Poverty and Progress in Peru

Stephen DeAngelis

June 27, 2008

When one thinks about emerging market tigers around the world, I imagine that Peru is not the first country that pops into one’s mind. Peru, according to The Economist, is South America’s fastest growing economy. While that is good news for a country that has been mired in poverty, the bad news is that economic progress is not spreading evenly throughout the country [“Poverty amid progress,” The Economist, 10 May 2008 print edition].

“[Lima, Peru’s capital,] is the visible face of a boom that has made Peru South America’s fastest-growing economy. That performance owes much to record prices for mineral exports. But newer export products, from designer cotton T-shirts to mangoes and artichokes, are also flourishing. As well as trade, private investment, growing at 20% a year, and domestic consumption are driving the economy forward at an accelerating pace (in the year to February, GDP grew by 9.2%). Thanks to high world prices for food and fuel, inflation has spiked to 5.5%, having been low for years. Nevertheless, the growth looks to be built on solid foundations. The national savings rate has risen to 24% of GDP, high by regional standards, and the government last year posted a fiscal surplus of 3% of GDP. A free-trade agreement with the United States is about to come into effect. In recognition of such achievements, Peru’s debt was awarded an investment-grade credit rating last month by Fitch, a ratings agency.”

The United States wishes it were in such good financial condition. It, too, faces increasing inflationary pressures, but the U.S. has a much slower rate of growth and Americans save at a rate below 14%. As I noted at the beginning, however, not everyone in Peru is feeling the impact of the country’s economic boom.

“Despite the growth, poverty has fallen only slowly. And many Peruvians are disgruntled. … There are several reasons for the relatively slow fall in poverty. Although the number of formal-sector jobs is expanding at 9% a year, many Peruvians still labour in the informal sector of unregistered businesses, where productivity is low. Wages for the unskilled have been slow to rise.”

We have witnessed uneven economic progress in other emerging countries, like China and India. These, however, are large countries and some geographical differences should be expected. China, after all, covers some 3,646,448 square miles and is home to about 1.3 billion people. Peru, on the other hand, covers 496,226 square miles (less than 14% of China’s size) and is home to about 28 million people (roughly 2% of China’s population). The fact is that geography nevertheless plays a large role in how economic development spreads, even in a small country like Peru. The Economist reports:

“The capital, the Pacific coastal strip and most of the north of the country are all thriving. The problem is the southern Andean region, where poverty reaches 70% of the population. Helped by tourism, mining and microcredit some Andean cities, such as Cajamarca, Cusco, Huaraz and Huancayo, are prospering. The big divorce is with the surrounding, often mountainous, countryside, where many Andean Indians remain trapped in subsistence farming on small plots. Whereas 60% of the labour force in Lima are waged workers, only 27% are in Apurímac, notes Efraín González, an economist at Lima’s Catholic University. These unwaged people are often more or less cut off from the market economy. And it is market connections that make economic growth ‘trickle down’ to the poor, points out Richard Webb, a social researcher and former central-bank governor. Enabling that to happen is thus a job for public policy. Better roads, education and social policy are all needed.”

As my colleague Tom Barnett and I have been preaching for some time, people need to be connected in order to take advantage of the economic benefits associated with globalization. It comes as no suprise that those “more or less cut off from the market economy” continue to struggle. Although Peru’s government recognizes that they must improve infrastructure and social policy to help its citizens break poverty’s grip, The Economist reports that knowing something must be done and actually doing it are two different things.

“With the help of the World Bank, the government has drawn up a new anti-poverty strategy which focuses on trying to end the malnutrition that affects 30% of Peruvian children, most of them in the southern Andes. It has ramped up social spending while trying to target it more closely on the poorest areas. But Ivan Hidalgo, the official in charge, accepts that a lack of good managers, especially in local governments, is hindering this effort. … Similarly, money for public investment in roads or to help farmers lies unspent at all levels of government, partly because of fears of corruption. In another paradox, Peru has created ‘a culture of fiscal propriety’ whose side-effect is that officials are ignoring a social emergency in the Andes, says Mr Webb. Tackling this effectively means reforming the education and health ministries as well as local government. [The] government has made some effort to improve the performance of teachers, but has otherwise done little. ‘It’s a government that insists on investment and not on reforms,’ says Julio Cotler, a sociologist at Lima’s Institute of Peruvian Studies.”

Another way of looking at the situation in Peru is that while money has begun to flow the capacity to spend that money wisely has not. Most organizations involved in development work understand that building indigenous capacities is critical to the success of sustainable development. It makes no sense to invest money in a place that has no capacity to handle the money. Capacity-building is one of the basic philosophical tenets behind Enterra Solutions’ Development-in-a-Box™ approach. The Economist article concludes that changes are coming slowly to Peru and warns that they must continue (probably at a faster pace) lest the unfulfilled expectations of those being left behind creates such anger that it results in growing unrest that unravels the gains that have been made.

“The economic boom is going hand in hand with a deeper cultural change. In the 1970s and 1980s, Peru was a collectivist country: first a military government nationalised much of the economy and then Mr García, in his first term, took over a chunk more, egged on by a powerful left-wing opposition. Since then Peru has undergone a ‘capitalist revolution’, as Jaime de Althaus, a liberal journalist, argues in a recent book. This revolution is based not just on big mining companies, but on thousands of small-scale farmers on the coast, who broke up their state co-operatives into commercial plots, and on small businessmen in the shanty towns, who are exporting everything from clothes to electrical components. When leftists complain the capitalism is ‘savage’ they sometimes have a point: while some companies post record profits, many Peruvians work long hours for low wages with few labour rights. Away from Lima and the north coast, which have embraced globalisation, many Peruvians cling to nationalist and statist attitudes, says Alfredo Torres of Ipsos-Apoyo. Unless the politicians do a better job of defending the capitalist revolution and spreading its benefits, it will be threatened by the rancour of those who feel left out.”

Socialist generally attempt to redistribute wealth in ways that are more likely to create dependencies than foster development. Good jobs with decent pay are what most emerging market countries need. Those jobs are generally found in societies that have healthy and educated populations and that are connected by good critical infrastructure to each other and the rest of the world. That is why economic and social capacities must develop simultaneously. Given a chance to succeed, most people will.