Monday, May 07, 2007

In Peru, Working Hard is Not Enough

On the suburban block in Arequipa where Hugo and Lizbeth live, there's no fewer than six family-run grocery stores. That's six on the one block, not the whole street.

There's also a constant stream of yellow "Tico" taxis buzzing by. According to Hugo, there are 40,000 taxis in Arequipa. With a population of around 1.3 million, that means a remarkable ratio of approximately one taxi for every six families.

Taxis and grocery stores provide just two examples of Peru's overcrowded economic geography, where too many service and retail providers compete to supply a limited market. Regardless of how hard they work, the pickings are stubbornly slim.

This situation stems from the Peruvian economy's inability to provide more than 30 percent of its people with formal employment. By necessity, the others become self-employed entrepreneurs. But most don't have the ability to accumulate capital or invest in something risky and innovative. So they must scramble to carve out a share of the limited internal market for basic goods and services.

Fifth-form economics tells us that supply increases to meet demand. But what this means depends on where you are. In Western countries, the decision to 'supply' is usually based on whether an enterprise can turn a decent profit. In Peru, the threshold is much lower, based on the need to simply subsist. So, wherever there's a stable, predictable demand for a good or service, the market is not just supplied, but saturated.

Meanwhile, other costs don't go down. Most taxi drivers, for example, have to work hard just to cover the rental of their vehicle and keep it gassed up. With a typical taxi shift running from around 7:00 am to 7:00 pm. it's effectively only around 2:00 pm that drivers actually start earning money for themselves.

And taxis or corner stores are fairly high up the complex hierarchy of service providers. At the bottom are the people, mostly children or the very old or disabled, who sell sweets two or three at a time out of big bags. This is effectively indistinguisable from begging.

Then there are the itinerant vendors who peddle cigarettes and gum from trays hung around their shoulders. Success is graduating to having a trolley which is parked on a street corner and adds cookies, potato chips and bottled drinks to the inventory. At night, these "carritos" sell hamburgers, hot dogs, herbal drinks and anticuchos. Other people carve out a little retail niche by buying and reselling popular items a few at a time. In tourist areas they wander along vending t-shirts, crafts, paintings, sunglasses; on the market streets it's nail scissors, cutlery, photo albums, shoelaces, or anything else that can be moved.

All this is great for the consumer, who has a choice of products at her fingertips most hours of the day and night. But the majority of hopeful entrepreneurs are barely getting by.

And being skilled is no guarantee of breaking out of the rut. In a turnabout that would make the Western householder chortle with irony, tradesmen wait around on the street to be hired. You can wander down to the corner and find an electrician, carpenter or builder for as little as 15-20 soles per day ($5-7 USD).

The phenomenon of chronic service oversupply continues up into an industry that in theory should be turning a decent profit - tourism. When I first arrived in Arequipa in April 2004, I estimated there were about 90 agencies selling the same things - the Colca Canyon, Misti, Chachani, and city tours. By March 2007 the number had risen to about 120.

What hadn't changed was the number of tourists. Even within Peru, Arequipa struggles to attract its share; the regional government, which has done little to effectively promote the area, estimated in 2006 that just 14 percent of visitors to Peru make it to Arequipa.

No one was offering anything very different or innovative, and the conditions for tourism hadn't changed. The road into the Colca valley was as potholed and arduous as ever. The same two bus companies offered the same crowded, uncomfortable service up into the sierra.

In such a static market, the growing number of providers produces a predictable result - intensifying competition on price. Relatively few of Arequipa's agencies actually operate the tours, which involves organizing transport, food and guides for the tourists. But the craft shops, internet cafes and hotels that throw in a desk and a sandwich board advertising "Colca, Chachani, Misti" are happy to clip the ticket, and shave a few dollars off the margin of the eventual operator.

And even among the operators, there's little compunction about joining the race to the bottom. Costs are squeezed by hiring a less experienced guide, providing less food for the tourists, or simply by taking a loss on the first few sales in order to get a group together.

A couple of years back, Lizbeth employed a woman called Yunisa in the Incaventura agency After a while, Yunisa quit and started her own agency. She installed herself in the corner of a crafts shop, half a block further up the calle Santa Catalina. Her sales tactic? She waited until tourists came out of the Incaventura office, having had the tours explained to them. Then she sent one of the three or four girls that hung round her office to run after the tourists, bad mouth Lizbeth, find out what price they had been offered, and undercut it.

Little encapsulates the Peruvian economic situation better than these "jaladores" (literally "pullers"). Normally students or otherwise unemployed young people, they are paid purely on commission, but this hardly dents their eagerness to work. They are often bright, articulate, and may even speak some English. But with a limited pool of possible sales to be made, any hard-won income is earned directly at the expense of each other.

In fact, in some places, so intense is the competition to "jalar" a tourist that it's to the mutual detriment of all. In central Cuzco the tourist is assaulted at almost every step by people promoting tours, bars, and restaurants, or selling crafts, jewellery, and clothing. It makes for a somewhat hostile environment, which doesn't encourage visitors to stay around and spend more of their money. Often their response is to retreat to the sealed-off, foreign-owned venues where they won't be hassled.

Tourists themselves hardly help the situation. They come with the expectation that Peru is a cheap country, and expect to have amazing adventures for orders of magnitude less expense than what they would pay for a similar experience in a developed country. In Arequipa, many are happy to cruise from agency to agency, looking for the cheapest offer. They assume that if someone charges them a few dollars more, they are being ripped off. I wonder whether their attitude would be different if they knew that the $2-3 USD they just bargained off a tour price had come at the expense of a couple of meals worth of wages for the guide, or the meagre commission of the girl who works in the office, or the profit margin of the agency which is used to pay its rent and employment costs?

Despite its diminishing returns, tourism is still seen as a bright propspect by many. These days, I instinctively groan when another young student tells me enthusiastically that "one day I'd like to open an agency of my own". How many more do we need, I ask?

Some people have bright ideas, like Tessy and Rafael who are saving to set up a hotel and tourist operation in Cotahuasi, picturesque location of the world's deepest canyon. But for now it's not viable; the destination is poorly promoted, and it's 11 juddering hours away from Arequipa on a mostly unsealed road. Few visitors make it that far.

The well-meaning outsider is tempted to question why more Peruvians don't band together to produce something of higher value, and to criticize the unfortunate habit of ripping off or undercutting one's neighbour. But once you appreciate the lack of confidence created by an unstable history, unhelpful government, and inadequate infrastructure, the tendency to grab at what's going becomes more understandable. So, until Peru can find ways to allow ordinary people more of a chance to get a slice of the economic pie, its citizens are condemned to continue the current vicious circles, scrapping over stale crumbs from the crust.

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Dave said...

I have been to Peru five times in the last few years to visit my wife's family in Ventanilla Alta, Ventanilla, Callao, Peru (a few miles north of the international airport). Everything you saw is 100% true. No tourists ever go to their town, but the same economics apply. For example, there are four "grocery stores" on the one block where they live, and small Pentium III internet cafes and/or Playstation 2 arcades are in every third or fourth house - at a cost of 1 sole (32 cents) an hour. Taxi fares barely cover the gas needed to move them. Even though tipping is rare in Peru (except in tourist meccas), try to be a good tourist and pay a fair price when offered without excessive haggeling, and also feel free to tip good service (1 or 2 soles / 5% is fine). Oh, as a "rich gringo" married to a Peruvian, I did notice that prices for me when shopping alone were about double those charged when my wife was there -- but I think I can afford a quality haircut for $3.20 instead of $1.60...

Simon Bidwell said...

Thanks for the comment, Dave. Yes, internet cafes are another one of those low-capital-investment services that proliferate widely. I reckon you could probably plot some consisent inverse relationship between the prosperity of an area and the density of internet cafes (read: holes in the wall). In Miraflores,Lima, only one or two on a whole avenue. In La Paz in Bolivia, three or four per block.

I think when tourists insist on haggling the price down, it's because they think it's unfair to be charged a different price than a local. But they should consider how many of those locals will ever have the chance to travel to a foreign country as they are doing.