Engaging in sound policy reforms to achieve the high-income level with greater well-being for all is the next step in Peru’s development path. The country has already achieved substantial socioeconomic gains in the last few decades, including the development of a resilient and attractive economy and a sizable middle-class. Further efforts are needed on three main fronts: economic diversification, connectivity and formalisation of jobs. This chapter sets up the policy action plan in these three priority areas. This is based on the recommendations presented in Volume 2 of the MDCR of Peru, and adds to the results of the workshops held in Lima with various stakeholders in the country, including civil society, private sector, academics and public authorities. It also includes the expected results of such reforms, detailed actions for implementation, and their degree of priority.
Multi-dimensional Review of Peru
Chapter 2. Plan of action to become a high-income economy with greater well-being for all
Abstract
Peru aspires to become a high-income economy with greater well-being for all. One of the main barriers to achieving this objective is the persistence of the middle-income trap, which to be overcome requires the implementation of meaningful reforms. While the reform agenda is broad, the MDCR stresses three areas on which the country should focus to promote sustainable and inclusive development, namely: promoting economic diversification and productivity, improving transport connectivity and tackling informal employment (Figure 2.1).
Figure 2.1. Key areas for achieving sustainable and inclusive development
Source: Authors’ elaboration based on (OECD, 2015).
Volume 3 of the MDCR of Peru synthesises the analysis of the first two reports and enriches the recommendations put forward for the abovementioned three priority areas. For this, MDCR uses the “government learning” approach, which is a useful technique for discussing public policy findings or recommendations in complex political-economy environments. The purpose of this dialogue is to transfer the knowledge gathered in the reports to local policy-makers as a first step before their implementation (OECD, 2018).
Three workshops were held in Lima between end 2017 and April 2018 to discuss the policy recommendations put forward by the MDCR Peru. Public administration, private sector, civil society, academics, technical and financial partners and other international organisations took an active part in this joint effort. During the workshops, the participants endorsed, rejected or reformulated the policy recommendations proposed by the OECD in Volume 2. Subsequently, a discussion was held on the potential modalities and relevant actors for implementation and their priority level. This exercise proved useful to ensure that the OECD recommendations are relevant to the local context and endorsed by the Peruvian government. Figure 2.2 summarises the process of the Multi-Dimensional Country Review (MDCR) of Peru.
Figure 2.2. The multidimensional review process in Peru
Source: Authors’ elaboration.
This chapter summarises the main findings and recommendations for the three priority areas, as presented in Volumes 1 and 2 of the MDCR. It also builds on the results of the workshops. Taken together, these inputs are used to build a plan of action in each one of the three priority areas. These action plans, in turn, will guide policy action in the near future, contributing to Peru’s ultimate objective of developing into a high-income economy with greater well-being for all.
Building a diversified economy
Increasing economic diversification in Peru requires ambitious reforms in many different policy areas. Market regulation and openness; development of new competitive industries; innovation strategies; taxation and the use of commodity-based resources; and the enhancement of the strategic institutional framework are some of these key priorities in the coming years. The new growth driver needs to be greater productivity, assisted by a host of structural policy changes to continue or accelerate the pace of convergence.
Peru had a challenging agenda of broad-based policies to boost productivity and competitiveness, implemented during the period 2014-18. The overall objective of the Agenda de Competitividad 2014-2018 was to increase competitiveness, and to foster formal employment and the well-being of the population. As of June 2016 (i.e. the latest available report), 38% of this Agenda had been achieved. In particular, scores in the three main areas for improving competitiveness were as follows: 47% for connectivity, 37% for productivity and 29% for the state’s efficiency (MEF, 2016). In this sense, challenges remain for improving productivity and diversification, meaning that new actions are required to achieve these objectives.
The Peruvian government recently approved the Política Nacional de Competitividad y Productividad (PNCP), i.e. the National Policy on Competitiveness and Productivity. This policy is the result of a participatory process. Actors from the public sector, private sector, academia, international co-operation and civil society participated in its design, which started in July 2018. It is composed of nine key objectives and 36 policy guidelines that frame the strategy that Peru will follow on competitiveness and productivity until 2030.
Moreover, on 28 July 2019, the government published the Plan Nacional de Competitividad y Productividad (National Competitiveness and Productivity Plan), which contains 84 concrete policy measures related to PNCP’s Key Objectives, and four time milestones for monitoring and accountability of the Plan. This Plan, as well as the Policy, is the result of intense coordination between stakeholders from the public and private sector, academia and civil society (see Box 2.1).
Box 2.1. The Peruvian Government’s Strategy towards Competitiveness and Productivity
In recent years, changes in competitiveness in international markets — due to decreasing technology adoption costs and higher connectivity amid globalisation — have revealed market failures and institutional weaknesses in Peru. These two factors have translated into a reduced factor productivity with a scarce contribution to economic growth, as well as the provision of low quality public services. The country needed to implement policies that aimed at medium- and long-term structural changes to boost the country's competitiveness and productivity. Therefore, on 31 December 2018 the Peruvian government published the Política Nacional de Competitividad y Productividad (PNCP) after a process started in July 2018.
The PNCP is a result of the joint work of different actors from the public sector, the private sector, international cooperation, academia and civil society. It was co-ordinated and articulated by the National Council of Competitiveness and Formalization (CNCF). The goal of the PNCP is to provide the necessary conditions for increasing the well-being of all Peruvians. The PNCP is composed of nine key objectives and 36 policy guidelines that will set the path to promote and consolidate medium- and long-term sustainable and inclusive economic growth, resulting in better public services, poverty reduction, and increasing income and welfare of citizens. The key objectives of the PNCP are the following:
|
Key Objective 1 Quality economic and social infrastructure |
Key Objective 2 Strengthen human capital |
Key Objective 3 Innovation, adoption and transfer of technological improvements |
||
|
Key Objective 4 Promote local and external financing mechanisms |
Key Objective 5 Create conditions for a dynamic and competitive labour market towards decent employment for all |
Key Objective 6 Develop conditions for a productive business environment |
||
|
Key Objective 7 Facilitate conditions for foreign trade of goods and services |
Key Objective 8 Strengthen institutions |
Key Objective 9 Promote environmental sustainability in the operation of economic activities |
Following the issuance of the PNCP, the government, with the CNCF as its main driver, published the National Competitiveness and Productivity Plan on 28 July 2019. This plan contains 84 specific measures, all of which are related to the 9 key objectives of the PNCP. The design of this plan was also participatory. Public-Private Technical Committees (CTPP) were constituted for each key objective. The purpose of the CTPPs is to formulate and prioritise the interventions of the Plan and to guarantee the representativeness of all relevant actors in the decision-making process. The committees are conducted by different sectors with the participation of other stakeholders from the public sector, the private sector, academia and civil society. The implementation and monitoring of the Plan will continue to be participatory, with a strong coordination component through the CTPPs and with CNCF as its main driver.
The formulation of this Policy (strategic approach) and the Plan (operational approach) presents some improvements with respect to past efforts. It tackles the issue of weak coordination among public institutions and between the public and private sectors. In addition, the formulation strategy contains a territorial approach that recognises the differences in economic potential and needs throughout the territory in favour of competitiveness and productivity. For instance, in February 2019 Peru started a Subnational Doing Business study, which will be carried out for the first time in 12 cities to diagnose the ease of doing business and to promote reforms according to particular local conditions. The Subnational Doing Business study is being carried out by the World Bank Group in collaboration with the Swiss Cooperation in Peru and the CNCF. The study will be co-ordinated with local authorities and public officials. Finally, an important feature of this strategy design is its nature of State policy; both the PNCP and the Plan have a time horizon of more than ten years, until 2030, moving beyond the current administration and providing room for short-, medium-, and long-term measures on the progress.
Source: MEF.
Peru needs to diversify its economy and increase productivity
Pillar 1. Identify new products and sectors
Hard commodities continue to represent a high proportion of the trade and capital accounts in Peru. While commodities only accounted for around 10% of Peru’s GDP in 2015, regarding the external sector, mining attracted about one-third of foreign direct investment and represented 61% of Peru’s annual exports in 2015. These natural resources comprise several mining components and, to a lesser extent, oil and natural gas. With its abundant and diverse natural resource supply, Peru stands among the top global producers of some of these minerals (OECD, 2015).
Promotion of economic diversification should target industries that could profit from the latent comparative advantages of Peru’s economy. Industries that exploit comparative advantages become competitive in domestic and international markets, making them sustainable beyond government support (Lin and Monga, 2010). Comparing Peru’s current resources to equivalent international economies is informative in identifying unexploited sectors.
Peru has at its disposal a large set of products with untapped potential with which it could expand the country’s economic diversification and boost productivity. Given current global trends and domestic challenges, there are opportunities for new exports that could create formal jobs, boost productivity and produce more processed products. Various semi- and fully-processed products could be exploited by Peru. The analysis of revealed comparative advantages (RCAs) suggests that Peru would benefit from developing a RCA in unprocessed products such as edible nuts, greasy wool or fish fillets (fresh or chilled). Among those fully- or semi-processed products, Peru could profit from the production of wine from fresh grapes, olive oil, palm oil, sugar confectionery, smoked fish, liquefied butane, electronic switch boards or crocheted textile fabrics (Figure 2.3).
Figure 2.3. Top 35 most likely Peruvian exports by level of processing and RCA index, 2014
Note: : RCA (revealed comparative advantage) is an index based on Balassa (1977); values larger than 1 suggest current specialisation in a product by the country. Products are classified according to the SITC rev. 3 at the 4-digit level (in parenthesis in X axis). Density is a measure based on Hausmann and Klinger (2007), which captures a country’s propensity to export a product. Y axis = normalised values of the density measure (i.e. average set to 0 and standard deviation equal to 1). The categorisation of products according to manufacturing levels follows Rieländer and Traoré (2016).
Source: OECD calculations based on export data from the World Integrated Trade Solution (WITS)/United Nations (UN) Comtrade (database) (accessed on 1 June 2016).
Pillar 2. Promote education, innovation, entrepreneurship and regional market integration
Improving skill levels is key to increasing productivity, and can lead to better access to formal jobs and even to their creation. The correlation between the use of skills at the workplace and productivity is very significant (OECD, 2016a). Unfortunately, informality limits the expansion of the pool of skills as, in a context of informality, certain skills tend to deteriorate or remain limited to a low value-added range, and access to training and intermediation services in the informal sector is scarce.
Education and skills are also a driver of innovation and entrepreneurship. Universities have become relevant in supporting start-ups in Peru. The Emprende Ahora programme, organised by the Invest Institute in conjunction with the Center for International Private Enterprise and the University of Lima, seeks to promote entrepreneurship among young people by providing scholarships to outstanding students from regional universities. Recipients benefit from a four-month training programme in business management and mentoring support to develop a business plan. In 2014, the programme attracted 130 applicants from 40 universities in 24 regions (OECD, 2016a).
Supporting entrepreneurship could positively impact the diversification and productivity of the Peruvian economy. For instance, market regulations designed to promote entrepreneurship may result in further formal jobs and consolidate new firms and activities in Peru.
Investment in innovation and research and development (R&D) is key for supporting SMEs and economic diversification. Yet, Peru’s level of investment in R&D remains low, which affects innovation outcomes. Peru’s business expenditure on research and development (below 0.1% of GDP) remains significantly below the average for OECD member countries (close to 1.6% of GDP) and many other countries in Latin America (0.17% for the Latin American benchmark countries).1 Peru also remains well below benchmark and OECD member countries in intellectual property imports and exports, figuring into the country’s low contribution to global activity in research and development (OECD, 2015).
Pillar 3. Improve the use of commodity-based resources and enhance domestic resource mobilisation
Proper management of the extraction process and the revenues raised from commodities can be a relevant source of funding to invest in productivity-enhancing policies. At the national level, Peru’s fiscal rule has a structural fiscal balance (i.e. cyclically-adjusted) as it targets to manage the volatility of commodity-based revenues (OECD, 2015). However, at the sub-national level, the volatility of international commodity prices and the uncertainty of commodity production have affected revenue streams to these authorities. A fiscal rule at this level would avoid pro-cyclicality of sub-national expenditures in boom periods. Linked to this, following the experiences at the national level, sub-national authorities, in co-ordination with the national government, can establish the creation of a stabilisation fund to better manage these resources.
Improvements in the allocation of commodity-based transfers could increase competitiveness and support formal jobs. The different levels of allocation could be associated to the level of development of Peruvian departments and investment in broad based policies. In Peru, the two main sources of commodity-based revenues for sub-national authorities, i.e. canon and royalties (Korinek, 2015), are distributed exclusively to the regional and local governments where the minerals are extracted. Canon represents half of the corporate tax from mining companies (i.e. the other half is retained by the central government), and revenue from royalties is based on the companies’ profits. The fiscal transfers based on commodities per capita received by Cusco and Moquegua alone are greater than those obtained by 15 departments in Peru put together (OECD, 2015). Only five out of the 25 departments received more than half of the total revenues from commodities in 2014 (OECD, 2016b). Therefore, improving the allocation of commodity-based transfers according to the level of development of Peruvian departments is a key challenge for the country. These revenues have not contributed to greater productivity and inclusiveness. The concentration of these revenues in a few departments and the lack of rules regarding their expenditures have negatively affected the efficiency of municipal districts (Muñoz, 2010). Furthermore, these fiscal revenues do not target the poorest regions, exacerbating regional disparities. Using data at the department level, the correlation between the amount of fiscal transfers per capita and the percentage of the population with at least one unmet basic need is less than -0.3.
Peru has made progress by strengthening the process of decentralisation and sub-national governments. In January 2018, the national government created the Multi-sectorial and Intergovernmental Commission for Strengthening Decentralization (Comisión Multisectorial e Intergubernamental para el Fortalecimiento de la Descentralización) with the objective to formulate a proposal of articulated intersectoral and intergovernmental management guidelines. These guidelines aim to promote and strengthen decentralisation and a Plan of action 2018-2021, within the framework of the decentralisation process (El Peruano, 2018).
Pillar 4. Develop an effective strategy to increase productivity and economic diversification
Expanded economic diversification is key for promoting formal job creation, boosting productivity and providing equal opportunities for all Peruvians. Indeed, many national strategic plans have been developed and are being developed, some of which highlight the necessity to reduce informality and create formal jobs. These include the Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021; the National Plan for Productive Diversification; the National Strategy on Development and Social Inclusion: “Incluir para Crecer”, the Política Nacional de Competitividad y Productividad (PNCP) and the Plan Nacional de Competitividad y Productividad. In particular, a key objective of the Plan Estratégico and of PNCP is to increase economic diversification, boost qualified workers and lower informality.
Strategic development plans, at both the sectoral and territorial level, are based on the objectives of the National Accord and the framework of the Plan Bicentenario. These strategic development plans apply horizontally, among different sectoral ministries, and vertically, among different levels of government, following the general principles highlighted in the Plan Bicentenario. These plans should also contribute to improving the quality of public investment by enabling stakeholders to prioritise projects that require public investment.
Improving the planning process from the central administration to achieve more effectiveness is at the core of Peru’s challenge. While the plans at the central and sub-national levels aim to tackle the crucial development issues in Peru, a better co-ordination among public institutions is needed to determine policy priorities and a better connection between the budgeting process and these agendas (OECD, 2016c). To achieve it, Peru should strengthen the Centre of Government (CoG) by better integrating and co-ordinating the Presidency of the Council of Ministries (PCM) and the Ministry of Economy and Finance (MEF) in the prioritisation process. In particular, Peru lags behind benchmark countries in this aspect of policy co-ordination. Indeed, despite efforts to increase dialogue among different institutions in recent years, the lack of collaboration and co-ordination among ministries and within the administration remains an obstacle to effective policy making and implementation. On this issue, the recent formulation of the PNCP and its Plan is a positive sign of the government trying to circumvent this issue by providing tools and frameworks for more co-ordination (see Box 2.1).
Overall, for promoting economic diversification, Peru should engage in reforms in at least four different areas of an action plan to increase economic diversification and productivity (Table 2.1): i) identify new products and sectors; ii) promote education, innovation entrepreneurship and regional integration; iii) improve the use of commodity-based resources and enhancing domestic resource mobilisation; and iv) develop an effective institutional strategy to increase productivity and economic diversification.
Table 2.1. Lines of action for promoting economic diversification and productivity
A plan of action to improve economic diversification and productivity in Peru
Pillar 1. Identify new products and sectors to contribute to further economic diversification and productivity
Pillar 2. Promote education, innovation, entrepreneurship and regional market integration
Pillar 3. Improve the use of commodity-based resources and enhancing domestic resource mobilisation
Pillar 4. Develop an effective strategy to increase productivity and economic diversification
Note: Based on the workshop “Hacia una mayor productividad y diversificación económica en el Perú”, held in Lima on 6 December 2017.
Source: Authors’ elaboration.
Unlocking the benefits of better connectivity
Greater connectivity is fundamental to reduce transport costs and boosting productivity and competitiveness in Peru. Good transport connectivity can make Peru more efficient and facilitate reaching sustainable and inclusive development goals. Improving connectivity requires going beyond transport infrastructure provision, recognising the need for policies and strategies that focus on increasing efficiency and reducing the costs of transport, including time, financial costs and negative environmental and social impacts.
Improving transport connectivity to support productivity and competitiveness
Pillar 1. Develop a national strategy to reduce transport costs, improve connectivity and promote multi-modality
Better connectivity can make the Peruvian economy more efficient and promote productivity and competitiveness. The development of a strategy for improving connectivity is particularly relevant for Peru, where transport costs are high compared to OECD member countries and transport is considered one of the main bottlenecks to development. Better logistics in transport as well as adopting a multi-modal approach that shifts focus from roads (e.g. developing railways, ports and waterways) are central to this strategy. Another key area are improvements in the institutional framework related to the design and implementation of transport policies at national and sub-national levels.
Peru should set a transport plan according to the guidelines and objectives of the National Strategic Development Plan. Transport plans in Peru assess indispensable logistics corridors based on interactions with local communities and technical evaluation, yet several bottlenecks affect the design and implementation of these plans. The logistics corridors and transport infrastructure projects lack adequate links to a national strategic agenda. Prioritisation and planning defined in a development agenda should be the basis for a transport strategy in Peru. Indeed, the Programa de Inversiones 2011-2016 Gestión Estratégica – Corredores Logísticos only refers to the Plan Bicentenario 2021 domestic trade analysis (and not to policies to boost exports) and does not contain specific criteria to match development objectives with the transport framework. In addition, investments needed for the implementation of these plans are not binding and not necessarily included in the budget for results (presupuesto por resultados) or in the national framework for public investment – Sistema Nacional de Inversión Pública (SNIP).
Consequently, defining transport strategies to realise outcomes for the economy and the population, rather than for infrastructure development exclusively, is key. With this framework of reference, increasing connectivity in Peru means developing a national strategy focused on reducing time and financial transport costs, as well as negative environmental and social externalities, and promoting multi-modality.
Additionally, improving logistics could boost Peru’s productivity. Despite some recent improvements, logistics and transport infrastructure continues to underperform versus benchmark and OECD economies. There are important differences for the six Logistics Performance Index (LPI) categories between the best-performing OECD country and Peru, Latin America, and the OECD average (Figure 2.4, Panel A). The largest gaps occur in infrastructure (the quality of trade and transport infrastructure), logistics competence (competence and quality of logistics services, e.g. transport operators, customs brokers), and tracking and tracing (ability to track and trace consignments). Peru performs below the OECD average and the Latin American average for these three indicators. Furthermore, Peru’s overall logistics performance is below most of the benchmark countries and OECD economies (Figure 2.4, Panel B). The Peruvian gap is equivalent to 2.6 times the gap for OECD countries.
Figure 2.4. Logistics performance gap versus the best-performing OECD country, 2018
Note: Scale of 1 to 5, where 5 = the best logistics performance. The gap refers to the difference for each logistics component from the best-performing OECD country, these being Germany for the overall LPI, infrastructure, logistics services and customs; Finland for tracking and tracing; and Belgium for international shipments and timeliness.
Source: Based on World Bank 2018 data (LPI), http://lpi.worldbank.org/.
Transport policies should be integrated into wider strategies. Indeed, transport and connectivity directly affect other policy areas such as environment, economic diversification and competitiveness, labour market, and education and skills. In addition, careful study of the factors influencing trip lengths and modal choice has stressed the importance of integrating spatial and transport development in regional and urban environments.
To achieve it, Peru should develop a transport plan according to the guidelines and objectives of the National Strategic Development Plan. In Peru, the transport strategy is articulated through different transport plans. In 2014, the Ministry of Transport and Communications (MTC) created the Development Plan of Logistic Services on Transport (Plan de Desarrollo de los Servicios Logísticos de Transporte) in order to improve connectivity. The plan proposes medium- to long-term measures for strengthening domestic logistics and building on existing opportunities in international markets. Twenty logistics corridors were prioritised based on the main productive activities that require logistics transportation services. In addition, the MTC set out key plans to increase multimodality in Peru: Plan Nacional de Desarrollo Portuario for the development of ports and Plan Nacional de Desarrollo Ferroviario for the development of railways.
Pillar 2. Develop a national urban transport plan
Improving urban mobility is one of the priorities for the Peruvian population. In fact, citizens listed public transport as the second greatest problem limiting quality of life in Lima (after insecurity). As many as 30.3% of surveyed citizens claim that they spend between 0.75 and 1.5 hours commuting between their homes and workplaces each day. In addition, 73.5% consider tackling vehicle emissions a priority to address pollution in the city, which is seen as the third greatest problem hampering quality of life (Lima Cómo Vamos, 2016).
A national urban transport plan is needed to support efficient, integrated and sustainable transport systems across the country. Sustainable urban transport policies are a common objective for the country that should be supported at the national level. Transport policies impact the vehicle fleet in the country, CO2 emissions and overall environmental effects linked to transport. Having a solid strategy provides certainty on the links between the city’s objectives and investment decisions. In this effect, the Ministry of Housing, Construction and Sanitation (MVCS) recently started to support cities by financing urban mobility studies as part of the City Programme (Programa Nuestras Ciudades). Studies have been developed for Huaral, Tacna, Conglomerado Cañete and Huancayo.
Defining a single national institution for leading the national urban mobility plan should be a priority. In Peru, the MVCS, in close co-ordination with the MTC, would be an adequate institution for developing the national urban mobility policy. Third-country experiences show that national urban mobility policies have been developed with diverse administrative structures. In Brazil and Mexico, new ministries have been created to lead urban policy at the national level. Other countries have assigned responsibility for developing national mobility policies to existing ministries, such as Colombia, France or India. The MVCS could build on the current programme, which comprise urban mobility studies, to create a national framework for urban mobility master plans. The process of developing mobility master plans can significantly strengthen the planning capacity of urban authorities. A mobility master plan identifies the challenges faced by an urban area and sets out a roadmap to guide the city on a sustainable course regarding its land use and transport system (GIZ, 2013).
Pillar 3. Improve policies implemented at the local level
Establishing a unique metropolitan mobility authority is necessary for the Lima-Callao metropolitan area. As Peru’s capital city and main port, and its economic and cultural hub, the metropolitan area of Lima-Callao and its performance is essential to the country’s development. Lima itself concentrates 50% of GDP. The metropolitan region includes two regional jurisdictions: Lima (43 districts) and Callao (7 districts). Lima-Callao reached 9.3 million inhabitants in 2018 (INEI, 2018), representing 32% of Peru’s total population and over 40% of Peru’s total urban population (INEI, n.d.). Its location has strategic advantages as both a gateway for Latin American trade and a competitive alternative to the Panama Canal ports for trans-shipment, especially on the Asia-Latin America route.
The many success stories that have implemented such a policy show the potential benefits it can bring. Internationally, mechanisms for the co-ordination of metropolitan mobility planning and policy come in many forms. For example, Indonesia employs informal metropolitan-wide co-ordination forums; and Mexico employs more formal metropolitan commissions, but without a legally binding obligation to co-operate. Although simple to implement, these mechanisms have often proved limited by the need for consensus in order to pursue their programme of work, with, consequently, long delays. They also tend to be particularly sensitive to changes in administration. By contrast, formal metropolitan-wide authorities with transferred responsibilities, capacities and funds generally deliver more solid and long-term improvements (Aguilar and Glocker, 2015).
In some cases, metropolitan mobility bodies are implemented as part of a wider metropolitan governance structure. Transport for London (TfL), for example, was created through the Greater London Authority (GLA) Act with the purpose of facilitating GLA’s transport responsibilities. In other cases, although without a wider metropolitan governance structure, metropolitan scale transport planning and regulation is nonetheless recognised and dedicated authorities have been created for this purpose (e.g. Syndicat des transports d’Île-de-France [STIF]).
In the case of Lima-Callao metropolitan area, co-operation from municipalities remains a key barrier to be addressed by the strategic mobility authority. The lack of metropolitan strategy has limited initiatives to reform the bus system, or implement the Metropolitano and the corredor azul, for instance. Re-grouping small and semi-formal bus providers into more professional enterprises subject to higher quality standards and providing services through high-capacity, cleaner buses was central to Lima’s ability to implement the Metropolitano and other new bus corridors. Callao, however, has been slow in preventing semi-formal services — concessioned by this government — from competing with the Metropolitano and the new corridors.
This policy recommendation was taken into account by national authorities after the publication of the second volume of the Multi-dimensional Review of Peru, In-depth Analysis and Recommendations (OECD, 2016b). Law no. 30900 of 26 December 2018 created the Urban Transport Authority (Autoridad de Transporte Urbano - ATU) for Lima and Callao. The ATU is a specialised technical body attached to the Ministry of Transportation and Communications (MTC), with legal status under internal public law; it has administrative, functional, economic and financial autonomy (see the entire law here: https://busquedas.elperuano.pe/download/url/ley-que-crea-la-autoridad-de-transporte-urbano-para-lima-y-c-ley-n-30900-1727064-7).
Box 2.2. The challenges of improving transport at the local level: The case of Lima-Callao metropolitan area
As Peru’s capital city and main port, and its economic and cultural hub, the metropolitan area of Lima-Callao and its performance is essential to the country’s development.
Port traffic in Callao has been growing rapidly. Container throughput between 1995 and 2014 grew by 650%, making it the sixth largest port in Latin America in Twenty-Foot Equivalent Units (TEUs). More than 60% of Peru’s foreign trade goes through Callao (Mesquita Moreira, 2013). In 2013, containers handled at the port represented close to 85% of all container traffic in Peru (author’s calculations based on World Bank, 2014).
Deficient transport services and restricted connectivity hinder Lima-Callao’s potential for economic development and improvement of citizen well-being. The number of motorised trips in the metropolitan area increased by 10 million between 1989 and 2012, corresponding to an increase from an average of 1.1 daily motorised trips per inhabitant to almost 2 trips per capita. Including walking, in 2012, the metropolitan area reached 22.3 million yearly trips (2.4 per person daily). While total trips increased by 4.2% yearly between 2004 and 2012, the population increased by 2.1% yearly during the same period (Municipalidad Metropolitana de Lima, 2014).
The urban mobility system of Lima-Callao is struggling to meet mobility demand and ensure reliable, safe, clean and accessible transport services. Increasing congestion is perceived as an important problem by the population. Average travel time for the average trip in the metropolitan area increased almost 20% between 2004 and 2012, from 31 to 37 minutes. Working trips have higher than average travel times and have increased from 40 minutes on average in 2004 to 45 minutes on average in 2012 (Municipalidad Metropolitana de Lima, 2014). Lima-Callao also has high levels of pollution, which jeopardises the health of the population (Transitemos, 2015). Between 70% and 80% of the pollution in Lima is estimated to be caused by vehicles (Barbero, 2006). Another major concern is the high and increasing number of deaths due to transport accidents. Lima concentrates about 62% of the national accidents and reports an average of 590 deaths, 180 injuries and 30 permanently disabled yearly as a consequence of transport accidents (Transitemos, 2015).
Source: (OECD, 2016b), Multi-dimensional Review of Peru: Volume 2. In-depth Analysis and Recommendations.
Overall, unlocking the benefits of better transport connectivity requires Peru to engage in policy actions in at least three different pillars (Table 2.2).
Table 2.2. Lines of action for reaching better transport connectivity
A plan of action for improving transport connectivity to support productivity and competitiveness
Pillar 1. Develop a national strategy to reduce transport costs, improve connectivity and promote multi-modality
Pillar 2. Develop a national urban transport policy
Pillar 3. Improve policies implemented at the local level (focus: Lima Callao)
Note: Based on the workshop “Hacia una mayor conectividad en el Perú”, held in Lima on 16 April 2018.
Source: Authors’ elaboration.
Improving working conditions through formal and better quality jobs
Informality in Peru is high and persistent, with a pervasive impact on economic activity and on jobs. More than two-thirds of workers and almost 90% of firms are informal. Although informality has decreased, it remained high throughout the most recent period of economic expansion and progress and continues to stand among the highest in Latin America and the Caribbean.
The negative impact informality has on jobs, firms and the overall economy makes it one of the main barriers to inclusive development in Peru. Informality is a complex, multi-dimensional phenomenon, both cause and consequence of the low levels of development in the country. The broad concept refers to all economic activity that happens outside of government regulations, whether by evasion or by being beyond the scope of regulation. Weak institutional frameworks, the costs associated with formalisation, the large size of low-productivity sectors and certain cultural and socioeconomic conducts common among economic agents are some of the most relevant drivers of informality. In turn, informality has a pervasive impact on economic efficiency and productivity, tax collection, firm development and job conditions, among other consequences. In order to promote more formal jobs and economic activity in Peru, it is crucial to better understand the complexity of this phenomenon in the country – its main causes and consequences.
Because informality in Peru is caused by diverse and structural factors, the response must be multi-dimensional. Informal employment and economic activity in Peru are very heterogeneous and manifest themselves in different ways, requiring different policy approaches, including actions to address specific barriers to formalisation in the short term, as well as longer-term strategies to create opportunities for more formal jobs and economic activities.
Informality is widespread in Peru and requires policies that both address its causes and alleviate its pervasive impact
Pillar 1. Mitigate the pervasive impact of informality on jobs and labour conditions
Informality has several adverse consequences on social protection and labour conditions for informal workers and the population. As informal workers are excluded from national labour laws and social security regulations, they are less likely to have access to pensions and health insurance systems. They also face more difficult working conditions, in particular lower wages and greater difficulty in finding sufficient work.
On the one hand, informality and the prevalence of self-employment are the main causes of relatively low health insurance coverage. Of the 9.7 million Peruvians estimated to lack health insurance in 2014, only 2.6% were living in households with no active workers. Even among the poor (e.g. in the first income quintile), only 9% of citizens without health insurance are in households with no workers, a percentage that is lower the higher the income level. On the other hand, 6.3 million were living in households with no formal workers.
On the other hand, affiliation to the pension system is as well a challenge. Peru has one of the lowest rates of affiliation to the pension systems in Latin America. Only 40.5% of employed urban workers were affiliated to a pension system in 2013 (ILO, 2014). Additionally, the low coverage of the pension system is largely driven by informality. Formal workers are much more likely to have access to pensions than informal workers. While only 16% of informal workers are affiliated to a pension system, 83% of formal workers are affiliated. Contributions are, in fact, compulsory for dependent formal workers. Since younger workers are more likely to be informal, coverage is lower for those aged 15 to 29, with 81% not covered. Coverage improves for those 30 and over, although 64% lack affiliation.
The coverage of non-contributory pensions could be extended. The Pension 65 social pension aims to cover the extreme poor over 65. Since the end of 2015, Pension 65 reached 500 000 beneficiaries, which is the limit set by the credits allocated. Given the coverage gap among older adults, the progressive universalisation of the social pension should be considered – that is, extending the programme to all adults above retirement age, beginning with those subsisting under the poverty line. Realising this in a financially sustainable manner would require taxing pension income and possibly progressively reducing the amount of the social pension for those receiving contributory pensions.
Additionally, working conditions are weaker in the informal sector. Informal workers earn significantly less than formal workers in terms of wages, job stability and contracts. Among employed persons with a contract working more than 30 hours per week, formal workers earn hourly wages 24.3% higher than informal workers and monthly wages 22.3% higher (Jaramillo, 2013). This disparity is amplified by the fact that, of the workers considered, formal workers work fewer hours – about one day less per month (Jaramillo, 2013). The pattern of working hours differs across the income distribution and between formal and informal workers. Informal workers are more likely to work short hours, but among those at higher income levels, fewer work short hours and more work long hours (over 48 hours per week). By comparison, formal workers in higher income quintiles are more likely to work full time (30 to 48 hours), and a significant proportion works over 48 hours in a normal week. These patterns suggest that the earning potential of informal workers heavily influences the quality of their jobs.
Pillar 2. Promote the formalisation of jobs
Peru has adopted a number of programmes to reduce informality and improve job quality, yet, informality remains high. To promote the formalisation of jobs, a combination of policies should be adopted. For instance, programmes facilitating workers’ registration in the formal sector, reductions in non-wage labour costs, and improving labour productivity through training programmes.
Relative to other countries in the region, the share of the social security burden to both employee and employer appears as low. The costs of pension and healthcare programmes represent 17.5% of total labour costs for salaried workers, 10.1% of which is paid by the employee, and 7.4% by the employer. However, collusion between the employer and employee might arise to lessen the tax burden on both (i.e. they both agree not to contribute to pension and healthcare such that the employer reduces the total labour cost, while the employee increases the net payment in the short-run), thereby encouraging informality.
Labour costs of formalisation represent a barrier to formality for low-income groups. For informal salaried workers who earn an average labour income of the first decile (the lowest in the income distribution), the cost of contributing to social security programmes would be 124% of his/her labour income, rendering it unaffordable (Figure 2.5, Panel A). The cost of becoming formal diminishes as incomes rise, evidencing the positive association between higher social security contributions as a share of income and higher levels of informality within the Peruvian economy. The price of social security contributions stabilises at the level of the minimum wage (sixth decile); however, overall levels of informality remain high even after costs for social security schemes become constant.
Most informal workers are not beneficiaries of the general regime, given that a large share of them are self-employed. At the fourth decile, self-employed workers have to contribute almost 90% of their income to social security programmes. This percentage declines for workers with higher income, but is still relatively high and represents a particularly large barrier to participation in social security for those in the third, fourth and fifth decile (Figure 2.5, Panel B). This creates a large gap and may create incentives to remain self-employed and not declare a share of income in order to remain with free access to SIS, which diminishes the benefit of being formal.
Figure 2.5. Informality and formalisation costs in Peru, 2014-16
Note: The white bar in Panel A represents workers earning minimum wage (PEN 750, although it rose to PEN 850 in May 2016). In Panel B, the poverty threshold to be eligible for the free SIS for 2014 – illustrated by the vertical dotted line – was established at PEN 161 per month for every member of a household.
Source: OECD calculations based on IDB (2015), Base de datos Sociómetro-BID: Sistema de Indicadores Sociales de América Latina y el Caribe and OECD/IDB/CIAT (2016), Taxing Wages in Latin America and the Caribbean for Panel A; OECD based on ENAHO (INEI, 2014), Encuesta Nacional de Hogares (ENAHO) (National Household Survey) (database) for Panel B.
Low labour productivity is one of the main barriers to formality. A large share of informal workers have an output per worker that does not cover minimum regulatory costs of formal hiring (i.e. the minimum wage). If labour income is used as a proxy for labour productivity, then the productivity of a significant share of workers in Peru is below the minimum wage they would need to be paid if they were hired formally. Low productivity, then, is a functional barrier to formality for this share of workers, as employers will not readily bear the costs of the formalisation of workers who do not produce enough to cover them. In fact, labour income of more than half – around 52% – of informal wage earners (dependent workers) remains below the PEN 750 threshold (which was the official minimum wage until May 2016).
Pillar 3. Promote the formalisation of firms
The informal sector is large in Peru and remains concentrated in micro and small productive units and in the agricultural, commerce and transport sectors. As much as 87% of all productive units were informal in 2012. Of these informal firms, almost all have fewer than 5 workers (98.4%), suggesting a strong association between informality and firm size. Only 1.2% of firms have between 6 and 10 workers, and 0.3% of all firms have more than 11 workers (INEI, 2014). In addition, approximately one in three informal firms (33.8%) in the agricultural and fisheries sector are informal, while in the non-agricultural sector, most informal firms belong to the commerce sector (23.9% of total informal firms) and transport (12.2%) (INEI, 2014).
The prevalence of informality among SMEs can be associated to the particular barriers they face to becoming formal. Costs of formalisation, like those linked to taxes and the associated book-keeping and filing procedures, can be particularly hard to overcome for SMEs, given their limited size, capacity and revenues. In an effort to bridge the barriers faced by SMEs, governments have adopted special simplified tax regimes with narrower tax bases tailored, in theory, to encourage formalisation through cost reduction and ease of compliance. Tax compliance costs average PEN 915.80 (Peruvian soles) for a business to adhere to special taxation regimes, which is a significant reduction relative to PEN 7 489.00 for firms to adhere to the general tax regime (SUNAT, 2015). These measures address the cost of tax compliance and, to some extent, special regimes have lowered efficiency hurdles for firms, but they generally do not enhance labour inspection capacities or address other regulatory hurdles.
Tax regimes for SMEs can be improved to provide incentives to become formal and grow. Peru has made efforts to strengthen and simplify the procedures needed for formalisation. There is a general regime and two simplified special tax regimes for SMEs (RUS and RER). However, tax regimes show various overlaps that can generate perverse incentives. For example, RER users can use invoices to deduct intermediate inputs and to recover VAT, while RUS users cannot. This turns the VAT into a de facto cost, hurting efficiency for firms under this scheme. Moreover, given the duplication and the tax benefits of these schemes, firms (single proprietor or larger) might opt for horizontal disaggregation (i.e. some firms split into two or more parts when they reach the maximum size to continue in the most advantageous tax regime), creating tax dwarfism (Inter-American Development Bank [IDB], 2013). Another driver of persistent informality across SMEs is that some elements of the SME legislation (mainly the Law on SMEs approved in 2007) have not been implemented, such as the social protection regime for workers of SMEs. In addition, some of the advantages (such as the general health insurance provided through the SIS) were already accessible without having to bear the costs of formalisation.
Pillar 4. Create the conditions for formal job creation and formal job opportunities
A more diversified economy would support formal job creation. An economic structure concentrated in primary and/or low-productivity sectors that employ large shares of the population in low-quality informal jobs impedes the expansion of formal employment (La Porta and Shleifer, 2014). This is the economic structure seen in Peru, coinciding with a dualist view of informality, which suggests the informal and formal sectors are largely separated, with a large informal sector consisting of many uneducated entrepreneurs running small, unproductive firms that add little value to productivity and a smaller formal sector of educated entrepreneurs who run bigger, more productive firms.
Improving vocational education and training and skills could bring higher opportunities to access formal jobs. Upgrading skills and improving their link with the productive system can raise labour productivity levels. Together with recognition of skills acquired in informal employment, it could also favour access to formal jobs. Improving overall skills levels is critical. A curricula generally more focused on developing STEM, technical and soft skills, and a stronger connection between the education system and skills demands in the economy, are critical to raising skills levels and productivity in Peru (OECD, 2016a). Recognition and certification of skills acquired in the informal sector can be another critical area for policy action, while moving towards a national qualifications framework could be a relevant policy goal in the medium term.
Overall, improving working conditions through formal and better quality jobs requires Peru to engage in policy actions in at least in four different pillars (Table 2.3):
Table 2.3. Lines of action for tackling informal employment
Pillar 1. Mitigate the pervasive impact of informality on jobs and labour conditions
Pillar 2. Promote the formalisation of jobs
Pillar 3. Promote the formalisation of firms by providing incentives for and reducing the costs of formalisation
Pillar 4. Create the conditions for formal job creation and formal job opportunities
Note: Base on the workshop “Hacia más empleos formales y una economía formal en el Perú”, held in Lima on 17 April 2018.
Source: Authors’ elaboration.
References
Aguilar Jaber, A. and D. Glocker (2015), “Shifting towards low carbon mobility systems”, International Transport Forum Discussion Paper, No. 2015-17, International Transport Forum/OECD, Paris, available at www.itf-oecd.org/shifting-towards-low-carbon-mobility-systems.
Barbero (2006), Perú: La Oportunidad de un País Diferente, World Bank, Washington, DC., 2006, http://siteresources.worldbank.org/PERUINSPANISHEXT/Resources/Notas_de_politica.pdf?resourceurlname=Notas_de_politica.pdf.
De Soto, H. (1989), The Other Path: The Invisible Revolution in the Third World, HarperCollins, New York.
Djankov, S. et al. (2002), “The Regulation of Entry”, Quarterly Journal of Economics, Vol. 117, No. 1, Oxford University Press, Oxford, pp. 1-37, http://dx.doi.org/10.1162/003355302753399436.
CEPLAN (2015), Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021, Centro Nacional de Planeamiento Estratégico, Lima.
CEPLAN (2011), Plan Bicentenario: El Perú Hacia el 2021, Centro Nacional de Planeamiento Estratégico, Lima.
El Peruano (2018), https://busquedas.elperuano.pe/normaslegales/crean-la-comision-multisectorial-e-intergubernamental-para-e-resolucion-suprema-n-026-2018-pcm-1610013-3/ (accessed 30 August 2018).
GIZ (2013), “Urban mobility master plans: National approaches and local practice, Sustainable Urban Transport Technical Document, No. 13, Deutsche Gesellschaft für Internationale Zusammenarbeit, Bonn, www.itdp.org/wp-content/uploads/2015/06/TD13_UMP_final.pdf.
IDB (2015), Base de datos Sociómetro-BID: Sistema de Indicadores Sociales de América Latina y el Caribe, Inter-American Development Bank, Washington, DC. Available at www.iadb.org/en/research-and-data// sociometro-bid,6981.html. (accessed in July 2019).
IDB (2013), More Than Revenue: Taxation as a Development Tool, Inter-American Development Bank, Washington, DC., available at www.iadb.org/en/research-and-data/dia-development-in-the-americas-idb-flagship-publication,3185.html?id=2013.
ILO (2014), Panorama Laboral 2014: América Latina y el Caribe (Labour Overview 2014: Latin America and the Caribbean), Regional Office for Latin America and the Caribbean, International Labour Organization, Lima, www.ilo.org/wcmsp5/groups/public/---americas/---ro-lima/documents/publication/wcms_334089.pdf.
INEI (2018), “Lima alberga 9 millones 320 mil habitantes al 2018”, INEI Perú, https://www.inei.gob.pe/prensa/noticias/lima-alberga-9-millones-320-mil-habitantes-al-2018-10521/ (accessed on 5 October 2018).
INEI (2014), Encuesta Nacional de Hogares (ENAHO) (National Household Survey) (database), Instituto Nacional de Estadística e Informática, Lima, http://webinei.inei.gob.pe/anda_inei/index.php/catalog/247
Jaramillo, M. (2013), “Is There Demand for Formality Among Firms? Evidence from Microfirms in Downtown Lima”, Avances de Investigación (Research Progress Paper), Grupo de Análisis para el Desarrollo, Lima, http://repositorio.grade.org.pe/bitstream/GRADE/42/1/AI13.pdf.
Jiménez, J.P. and T. Ter-Minassian (2016), “Política fiscal y ciclo en América Latina: el rol de los gobiernos subnacionales”, Serie Macroeconomía del Desarrollo, ECLAC, Santiago, No. 173, available at http://hdl.handle.net/11362/40252.
Korinek, J. (2015), “Managing the minerals sector: Implications for trade from Peru and Colombia”, OECD Trade Policy Papers, No. 186, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jrp6wrc2r7l-en.
La Porta, R. and A. Shleifer (2014), “Informality and Development”, Journal of Economic Perspectives, Vol. 28, No. 3, American Economic Association, Nashville, pp. 109-126, http://dx.doi.org/10.1257/jep.28.3.109.
Lima Cómo Vamos (2016), Encuesta Lima Cómo Vamos, Quinto Informe de Percepción Sobre Calidad de Vida, Lima Cómo Vamos, Observatorio Ciudadano, Lima, available at http://www.limacomovamos.org/cm/wp-content/uploads/2017/04/EncuestaLimaC%C3%B3moVamos_2016.pdf, (accessed on 1 October 2018).
Lin, J. and C. Monga (2010), “Growth Identification and Facilitation. The Role of the State in the Dynamics of Structural Change”, Policy Research Working Paper, No. 5313, World Bank, Washington, DC.
MEF (2018), Principal pillars to boost competitiveness and productivity, National Competitiveness and Formalization Council, Ministry of Economy and Finance, https://gobpe-production.s3.amazonaws.com/uploads/document/file/176403/Principales_Ejes_Para_Impulsar_La_Competitividad_y_Productividad.pdf. (accessed on 30 August 2018)
MEF (2016), “Agenda de Competitividad 2014-2018 logra un avance de 38% en la Tercera Rendición de Cuentas Pública”, available at https://www.mef.gob.pe/es/noticias/notas-de-prensa-y-comunicados?id=4521,( accessed on 25 September 2018).
Mesquita Moreira, M. (2013), “Too far to export: domestic transport cost and regional export disparities in Latin America and the Caribbean”, Mauricio Mesquita Moreira, Juan S. Blyde, Christian Volpe, Danielken Molina (eds.), Inter-American Development Bank, Washington, DC., available at: https://publications.iadb.org/handle/11319/3664#sthash.bCtLCSqb.dpuf.
Municipalidad Metropolitana de Lima (2014), “PLAN Lima y Callao 2035”, Lima, Peru, available at: www.transitemos.org/aprende-de-movilidad/plam-lima-y-callao-2035/.
Muñoz, P. (2010), “¿La Política Importa? Los Determinantes Políticos de la Eficiencia del Gasto Municipal”, Censorcio de Investigacíon Económicas y Sociales, Asociación Servicios Educativos Rurales, Lima.
OECD (2018), Examen multidimensionnel du Sénégal: Volume 3. De l’analyse à l’action, Les voies de développement, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264300347-fr.
OECD (2016a), “Avanzando hacia una mejor educación en Perú”, Making Development Happen, No. 3, OECD Development Centre, Paris, https://www.oecd.org/dev/Avanzando-hacia-una-mejor-educacion-en-Peru.pdf.
OECD (2016b), Multi-dimensional Review of Peru: Volume 2. In-depth Analysis and Recommendations, OECD Development Pathways, OECD Publishing, Paris, https://doi.org/10.1787/9789264264670-en.
OECD (2016c) “Peru: Implementing integrated governance for inclusive growth”, OECD Public Governance Reviews, OECD Publishing, Paris, https://doi.org/10.1787/9789264265172-en.
OECD (2015), Multi-dimensional Review of Peru: Volume 1. Initial Assessment, OECD Development Pathways, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264243279-en
OECD/IDB/CIAT (2016), Taxing Wages in Latin America and the Caribbean, OECD Publishing, Paris, http:// dx.doi.org/10.1787/9789264262607-en
Rieländer, J. and B. Traoré (2016), “Explaining Diversification in Exports Across Higher Manufacturing Content: What is the role of commodities?”, OECD Development Centre Working Papers, No. 327, OECD Publishing, Paris, https://doi.org/10.1787/5jrs8sq91p9x-en.
SUNAT (2015), Memoria Anual 2015, La Superintendencia Nacional de Aduanas y de Administración Tributaria, Lima, http://www.sunat.gob.pe/institucional/publicaciones/memoria2015.pdf (accessed on June 2016).
Transitemos (2015), “Autoridad Unica de Transporte y Movilidad para Lima Metropolitana y provincias conurbadas”, presentation given to the OECD delegation.
World Bank (2014), Connecting to Compete 2014. Trade Logistics in the Global Economy: The Logistics Performance Index and Its Indicators, World Bank, Washington, DC., www.worldbank.org/content/dam/Worldbank/ document/Trade/LPI2014.pdf.
Note
← 1. Benchmark countries correspond to the selected countries for the Multi-dimensional Country Review Volumes 1 and 2: 8 OECD member countries (Australia, Canada, Chile, Korea, Mexico, Norway, Portugal, and Turkey), 5 Latin American countries (Brazil, Colombia, Costa Rica, Ecuador and Panama) and South Africa.