OBG talks to Esteban Chong, Senior Partner, PwC Peru

Interview: Esteban Chong

The informal sector has been a large obstacle to tax collection in Peru. What is the best way forward?

ESTEBAN CHONG: The informal sector creates a very complicated situation for the economy. The sheer size of it undermines competitiveness and allows for the violation of the rights of workers who are not registered for the national health or pension programmes.

While there is a need to combat the spread of informal business, it is more important that the government encourage and improve the formalisation process. Rather than penalise the informal sector, the key is to facilitate its transition to the formal sector. This means working to clarify regulations, decrease bureaucracy and simplify the registration process. As long as the formalisation process remains complicated, it will be difficult to entice companies to switch.

It is essential that formalisation be facilitated, as the informal sector continues to undermine potential investment. When investors consider possible destinations, they look for clarity as well as equal application of regulations. Given today’s globalised economy, Peru is competing for investment with countries across the world and it is only through simplified processes at all levels that it will continue to be competitive.

How can socioeconomic inequality and social conflicts in the country be addressed?

CHONG: We have seen the level of extreme poverty decrease significantly over the past few years, a trend which is expected to continue. However, much remains to be done, and two important tools for the future will be promoting the formalisation of the economy and investing in education and health.

In the coming years, both the private sector and the government will play important roles in ensuring continued inclusive economic development with as little conflict as possible. People must understand that everything is conducted against the backdrop of a historical lack of government presence in many rural areas, combined with imperfect corporate practices from another era. Moving forward, open communication and dialogue will be vital. It appears that the new generation of businesses that are entering or investing in Peru are better informed and more prepared for the challenges they will face. Hopefully, the success stories will outweigh the negative experiences.

Peru’s investment in education is among the lowest in the region. Is this sustainable?

CHONG: Having lived through periods of instability and terrorism, Peruvians are accustomed to thinking in the short term. However, the unprecedented economic growth and success that we have seen over the past two decades demands that people and businesses change this way of thinking. This is especially true for the education sector. Still, reforming the education system is hard to sell politically for two reasons. First, the sector is heavily unionised. Second, efforts to improve it will not necessarily yield short-term results as education is a sector oriented toward the long term, and politicians prefer quick fixes and immediate results.

However, one need only look at the state of human resources to know that there is a need for urgent action. The country is facing a huge deficit of qualified human capital, as our universities are currently not producing sufficient qualified graduates to meet the needs of the growing business sector. With a shortage of qualified human capital, companies are forced to delay projects and expansions, thus undermining the overall growth potential. The situation is only exacerbated by the increasingly globalised nature of business, as Peruvian companies are forced to compete for qualified individuals not only with other Peruvian companies, but with international organisations as well.

If Peru is to enjoy long-term sustainable growth, investment in education is absolutely key. Basic reforms have been implemented and it is now time to institute more structural changes. Some of these may be difficult and require significantly more effort, but they will put Peru on the right path for continued development.