In order to be able to develop a critical examination on the strengths and weaknesses of Perù’s business environment, this paper is using the PIE framework as a baseline analysis. The PIE models stands for Politics, Institutions, Economics. Unlike other models such as PEST or PESTLE that are static and neglect the importance of institutions, the PIE framework captures the dynamics within the three environments and the interdependence between them. The PIE framework can be used as a good indicator for the overall business environment in a given society. The PIE model suggests that misunderstanding these elements and considering them as individual entities often make the ...view middle of the document...
Politics are the driving force for institutional change and at the same time the institutions set the framework for how this political change process is run. The institutions determine to a high degree the functioning of the economy and the dynamics in the economic system are decisive for the living conditions for different social groups and thus their political reaction to the economic performance.
According to North (1990) institutions are any form of constraints that human beings devise to shape human interaction. High institutional quality results in reduced uncertainty and lower transaction costs for the actors in the economy. Formal institutions are legally introduced and enforced by state institutions, which are embedded in state operations based on laws that are enforced and monitored by the government. Institutions structure human interaction by setting rules for the distribution of power and protection of property rights, enforcement of laws, etc. There are formal as well as informal institutions. Informal institutions are unwritten practices and norms that are deeply embedded in the societal behaviour. They have roots in the local communities and are embedded with the existing customs, traditions, rules of conduct, and beliefs.
We can distinguish between types of institutions influencing the country’s business environment. The political and economic institutions of a society define the rules of the game between the citizens in a given society, and high institutional quality is a main driver for growth.The political institutions define the rules for how the political system functions through the national constitution. The economic institutions set the framework for the game rules in the economy. The informal institutions in the culture 'set' unwritten rules both for politics and for the economy. The formal and informal institutions combined determine the law enforcement and hence the formal institutional quality. The changes of institutions depend on the power of different social groups and the political processes. Closely related to this is also economic and technological development. In addition the informal institutions play an important role with most cultural values changing only slowly over time. Thus, institutions vary much between different societies, and it comes as a package with a certain fit between the formal and the informal institutions.
The economy is divided in two parts: flow variables, such as GDP, investments, consumption, inflation...