Peru: Will New Military Draft Law Affect the Economy?

Francisco A. Laguna & Emily Schneider 

Photo Credit: Sen67howard via Wikimedia Commons

Photo Credit: Sen67howard via Wikimedia Commons

New legislation in Peru has sparked heated debate because it reinstates the military draft but allows persons to skip obligatory service by paying a fine of ~ US $700. The law has been attacked as discriminating against the poor, particularly against individuals from the Amazon and Andes. The minimum wage in Peru is 750 soles (~ US $290) per month.  The opt-out fine is 1,850 soles, making it nearly impossible for lower- and low-income individuals to take advantage of this option. While a similar law exists in Colombia (only applicable to students and priests), the ability to avoid the draft has been especially polarizing in Peru, where the majority of those who adversely affected are either Afro-Peruvians or of indigenous descent.

The mandatory draft could negatively impact the overall economy in Peru by forcing many minimum wage workers to forfeit their jobs to fulfill the service requirement. Since Peru’s main exports are gold, copper, silver, zinc and lead, the draft could slow production of many of Peru’s main commodities, but at this point, it is unclear whether the mandatory draft will affect Peru’s export numbers. Undoubtedly, however, the true impact will be on the local level: Conscripts will be paid approximately half of the current minimum wage and will be living away from home.  The absence of a contributing person will certainly affect the purchasing power of families and extended families, translating into negative impacts on small- and medium-sized businesses, all at the local level.

Photo Credit: tehzeta via Wikimedia Commons

Photo Credit: tehzeta via Wikimedia Commons

On the international front, foreign investors can still benefit from Peru’s burgeoning trade and real estate markets. Since 2006, Peru has signed trade deals with the US, Canada, Singapore, China, Korea, Mexico, Japan, the European Free Trade Association and Chile, concluded negotiations with Venezuela, Costa Rica and Guatemala, begun trade talks with two other Central American countries and the Trans-Pacific Partnership. Peru is also part of the Pacific Alliance with Chile, Colombia, and Mexico that rivals Mercosur in combined population, GDP, and trade.  The particular goal of the Alliance is to tap Asian markets.  Again, however, it is uncertain how mandatory military service will impact Peru’s export levels.

In terms of imports, foreign companies seeking to sell their products in Peru will largely be unaffected by the new law.  Imported products – clothing; food; electro-domestics; cosmetics – are typically purchased by the middle and upper classes, the very sectors who will be able to pay the service opt-out fine.

Photo Credit: Cacophony via Wikimedia Commons

Photo Credit: Cacophony via Wikimedia Commons

In terms of real estate, the Peruvian market continues to thrive.  The residential sector broke a 17-year record in 2012, even after recording a banner year in 2011.  According to a study by the Camara Peruana de la Construcción (Peruvian Construction Chamber), 21,990 residential units were sold in Peru in 2012.   In 2011 and 2010, 21,441 and 14,516 units were sold. Even with the high number of residential sales, a significantly greater number of residential units could be added to the market.  According to the Peruvian newspaper Gestión, 48,394 residential units were registered as under construction during 2012.  Of these units, over 20,000 units were reported as sold and 22,000 units were to be offered for sale.  Bullish commentators predict that the sector will remain strong for the next 15 – 20 years.

TransLegal has assisted clients understand Peruvian regulations governing the importation of genetically modified foods, pharmaceuticals and cosmetics.  Call us with your questions concerning Peru.

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