Peru's Future Growth Can be Lifted Through Structural Reforms
IMF News, June 28, 2017
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- Authors: Francisco Roch
- Published: June 28, 2017
Overview
- After sustained improvements in economic and social indicators since the turn of the century, Peru aims to become a high-income nation, but achieving this goal will require additional reforms.
- Sound economic policies and structural reforms—in the context of the recently ended commodity boom—have played an essential role in improvements: growth averaging over 5¼ percent since 2000; significant reductions in unemployment and poverty; inflation in the low single digits; strengthened fiscal position; and marked decline in dollarization (borrowing and saving in U.S dollars).
- International experience suggests avoiding the “middle income trap” will be challenging and, even if high-income status is attainable, it will take time.
Short-term picture: resilience in the face of major domestic shocks
- Current domestic shocks: the Odebrecht corruption scandal and one of the worst episodes of flooding and landslides in over 50 years.
- External environment: commodity prices have recovered somewhat since late 2016 but remain significantly lower than during the commodity boom; uncertainty about the U.S outlook and potential rise in protectionist pressures.
- Growth forecast: 2017—2.7 percent.
- Outlook: the economy is expected to bounce back in 2018–19.
Fast Facts (as reported)
- Real GDP growth (2016): 3.9%
- Per capita GDP (2016): $6,199
- Unemployment rate (2016): 6.7%
- Poverty rate (2016): 20.7%
- Life expectancy at birth (2015): 74.6 years
- Adult literacy rate (2015): 94%
Potential growth: causes of decline and IMF medium-term estimate
- Potential growth has been declining since the end of the commodity boom.
- During 2001–08 (before the Great Recession), potential growth averaged 5.7 percent.
- Main factors behind the decrease: low productivity and insufficient capital.
- IMF estimate of potential growth over the medium term: about 3¾ percent.
Structural reforms to boost investment and productivity
- Government measures already introduced to tackle impediments to higher investment, stronger tax collection, and lower financing costs include:
- a new institutional framework for public and public-private infrastructure investment to reduce red tape;
- improving the business climate by cutting administrative procedures and promoting the use of digital processes;
- a new tax regime for small and medium enterprises to make the current tax system more progressive, reduce compliance costs, increase the use of electronic payments, and formalize value chains.
- IMF recommendation: to increase potential growth above 4 percent over the medium term, Peru should consider additional reforms that:
- help investment grow at a similar pace to during the commodity boom;
- increase productivity to around double the rate assumed in the report’s baseline scenario.
Labor market policies
- Current labor market features:
- Labor laws offer generous protection, contributing to large informality: about 53 percent of Peru’s workforce is outside the formal job market, with no protection, no social security or unemployment contributions and paying no taxes.
- Termination for economic reasons is severely limited, requiring authorization from the Ministry of Labor or the courts.
- Labor market regulations are identified in a recent opinion survey as a key impediment to growth.
- Other contributors to informality: education levels, the tax system, access to public services, and enforcement of laws.
- Government actions:
- Focus on reducing high levels of informality.
- Set up a Social Protection Commission to reform the social security system, aiming to increase coverage while reducing informality.
- IMF analysis:
- Growth gains from labor market reform—such as relaxing policies that push labor costs above productivity growth, or reducing labor taxes and firing costs—can be significant.
- The Social Protection Commission can make an important contribution to help Peru reach its high-income goal.
IMF Country Focus: Peru's Future Growth Can be Lifted Through Structural Reforms (June 28, 2017), by Francisco Roch, IMF Western Hemisphere Department.