Multi-dimensional Review of Peru

Executive summary

This third volume of the Multi-dimensional Country Review (MDCR) of Peru builds on the results of the first two volumes. Volume 1 identified the main constraints to achieving well-being and sustainable and inclusive development. The second volume provided recommendations in three key areas to address these constraints: the diversification of the economy, the improvement of transport connectivity, and the formalisation of jobs and economic activities. This third volume proposes a way of prioritising policy interventions and a framework for measuring policy implementation.

In the last two decades, Peru experienced considerable socioeconomic progress that improved well-being, lifted scores of its people out of poverty and led to a burgeoning middle class. Progress resulted from a combination of sound domestic policies and favourable external conditions. Today, Peru must undergo structural reforms to embark on the next chapter of its development: broadening social inclusion, consolidating its middle class and becoming a high-income economy. To transition from a middle-income to a high-income country Peru must overcome a series of “development traps” that are associated with low levels of productivity, persistent vulnerability across large segments of society, institutional weaknesses and environmental sustainability. This will demand bold policy actions in various areas. Based on the analysis and recommendations presented in Volume 2 of the MDCR Peru, this third volume presents an action plan for each of the following three priority areas.

Building a more diversified economy and increasing productivity

Peru’s labour productivity is only about one-third that of OECD countries. Significant gains are thus required for Peru to boost growth further and reach high-income status. Even if Peru were able to sustain the strong macroeconomic performance of recent years it would take Peru until 2029 to become a high-income country in a sustainable way. Under this scenario, the country would have been a middle-income country for more than 80 years. By comparison, OECD countries spent in around three decades on average in the middle-income range. To design and implement a development agenda for diversification and productivity for all Peruvians, policy actions in several domains should be implemented. The main priority areas are:

• Identifying new products and sectors. This should be based on evidence, and hence it is crucial to continue improving data and its use regarding the insertion of Peru in global value chains (GVCs). In addition, Peru needs to strengthen technical assessments in order to explore new sectors with exporting potential by working closely with relevant stakeholders. Peru should use its experience in a variety of areas (agro-industry, tourism, metal-mechanics, forestry, etc.) to explore new industries with export potential.

• Promoting innovation, entrepreneurship and regional market integration. Investment in R&D must be increased, supporting stronger cooperation between the public and the private sector. Providing the most relevant CITEs (Centros de Innovación Tecnológica) with more technical capacity, technology transfers and the involvement of private sector will be vital. Barriers to entrepreneurship are still high, so efforts are also needed on this front. Regional integration, for example within the Pacific Alliance in areas like tariffs and cumulative origin, or in the context of the MILA (Latin American Integrated Market) for greater financial integration, can also support productive transformation.

• Improving the use of commodity-based resources and enhancing domestic resource mobilisation. Consider a fiscal rule for sub-national commodity-based transfers to avoid pro-cyclicality of expenditures, and consider a stabilisation fund to manage revenues, supported by the creation of an institution at the national level focused on promoting capacity-building at the sub-national level. Increasing available resources through the expansion of the tax base with greater progressivity and more robust measures to combat tax evasion should be another priority area.

• Developing an effective strategy to increase productivity and economic diversification. The recently published Politica Nacional de Competitividad y Productividad (PNCP) and its associated Plan go in this direction. The objectives of the PNCP should be reflected in planning at the sub-national level, and in this sense an institution at the national level to support dialogue with and strengthen capacity within sub-national bodies will be desirable.

Unlocking the benefits of better transport connectivity

Improved connectivity is particularly relevant for Peru, where the ratio of transport costs to trade tariffs is 20 times higher than in OECD economies. The improved connectivity of goods and people implies going beyond providing transport infrastructure to implementing policies and strategies to increase efficiency and reduce time and financial transport costs for businesses and individuals. Increasing connectivity in Peru also means developing other modes of transport beyond roads. Policy actions are needed to improve the institutional framework to design and implement transport policies at national and urban levels. Priority areas for action include:

• Develop a national strategy to reduce transport costs, improve connectivity and promote multi-modality. The Ministry of Transport should take the lead of a national transport plan, in co-ordination with other relevant actors. The priorities should be linked to specific budget lines, and to broader national development objectives. The creation of a logistics observatory to monitor indicators, reduce transport costs and improve co-ordination between different agencies would be a relevant step forward.

• Develop a national urban transport and mobility policy. A lead agency should be identified for its effective implementation, and this should be accompanied by stronger technical capacity and human resources, and by a co-ordination mechanism across relevant actors (mainly the Ministry of Transport and the Ministry of Housing, but also others).

• Improve policies implemented at the local level, with a focus on Lima-Callao. The recent creation of a single mobility authority for the metropolitan area of Lima-Callao is a step in the right direction. Such an authority would be responsible for a broad range of transport policies so that it can develop comprehensive strategies. Improving multi-modality to unlock the benefits of walking, cycling and public transport must be a priority.

Promoting the formalisation of jobs and economic activities

Informal employment remains too high, involving more than 70% of total workers, despite a decline in recent years. In Peru, informality and socioeconomic vulnerability go hand-in-hand: close to 80% of informal workers belong to the so-called vulnerable class and work in low-productivity sectors. Access to formal jobs is particularly difficult for younger workers, women, those with low education and workers from rural areas. To promote formal jobs and deal with current high levels of informality, Peru should implement an integrated package of labour, tax and social protection interventions, coupled with productive development policies. The main priority areas are:

• Mitigate the pervasive impact of informality on working conditions. This entails such initiatives as integrating existing health regimes into a single one and progressively expanding it to all citizens, as well as extending non-contributory old-age pensions to gradually move towards universal coverage.

• Promote the formalisation of jobs. Strengthening inspection and supervision systems will be important, accompanied by efforts to increase the incentives of being formal. In this respect, reducing the costs of formal hiring can be vital, for example by setting up different minimum wages across regions with large discrepancies in terms of productivity. Reducing the social security contributions paid by the most disadvantaged groups can encourage them for being formal, particularly for independent workers. Contributions could be more flexible, and be based more on the characteristics of independent workers’ economic activity.

• Promote the formalisation of firms. This includes actions to reduce incentives that encourage businesses to remain small, including the simplification of taxation regimes and the reduction of the red tape and fixed costs of being formal.

• Create the conditions for formal job creation and formal job opportunities. Peru should link its formalisation efforts to the broader productivity diversification strategy, aimed at creating more opportunities for formal, better-quality jobs. The approval of the Politica Nacional de Competitividad y Productividad moves in this direction. Increasing skill levels and closing skills gaps are crucial in this context, to better match the supply of skills with existing formal job opportunities.

To achieve this objective, and overcome the so-called middle-income trap will require economic diversification, i.e. shifting away from natural resource dependency and into sectors with higher levels of productivity. Closely related to higher productivity is the challenge of social cohesion. Peru’s middle class has grown considerably in size and in its expectations. Estimated at 38% of the population, twice its share in 2004, the middle class expects more sound policies to expand formal jobs and better public services, such as transport connectivity, education and skills training. Economic diversification, better transport connectivity and tackling informality are thus crucial to Peru’s inclusive growth agenda.

Based on the results of previous volumes of the MDCR Peru, this third volume proposes an implementation strategy in the aforementioned three key policy areas. This action plan contains a number of reforms to undertake and actors to involve. These policy actions were discussed with Peruvian authorities, civil society, the private sector and academics during several workshops held in Lima from December 2017 to April 2018. Finally, this report recommends a series of indicators for monitoring the implementation of the reforms proposed.