Sunday, March 09, 2008

Peru's economy booms, but is it overheating?

Economic Times—“Peru cuts taxes on fuel, food to curb inflation”
Bloomberg—“Peru’s economy expanded 9.1 percent in fourth quarter”

Reuters—“Peru to grow 6-7 percent for 20 years: finance minister"

Peru’s economy has been booming, expanding almost 9% over the whole of 2007. However, the nation’s rapid growth has fueled fears that the economy is overheating.

The government responded last week to concerns over growing inflation by further cutting tariffs on food and fuel. In October of 2007, tariffs on essential foodstuffs such as vegetables, meat and milk products, were cut by 70%. Last week's cuts reduced the taxes on many of these necessary products to zero.

Peru, which has long been considered an “economic laggard” in Latin America, has become popular with investors as a result of a number of reforms, including tariff reductions on foreign imports and a focus on public investment.

The nation’s finance minister claims that with $30 billion in the federal reserve, Peru is financially bulletproof, but it is not clear that the nation would be able to completely insulate itself from ill affects of a change in investor sentiment.


In a globalized world where much depends on attracting foreign investment, how can a nation best insulate itself from the problem of investor flight?

No comments: