Page last updated at 16:22 GMT, Thursday, 20 November 2008

Peru bets on China's economic muscle

By Dan Collyns
BBC News, Lima

Shoppers pass a clothing store in Peru
Peru's textile industry stands to lose the most from a deal with China

Ever since its independence 184 years ago, Peru has gone through periods of boom and bust.

The wealthy periods came from guano - sea bird droppings used for fertiliser - in the mid-19th Century, rubber came shortly afterwards, then a later boom in silver and gold.

Many Peruvians remember recent busts, like the hyperinflation which marked the end of current President Alan Garcia's first term in office in the late 1980s.

But Mr Garcia, who swore not to repeat his mistakes when he took office in 2006, is now presiding over a very different economy which he says is well-placed to withstand the international financial crisis.

As Peru hosts 21 heads of state for the Asia Pacific Economic Cooperation (Apec) summit, many of them - particularly China - appear to agree, and Peru has been signing a number of free trade pacts.

'Mutual benefits'

Chinese President Hu Jintao is visiting Peru for the first time and has signed his country's second free trade agreement with a Latin American country, after Chile in 2005.

He has also promised to invest a further $6bn (4bn) in Peru's mining sector over the next three years - a welcome move for Peru as commodity prices plunge.

Chinese internet entrepreneur Jack Ma

The world is changing. Nobody can protect you
Jack Ma
Chinese entrepreneur

But most of the 600-strong delegation with him is not be interested in mining - they are looking for new markets in agriculture or telecommunications, or to start up small businesses.

"They are looking for possibilities for their manufacturers to get into other markets using Peru as a base," said Peru's trade and tourism minister, Mercedes Araoz.

"They have barriers to trade elsewhere but they can produce from our country and sell elsewhere, given that we have free trade agreements with other countries in the world."

China's richest man, Jack Ma, the internet entrepreneur who created, is among them. He says where there is crisis there is also opportunity.

"I believe in the next 10 years China's market will be the world's largest market," says Mr Ma. "China should shift away from the US and Europe to focus [on] other parts of the world like Latin America and countries like Peru. There are a lot of mutual benefits."

Cause for concern

But there are also concerns that a bilateral agreement would mean some Peruvian sectors, particularly textiles, will be pushed out of business and thousands of jobs lost due to a glut of cheaper Chinese imports.

"We can't allow these jobs to go abroad," says Diogenes Alva, nicknamed the King of Gamarra, Lima's bustling textiles district and the hub of the national industry.

Diogenes Alva, nicknamed the King of Gamarra, Lima's textiles district
Textile boss Diogenes Alva says 20,000 small businesses will be hit

A self-made man who boasts he arrived in Lima with nothing but a pair of trousers and the shirt on his back, he now employs hundreds in garment-making and tailoring and exports clothes to other Latin American countries.

"The government ministers are Peruvians so they should listen to what Peruvians are saying," he says fearing around 20,000 small businesses employing around 100,000 people will be hard hit.

But Ms Araoz, says clauses in the deal would protect Peruvian textiles against dumping.

Mr Ma, a champion of small and medium-sized businesses, says he would encourage people like Mr Alva to go to China and see the opportunities there.

"The world is changing, ask any business," he says pragmatically. "Nobody can protect you, the only thing that can protect you is the market."

Competition dangers

But several economists and the political opposition in Peru say the country, with still high levels of poverty, should take more care of its small businesses which create a lot of jobs.

Other concerns are a widening trade imbalance. Peruvian exports make up just 0.3% of China's imports but the Asian giant has been Peru's second largest trading partner for the last four years.

Pedro Francke, an economist at Lima's La Catolica University
Economist Pedro Francke says the government is overlooking dangers

"I think the government is betting a lot on this free trade agreement with China because they think that the growth in China could help the Peruvian economy," says Pedro Francke, an economist at Lima's La Catolica University.

"But they are not seeing the dangers of the competition from Chinese industry and its mining investment which it carries out in Peru without concern for the environment or labour rights."

China has been criticised in the past for its poor record on this front. But there are signs of improvement as its companies increasingly trade on international markets and are forced to comply with international standards.

Long-term vision?

Peru's Finance Minister Luis Valdivieso says China is an important trading partner but Peru is not relying on it alone to support its mining industry.

He adds that Peru has around $35bn (23bn) of foreign investment projects, less than half in the mining sector as the country moves to diversify its economy.

As far as Mr Valdivieso is concerned, Peru's position as the fastest growing economy in Latin America this year is down to more than high commodity prices and China's appetite for raw materials.

Peruvian Finance Minister, Luis Valdivieso
Peru's finance minister predicts 6.5% growth despite the global slowdown

"There hasn't been a fundamental change in the economic policy of the country for the last 18 years. I hope it will continue because it has given results and people like results," Mr Valdivieso said.

"What happens when a country moves from a low income level to a medium one, people will always demand more, you learn to live better and therefore you identify more needs - you no longer live day to day. That's what we're confronting at the moment," he says.

The number of protests and outbreaks of unrest in the country have more than doubled in the last year, according the Peru's national ombudsman, La Defensoria del Pueblo.

Mr Valdivieso maintains Peru's poverty level is now at 36%, a reduction of 5% from last year and the aim is to bring it down to the 30% mark by the end of President Garcia's term in 2011.

He also predicts Peru's economy will grow 6.5% next year despite the global downturn.

China is known for its long-term vision and as trade and economic deals are struck, perhaps it is not just Peru which is betting on China.

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