Speech

Peru—Seizing Opportunities in a Changing Global Economy

November 18, 2016

Buenas tardes . Good afternoon.

Professor Gustavo Yamada, thank you for the generous introduction! President Elsa Del Castillo, Dean Roberto Urrunaga, students, and faculty: thank you for this wonderful welcome.

For more than half a century, Universidad del Pacífico (UP) has played a leading role in economic and social development here in Peru and across Latin America. Today UP graduates can be found in top positions in business, finance, government, and academia, to name just a few.

So it is not surprising that nearly all Peruvian economists at the International Monetary Fund are UP graduates. And that is not the only connection between our institutions.

Both institutions are deeply committed to innovation and continuous learning. Both are keenly aware that the best research—the brightest policy ideas—are those that can change our lives, our economies, our nations for the better.

I am delighted, therefore, to accept this Honorary Membership as recognition of our shared goals. I receive it on behalf of our membership and my colleagues at the IMF. I am proud to lead this outstanding group of public servants, who work tirelessly to help build a global economy in which all people can prosper.

When it comes to global leadership, Peru has been playing its part. Last year, for example, the IMF-World Bank Annual Meetings were held here in Lima—our first in Latin America in nearly fifty years.

For me, it was a beautiful moment—not just because of your incredible hospitality, but because Peru seized the opportunity to showcase its rich culture and impressive economic and social achievements. Peruvians embraced the world, and the world embraced them.

As Antonio Raimondi, the great Peruvian geographer, once said: “ El Perú tiene escrito en el libro del destino, un porvenir grandioso!”. [1] According to its book of destiny, Peru has a magnificent future.

1. The world you are stepping into

I can see this kind of optimism here in this room today. And Peru has indeed made a remarkable journey in recent decades, leaving your generation better off in almost every way than previous generations.

This is also the story of humankind as a whole, of course. For example, more than 90 percent of humanity lived in extreme poverty [2] in 1826, the year Antonio Raimondi was born. That dropped to 37 percent in 1990 and less than 10 per cent in 2015—single digits for the first time in human history. [3]

In addition to being more prosperous, human lives are also longer and healthier. Back in 1900, average life expectancy around the world was 31 years; it is now 71 years. Of course, life expectancy varies greatly across regions—from a low of 61 years in Africa to a high of more than 80 years in northern America, Japan, and many European countries. [4]

If you add up these and many other data points, you see a picture of astonishing progress in human development, progress that will be up to your generation to maintain and expand.

2. Global economic integration

Let us think of the essential role that global economic integration has played in this region and around the world. By opening countries to trade, migration, capital flows, and technology sharing, the world has been transformed.

Between 1970 and 2008, for example, global exports of goods and services saw a nine-fold increase [5]—which contributed to an almost three-fold increase in average income in emerging and developing countries, and helped to more than double average income in advanced economies—while lifting hundreds of millions of people out of poverty.

This has of course benefited all countries in the APEC area that meet here in Lima this weekend, and it has benefited your country. Peru has seen tremendous progress, with the poverty rate in 2015 being less than half what it was a decade ago.

Average income in Peru has nearly tripled to $6,000 [6] over the past two decades—because of good macroeconomic policies and booming commodity trade, combined with a better investment climate and stronger social protection programs. In other words, economic openness does not guarantee success—but without it, Peru would not be where it is today.

Side effects of trade and innovation

However, gains from economic integration and technological change have not been equally shared.

In the United States and other advanced economies, for example, some industries and regions have been heavily affected by labor-saving technology and competition from low-wage countries. [7] This has contributed to a sharp decline in US manufacturing employment and has caused deep, long-lasting effects in some local labor markets. [8]

Some of these effects can be traced back to the early 1990s, when China, India, and the former communist countries entered the global trading system. That was a pivotal moment because the size of the global workforce effectively doubled—which put downward pressure on wages, especially for lower-skilled workers in advanced economies.

Like everybody else, workers have benefited from cheaper products and greater choice brought about by competition. And society as a whole has become more prosperous because of higher productivity. But for a significant number of lower-skilled workers, the benefits of trade and innovation have been outweighed by their side effects.

One of these side effects has been a rise in economic inequality over the past two decades. Inequality of income, for example, has risensubstantially in major emerging market economies, especially in Asia and Eastern Europe. In Latin America, inequality levels have been declining, but it remains the world’s most unequal region.

And across the advanced world, inequality levels remain high. In major advanced economies, for instance, incomes for the top 10 percent increased by 40 percent in the past two decades, while growing only modestly at the bottom. [9]

3. Inclusive growth is key

The social and political consequences are now becoming all too apparent. Voters in the United States and the United Kingdom, for example, have sent clear signals of concern about migration, trade, and technological change. And they have called on policymakers to boost domestic employment and income growth.

Clearly, these developments pose a challenge for countries that have benefited greatly from trade in the past—such as Peru. But they also pose an intellectual challenge for policymakers and the economics profession as a whole.

It is our job to analyze and explain how trade has benefited growth; where policies have fallen short; and how we can extend the benefits of integration and new technologies—while making sure that the gains are shared more widely.

In other words, we need a better policy recipe to foster inclusive growth . Think of retraining to help workers displaced by outsourcing. Think of minimum wages and tax incentives to give women more opportunities in the labor market. Think of smart education policies that allow young people to thrive in our digital economy.

We also need more economic fairness. This means, for example, building an international tax system that minimizes loopholes and guards against the corrosive effects of corruption. It means protecting the tax base of low-income countries—by preventing multinational companies from artificially shifting profits to low-tax locations.

These are only some of the ingredients of a more inclusive policy recipe. More needs to be done to identify better ingredients and use them more effectively. I hope to have more to share with you over the next few months from our ongoing work in this area.

4. Transforming the Peruvian economy

Now, what does this mean for Peru, which has remained one of the fastest-growing economies in Latin America?

We currently expect the Peruvian economy to grow by about 4 per cent this year and next—and chances are this figure could be even higher.

This is the kind of optimism that Antonio Raimondi would recognize if he were here today. Back in the 19^th century, he envisioned a “magnificent future” for the people of Peru. Today policymakers have the opportunity to translate his dream into reality.

How? By building on the robust policy framework that has served this country well over the past two decades. By unleashing the creative energy of a young and fast-growing labor force. And by pressing ahead with economic reforms that will allow Peru to diversify its economy and catch up with high-income peers.

Seizing opportunities

With this in mind, let me highlight three opportunities that Peru can seize right now.

First—step up the ongoing education reform by improving the management of schools and by upgrading school infrastructure—which means closing an infrastructure gap of about 10 percent of GDP.

A fresh approach is needed to improve basic reading, writing, and math skills [10] and to increase access to higher education for low-income students and students from rural areas.

Second—step up investment in transportation, telecoms, energy, water, and sanitation.

A good example is the expansion of the Metro in Lima, which will improve connectivity and reduce road congestion. Another example is the construction of new roads to link the coastal area with the Sierra and the Peruvian Amazon. These connections will be good for local businesses and good for consumers.

With an estimated infrastructure gap of 35 per cent of GDP [11], Peru will need to increase government revenue and upgrade its framework for public-private partnerships.

Third—promote greater financial inclusion as a way of reducing poverty and inequality. Think of the massive potential of cell-phone-based banking in a country where 75 percent of the population own a mobile phone.

The government has been taking this very seriously with its national strategy to expand access to personal accounts. And in the private sector, we have seen telecom companies and financial services providers coming together to create Billetera Móvil (BiM), a fast-growing e-money platform.

Another good example of financial inclusion is Haku Wiñay, a microcredit initiative that can turn poor people—mostly women—into successful micro-entrepreneurs—as I could see in the Ayacucho region last year.

Let me emphasize that Peru has made significant progress on financial inclusion in recent years [12]. But more needs to be done to close the gap with Latin American and global peers, particularly in the area of financial inclusion of women.

Increasing financial inclusion of women is good for households, companies, and economies. In emerging and developing economies, for example, 70 percent of female-owned small and medium-sized enterprises are either unserved or under-served by financial institutions. [13] That is a huge economic opportunity just waiting to be seized.

Informality

As you continue to foster a more inclusive growth model, I am certain that you will also see a reduction in economic informality—which has been historically high in Peru.

A reduction in informality can lead to productivity increases as firms benefit from economies of scale and better access to financial services. Peru could very well see a virtuous cycle, with higher growth and better macroeconomic policies leading to increased levels of formalization and higher productivity—which leads to higher growth. [14]

Will Peru be able to seize the opportunities in education, infrastructure, and inclusion? I firmly believe that it can be done—because of the incredible energy and ingenuity of the people of Peru.

Most of all, because of you.

Conclusion

Here in this room, I see future policymakers and business leaders. I see a generation that will have a unique opportunity to lead the transformation of the Peruvian economy in the 21^st century. What an exciting prospect! But also, what a great responsibility!

As Mario Vargas Llosa once said:

“A veces, los economistas cuentan mejores historias que los novelistas.”

(Sometimes, economists tell better stories than novelists.)

You will have a chance to tell a story about your contributions to openness, inclusion, and shared prosperity here in this country and around the world. Your children and grandchildren will hear that story—and they will thank you.

Muchas gracias .