Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993-Continued [Millions of U.S. dollars)

1Because of recent hyperinflation, the current dollar value of Peru's GDP is a subject of debate. These figures represent official Central Bank estimates. They do not equate to nominal GDP in soles converted at the market exchange rate.

Figures are for money supply in national currency only. The majority of financial system liquidity consists of dollars.

Annualized rate of interest commercial banks charge each other on loans denominated in soles. The rates on dollar loans are significantly lower.

*Does not include lump-sum payments in 1993 connected with Paris Club rescheduling.

Source: Central Reserve Bank, National Institute of Statistics, Ministry of Labor and U.S. Embassy estimates.

1. General Policy Framework

Peru has taken dramatic steps to stabilize and liberalize its economy since the inauguration of President Alberto Fujimori in July 1990. Bureaucratic procedures

have been streamlined, price controls terminated, the tax system simplified, and labor laws made more flexible. Exchange controls have been lifted, and there are no restrictions on remittances of profits, dividends or royalties. By mid-1995, the government expects all remaining state-owned firms to have been privatized or liquidated.

Import licenses have been abolished for practically all products and non-tariff barriers eliminated. The average tariff rate has been cut to 16 percent, compared with 80 percent in 1990. The government plans to move to a flat 15-percent tariff in 1995. Currently, 98 percent of imports enter at the 15-percent rate, the rest at 25 percent. Peru maintains import surcharges on five basic agricultural products, which reduces the competitiveness of U.S. farm products. But these surcharges are scheduled to be phased out by 1997.

The economy is recovering from the deep recession and hyperinflation of the late 80s and early 90s, but it has yet to produce significant job growth. Real gdp growth could exceed 10 percent in 1994, and inflation is likely to fall below 20 percent (versus 39 percent in 1993 and 7,650 percent in 1990). In September 1994, consumer prices rose just 0.5 percent-the lowest monthly inflation rate in 19 years.

The Central Bank manages the money supply and affects interest and exchange rates through emission, open-market operations, rediscounts and reserve requirements on dollar and sol deposits. Dollars still account for more than 60 percent of total liquidity (the legacy of hyperinflation), which complicates the government's ef forts to manage monetary policy. The central bank does not finance the fiscal deficit. Current government expenditures have been in balance with revenues since late 1990, and the combined fiscal deficit (resulting fromdebt payment) has been financed by external sources. Over the last two years, a strong inflow of foreign capital, primarily from privatizations, has more than offset the merchandise trade deficit, and net foreign reserves have grown to nearly USD 6 billion (they were negative when Fujimori took office).

Peru has ratified the Uruguay Round agreements and became a founding member of the World Trade Organization (WTO) on January 1, 1995. President Fujimori faces re-election in April 1995. His principal opponent is former UN Secretary General Javier Perez de Cuellar, running as an independent.

2. Exchange Rate Policy

The exchange rate for the Peruvian New Sol is determined by market forces, with some intervention by the central bank to stabilize movements. There are no multiple rates. The 1993 constitution guarantees free access to and disposition offoreign currency. There are no restrictions on the purchase, use or remittance of foreign exchange. Exporters conduct transactions freely on the open market and are not required to channel their foreign exchange transactions through the central bank.

Since the end of 1992, the Sol has declined 27 percent against the dollar in nominal terms. However, when differences in inflation rates are taken into account, the Sol has appreciated in real terms.

3. Structural Policies

In the short span of four years, Peru has been converted from an economy dominated by a protectionist and interventionist state to a liberal economy dominated by the private sector and market forces. Several major state-owned businesses have been privatized in the past two years, including the phone company, the national airline (Aeroperu), electrical utilities and a number of mining properties. By the middle of 1995, the government intends to have sold off all remaining state-owned enterprises, including the petroleum company (Petroperu), the remaining electrical utilities, the water and sewage utilities, the fish-processing operations (Pesca peru), the ports (ENAPU), the airport authority (Corpac), tourist hotels and the remaining mining properties, including the largest, Centromin. There is some public sentiment against privatization, especially the privatization of Petroperu. But the government is determined to go ahead with its plans.

Price controls, subsidies and restrictions on foreign investment have been eliminated. A major revision of the tax code was enacted at the end of 1992, and the corrupt and inefficient tax authority (Sunat) was completely revamped, as was the customs authority. Tax collection has improved from 4 percent of gdp in 1990 to between 10 and 12 percent in late 1994. Customs collections in 1994 were running at a record pace, despite the sharp cut in tariff rates. Although income tax collection has increased, the government still relies primarily on consumption taxes, including an 18 percent value-added tax. There are also surtaxes on certain big-ticket luxury items, such as automobiles. As a result, the total tax levied on an imported car, including VAT, luxury tax and 15-percent tariff, exceeds 40 percent.

Regulatory regimes have been streamlined in most sectors. For example, registra tion of a new company now takes about a month in most cases, compared with two years under the previous regime. There are exceptions for certain regulated industries, such as casinos, which require approval of the Gaming Commission. Under the new automatic registration process, companies may open for business if they do not receive a negative reply to their license applications within 60 days. The 1993 constitution guarantees national treatment for foreign investors. However, many US. investors continue to have problems because of Peru's unpredictable judicial system. 4. Debt Management Policies

Peru's public external debt at the end of June 1994 totaled USD 22.4 billionroughly two-thirds of gdp. Total service payments on the debt in the first half of 1994 totaled USD 460 million, or 23 percent of merchandise exports.

Peru cleared its arrears with the Interamerican Development Bank in September 1991. In March 1993 it cleared its USD 1.8 billion in arrears to the IMF and World Bank and negotiated an extended fund facility with the IMF for 1993-95. The Paris Club rescheduled almost USD 6 billion of Peru's official bilateral debt in 1991. A second Paris Club rescheduling in May 1993 lowered payments for the period March 1993 to March 1996 from USD 1.1 billion to about USD 400 million.

In September 1994, the Peruvian congress voted to recognize the government's obligation to repay the debt to Chemical Bank and American Express dating to 1983 for the lease of two ships-the Mantaro and the Pachitea. The settlement of this longstanding dispute paves the way for Peru to renegotiate its debt with the foreign commercial banks-estimated at between USD 6 billion and USD 9 billion, including arrears and penalties. Peru hopes to negotiate a Brady Plan agreement with the commercial banks that will significantly lower its debt-service obligations. Preliminary discussions with the banks were underway in October 1994. The government is also accepting cancelled debt as partial payment in selected privatizations. In October 1994, Peruvian debt was trading at about 60 percent of face value.

5. Significant Barriers to U.S. Exports

Almost all barriers to U.S. exports and direct investment have been eliminated over the past four years. There are no quantitative or qualitative ceilings on imports. The investment law is extremely liberal. Customs procedures have been simplified and the customs administration made more efficient.

Import licenses have been abolished for the vast majority of products. The only remaining products requiring licenses are firearms, munitions and explosives; chemical precursors (used in cocaine production); and ammonium nitrate fertilizer, which has been used as a blast enhancer for terrorist car bombs.

Import surcharges imposed in May 1991 remain in effect on 18 categories of agricultural products, covering five basic commodities: wheat, rice, corn, sugar and milk products. The surcharges on wheat (including wheat flour), rice (milled and paddy), corn and sugar are variable import levies, based on price bands determined weekly by the Ministry of Agriculture, tied to world market prices. Whole and skimmed milk powder and milk fat are subject to per-ton surcharges. The Peruvian government defends the surcharges as necessary to protect Peruvian farmers from subsidized international competition and cushion the effect of an overvalued Sol and structural adjustment. In March 1993, the government agreed to phase out the surcharges over a three-year period as a condition for disbursement of an Interamerican Development Bank trade-sector loan. The surcharge levels were reduced by about 5 percent in April 1994 and by an equal amount in October 1994. Further cuts are scheduled to take place in January and July 1995, and every six months thereafter until the surcharges are eliminated. At present, however, it is difficult for U.S. grain exporters to effectively compete in the Peruvian market. 6. Export Subsidies Policies

The Peruvian government provides no export subsidies. The Andean Development Corporation, of which Peru is a member, provides limited financing to exporters at rates lower than those available from Peruvian banks (but higher than those available to U.S. companies). Exporters of non-traditional and mining products can apply certain sales and consumption taxes paid on inputs as a credit against income and asset taxes. Exporters also can receive rebates of the value-added tax on their inputs.

7. Protection of U.S. Intellectual Property

Intellectual property protection in Peru has improved in recent years but still falls short of international standards. Enforcement mechanisms are in the early stages of development and are still unproven for the most part. Peru remains on the Special 301 Watch List.

Peru is a signatory to the Berne Convention for the Protection of Literary and Artistic Works and to the Universal Copyright Convention and is a member of the World Intellectual Property Organization. In October 1994, the Peruvian congress ratified the Paris Convention on Industrial Property. The government plans to implement the GATT TRIPS provisions once the Peruvian congress ratifies the Uruguay Round agreement.

As of January 1, 1994, Peruvian law provides patent protection for all classes of inventions, without exception. This exceeds the protection provided under Andean Pact Decision 344. Peru does not provide transitional (pipeline) protection. Decision 344, which went into effect on January 1, 1994, lengthened the patent protection period to a straight 20 years (compared with the 15-plus-5 regime under the old law). It permits member countries to improve patent and trademark protections beyond those provided by the pact. Decision 344 contains compulsory licensing provisions, but these provisions are unlikely to be used in Peru because of the numerous requirements that must first be fulfilled.

Counterfeiting of trademarks is prevalent, because there is only rare, disjointed regulatory enforcement. At times the local courts have failed to back enforcement efforts in clear-cut cases. Some U.S. companies have spent years in fruitless litigation attempting to secure protection for their trademarks in Peru.

Copyrights are widely disregarded, but enforcement is improving, particularly with regard to software, videos, and musical recordings. Textbooks and books on technical subjects are rampantly copied, and illegal copies of audio cassettes are widely available. Pirated copies of motion picture videos constitute the inventories of nearly all video rental outlets. As soon as a film is in general release in Lima, its bootleg appears in local video stores. Although computer software is now protected by Peruvian copyright law, pirated software is widely available. Recently, however, authorities have raided large-scale software users, such as computer schools and economic consulting firms, to check for pirated software, and pirated software has been destroyed in well-publicized public burnings.

Peruvian law does not protect semiconductor chip layout designs, but the Embassy is not aware of any infringement of integrated circuits or semiconductor chips. Private freebooting of broadcast satellite signals may exist, but the commercialization of the captured signals without a license appears to have ended.

8. Worker Rights

Articles 28 and 42 of the Peruvian constitution recognize the right of workers to organize, bargain collectively and strike. Out of an estimated economically active population of 8 million, only about 7 percent belong to unions. Roughly two-thirds are employed in the informal sector, beyond government regulation and supervision. Strike activity increased in 1994 as the economy picked up and workers demanded better pay and conditions. The beginning of the campaign for the 1995 presidential election also inspired labor actions.

a. Right of Association.-Peruvian law allows for multiple forms of unions across company or occupational lines. Workers in probational status or on short-term contracts are not eligible for union membership. Public employees exercising supervisory responsibilities are excluded from the right to organize and strike, as are the police and military. The amount of time union officials may devote to union work with pay is limited to 30 days per year. Membership or non-membership in a union may not be required as a condition of employment. Although some unions have been traditionally associated with political groups, unions are prohibited by law from engaging in explicitly political, religious or profit-making activities.

6. Collective Bargaining.-Bargaining agreements are considered contractual agreements, valid only for the life of the contract. Productivity provisions must be included in any collective bargaining agreement. Unless there is a pre-existing labor contract covering an occupation or industry as a whole, unions must negotiate with each company individually. The government has set up a system of conciliation and arbitration to resolve disputes in collective-bargaining impasses. Strikes may be called only after approval by a majority of all workers (union and non-union) voting by secret ballot. Unions in essential public services, as determined by the government, must provide sufficient workers, as determined by the employer, to maintain operations during the strike. Companies may unilaterally suspend collective bargaining agreements for up to 90 days if required by force majeur or economic conditions, with 15 days notice to employees.

c. Forced or Compulsory Labor.-Forced or compulsory labor is prohibitted, as is imprisonment for debt. There are periodic reports of forced labor in remote mountainous and jungle areas, which the government claims it cannot control.

d. Minimum Age of Employment.-The minimum legal age for employment is 16. Workers aged 16-21 may not exceed 15 percent of a company's workforce. However,

although education through the primary level is free and compulsory, many schoolaged children must work to support their families, usually in the informal economy without government supervision of wages or conditions.

e. Acceptable Conditions of Work.-The 1993 constitution provides for a maximum eight-hour work day, a 48-hour work week, a weekly day of rest and 30 days annual paid vacation. The labor code also sets a 45-hour work week for women. Workers are promised a just and sufficient wage (to be determined by the government in consultation with labor and business representatives) and adequate protection against arbitrary dismissal. No labor agreement may violate or adversely affect the dignity of the worker. These and other benefits are readily sacrificed in exchange for regu lar employment, especially in the informal sector. The current minimum wage is 130 Soles per month (about USD 57 at the current exchange rate).

f. Rights in Sectors With U.S. Investment.-US. investment in Peru is concentrated primarily in the mining and petroleum sectors. Labor conditions in those sectors compare favorably with other parts of the Peruvian economy. Workers are primarily unionized, and wages far exceed the legal minimum. Oil and mining workers called a number of strikes in 1994 to demand higher pay and to protest government privatization plans.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993