The Journal of Commerce / February 4, 1999
By Larry Luxner
WASHINGTON -- Ecuador and Peru, their fragile economies battered by border hostilities, El Nino and low world commodity prices, have decided to stop fighting and start working together to lure U.S. investment.
To that end, Peruvian President Alberto Fujimori and his Ecuadoran counterpart, Jamil Mahuad, will kick off a two-day summit Thursday [Feb. 4] in Washington aimed at bringing to fruition a list of 35 key infrastructure projects ranging from ports to pipelines.
The meeting, hosted by President Clinton, takes place just over three months after the Oct. 26, 1998, signing of an Ecuadoran-Peruvian peace treaty in Brasilia that ends over 150 years of hostilities over a remote chunk of Amazon territory.
The last skirmish, in early 1995, led to renewed efforts by the four so-called "guarantor nations" -- Argentina, Brazil, Chile and the United States -- to find a definitive and lasting solution to South America's oldest and most contentious border conflict.
The accord signed in October awards Peru ownership of a disputed 49-mile stretch of jungle, while giving Ecuador unfettered access to the region through separate navigation and infrastructure agreements. It also calls for $3 billion of investment in highways, navigation, urban development, rural electrification, telecommunications and reforestation. The Inter-American Development Bank and the Andean Development Corp. have each committed $500 million in seed money; the World Bank is likely to follow suit.
Thomas Skilton, an attorney with Squire Sanders & Dempsey, says both countries will likely enjoy more investment from U.S. oil companies, utilities and mining firms as a result of the treaty.
"The cessation of hostilites and the settlement of the boundary dispute removes a level of uncertainty concerning stability in the region that is of paramount importance to investors," said Mr. Skilton, whose Washington law firm belongs to the newly formed U.S.-Ecuador Business Council. "Particularly with regard to Ecuador, which lags Peru in privatizing its state companies and opening up its economy -- I think entering into this treaty and pursuing it the way they did sends a signal that the new government is serious about getting its house in order."
Other multinationals involved in the new council include Arco, BellSouth, Citigroup, Continental Airlines, Enron, Texaco and Occidental Petroleum -- all of which have substantial operations in Ecuador and/or Peru.
Observers say the treaty will lead to a "peace dividend" for both countries in the form of greater bilateral trade flows, bilateral investment, defense spending cuts and lower risk premiums. During their time in Washington, Presidents Fujimori and Mahuad -- who have had no less than a dozen official meetings since Mr. Mahuad's inauguration last August -- will outline specific investment projects ranging from industrial free zones to oil pipelines to the building of two new ports on the Pacific.
That's crucial for an impoverished country like Peru, 70% of whose 24 million people live below the poverty line. In 1998, Peru's Gross Domestic Product grew only 1% -- a dramatic drop from the 7.4% growth recorded the year before. Things are even worse in Ecuador, where 1997 per-capita income was only $1,392 -- making it one of the poorest countries in South America. Although Ecuador's overall GDP rose 1.0% in 1998, it fell 1.0% in per-capita terms, largely as a result of falling oil prices
"What we're now constructing on the basis of that is not just verbal, rhetorical support from both governments but actual, specific projects of integration and cooperation," said Peru's ambassador to the United States, Ricardo Luna. "We're passing from decades of mutual distrust to a peace paradigm."
Mr. Luna's counterpart in Washington, Ivonne Abdel Baki, says peace with Peru is a milestone she thought would never come to pass.
"Ever since I was a child, I was raised with the idea that Peru was our enemy," said Mrs. Baki, who presented her credentials to Mr. Clinton last week. "With peace, our economy will completely open up. We'll have even more trade with Peru than we have with Colombia."
According to John Bowler, an analyst with the Economist Intelligence Unit in London, Ecuador's exports to Peru averaged less than $9 million a year from 1980 to 1987, then jumped to an average of $125 million a year in 1988-94 before falling again to an average $70 million between 1995 and 1997.
"Ecuador therefore has plenty of room to expand its exports to Peru just to return to levels reached in the early 1990s," Mr. Bowles concluded. "In light of good long-term growth prospects for the Peruvian economy, Ecuador can reasonably expect to reach and exceed these levels in the medium term. The rights granted to Ecuador under the trade and navigation treaty will assist Ecuadoran producers in finding outlets for their goods."
According to an analysis carried out by Rand Corp., Peru's military budget will fall by 0.5% to 4% annually over the next two years. Peruvian economist Gabriel Ortiz de Zevallos of Instituto Apoyo in Lima calculates that the savings could reach $325 million a year, equivalent to half a percentage point of GDP.
Duff & Phelps Credit Rating Co. (DCR) predicts that growth in Peru should pick up in 1999, but will probably fall short of official projections for a 5.5% expansion.
"The investment climate isn't growing as fast as we'd like, but that's because of what's happening in Asia," says Jaime Garcia, general manager of the American Chamber of Commerce of Peru. "It's not a reflection of Peruvian policy."
If peace really brings prosperity, it could help Ecuador's Mr. Mahuad calm critics at home -- who say his pro-privatization policies have made life more difficult for Ecuador's 11 million inhabitants while doing nothing to improve the country's oil- and banana-dependent economy.
"Peace will give an incentive for companies to invest," said Ecuador's Mrs. Baki. "The president's urgency was to sign a peace treaty with Peru, and now his priority is privatization. I think it's a must."