Peru—Seizing Opportunities in a Changing Global Economy

IMF News, November 18, 2016

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Progress in human development:
- More than 90 percent of humanity lived in extreme poverty in 1826; that dropped to 37 percent in 1990 and less than 10 per cent in 2015.
- Average life expectancy: 31 years in 1900; 71 years now; regional range from 61 years in Africa to more than 80 years in northern America, Japan, and many European countries.
Implication:
- Sustaining and expanding this progress will be up to the current generation.

Role of openness:
- Between 1970 and 2008, global exports of goods and services saw a nine-fold increase.
- This 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.
Peru-specific outcomes:
- Poverty rate in 2015 was less than half what it was a decade ago.
- Average income in Peru has nearly tripled to $6,000 over the past two decades ($6,000 at current prices; or $12,000 in PPP terms).
Side effects and distributional concerns:
- Labor-saving technology and competition from low-wage countries contributed to a sharp decline in US manufacturing employment.
- Entry of China, India, and former communist countries into the global trading system in the early 1990s effectively doubled the size of the global workforce, putting downward pressure on wages for lower-skilled workers in advanced economies.
- Inequality trends:
- Income inequality has risen substantially in major emerging market economies, especially in Asia and Eastern Europe.
- Latin America: inequality levels have been declining but remain the world’s most unequal region.
- Major advanced economies: incomes for the top 10 percent increased by 40 percent in the past two decades, while growing only modestly at the bottom.

Political and social implications:
- Voter concerns about migration, trade, and technological change have surfaced in advanced economies.
Policy priorities to foster inclusion:
- Retraining for workers displaced by outsourcing.
- Minimum wages and tax incentives to expand women’s opportunities in the labor market.
- Smart education policies for the digital economy.
- International tax reform to minimize loopholes and protect the tax base of low-income countries by preventing profit shifting.
Ongoing IMF work:
- More findings and policy proposals to be shared from ongoing work in this area.

Near-term growth outlook:
- The IMF expects the Peruvian economy to grow by about 4 per cent this year and next—and chances are this figure could be even higher.
Foundations for transformation:
- Build on the robust policy framework of the past two decades.
- Leverage a young and fast-growing labor force.
- Press ahead with reforms to diversify the economy and catch up with high-income peers.
Three opportunities to seize now:

1. Education reform

Improve school management and upgrade school infrastructure, closing an infrastructure gap of about 10 percent of GDP.
Improve basic reading, writing, and math skills; increase access to higher education for low-income and rural students.
Note: Peru had the lowest score in the 2012 PISA tests, based on a sample of 66 countries.

2. Infrastructure investment

Step up investment in transportation, telecoms, energy, water, and sanitation.
Examples: expansion of the Metro in Lima; construction of roads linking the coast with the Sierra and the Peruvian Amazon.
With an estimated infrastructure gap of 35 per cent of GDP (Period 2016-20), Peru will need to increase government revenue and upgrade its framework for public-private partnerships.

3. Financial inclusion

Promote greater financial inclusion to reduce poverty and inequality.
Context: 75 percent of the population own a mobile phone.
Government national strategy to expand access to personal accounts; private-sector example: Billetera Móvil (BiM) e-money platform.
Example initiative: Haku Wiñay microcredit program targeting mostly women micro-entrepreneurs in Ayacucho.
Peru has made significant progress on financial inclusion in recent years; The Economist’s Global Microscope on Financial Inclusion ranks Peru as the top country in terms of the supporting environment for financial inclusion.
Gender gap: In emerging and developing economies, 70 percent of female-owned small and medium-sized enterprises are either unserved or under-served by financial institutions.

Informality
- Reducing informality can raise productivity as firms achieve economies of scale and gain better access to financial services.
- Potential virtuous cycle: higher growth and better macroeconomic policies → increased formalization → higher productivity → higher growth.

Call to action:
- A generation of future policymakers and business leaders in Peru has a unique opportunity and responsibility to lead economic transformation in the 21st century.
- Key focus areas: openness, inclusion, and shared prosperity.
Closing remarks:
- “A veces, los economistas cuentan mejores historias que los novelistas.” (Sometimes, economists tell better stories than novelists.)
- Muchas gracias.

Source: Speech by Christine Lagarde, Managing Director, International Monetary Fund, Universidad del Pacífico, Lima, November 18, 2016.