacilitatedialoguebetweenkey privateandpublicactorstoidentifyinitiativesforthegovernmenttoadoptortosupport thedevelopmentoftheclusters. Thegovernmentmustsignificantlyincreasefinancialandhumanresourcestoensure PeruCompitehassufficientcapacityandcapabilitytomeaningfullyplaythisrole.To accomplishthistask,PeruCompitehastoengagewiththeprivatesectoranddecentralize

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thescopeofdiscussionandpolicyinitiativestoreachoutsideLima.CreatingRegional CompetitivenessCouncilswouldalsoproveusefulinachievingthisgoal. 4.2. Investinhealthandeducation Perusabilitytocompeteanddevelopnewclusterswillcontinuetobehamperedwhile itsuffersfrompoorhealthandeducationaloutcomes.Thegovernmentmustsetthe improvementoftheseoutcomesasatoppriority;thishasnotbeenthecaseinthepast. Oneducation,thekeyistomoveorientationfromafocusonquantity,whichhasbeen largelyachieved,tooneofquality.Thiswillrequireclarificationofstandardsand accreditationmechanismsandstringentimplementationofaccountabilityandmonitoring mechanismsbytheMinistryofEducationandrelevantcivilsocietyinstitutions.Thiscanbe achievedbycreatingaharmonizedteachereducationsystem,ongoingtrainingprograms forteachers,andbycreatinganationalsystemtoevaluateandaccrediteducativequality36. Onhealth,themainneedistosignificantlyincreasespending.Werecommenddoubling spendingtomatchLatinAmericanaverages(Poullieretal,2002).TheMinistryofHealth willneedtoidentifypriorityinvestmentstoensurethattheincreasedspendingcanbe efficientlyabsorbedandeffectivelydeployedtoimprovetheconcerninghealthindicators. Inparticular,thegovernmentshouldallocateeffortsinimprovinguniversalcoverageand developmentofhumanresourcesforthehealthsector37. 4.3. Tacklecorruption AsPerulookstodiversifyawayfrommining,developnewPeruvianenterprises,and attractnewplayerstothecountry,thegovernmentmustinvestinimprovingitscredibility asalegitimate,nonrentseekingpartner.
36ConsejoNacionaldelaEducacion.2006.ProyectoEducativoal2021.

37Franckeetal.2006.SaludenelPeru:DiagnosticoyPropuestasparaelPeriodo20062011.

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Totacklecorruption,thegovernmentshouldstreamlineitsprocessesandrevise regulations.Moreover,thegovernmentshoulddevelopegovernmentprocesses,clarify procurementstandards,andincreasetransparencyingovernmentprocurement.Finally, thegovernment,privatesector,andcivilsocietyinstitutionsshouldrequestaccountability andprogressreportsontheimplementationoftheNationalPlanagainstCorruption. 4.4. Secureafair,competitiverevenuestreamfromtheminingcompanies Therecommendationsaboveallrequiresignificantfunding.Whilethegovernmentmay beabletoreprioritizeotheractivitiesordeployfundingthatmightotherwisehaveformed afiscalsurplus,webelievethatitisessentialtosecurerevenuesfromthemining companies.Theycurrentlyenjoycontractsthat,duetolegacyagreements,aresignificantly beyondwhatisnecessaryforinternationalcompetitiveness.Forexample,mining companiespaybetween45%ofroyaltiesinChile,totaling$24.8billionintaxesoverthe pastfiveyears38.Thegovernmentshouldatleastchargewhatthelegalroyalty requirementsstipulate,whichwouldgenerateanestimated10%increaseinbudget39.Ifa negotiationimpasseisreached,andgovernmentcontinuestobeunabletosecuredirect taxesinatimelyfashion,onecreativeoptionwouldbefortheminingcompaniestodirectly fundPeruCompiteactivities,butwithnomembershipontheboard.Thismayprovide themwithafacesavingopportunityonthetaxfront,whilstallowingthegovernmentto pursueitsaims.

2007

38BloombergNewshttp://www.bloomberg.com/apps/news?pid=20601086&sid=afTImVbrHf6E 39Estimated$2.7billionincreasesinrevenuesfrom13%royalties,onanestimatedbudgetof$26billionin

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II. TourismClusterAnalysis TheWorldTourismOrganizationdefinestourismastravelandstayinplacesoutsidea personsusualenvironmentformorethantwentyfourhoursandnotmorethanone consecutiveyearforleisure,businessandotherpurposesnotrelatedtotheexerciseofan activityremuneratedfromwithintheplacevisited."40 Tourismcanbeofseveraltypes.ThePeruviangovernmenthasidentifiedthemost importantonestobe:urban(cities),cultural(archeologicalsites,museums,etc.),nature (naturalreserves,etc.),community,adventure,andbeachtourism41.Inthissection,our discussionwillcenteroninternationaltourism,acrossalltheabovetypes,asitcanbe definedasanexportandismorescalablethandomestictourism. 1. Theriseoftourism 1.1. Globaltrends42 In1950,therewereonly25millioninternationaltouristarrivals43worldwide

comparedto922millionin2008.Thisrepresentsanaverageannualgrowthrateof6.5%, makingtourismnowoneofthelargestandfastestgrowingeconomicsectorsworldwide. Thetravelandtourismsectornowaccountsfor9.9%ofglobalGDP,10.9%ofexports,9.4% ofinvestment44and30%ofcommercialserviceexports.Theshareofarrivalsreceivedby developingcountrieshasrisenfrom31%in1990to45%in2008.Thesestatisticsshowthe potentialofinternationaltourismtocontributetoeconomicgrowth.

40WorldTourismOrganization.1995.CollectionofTourismExpenditureStatistics. 41PROMPERU.2007.Perfildelturistaextranjero. 42AllfigurestakenfromUNWO2009ToursimHighlightsunlessotherwisestated 43UNWTOHistoricalPerspectiveofWorldTourism,http://unwto.org/facts/menu.html 44WTTC,figuresincludeestimatesofT&Tsectordirectandindirectactivities

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1.2. HistoryofPeruviantourism AstheonlyseatoftheancientIncanempire,Peruisunique.In1983,MachuPicchuand cityofCuscoweredeclaredWorldHeritagesitesbyUNESCO.Anadditionalfivesiteswere addedintheeighties,twointhenineties,andtwomorethisdecade,bringingthetotalto eleven45.ThisplacesPeruinthetop20countriesglobally,andthirdinLatinAmerica behindMexico(29)andBrazil(17). In1988,fiveyearsaftertheinitialWorldHeritageSitedeclaration,Perustillreceived lessthan200,000touristsayear46.Akeyturningpointoccurredin1992,whenAbimael Guzman,leaderoftheShiningPathwascaptured.Thedisintegrationoftheterrorist organizationledtoincreasedsafetyandstabilityinthecountry,enablinganincreasein tourism.ThegovernmentcreatedtheCommissionforthePromotionofPeru,PROMPERU, in1996anddeclared1997astheyearof600,000tourists47,acknowledgingforthefirst timethattourismshouldbeapriority.In1999,theViceMinistryofTourismwascreated, andtheNationalStrategicTourismPlanwascreatedin2004.In2007,intheassociated foodcluster,theNationalGastronomicAssociation(APEGA)wascreated.Inthesameyear MachuPicchuwasdeclaredoneofthe7newwondersoftheworld. 2. TourismEconomicPerformance 2.1. Growthandcurrentperformance ThePeruviantourismindustryhasgrownatstrikingratesastheeconomyhas stabilizedandpublicsafetyhasincreased.Since2004,tourismarrivalshavegrown12% annually,over3timesasfastasaveragegrowthratesintheworld(UNWTO,2009). 45UNESCOwebsitehttp://whc.unesco.org/en/statesparties/pe
46ObservatorioTursticodelPer,

http://www.observatorioturisticodelperu.com/badatur.php?pa=peru&id=datecoperu 47Targetmissedby1year576Kin1997,616Kin1998

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 Thestoryregardingtotalreceipts(spendingbytourists)issimilarlyadvantageous. Whilethisgrowthisimpressive,ithasbeenhighonalowbaselevel.AsfigureCshows, Perureceivesonly71touristsper1000capita,whichislowrelativetootherLatin

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AmericancountriesandalsotoothercountriessuchasCambodia,Egypt,Thailandand JordanthatarecompetitorsforPeru48andhelpsetabenchmarkfordesirableoutcomes. AsPeruhasMachuPicchuandthecityofCusco,theseselectedcountriesalsohave uniquehistoricalandculturalendowments,suchasthepyramidsinEgypt,AngkorWatin CambodiaandPetrainJordan.However,thesecountrieshavemanagedtobuildtourism intoamoreimportantpartoftheireconomy,representing69%ofGDP,comparedtoonly 3%ofGDPinPeru(WEF,2009). 2.2. TheimportanceandlimitationsofMachuPicchu PartoftheexplanationofPeruslimitedvolumeoftourismisthatthecountryrelieson thesinglemajorattractionofMachuPicchu,whichdominatesthesector.Touristscurrently donotexploretherestofthecountry.InsteadtheyflyintoLima,maketheirwaytoCusco, visitMachuPicchuandthenleave.Touristsareconcentratedinthesefewareas:73%of internationaltouristsenterLima,primarilyintransitoronbusiness,and40%visitCusco andMachuPicchu49.Only20%ofinternationaltouristsgoontovisitthenextmost popularsites,ArequipaandLakeTiticaca. Moreover,thenumberoftouriststhatMachuPicchucanabsorbislimitedbytheneed topreservethesite.Currently,thedailycapontouristsallowedintothesanctuaryis2,000 people.MachuPicchuiseffectivelysaturatedasatouristdestinationandcannotberelied uponasafuturesourceofgrowthforthecluster.

48Intermsofattractions,anddistancefromthecountryoforiginwherelargestshareoftouristscomefrom.

Source:MINCETUR.2008.PlanNacionaldeTurismo. 49PROMPERU.2007.PerfildelTuristaExtranjero. http://www.peru.info/s_ftoPublicaciones.asp?HidAccion=Grupo&HidId=2&ic=1&SubTipo_ZP=1

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3. TourismCluster Peruhasdevelopedafairlyrobusttourismcluster,whichisdisplayedbelow:

Atthecenterofthemaparethekeyelementsofthecluster:theattractionsand activities,restaurants,accommodations,andlastly,transport.Wehavealreadydiscussed Perusstrengthsintermsofculturalattractions.Theseareaugmentedbyactivitiessuchas hikingandtrekkingintheAmazon,communitydevelopmenttourisminLakeTiticaca,and wildlifetourisminthemountains. Alsoofnoteistherestaurantsector,whichisthelinktotheassociatedfoodcluster,an increasinglyimportantsectorinPeruthatwillbediscussedlaterinthisdocument.Wewill alsoreturntotheissueoftransportationinthefollowingsection.

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Onthelefthandsideoftheclustermaparetherelatedandsupportedindustriesforthe tourismclusterwhichrangefromhospitalityservicesandsuppliers,toartisanand handicrafts,toconservationandpreservationservicestomaintainhistoricalandnatural sites.Ontherighthandsidearethesupportinggovernmentagencies.Itisclearthatthere areplentyoftheseagencies,thoughtheirefficacycouldbeimproved,aswewilldiscuss. 4. TourismBusinessEnvironment Perustourismclusterisextremelypromising,buthasyettoperformtopotential.At thecoreoftheclusterarerichhistoricalandculturalendowments,whichserveasakey driverfortourism.Beyondtheseendowments,Perualsohasthebenefitofavibrant culinarycluster,whichis showingpromisinggrowth. However,criticalissues remainacrossallcomponents ofthediamond,including poortransportinfrastructure, weakIFCs,limited competition,andthelackof diversificationawayfrom MachuPicchu. 4.1. FactorConditions TheIncanruinsandthebiodiversityprovideastrongbasefromwhichtoattract tourists.AstheTourismCompetitivenessratings(WEF2009)furtherillustrateinfigureG

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below,Peruhasastrongcompetitiveadvantagehere,particularlyonnaturalresources whereitranks8thglobally. However,fortourismtothrive,a robusttransportinfrastructureisneeded inadditiontotheattractions.Perudoes notperformwellhereasillustratedby verypoorrankingsongroundtransport andairtransportinfrastructure.On groundtransport,therearequantity issuesintermsofroaddensitywhichis ranked114thoutof133countries.One mayarguethatthismetricislessrelevant foracountrywithlargeareasofmountainousandjungleregions.Howevermoreworrying isthepoorqualityoftheexistinginfrastructure.Theroadqualityisranked99thandthe overallqualityofgroundtransportnetwork,whichreflectsthecountrysinabilitytooffer efficient,accessibletransportationtokeybusinessandtouristattractions,isranked120th. Thisislikelyaresultoflowinvestment;publicinvestmentininfrastructureislessthat1% ofGDPcomparedtoover3%inColombiaandBolivia50. Onairtransportinfrastructurethepictureismorecomplex.Perudoeswellinterms ofthecarryingcapacityofitsairlines,withacompetitiveadvantageinavailableseat kilometers(ranked33rddomesticand47thinternationallyaccordingtoWEF2009).Limas JorgeChavezairportrecentlyretaineditspositionasthebestairportinSouthAmericain

50Dreesgros(2006),InfraestructuraparaelPerudemananausingdatafromEasterlyandServen(2003).

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Skytrax2010WorldAirportAwards.Thisairportisoperatedunderathirtyyear concessionbyaGermanconsortium.Underthisconcession,thefirmwillbuildasecond runway,constructanewterminalcomplex,expandtheretailstrategy,anddevelopnewair cargofacilities. Howevermovingbeyondthisairport,thequalityofairporttransportinfrastructureis low,ranked94thbytheWorldEconomicForum.Furthermore,forthesizeofthecountry, Peruhasfewairports,leadingtoarankingof73rdonairportdensity,puttingitbehindits neighborsEcuador,Chile,ColombiaandBolivia.Perualsodoesparticularlypoorlyinterms ofinternationalairtransportnetwork,ranked90th,primarilyduetorestrictiveAirService Agreementsasdiscussednext. 4.2. FirmRivalry RestrictiveAirServiceAgreementsmeanthatthenumber,size,andpricesofflightsin andoutofPeruaresubjecttoreviewbythegovernment.Expertsfoundthatonlyoneof Perusairserviceagreementswouldqualifyastrulyopenskies,thatwiththeUS (IntervistasEU,2009).In2004,PeruwithdrewfromanopenskiesagreementwithChile, thesecondlargestorigin/destinationcountryfromPeru(IntervistasEU,2009).Forecasts saythatliberalizingtheAirServiceAgreementswouldincreaseinternationaltraffictoPeru by2.2millionpassengers,anincreaseof56%from2007numbers(IntervistasEU,2009). Thesamereportfoundthat,forpassengers,fareswoulddeclineby35%ifbothmarket accessandownershiprestrictionswererelaxed(IntervistasEU,2009). Theairlineindustryisrestrictedmuchliketheairinfrastructuresector.Forexample, Perurestrictsforeignownershipandcontrolinaircarriersto49%(IntervistasEU,2009). Asaresult,LanPeru,asubsidiaryofLanChile,serviced80%oflocalflightsin2010.Star

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Peru,anotherlocalfirm,reached12%ofdomesticflightsbutmostsmallairlineshavevery limitedparticipationandmanyhavegonebankrupt51. Thelimitedcompetitionintheairlineindustryismirroredbylackofcompetitionin thehighendhotelmarket.Thoughthenumberofhotelshasincreased,occupancyratesfor hotelroomsremain highrelativetoother touristdestinations. Thissuggestsa higherthanaverage profitmargin, especiallywhen combinedwiththe insightfromour interviewsthathighendhotelroomstendedtobeoverpriced52.Inacompetitivemarket wewouldexpectthisapparentprofitabilitytoattractentry,resultinginareductionin occupancyandpricestomorecompetitivelevels.However,wemightbeobservingatime lag,asnewspapersarenotingtheappearanceandconstructionofseveralnewfivestar hotelsinPeru,includingthreebytheStarwoodGroup53.Thesestatisticsshouldbe monitoredgoingforwardtoseeiftheymovetolevelsthatsuggestthereisacompetitive environmentwithoutsignificantbarrierstoentry.
51AmericaEconomicahttp://www.americaeconomia.com/notas/perudebatesobreunacompetenciaparala aerolineachilenalan 52InterviewwithDiegoComin(HBS)afterhisworkstudyingtourisminPeru,supplementedbyDaniel Alfaros(headofPENTUR)viewofindustryconsolidationleadingtolackofcompetition 53NASDAQhttp://www.nasdaq.com/aspx/stockmarketnewsstory.aspx?storyid=201003221725 dowjonesdjonline000394&title=hotelshotinperuasnewdevelopmentsdriveboom

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Thoughcompetitivenessintheairlineandhotelindustriesappearslimited,signsforthe futureseempromising.Awardingaconcessionfortheairportwasagoodfirststep.The governmenthasgonefurther,enactingataxbreaktohelpboostthesector.Asof2001,the salestaxontourismrelatedindustriesincludinghotels,touristpackages,andrestaurants waseliminated54. 4.3. Relatedandsupportingindustries Asinthenationalbusinessenvironment,theinstitutionsforcollaborationinthe tourismclusterarequiteweak.Therearethreemaingovernmentbodiesinfluencingthe tourismclusterdevelopment.PROMPERU,thePeruvianPromotionAgency,hascentered itseffortsinpromotingMachuPicchuasthemaindestinationinPeru.CENFOTUR,the educationalinstitutionfortourism,issupposedtobedecentralized;however,asmostof thetourisminstitutions,itspresenceisconcentratedinLimaandCusco.Finally, PROINVERSION,theinvestmentpromotionagency,hasallocatedmoreeffortstoattract investmentsinminingandinfrastructure,whileinvestmentinthetourismsectorhasnot beenapriority. ThemainprivatesectorIFCsareCANATUR,theregionalchambersoftourism,and APEGA.CANATUR,themainindustrygroup,iscomposedofnineofthemostimportant nationalchambers,includinghotels,airlines,andtravelagenciesassociations.CANATURis basedinLima,asisitsscopeofdiscussion.Althoughregionalchambersexist,accordingto ourinterviews,theyarepoorlycoordinatedwiththenationalchambers55.Moreover,Lima andCuscodominatediscussionsandinfluencetheclustersinitiatives.

54EconomistIntelligenceUnit.2008.Peru:CommerceReport.

55HenriqueUrbanoandManuelIzaguirre.ObservatorioTuristicodelPeru.InterviewheldinMarch2010.

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AnotherIFC,APEGA(NationalGastronomicAssociation)showspromise.Itsleader, GastonAcurio,isaleadingrestaurateurandhasgarneredbroadpublicandprivatesupport fortheorganization.Thisbringsustothecriticalrelatedfoodcluster,whichislinkedtothe tourismclusterthroughtherestaurantindustry. Peruisexperiencingagastronomic boomreflectedbyaneardoublingof restaurantsoverthelasttenyears.The cuisinebenefitsfromthebiodiversity oftheregionandisoneofthemost diverseintheworldwithalmost500 typicaldishes56.In2009,BonAppetitemagazinecalledPeruviancuisinethenextbest thinginworldcuisines.ChefGastonAcuriohasbeenattheforefrontoftheexpansionof PeruvianrestaurantsandhasopenhighlyratedrestaurantsinSanFrancisco,MexicoCity, andColombia,makinghimtheonlyLatinAmericancheftoopenaninternationalchainof restaurants. Thisboomhasbenefittedthetourismindustryaswell.42%oftouristsnotethat PeruviancuisinewasafactorintheirdecisiontocometoPeru57.Over90%oftouristsare highlysatisfiedwiththefoodandwouldrecommendittotheirfriendsandrelatives58. Evenmoredirectly,anumberoftouristsarecomingonlyforthefood.5%oftourists describethemselvesasgastronomictourists.InMexicoandSpainthesetouristsmakeup

56ExpatPeru,http://www.expatperu.com/peruvianfood.php 57PROMPERU.2007.PerfildelTuristaExtranjero.

http://www.peru.info/s_ftoPublicaciones.asp?HidAccion=Grupo&HidId=2&ic=1&SubTipo_ZP=1 58Ibid

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8%and10%oftouristsrespectively59.Travelagenciesarenowofferinggastronomic toursofPeru.Thisindustrycouldprovetobearealadvantageforthetourismsector. DemandConditions Perucurrentlyappearstoattractapredominatelylowprofitmarginbackpacker segment.Whiletouristsspendonaverage$970pervisit60,thisisspreadoveran11day triponaverage61.46%oftouristsstaymorethan2weeks,and26%staymorethan3 weeks62.VisitorstoPerutendtobelesswealthy48%haveanannualfamilyincomeof lessthan$40,000.52%stayinlowendaccommodations(12starorcamping)63.An additionalpartoftheexplanationofloworlowmarginspendisseeninthecountryof originoftourists.Currently,Perureceivesthevastmajorityofitsinternationaltourists fromLatinAmericancountries.Whilethe USisthesecondlargestsender,theother topfivesendingcountriesareallneighbors. Peruisunabletoattractsignificant numbersoftouristsfrommoredistant countriesbecausePeruisundersold.To start,despiteallthemanyissuesthathave beenmentionedthroughoutthisdocument,

59SecretariadeTurismodeMexico.2008.PerfilyGradodeSatisfacciondelTurista. http://www.sectur.gob.mx/wb/sectur/sect_perfil_y_grado_de_satisfaccion_de_los_turista,Institutode TurismodeEspana.2008.ElTurismoEspanolencifras.http://www.iet.tourspain.es/paginas/ Publicaciones/FichasPSel.aspx?clase=12&option=public&idioma=esES 60WorldTravelandTourismCouncil.http://www.wttc.org/eng/Tourism_Research/ 61Ibid 62PROMPERU.2007.PerfildelTuristaExtranjero. http://www.peru.info/s_ftoPublicaciones.asp?HidAccion=Grupo&HidId=2&ic=1&SubTipo_ZP=1 63Ibid

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thesatisfactionlevelsoftouristsareveryhigh,reflectedbythefactthat87%ofvisitors wouldrecommendtootherswithoutadoubt64.Interviewsalsosuggestedthattourists areoftenpleasantlysurprisedbyPeru,whichsuggeststheyhadlowexpectationsofthe country65.Thegovernmentlaunchedamarketingcampaignin2008usingthesloganPeru, LivetheLegend,whichreplacedthepreviousPackyoursixsenses,cometoPeru.The newcampaignwasintendedtotargetanaudienceof510millionpeopleacrosstheUS, WesternEuropeandthewealthierSouthAmericancountries.However,advertisingdoes notappeartobepenetratingsuccessfully,asevidencedbythelackofvisibilityofthe campaignintheUS,especiallyrelativetoColombianandChileancampaigns66. 5. ClusterRecommendations PeruneedstodiversifyitstourismofferingsawayfromCuscoandMachuPicchu.It needstoattractmoretouristsandalsomovetohighervalueaddtourists,whowillspend onhighermarginactivities.However,Perushouldnotloseitscurrenttouristbase,asthey contributetotheeconomyandmayreturninlateryearswhenmorewealthyandableto spend.Toachievethisaim,weproposefourspecificrecommendations. 5.1. InitiatearobustNationalTourismStrategy Giventhepotentialoftourism,Perumustpositionthisclustersdevelopmentasa nationalpriority.Itmustdevelopauniquevaluepropositionarounditsimpressive cultural,naturalandculinarystrengthsandaconcretenationalvisionwithspecifictargets (e.g.numberoftourists,numberofvisitorstoeachsite),timelinesandintermediate milestones.Theexistingplans,whichlacksufficientclarityandactionsteps(e.g.,Tourism

64MINCETUR.2008.NationalTourismPlan. 65InterviewwithDiegoComin(HBS)afterhisworkstudyingtourisminPeru, 66PerceptionsfrominterviewedPeruvianslivingintheU.S.

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plan,COPESCO,CALTUR)needtobeupdated,revampedandifnecessary,consolidated.We suggestthattheMinistryandTradeandTourismbeheldaccountablefordeliveringthe vision,butshouldbeempoweredtodosothroughallocatingappropriateresourcesand decisionmakingpower. 5.2. Developandpromotenewtourismproducts Peruneedstoinvestsignificantlyindiversificationofitstourismproducts.First,itmust acceleratedevelopmentoftheotherruinsandsitessuchasKuelaptobroadentheportfolio oftourismlocations.Strongertiesanddevelopmentofarcheologicaltrainingcanbeused aspartofthedriveinthisarea. Second,inadditiontolocationdevelopment,Perumustalsofocusonthematic development.Thealreadyemerginggastronomicandecotourismproductsshouldbe supported.Theybothbuildonstrongnaturalandhistoricendowmentsbutwillbenefit fromthedevelopmentofspecificinfrastructureandtrainingprograms,whichthe governmentcansupport,bringingintheprivatesectorwhereprofitincentivesare sufficient.Perushouldalsolookbeyonditsgeographicboundariestocoordinatecross countryinitiativessuchasAmazonadventureswithBrazilandColombiaorAndeancircuits withBoliviaandEcuadortotakeadvantageofanddevelopregionalstrengths. HoweverPerushouldnotassumethatdemandwillgrowsufficientlyjustbyimproving thesupplyoftouristproducts.PROMPERUshouldbetaskedwithpromotingPeruasa diversecountrywithseveraldestinationsandactivitiesintradefairs,writtenmedia,and television.Inadditiontobroadnationalcampaigns,targetedmessagesforparticular audiencesshouldbedeveloped(e.g.PROMPERUshoulddelegatetoAPEGAtoleadin marketingtointernationalgastronomicaudiences).

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5.3. Upgradetransportinfrastructure Thegovernmentshouldliberalizeitsairserviceagreementsandallowmarket mechanismstoplayagreaterroleindeterminingthenumber,size,andpricesofflights. Thegovernmentwillalsoneedtoincreaseinvestmentinregionalairports,giventhelow airportdensityandourrecommendationofdevelopingnewtouristsitesandlocations. Thegovernmentshouldacceleraterelevantexistingtransportinfrastructureprojects byincreasingthebudgetallocatedtotheseinitiativesandunlockingmoreofthebudgetfor immediatedeployment.However,focusshouldbeappliedtothoseprojectsthatarecritical totourism.WhiletheMinistriesofTourismandofTransporthavetakenfirststepsin coordinationthroughthedevelopmentoftheCOPESCOInfrastructurePlan,the governmentshouldstrengthenthis,andensureadequateoversight,leadershipandbudget. 5.4. StrengthenIFCs Inordertosupportadiversification,theIFCsshoulddecentralizethescopeof discussionstopreventLimaandCuscofromdominatingallinitiatives.Thegovernmentcan encouragetheexistingIFCstodothis,ornewIFCstoemerge,bysharingthenewNational Strategy,andearmarkingfundsthatcanbeusedforpublicgoodprojectsthatalignwiththe newplan.AspartofthediversificationtheIFCsmustfocusonimprovecoordination betweenregional,nationalandlocallevels. Currently,tourismsIFCsrelytooheavilyongovernmentinvolvementanddrive. Ownershipmustbesharedwiththeprivatesectortosecurenecessarybuyinandensure sustainability.Whilethegovernmenthassuccessfullyidentifiedafewchampionsthe baseofprivatesectorinvolvementshouldbebroadenedtoincludeentrepreneursfrom otherregionsandbusinesslinese.g.,travelagencies,Universities,traininginstitutes.

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TransparencyInternational(2004).GlobalCorruptionReport:2004.London:PlutoPress. UnitedNations(2000).InvestmentPolicyReview:Peru.NewYork:UnitedNations ConferenceonTradeandDevelopment. http://www.unctad.org/en/docs/iteiipmisc19_en.pdf UNWTO(2009).TourismHighlights2009.UNWTOPublicationsDepartment. http://www.unwto.org/facts/eng/highlights.htm WorldBank(2007).TowardHighqualityEducationinPeruStandards,Accountability,and CapacityBuilding.Washington,DC:TheWorldBank WorldEconomicForum(2009).TravelandTourismCompetitivenessReport http://www.weforum.org/en/initiatives/gcp/TravelandTourismReport/index.htm WorldHealthOrganization.TheWorldHealthReport2000Healthsystems:Improving performance.Geneva:WorldHealthOrganization WorldTradeOrganization(WTO)(2000).Peru:May2000.PressRelease22May2000. http://www.wto.org/english/tratop_E/tpr_e/tp134_e.htm

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