Peru and Brazil
Connecting to the world
September 11, 2008 - The Economist

A president goes to market

LIMA---ALAN GARCIA seems determined to leave his presidential mark on Peru’s economy—not just by implementing, with a January 1st deadline, free-trade agreements with Canada, Singapore and the United States and by negotiating future trade deals with China and South Korea, but also by cosying up to the region’s economic power, Brazil. On September 18th and 19th Mr Garcia will head a deputation, including half his cabinet and more than 200 business leaders, to see Brazil’s president, Luiz Inácio Lula da Silva, in São Paulo.

(left) Lula and Garcia go shopping

With luck, it will be a fruitful visit. According to Jorge Taunay, Brazil’s ambassador to Peru, Brazil could become the top foreign investor in Peru in the next ten years thanks to investments in energy, mining and manufacturing (last year Brazil was the ninth biggest direct investor, with Spain leading the way at the end of the year with some $3.7 billion out of the $16.1 billion recorded in total).

Since late August, three Brazilian mining companies, Votorantim Metais, Vale and Gerdau, have each announced large investments and acquisitions in Peru. Gerdau pledged $1.4 billion on September 1st to increase production, mostly for export, at Siderperú, a steel company that it took control of two years ago for some $60m. Vale, the world’s second largest mining company, has two projects under development in Peru and Votorantim has just pumped another $500m into its Peruvian zinc mill and is trying to take control of the lead, zinc and silver mine at Milpo. In addition, Brazil’s state-controlled oil company, Petrobras, has tentative plans to plough nearly $3 billion into Peru over the next decade, quite apart from other state-controlled Brazilian utility companies exploring the idea of hydroelectric plants along the border between the two nations.

But Mr Garcia’s strategy goes beyond inward investment: he wants to make Peru a bridge for Brazil to markets in Asia and North America. Significantly, he has invited President Lula to visit Peru when it hosts the November summit of the 21 Pacific Rim countries of the Asia-Pacific Economic Cooperation (APEC) forum. The idea is that Brazilian companies producing in Peru—such as Gerdau—would be able to take advantage of the various actual or potential free-trade agreements. One beneficiary would be Brazil’s ethanol industry, which has little access to the United States, its largest natural market, because of an American import tax. By producing sugarcane-based ethanol in Peru, whose northern coast has an output of 131 tonnes per hectare, compared with the Brazilian average of 72 tonnes, Brazilian companies could gain tariff-free access to the United States.

The prospect of a bridge to Asia depends on the construction of three roads, each being built by Brazilian-led consortia, to connect Pacific and Atlantic Ocean ports. The most ambitious is a $1.3-billion highway that will link the port of Santos in São Paulo to three ports in Peru. This should be finished by the start of 2011 and will cut several weeks of travel time for Brazil’s exports of soybeans and minerals. Similar roads are being planned with Bolivia and Ecuador, but neither country offers the same infrastructure as Peru. Meanwhile, as its businessmen spy the chance to supply farm exports to Brazil’s western states (so saving them the cost of transport from the Atlantic coast), Peru is mounting a food festival in São Paulo ahead of Mr Garcia’s arrival in Brazil. “Peruvian gastronomy”, says Miguel Vega of the Peru-Brazil chamber of commerce, “is the link that will involve the people of Peru and Brazil in the strategic alliance being formed by our countries.” Buen provecho, bom apetite.