Multi-dimensional review of Peru. 9789264243262, 9264243267, 9789264264663, 9264264663, 9789264264670, 9264264671, 9789264727250, 9264727256

Table of contents :
Foreword
Acknowledgements
Acronyms and abbreviations
Executive summary
Building a more diversified economy and increasing productivity
Unlocking the benefits of better transport connectivity
Promoting the formalisation of jobs and economic activities
Chapter 1. Peru’s path to a high-income economy with better well-being for all citizens
Towards high-income levels and greater well-being…but challenges remain
Overcoming the middle-income trap demands bold policy reform
The emergence of the middle-class has been a great socio-economic achievement, but comes with new challenges
Well-being in Peru is higher…although large gaps persist
A dynamic economy at a crossroads
A resilient economy with productivity challenges
Employment is concentrated in the least productive sectors
An open economy with insufficient levels of productive diversification
A more inclusive society but vulnerabilities are still widespread
Informality in Peru is high and persistent, with a pervasive impact on the quality of jobs and on social protection
Access to education has improved but learning outcomes remain poor
A weak institutional framework undermines the social contract
Lack of trust in institutions has persisted in Peru
Low confidence in institutions undermines state capacity
Recent policies have been set up to strengthen the state-society link
Conclusions
Notes
References
Chapter 2. Plan of action to become a high-income economy with greater well-being for all
Building a diversified economy
Peru needs to diversify its economy and increase productivity
Pillar 1. Identify new products and sectors
Pillar 2. Promote education, innovation, entrepreneurship and regional market integration
Pillar 3. Improve the use of commodity-based resources and enhance domestic resource mobilisation
Pillar 4. Develop an effective strategy to increase productivity and economic diversification
A plan of action to improve economic diversification and productivity in Peru
Unlocking the benefits of better connectivity
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 plan
Pillar 3. Improve policies implemented at the local level
A plan of action for improving transport connectivity to support productivity and competitiveness
Improving working conditions through formal and better quality jobs
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
Pillar 2. Promote the formalisation of jobs
Pillar 3. Promote the formalisation of firms
Pillar 4. Create the conditions for formal job creation and formal job opportunities
Notes
References
Chapter 3. The dashboard of indicators to monitor reforms
The scorecard proposes indicators for achieving the Sustainable Development Goals by 2030
Notes
References
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OECD Development Pathways

Multi-dimensional Review of Peru VOLUME 3. FROM ANALYSIS TO ACTION

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OECD Development Pathways

Multi‑dimensional Review of Peru VOLUME 3. FROM ANALYSIS TO ACTION

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the member countries of the OECD or its Development Centre. This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

Please cite this publication as: OECD (2019), Multi-dimensional Review of Peru: Volume 3. From Analysis to Action, OECD Development Pathways, OECD Publishing, Paris, https://doi.org/10.1787/c6c23d2c-en.

ISBN 978-92-64-72725-0 (print) ISBN 978-92-64-56118-2 (pdf)

OECD Development Pathways ISSN 2308-734X (print) ISSN 2308-7358 (online)

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FOREWORD

Foreword Economic growth matters, but it is just one facet of development. Policy makers should focus their attention on ensuring that their country’s development path is sustainable and that the lives of their citizens improve. This requires reconciling economic, social and environmental objectives. OECD Development Pathways is a series that looks at multiple development objectives beyond an exclusive focus on growth. It recognises well-being as part and parcel of development and helps governments identify the main constraints to more equitable and sustainable growth by undertaking a multi-dimensional country review (MDCR). Governments trying to achieve economic, social and environmental objectives need to understand the constraints they face and develop comprehensive and well sequenced strategies for reform that take into account the complementarities and trade-offs across policies. The MDCR methodology is based on quantitative economic analysis, as well as qualitative approaches including foresight and participatory workshops that involve actors from the private and public sectors, civil society, and academia. The MDCRs are composed of three distinct phases: initial assessment, in-depth analysis and recommendations, and implementation of reforms in the identified key areas. This approach allows for a progressive learning process about the country’s specific challenges and opportunities that culminates in a final synthesis report to inform reforms in the country. The MDCR of Peru – Volume 1, Initial Assessment was launched in October 2015 in Lima. The second volume, entitled In-depth Analysis and Recommendations, focused on three key constraints for inclusive development in Peru, namely productive diversification, the improvement of transport connectivity, and the formalisation of jobs and economic activities. It was launched in October 2016 in Lima. This third volume, From Analysis to Action, is based on the recommendations presented in the second volume, and presents the conditions and actions for making reform happen. This MDCR is designed to help Peru formulate development strategies, and identify and support the policy reforms needed to achieve further sustainable and inclusive development. This review comes at a time when Peru aims to boost inclusive growth and when policy action is needed to expand socioeconomic benefits across all economic sectors, regions and households.

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4  ACKNOWLEDGEMENTS

Acknowledgements Multi-dimensional Country Reviews (MDCRs) are the result of a collaborative effort of the OECD and the country under review. Work on this third phase of the Multidimensional Review of Peru was carried out by the OECD Development Centre, and includes the inputs produced by the OECD International Transport Forum (ITF) in the second volume of the MDCR Peru. Mario Pezzini, Director of the OECD Development Centre, and Federico Bonaglia, Deputy Director of the OECD Development Centre, guided and oversaw the review. The Multi-dimensional Country Review process is led by Jan Rielaender, Head of the MDCR Unit and Sebastián Nieto Parra, Head of Latin America and the Caribbean Unit, both at the OECD Development Centre. The review was co-ordinated by Sebastián Nieto Parra, Head of Latin America and the Caribbean Unit at the OECD Development Centre, and Juan Vázquez Zamora, economist at the same Unit, and drafted by Adriana Caicedo, Nathalia Montoya Gonzalez, Juan Vázquez Zamora (OECD Development Centre) and Aimée Aguilar Jaber (OECD Environment Directorate, former OECD International Transport Forum). Deirdre Culley (former OECD Development Centre) managed the participatory Foresight process for the formulation and testing of scenarios and provided inputs to the report. Additional inputs were provided by Benedicte Busquet, Olaf Merk (both at the International Transport Forum at the OECD), Cristina Cabutto, Marina Quenan, Annalisa Primi and Caroline Tassot (OECD Development Centre). The team is grateful for the insightful discussions, data provided and comments made by Paula Cerutti, Juan de Laiglesia, René Orozco, and Agustina Vierheller (OECD Development Centre), Bert Brys (OECD Centre for Tax Policy), Raffaele Trapasso (OECD Centre for Entrepreneurship, SMEs, Regions and Cities), Alessandro Goglio and Veerle Miranda (OECD Directorate for Employment, Labour and Social Affairs). Various ministries and public agencies provided useful support during the authors’ visit to Peru from December 2017 to April 2018 as well as throughout the production of the report. The role of the Ministry of Economy and Finance, the main counterpart for this report, was particularly valuable, both technically and analytically. Special thanks go to Pedro Herrera Catalán and Jose Alfredo La Rosa Basurco for all their support. The Peruvian Embassy in Paris, principally Gonzalo Guillen and Elizabeth Flores, member of the OECD Development Centre’s Governing Board, provided crucial support in the realisation and production process of this report. The Ministry of Foreign Affairs, the Ministry of Development and Social Inclusion, the Ministry of Education, the Ministry of Foreign Trade and Tourism, the Ministry of Housing, Construction and Sanitation, the Ministry of Labour, the Ministry of Production, the Ministry of Transport and Communications, the National Centre for Strategic Planning (CEPLAN), the National Council of Competitiveness and Formalisation (CNCF), the National Institute of Statistics (INEI) as well as the Supervisory Authority of Investments on Public Transport Infrastructure (OSITRAN) also contributed significantly. Discussions with the private sector, in particular with CONFIEP, academics, in particular GRADE and Universidad del Pacífico,

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ACKNOWLEDGEMENTS

and civil society, Transparencia and Fundación Transitemos, were extremely useful in the production of the report. Finally, the team is grateful to all the participants of two workshops hosted by Universidad del Pacífico in Lima in December 2017 and April 2018 that brought together stakeholders from a broad set of backgrounds from public sector, academics, private sector and civil society to identify global trends that could affect Peru’s future development. Particular thanks also go to Mauricio Novoa (Goberna Perú) for his support in the design and organisation of these workshops. Other experts participating in these workshops provided invaluable insights for the production of the report. These include José Luis Bonifaz and Gustavo Yamada (Univerdad del Pacífico), Juan Chacalatana (ILO), Hugo Ñopo (ILO, former GRADE), Miguel Jaramillo (GRADE), Santiago Matallana (former Department of National Planning, Colombia), Alexis Michea (Ministry of Trasport, Chile), and Reiner Starink (PEMANDU- Delivery Unit, Malaysia). Other international organisations have been very supportive for this MDCR through discussions and comments during the production of the report: the Development Bank of Latin America (CAF), the Economic Commission for Latin America and the Caribbean (ECLAC), the Inter-American Development Bank (IDB), the International Labour Organization (ILO), the International Monetary Fund (IMF), and the World Bank. The team is grateful to the OECD Development Centre’s Communications and Publications Unit, especially Delphine Grandrieux, Aida Buendia and Elizabeth Nash and to Agustina Vierheller from the OECD Development Centre’s Latin America and the Caribbean Unit for their excellent support in editing, laying out and producing the report. This review would not have been possible without the financial support from the Korean International Co-operation Agency (KOICA), as part of its efforts to contribute to inclusive and sustainable development in Peru. Special thanks go to KOICA, and in particular to Daehwan Kim, former Director of KOICA Peru, for his support all along the process.

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6  TABLE OF CONTENTS

Table of Contents Foreword ................................................................................................................................................ 3 Acknowledgements ................................................................................................................................ 4 Acronyms and abbreviations ................................................................................................................ 8 Executive summary ............................................................................................................................. 10 Building a more diversified economy and increasing productivity ................................................... 10 Unlocking the benefits of better transport connectivity ..................................................................... 11 Promoting the formalisation of jobs and economic activities ............................................................ 12 Chapter 1. Peru’s path to a high-income economy with better well-being for all citizens ........... 13 Towards high-income levels and greater well-being…but challenges remain .................................. 15 A dynamic economy at a crossroads .................................................................................................. 20 A more inclusive society but vulnerabilities are still widespread ...................................................... 25 A weak institutional framework undermines the social contract ....................................................... 29 Conclusions........................................................................................................................................ 32 Notes .................................................................................................................................................. 33 References.......................................................................................................................................... 34 Chapter 2. Plan of action to become a high-income economy with greater well-being for all ..... 37 Building a diversified economy ......................................................................................................... 39 Unlocking the benefits of better connectivity .................................................................................... 48 Improving working conditions through formal and better quality jobs ............................................. 57 Notes .................................................................................................................................................. 65 References.......................................................................................................................................... 66 Chapter 3. The dashboard of indicators to monitor reforms .......................................................... 69 The scorecard proposes indicators for achieving the Sustainable Development Goals by 2030 ....... 70 Notes .................................................................................................................................................. 75 References.......................................................................................................................................... 76

Tables Table 2.1. Lines of action for promoting economic diversification and productivity ........................... 46 Table 2.2. Lines of action for reaching better transport connectivity .................................................... 53 Table 2.3. Lines of action for tackling informal employment ............................................................... 62 Table 3.1. General indicators of economic performance and statistical capacity.................................. 72 Table 3.2. Achieving higher economic diversification and productivity .............................................. 73 Table 3.3. Improving transport connectivity ......................................................................................... 74 Table 3.4. Creating more formal jobs and economic activities ............................................................. 75

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TABLE OF CONTENTS

Figures Figure 1.1. GNI per capita ..................................................................................................................... 15 Figure 1.2. Policy priorities to overcome the middle-income trap ........................................................ 16 Figure 1.3. Evolution of socioeconomic groups .................................................................................... 17 Figure 1.4. Current and expected well-being outcomes for Peru .......................................................... 19 Figure 1.5. Labour productivity in Peru and selected benchmark countries, 1980-2018 ...................... 21 Figure 1.6. Labour productivity is concentrated in just a few sectors ................................................... 23 Figure 1.7. Domestic value added in third countries' exports by sector of origin in Latin America (6) and Peru, 1995-2014 ................................................................................................................ 24 Figure 1.8. Exports composition, 2017 ................................................................................................. 25 Figure 1.9. Informal employment in Peru and benchmark countries .................................................... 26 Figure 1.10. PISA 2015 scores in reading, maths and science .............................................................. 28 Figure 1.11. Perception of corruption in government ........................................................................... 30 Figure 1.12. Tax-to-GDP ratio composition in Peru and selected benchmark countries ...................... 31 Figure 1.13. Impact of taxes and transfers on income distribution ....................................................... 31 Figure 2.1. Key areas for achieving sustainable and inclusive development ........................................ 38 Figure 2.2. The multidimensional review process in Peru .................................................................... 39 Figure 2.3. Top 35 most likely Peruvian exports by level of processing and RCA index, 2014........... 43 Figure 2.4. Logistics performance gap versus the best-performing OECD country, 2018 ................... 50 Figure 2.5. Informality and formalisation costs in Peru, 2014-16 ......................................................... 60

Boxes Box 2.1. The Peruvian Government’s Strategy towards Competitiveness and Productivity ................ 40 Box 2.2. The challenges of improving transport at the local level: The case of Lima-Callao metropolitan area ........................................................................................................................... 53

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8  ACRONYMS AND ABBREVIATIONS

Acronyms and abbreviations ATU

Autoridad de Transporte Urbano (Urban Transport Authority)

CAF

Development Bank of Latin America

CEDLAS

Center of Distributive, Labor and Social Studies

CEPLAN

Centro Nacional de Planeamiento Estratégico (Nacional Centre for Strategic Planning)

CEQ

Commitment to Equity Institute

CNCF

Consejo Nacional de Competitividad y Formalización (National Council of Competitiveness and Formalization)

CoG

Centre of Government

CTPP

Public-Private Technical Committees

ECI

Economic complexity Index

ECLAC

Economic Commission for Latin America and the Caribbean

ESCALE

Unidad de Estadística Educativa (Education Statistics Offices)

GDP

Gross Domestic Product

GNI

Gross National Income

IDB

Inter-American Development Bank

ILO

International Labour Organization

INEI

Instituto Nacional de Estadística e Informática (National Institute of Statistics)

INVIAS

Instituto Nacional de Vías (National Institute of Roads)

LAC

Latin America and the Caribbean

LPI

Logistics Performance Index

MDCR

OECD’s Multidimensional Country Reviews

MEF

Ministerio de Economía y Finanzas (Ministry of Economy and Finance)

MINAM

Ministerio del Ambiente (Ministry of Environment)

MINCETUR

Ministerio de Comercio Exterior y Turismo (Ministry of Foreign Trade and Tourism)

MINDES

Ministerio de Desarrollo Social (Ministry of Social Development)

MINEDU

Ministerio de Educación (Ministry of Education)

MINSA

Ministerio de Salud

MTC

Ministerio de Transporte y Comunicaciones (Ministry of Transportation and Communications) MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

ACRONYMS AND ABBREVIATIONS

MTPE

Ministerio de Trabajo y Promoción del Empleo (Ministry of Labour and Promotion of Employment)

MVCS

Ministerio de Vivienda, Construcción y Saneamiento (Ministry of Housing, Construction and Sanitation)

OECD

Organisation for Economic Co-operation and Development

ONP

Oficina de Normalización Previsional (Social Security Office)

PCM

Presidencia de Consejo de Ministros

PEN

Peruvian sol

PISA

Programme for International Student Assessment

PNCP

Política Nacional de Competitividad y Productividad (National Policy on Competitiveness and Productivity)

PPP

Purchasing-Power Parity

R&D

Research and Development

RCA

Revealed Comparative Advantage

RER

Régimen Especial del Impuesto a la Renta (Special Income Tax Regime)

RUS

Régimen Único Simplificado (Single Simplified Regime)

SDGs

Sustainable Development Goals

SEDLAC

Socio-Economic Database for Latin America and the Caribbean

SIS

Seguro Integral de Salud

SME

Small and Medium Enterprises

SNDP

Strategic National Development Plan

SNIP

Sistema Nacional de Inversión Pública (National System of Public Investment)

STEM

Science, Technology, Engineering and Mathematics

SUNAFIL

Superintendencia Nacional de Fiscalización Superintendence of Laboral Inspection)

SUNAT

Superintendencia Nacional de Aduanas y de Administración Tributaria (National Superintendence of Customs and Tax Administration)

TFP

Total Factor Productivity

UIS

UNESCO Institute of Statistics

UN

United Nations

UNESCO

United Nations Educational, Scientific and Cultural Organization

USD

United States Dollar

VAT

Value-Added Taxes

WDI

World Development Indicators

WITS

World Integrated Trade Solution

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Laboral

(National

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10  EXECUTIVE SUMMARY

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 wellbeing 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 highincome 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

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EXECUTIVE SUMMARY

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 multimodality to unlock the benefits of walking, cycling and public transport must be a priority.

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12  EXECUTIVE SUMMARY

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 lowproductivity 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.

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1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

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Chapter 1. Peru’s path to a high-income economy with better well-being for all citizens

Peru has followed an advantageous path in recent decades. The country has emerged to become an upper middle-income economy but challenges lie ahead if the country is going to avoid getting caught in the development traps. Main bottlenecks are related to productivity, diversification, informality, connectivity and institutional capacities. Overcoming these challenges in the near future remains crucial for taking the economy to the next level and becoming a high-income country with inclusive development and wellbeing for all.

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14  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Peru aspires to become a high-income country where citizens enjoy high levels of wellbeing. This demands an economy that provides quality formal jobs for citizens with the purchasing power to enjoy consumer goods and generates fiscal revenues to provide highquality public services. In this vision, Peru would be a highly connected, inclusive and sustainable society, where educated and healthy citizens trust institutions and actively engage in political and civil life. Peru would be well integrated in the region, with innovation and entrepreneurship that fosters a vibrant business environment. In addition, it would have a modern agro-industrial sector and well-managed natural resources. Efforts to improve sustainability will enable citizens to enjoy their country’s well-preserved, rich natural heritage and diverse culture. Peru will need to engage in structural reforms in order for this vision to fully materialise. The policies that led Peru to be part of the upper middle-income countries must be complemented and upgraded if it is to become a “high-income” country and embark on the next chapter of its development. The implementation of sound macroeconomic policies in the 1990s, both at monetary and fiscal levels, helped boost investment and improve consumer confidence, making the Peruvian economy attractive and dynamic. However, further reforms are needed to achieve inclusive growth and improve living conditions for all the Peruvian population. So far, Peru has experienced considerable socioeconomic progress with improved wellbeing. The combination of favourable external economic conditions and assertive internal policies has underpinned Peru’s strong economic growth since the beginning of the 21st century, reaching an annual average rate of GDP growth of around 5.0% in that period. Significant reductions in poverty rates and the emergence of the middle-class were amongst the most outstanding achievements in the last decade. Yet, significant economic vulnerabilities remain, namely those associated with the development traps (OECD/CAF/ECLAC/EU, 2019). The Peruvian economy is poorly diversified, with a heavy reliance on natural resources that makes it heavily dependent on external macroeconomic conditions. In the past, Peru profited from the boom in commodity prices and a positive global economic landscape. Today, the country must overcome low productivity growth, which is already translating into a prolonged economic slowdown, often known as the middle-income trap. Additionally, socioeconomic gains remain unevenly distributed and the country requires better institutional development. Inequalities are still high, and vulnerabilities are significant for a sizeable share of the population. In fact, many Peruvians still suffer from poor access to quality public services and still work in informal jobs. As a result, many continue to face the risks associated with low levels of social protection. Furthermore, the country requires stronger institutional capacities to improve the effectiveness of public policies and achieve higher state legitimacy, which is critical to strengthen the social contract and bridge the growing divide between citizens and institutions. On balance, Peru has recorded remarkable socioeconomic progress but significant challenges remain along the path to becoming a sustainable high-income economy with greater well-being for all. Overcoming these challenges requires engaging in sound reforms and implementing structural policies to ignite new engines of inclusive and sustainable economic growth.

MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

Towards high-income levels and greater well-being…but challenges remain Overcoming the middle-income trap demands bold policy reform Peru’s convergence with high-income levels has accelerated. From the 1960s to the 1990s convergence was slow, but in the past two decades Peru’s growth reached an annual average of around 5%, one of the highest in the Latin America and Caribbean (LAC) region. This has supported a dynamic economy and has resulted in better living conditions for the population. However, the country faces a period of prolonged slowdown, which has plagued many countries stuck in the “middle-income trap” (Figure 1.1). This phenomenon occurs when a country can no longer rely on its traditional growth drivers to make further progress, as this requires deep, long-term structural reforms that are not easy to achieve or to co-ordinate. In the case of Peru, even if it were to sustain the strong macroeconomic performance of recent years, it would take until 2029 to become a high-income country, supposing more than 80 years as a middle-income country in total.1 While this is a common phenomenon for most countries in LAC, the performance of some countries worldwide suggests that a more rapid transition from a middle-income to a high-income economy is possible. For instance, this transition took Korea 27 years, Portugal 46 years and Chile 55 years. Figure 1.1. GNI per capita Atlas method (current USD) Peru Portugal

Chile Lower middle-income

Colombia Upper middle-income

Korea High-income

current USD

30 000 25 000 20 000 15 000 10 000

5 000 0

Source: World Development Indicators, with last updated date on 21-09-2018 and World Bank country and lending groups guidelines and analytical classifications. StatLink 2 http://dx.doi.org/10.1787/888933995764

Overcoming the middle-income trap requires policy challenges on several fronts that goes beyond income (OECD/CAF/ECLAC/EU, 2019). The priority areas for Peru to focus on are rule of law, quality of education, tax revenues, capabilities and the financial sector (stocks traded and domestic credit as a percentage of GDP) (Figure 1.2). These correspond to the areas where the gaps are larger relative to the average of selected high-income countries before passing to the high-income status (Melguizo et al., 2017).

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16  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Figure 1.2. Policy priorities to overcome the middle-income trap 1 0.9 0.8 0.7 0.6 0.5

0.4 0.3 0.2 0.1

0

Rule of law

Quality of education

Tax revenue (%)

Democratic stability

Gross capital formation (% GDP)

Capabilities

Tertiary schooling

Stocks traded

Domestic credit

Note: Average of the coefficient of each normalised variable, derived from the linear analysis, based on 1 295 estimates. In blue, the variables in which Peru has the greatest gap with respect to countries that went from middle income to high income. Capabilities refer to productive capabilities based on the economic complexity index, which describes the amount of productive knowledge implied in the country's export structure. Source: Based on Melguizo, A., S. Nieto-Parra, J.R. Perea y J. Perez (2017), “No sympathy for the devil! Policy priorities to overcome the middle-income trap in Latin America”, OECD Development Centre Working Paper No. 340. StatLink 2 http://dx.doi.org/10.1787//888933995783

The emergence of the middle-class has been a great socio-economic achievement, but comes with new challenges The Peruvian middle-class has significantly expanded over the past decade. In line with the LAC trend, the middle-class in Peru has been growing since the beginning of the 2000s. In 2005, only around 15% of the population was considered part of the middle-class (daily income of USD 13-70/day, 2011 PPP). This percentage already reached 34.3% of the population in 2016, on par with the LAC average of 35.3% (Figure 1.3). Additionally, Peru’s growth has been strongly pro-poor. In the past few decades, the country has been particularly successful in lifting people out of poverty. The poverty rate has almost halved, from 46.7% in 2006 to 24.6% in 2016. While the middle-class emergence has been one of Peru’s greatest socioeconomic achievements, it also brings a whole set of new challenges. In particular, it has created new vulnerabilities, with a vulnerable population (i.e. those who have a daily income of USD 5.5-13, 2011 PPP), which increased from 31.8% to 37.6% between 2005 and 2016. In fact, this vulnerable population represented the largest socio-economic group in the country (World Bank, 2019). This implies that many people in Peru are in an unstable situation where they could easily slip back into poverty following any turbulence or slowdown in the economy, or any setback in the household due to the loss of a job, health problems, etc. Most of the vulnerable population hold precarious jobs in the informal sector, and, therefore, generally have poor job conditions and low levels of social protection.

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1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

In addition, the emerging middle class brings new and evolving demands, notably with regard to public services such as education, health and transportation. This is particularly challenging for a country like Peru, where dissatisfaction with public services remains high and tax collection is still a challenge for governments. The vicious cycle of low quality services, dissatisfaction and low willingness to pay taxes (i.e. tax morale) emerges as a relevant development trap for the country, resulting in the erosion of the state’s fiscal legitimacy. This makes it difficult to increase tax revenues, which are already low in the country relative to the OECD average: 16.1% vs. 34.3% (OECD et al., 2018). Figure 1.3. Evolution of socioeconomic groups

Peru - Poverty LAC - Poverty 60

Peru - Vulnerable LAC - Vulnerable

Peru - Middle-class LAC - Middle-class

% population

50 40 30 20 10 0

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Note: Poverty rate (share of the population living with less than USD 5.5, 2011 PPP), middle-class (USD 1370 a day, 2011 PPP), vulnerable (USD 5.5-13 a day, 2011 PPP). Source: OCDE/ECLAC/CAF based on World Bank 2019, LAC Equity Lab. StatLink 2 http://dx.doi.org/10.1787/888933995802

Well-being in Peru is higher…although large gaps persist Peru performs relatively well in terms of well-being when compared to the worldwide average. Overall, the OECD well-being framework assesses both material and quality of life standards, providing a comprehensive analysis of people’s living conditions. Peru performs reasonably well in the areas of work, health and education and skills, but it underperforms in the areas of environment, empowerment and vulnerability (Figure 1.4). Peru also displays weaknesses in terms of housing and infrastructure. Peru’s scores on consumption indicators are in line with its level of economic development. Gross national income (GNI) per capita captures the gross flow of income to individuals from earnings, self-employment and income from capital. Peru’s GNI is USD 12 890 per capita (2017), which is around the expected level for countries with similar GDP per capita. However, Peruvians report their household income is not enough to afford basic needs and the poverty rate is higher than what would be expected for countries with Peru’s GDP per capita. Labour force participation is high in Peru, yet jobs remain a source of vulnerability. The ratio of employment to population is 73.8% among individuals over the age of 15. MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

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18  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Unemployment is relatively lower than the average of countries at this GDP per capita level. However, Peru underperforms significantly in terms of the quality of employment. The share of vulnerable employment2 in the Peruvian labour market reaches 49.7%, which is worse than other countries with its GDP per capita. Regarding health, Peru shows relatively good outcomes but underperforms in terms of perception. Peru’s results show a relatively high life expectancy and low mortality rate, with respect to the level expected for countries with Peru’s level of GDP per capita. Yet, Peruvians report being dissatisfied with the availability of quality healthcare (i.e. indicators are worse than expected). Education outcomes suggest that the quality of education is still a barrier in Peru despite progress. The country has improved in coverage indicators such as the mean years of schooling, which is slightly higher than the level expected. The net enrolment rate – which includes the total number of students enrolled in a given level of education and with the theoretical age, expressed as a percentage of the total population in that age group – is higher than expected as well. However, in terms of quality of education, the country’s results remain low: the mean reading score in the Programme of International Student Assessment (PISA) (398) is still well below the expected level for Peru’s GDP per capita. PISA measures the cognitive skills of 15- to 16-year olds in the areas of mathematics, reading and science, assessing their competencies when they reach the end of compulsory education. Finally, Peru has significant weaknesses in the area of empowerment. Trust in government and institutions is relatively low and participation is similarly limited. The Corruption Perception Index that ranks countries according to the level of perceived corruption, ranks Peru on the expected level for its GDP per capita. Yet, the country underperforms in most of the indicators related to public opinion on institutions and governance. Indeed, 86.8% of the population think corruption is widespread in government according to the Gallup World Poll (2017), an exceptionally high level for a country with Peru’s level of per capita income. People voicing an opinion to an official in the last month is below expected levels as well. In terms of life satisfaction, Peruvians report being satisfied as expected, and report a high positive experience index. In a similar vein, the negative experience index reports to be significantly below than expected.

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1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

Figure 1.4. Current and expected well-being outcomes for Peru Worldwide comparison

Note: This figure is based on running bivariate regressions where the indicator is the dependent variable and GDP per capita is the independent variable. The expected value of each indicator is then computed by taking the coefficient of the bivariate regression and applying it to the actual GDP per capita of the country. The country’s observed results are then compared to the expected value for each indicator. The difference between the fitted values and the observed values is standardised by the standard deviation of the indicator. Standardising the size of the gap highlights those dimensions in which the performance of the country stands out. Expected values are calculated using all countries with a population over 1 million. Source: OECD calculations based on Gallup Organization (2016), Gallup World Monitor (database); UNDP (United Nations Development Programme) (2016), International Human Development Indicators (database), United Nations Development Programme, http://hdr.undp.org/en/data; UIS (UNESCO Institute for Statistics) (2016), UIS Data Centre (database), United Nations Educational, Scientific and Cultural Organisation, http://data.uis.unesco.org; World Bank (2017), World Development Indicators (database), Washington, DC, http://data.worldbank.org; OECD PISA 2015 data; Transparency international (2016), Corruption Perceptions Index, http://www.transparency.org/cpi2014/results#myAnchor1. StatLink 2 http://dx.doi.org/10.1787/888933995821

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20  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Persistent challenges are jeopardising the broad socioeconomic gains the country has made. At least three crosscutting challenges in Peru exacerbate the need for structural reforms: 

Low levels of productivity, which are a longstanding issue for the Peruvian economy and remain a defining feature of countries bogged down in the middleincome trap. Improving productivity will be at the heart of a sustained growth process and the capacity to compete in global markets and to raise income levels for all.



High levels of inequality, which is strongly associated with the country’s high and persistent levels of informality. These affect social cohesion and equality of opportunities, leaving many people in poverty or in a situation of vulnerability. Inequalities appear at many different levels, from income and regional location, to gender and ethnic groups, among others. Large informality is associated with poor job conditions and with low levels of social protection, leaving many in a vulnerable situation.



A growing disconnect between society and institutions, with low levels of trust and high dissatisfaction with public services. As it aspires to a better life, the growing middle class, coupled with persistent institutional challenges, is straining the social contract. This has put pressure on the country to transform its institutional architecture.

A dynamic economy at a crossroads A resilient economy with productivity challenges Peru’s economy has been remarkably resilient to global headwinds. Over the last two decades, it has been one of the fastest-growing economies in the region, enjoying macroeconomic stability, a strong mining sector, an open economy, and growing agroindustry and services sectors. The economy recovered from the 2008 global financial crisis and continued to generate one of the highest annual growth rates in LAC. Positive GDP growth continued despite the end of the commodity boom, with an average growth of around 5% in past decade. However, recent growth has not been enough for Peru to catch up with its peers. Despite an impressive surge in per capita GDP performance over the last decade, Peru has not been able to close the gap with other emerging economies. Since the beginning of the seventies, GDP per capita in Peru diverged from upper middle-income, middle-income and high-income economies on average. Peru’s productivity performance has been poor despite high economic growth. Across Latin America, labour productivity – measured by GDP produced by an hour of labour –, has been declining over the past decade, relative to more advanced economies. Yet, Peru has historically shown a low productivity compared to its peers and to the LAC average. In particular, labour productivity represents only 20% of that in the US, a decline from a level of almost 36% in 1982 (Figure 1.5). This productivity divergence stems from a combination of factors: from low savings and poor use of them, to slower capital accumulation, low efficiency in factor utilisation and limited labour contribution to growth.

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1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

Figure 1.5. Labour productivity in Peru and selected benchmark countries, 1980-2018 As a percentage of labour productivity in the United States, 2011 PPP Peru Mexico

%

Australia Norway

Canada Portugal

Chile Turkey

Korea LAC average

140 120

100 80 60 40

20 0

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Note: Labour productivity per person employed in 2017 USD (converted to 2017 price levels with updated 2011 PPPs). Source: The Conference Board Total Economy Database™ (Adjusted version), March 2018. StatLink 2 http://dx.doi.org/10.1787/888933995840

Improving total factor productivity and human capital will be key for promoting labour productivity. Labour productivity, calculated as the output per worker, can be broken down into human capital, physical capital and total factor productivity (TFP). TFP, the portion of output not explained by the amount of inputs used in production, is determined by how efficiently and intensely the inputs are utilised in production. Peru’s TFP alone accounts for 49% of the labour productivity gap with the United States; years of schooling accounts for 27% and quality of education accounts for 22% (OECD, 2015). Peru’s TFP has grown at an annual rate of less than 2% over the last two decades – even achieving negative rates in the past five years – not enough to close the gap with OECD economies. The productivity of firms exhibits high heterogeneity compared to other LAC economies and especially to the United States. While in Peru, the ninetieth percentile of most productive firms are 500% more productive than the tenth percentile, in the United States it is approximately 200%, highlighting significant disparities in the allocation of production factors in Peru (Vostroknutova et al., 2015). To make the economy more efficient and promote productivity and competitiveness, Peru should engage in better connectivity. After controlling for other variables affecting economic growth, there is a significant association between improved logistics and transport infrastructure performance on the one hand and productivity gains and sophistication of exports on the other (OECD/CAF/UN ECLAC, 2013). In particular, Peru has a relatively high share of logistics-intensive and time-sensitive exports, which account for 17% of all exports: 1.38 times higher than the OECD median (OECD, 2015). Additionally, improving logistics could boost Peru’s productivity. The World Bank’s Logistics Performance Index (LPI) compares logistics and transport infrastructure performance through six components: customs, infrastructure, ease of arranging shipments,

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22  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS quality of logistics services, tracking and tracing, and timeliness. The LPI scores countries between 1 and 5. Peru’s score in 2016 was 2.89. Countries that improve their score by 1 in the LPI, improve their labour productivity by 35% on average, the productivity gain Peru would enjoy if it achieved the same LPI as Canada (OECD, 2015).

Employment is concentrated in the least productive sectors Labour productivity varies widely across economic sectors in Peru. Mining, finance, energy and water, and telecommunications have high labour productivity, while retail and restaurants, and agriculture are particularly low (Figure 1.6). This trend is consistent with the average productivity observed over the past decade. Mining is the most productive sector, with a level of labour productivity of more than seven times the average for Peru, and more than 40 times the level for agriculture. Most of Peru’s jobs are concentrated in the most unproductive sectors. More than half of all workers were in Peru’s two most unproductive sectors: retail and restaurants, and agriculture. In contrast, the manufacturing sector accounts for more than twice the average labour productivity in Peru, yet provides only 10.6% of total employment – a share that has decreased from 12% since the start of the century. This picture is even more striking for the most productive sectors. Together, mining, finance, energy and water, and telecommunications represent less than 4% of total employment. Additionally, the few sectors with high labour productivity create few jobs. The mining sector alone accounts for less than 1.5% of total employment. By contrast, retail and restaurants, and agriculture create close to half of the country’s total number of jobs. Yet, they are the least productive sectors in Peru. While these findings seem to imply a misallocation of labour, they also present enormous potential for growth-enhancing structural transformation. The average wage is more than six times higher in the four sectors with the highest labour productivity than in the two sectors with the lowest. The average wage in the mining sector is 12.5 times higher than the average wage in agriculture (Távara et al., 2014), which is less than the 40-fold difference in productivity between those sectors.

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Figure 1.6. Labour productivity is concentrated in just a few sectors Relative value-added as a percentage of workers and employment by economic sector (y axis: 100 = total labour productivity and x-axis: % of employment

Mining Construction

Finance Services

Energy and water Transport and logistics

ICTs Retail and restaurants

Manufacturing Agriculture

Relative gross value added 1 200 1 000 800 600 400 200 0

0

10

20

30

40

50

60

70

80

90 100 Employment share

Note: Number of workers is based on Peru’s National Households Survey (INEI) of 2013. “Energy and water” is the item with the lowest employment contribution, representing less than 0.5% of total employment. Source: OECD calculations based on data provided by INEI (National Institute of Statistics). StatLink 2 http://dx.doi.org/10.1787/888933995859

An open economy with insufficient levels of productive diversification Peru’s integration into international global value chains is low and the country relies heavily on raw materials. The Peruvian economy is overly dependent on commodity exports with limited potential to drive job growth and economic diversification. Commodities still dominate Peru’s international trade. Indeed, mining accounted for 42% of total value added in third countries’ exports, 14 percentage points more than in 1995 (28%). In contrast, the low, medium and high-technology industries represented altogether 11.7% of the domestic value added in third countries’ exports. In Peru, commodities account for 47% of domestic value added, which is slightly lower than the rest of Latin America. In particular, mining as a percentage of domestic value added has been decreasing across the LAC region (Figure 1.7).

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24  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Figure 1.7. Domestic value added in third countries' exports by sector of origin in Latin America (6) and Peru, 1995-2014 Agriculture

Mining

Medium-high-technology industries

Low-technology industries

Medium-low-technology industries

High-technology industries

Services

2014

1995

Latin America (6 countries)

10

10

8 20 12

51

47

7

11 1

7

1995

Peru

11

0 5

2014

7

6

34 28

41

42

0

10 2

13

2

0 10

6

Note: Data for Australia, Colombia, Ecuador, Korea, and Mexico are from 2013. Latin America (6) is the average of Argentina, Brazil, Chile, Colombia, Costa Rica and Peru. Source: WITS / UN Comtrade, Trade Indicators (database) and Central Bank of Peru (Banco de la Reserva del Perú), http://www.bcrp.gob.pe/estadisticas.html. StatLink 2 http://dx.doi.org/10.1787/888933995878

Peru remains reliant on its diverse natural resources, making it necessary to improve economic diversification. Peru stands among the top global producers of minerals such as copper, lead, silver, tin and zinc. In addition, Peru contains a significant share of the world’s reserves of certain commodities, such as silver, tellurium, cadmium, selenium and copper. Peru’s primary mineral production is competitive due to the quality of its resources MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

(e.g. good mineral grades and its wealth of multiple metals) and the low cost of production inputs. Labour and energy costs account for 15-25% of the total costs of production (McKinsey, 2013). Having an economy that relies so heavily on raw materials makes the economy highly vulnerable to external shocks, and makes the economy highly concentrated in sectors with little added value to global value chains (Figure 1.8). Figure 1.8. Exports composition, 2017 Other fishing 3% Squid, cuttlefish, cuttlefish, shrimp tail 2% Other farming 5% Asparagus, cranberries, mangoes and mangosteens 2%

Metalworking Textile 1% 2% Other non-traditional 8% Copper 36%

Grapes and avocados 2%

Other traditional 9% Lead 4% Zinc 7%

Oil and natural gas derivatives 10%

Gold 9%

Source: OECD calculations based on INEI. StatLink 2 http://dx.doi.org/10.1787/888933995897

A more inclusive society but vulnerabilities are still widespread While socio-economic conditions have improved, large challenges remain in the pursuit of a sustainable development pattern that promotes social inclusion and well-being for all. The vulnerable population remains the biggest socioeconomic group in Peru. Despite the emergence of the middle-class coupled with a decrease in poverty rates, vulnerable population (those earning between USD 5.5 and 13 a day) still accounts for 37.6% of the total population. They are usually informal workers with access to low quality public services such as education and health, and social protection systems.

Informality in Peru is high and persistent, with a pervasive impact on the quality of jobs and on social protection Informality is both a cause and consequence of the low levels of development in Peru. Informality refers to all economic activity happening outside government regulations. The most relevant causes are weak institutional frameworks, high costs associated with formalisation, large size of low-productivity sectors and certain cultural behaviours MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

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26  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS common amongst economic agents. Consequences include a pervasive impact on economic efficiency and productivity, tax collection, firm development and poor job conditions, all of which affect the overall performance of a country’s development. Informal employment in Peru remains high and is deeply entrenched. It reached 72% of total employment in 2016 (INEI, 2017). At 68.8% when using the ILO definition applied to non-agricultural employment, it is one of the highest in LAC and among benchmark countries (Figure 1.9). Informal employment has been persistently high in Peru, even throughout the recent period of large economic expansion, when it dropped from 79.9% in 2007 to 72.8% in 2014. Most of this reduction took place in urban areas, while in rural areas informal employment is particularly entrenched. The incidence of informal employment is unequal across socioeconomic groups. It is higher among young workers (aged 15 to 29) and older workers (age 65+), women, those with lower levels of education and those living in rural areas (OECD, 2015). Among the young, informality is high for all groups and particularly high for those living in poor households. For young people aged 29, approximately eight out of ten workers are informal among those living in extreme poverty households. The rates are seven out of ten among those moderately poor and five out of ten among those living in vulnerable households (OECD/CAF/ECLAC, 2016). Figure 1.9. Informal employment in Peru and benchmark countries % of non-agricultural employment

Productive definition

Legal definition

% 70 60 50

40 30

20 10 0

Chile

South Africa

Costa Rica

Brazil

Panama

Colombia

Peru

Mexico

Ecuador

Note: Non-agricultural employment rates are based on 2015 data for Costa Rica, Ecuador, South Africa and Turkey; 2013 data for Brazil, Colombia, Mexico, Peru and Panama. No data available for Chile for that indicator. Productive definitions are based on 2017 data for Costa Rica; 2016 data for Brazil, Colombia, Ecuador, Mexico, Panama and Peru; 2015 data for Chile. Legal definitions are based on 2017 data for Costa Rica; 2016 data for Colombia, Ecuador, Mexico and Peru; 2015 data for Brazil and Chile. No data available for Panama for that indicator. Source: CEDLAS and World Bank (2018), Socio-Economic Database for Latin America and the Caribbean (SEDLAC) (database) for legal and productive definitions, http://sedlac.econo.unlp.edu.ar/eng/index.php and ILO (2018), ILO Stats, International Labour Office, Geneva for non-agricultural definition. StatLink 2 http://dx.doi.org/10.1787/888933995916

Informality has adverse consequences on social protection and labour conditions for informal workers and the broader population. As informal workers are excluded from national labour laws and social security regulations, they are less likely to have access to MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS

pensions and health insurance systems. They also face more difficult working conditions, in particular lower wages and greater difficulty in finding sufficient work. Health coverage remains low across Peru, where as many as 31% of Peruvians do not have health insurance coverage. Health insurance is provided through contributory social security (Seguro Social de Salud [EsSalud]) as well as the subsidised Seguro Integral de Salud (SIS). Almost 40% of the population is covered by SIS, while 25% is covered by EsSalud. Other schemes insure 5% of the population. Young adults have the lowest coverage compared to other age groups, with 46% of those aged 18 to 25 having no coverage at all. The various health insurance systems that automatically cover dependents do not cover the beneficiary’s children if they are over 18, unless they are disabled or otherwise unable to work. Likewise, informality challenges pension provision and finance. Peru has one of the lowest rates of affiliation to pension systems in Latin America. Only 40.5% of employed urban workers was affiliated to a pension system in 2013 (ILO, 2014). While this is an improvement over the very low coverage rates of a decade ago (26.7% in 2005), the improvement has been much slower than for health coverage and has slowed down since 2010 (Casalí, Cetrángolo and Goldschmit, 2015). The low coverage of the pension system is largely driven by informality. By definition, informal work remains at the margins of the social protection systems, meaning that workers remain highly vulnerable as they grow older. 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, the affiliation rate is lower for those aged 15 to 29, with 81% having no retirement plan. This figure is better for those 30 and over, although 64% lack affiliation. Current regulations perpetuate high levels of informality. Despite reforms to labour regulations, firms in Peru continue to struggle with high labour costs. Efforts have been made in reducing enterprises’ firing costs but other obstacles remain, limiting firms’ capacity to formalise more jobs. Individual dismissals are not allowed unless there is a legal basis or misconduct on the part of the worker; otherwise workers have a right to severance pay consisting of 1.5 times their monthly salary for each year of service up to a maximum of 12 monthly salaries in the case of an indefinite-term relationship. Improvements have been made since neither the notice period for redundancy nor severance pay are very high in Peru, and the firing cost (measured in weeks of wages) was reduced to 17 weeks in 2010 (from 52 weeks in 2005) (OECD, 2015).

Access to education has improved but learning outcomes remain poor Access to education at all levels in Peru has increased markedly. A variety of indicators show that the “quantity” of education held by the population in Peru has increased in recent years. The average number of years of schooling among 15+ year olds reached 10.1 in 2016, up from 9.5 years in 2005 (INEI, 2015). Adult literacy rates (for 15-year olds and over) have also expanded, from 87.6% in 2004 to a rate of around 94.5% for 2015 (UNESCO/UIS, 2015). But the main improvement has been the number of people participating in education, which has increased substantially at all levels in the last decade. Access to pre-primary, primary and secondary education has improved. In pre-primary, net enrolment rates for those aged three to five reached around 79.2% by 2016, up from around 60% in 2005 (INEI, 2015). Furthermore, access to primary education is high, although it has decreased slightly and students still repeat years and drop out. Net enrolment MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

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28  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS rates in primary education were around 91.1% in 2016, similar to the LAC average (91.5%), and slightly below the rate for OECD members of 97% (UNESCO/UIS). Moreover, almost 8 out of 10 students in Peru participate in secondary education, although many leave before completion. Net enrolment rates have increased – from 68.1% in 2004 to around 83% in 2016 – slightly above the levels in the LAC region. However, Peru still remains behind the OECD, where access to secondary education reached around 90% in 2012 (UNESCO/UIS, 2015). Additionally, access to tertiary education has expanded significantly. This expansion has to a large extent been fuelled by newly created, or expanding, private higher education institutions. Just 45% of students were enrolled in private universities in 2004, but by 2012 that share had reached 66% (INEI, 2015). Despite this increase, only around 20% students aged 22-24 had completed tertiary education in 2013, up from 13.7% in 2005, and around 27% of those aged 25-34 (ESCALE, 2015). However, the quality of education in Peru still lags behind, despite some recent improvements (OECD, 2016c). Peru improved from 2012 to 2015 in the three categories of the Programme for International Student Assessment (PISA): reading, mathematics, and science. Yet the country still has large room for improvement: it scores on average 380, being the lowest amongst the group of benchmark countries (Figure 1.10). In science, which was the main category assessed in 2015, Peru has the highest level of low achievers (58.4%) amongst benchmark countries. Peru’s score in science in PISA 2015 implies that an average 15-year-old student in the country is behind its LAC peer by the equivalent of eight months of secondary schooling, and around three years behind its OECD peers. Figure 1.10. PISA 2015 scores in reading, maths and science Australia Norway 600

Canada Portugal

Chile Turkey

Reading

Korea Peru

Math

Mexico

Science

550 500 450 400 350 300

2000 2003 2006 2009 2012 2015

2003

2006

2009

2012

2015

2006

2009

2012

2015

Note: Based on Table I.2.4a, Table I.4.4a and Table I.5.4a. Source: OECD (2016), PISA 2015 Results (Volume I): Excellence and Equity in Education, PISA, OECD Publishing, Paris, https://doi.org/10.1787/9789264266490-en. StatLink 2 http://dx.doi.org/10.1787/888933995935

Pertinence of education is also challenging, as shown by the large share of firms that face difficulties to find the workforce they need. In fact, on average between 2005 and 2018

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around 4 out of 10 firms claimed that they had difficulties to fill their vacancies (Manpower Talent Survey, 2017). These skills gaps are critical as they represent a barrier to growth but also to labour participation, favouring the concentration of economic activity on low-skilled sectors, and making it difficult to move towards a productive structure of higher valueadded and with the capacity to create good quality, formal jobs.

A weak institutional framework undermines the social contract Lack of trust in institutions has persisted in Peru Peru has made progress concerning governance over the last decade. Particularly, the country improved in terms of various governance indicators, namely government effectiveness, regulatory quality, political stability and voice and accountability. Peru has also improved relative to citizens’ trust in public institutions. Notably, 82% of people in Peru expressed little or no confidence in the national government in 2017, which was a deterioration from 2007 (77%) and lower than the LAC average of 75% (Latinobarómetro, 2017). On the contrary, confidence in the country’s judicial systems and courts improved by 7 percentage points, increasing from 14% to 21.1% over 2006-17, but still remains well below the LAC average in 2016 (34%) (OECD/CAF/ECLAC, 2018). Significant weaknesses remain and the growing middle-class has come with a rise in social aspirations, leaving social demands unmet in many cases. These dynamics are one of the main explanations to why discontent has remained high even after a period of unprecedented socioeconomic progress (OECD/CAF/ECLAC, 2018). To meet citizens’ needs, the state must be able to deliver certain services, improve communication with the population and strengthen administrative aspects. In Peru, these demands have not been fully met. The population still has negative perceptions of the state and public institutions. Mainly, institutions are perceived as ineffective in achieving their goals, non-transparent in how they act and unaccountable for their results. This undermines social cohesion, hampers collective action to achieve shared objectives, and reduces the well-being of individuals and communities. In particular, several institutions in Peru suffer from lack of public confidence. Corruption is perceived to be widespread, with 87% of Peruvians believing the entire national government is corrupt (Gallup, 2017). Peru is the third country in Latin America with the highest percentage of people (19%) believing that corruption is the most important problem in the country (Latinobarometro, 2017). Indeed, and despite a substantial increase in corruption perception throughout the LAC region since 2010, perception of corruption in Peru has been historically higher, compared to LAC and to OECD countries (OECD/CAF/ECLAC, 2018) (Figure 1.11). To face this, building a culture of integrity, transparency and accountability across the public sector can bolster public trust in state institutions and sustain greater socio-economic performance over time (OECD, 2016a).

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30  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS Figure 1.11. Perception of corruption in government Latin America and Caribbean

OECD

Peru

95% 90%

85% 80% 75% 70% 65%

60% 55% 50%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: OECD (2018) based on Gallup (2017), World Poll. StatLink 2 http://dx.doi.org/10.1787/888933995954

Low confidence in institutions undermines state capacity Providing good quality public services requires strong fiscal will. Achieving substantial tax collection is both a matter of technical capacity and citizens’ willingness to pay. The combination of the two would allow states to invest in the provision of more and better public services, which would result in a growing satisfaction of citizens towards public institutions. Yet achieving this virtuous circle is not straightforward, even less in LAC countries where the level of tax morale is low and has been declining in recent years. Notably, in Peru only 31.7% of the population declares tax evasion as being never justifiable, well below the LAC average of 48.1% (OECD/CAF/ECLAC, 2018). A key challenge for Peru is to improve the technical capacity of levying taxes through a sound tax policy. Tax revenues in Peru are still low compared to benchmark countries (Figure 1.12). Tax revenues represent only 16.1% of Peru’s GDP, below the LAC average of 22.7% and well below the OECD average of 34%. The current tax system does not generate sufficient revenues to finance the provision of the services needed to stimulate inclusive and sustainable economic growth. The fiscal system needs to be improved to turn revenues into a more effective tool for economic and social development. The corporate income tax accounts for 3.8% of the GDP and represent 23% of the total revenue, while the personal income tax accounts for 1.8% and 11% respectively. In contrast, in OECD countries corporate income tax accounts for 8.2% of GDP while personal income tax accounts for 24.8% of GDP. A key feature is that a large share of Peruvian tax revenues are generated through taxes on goods and services, which represent 7.3% of GDP and 46% of total revenues. Within income tax, the personal income tax – which is one of the more redistributive taxes – accounts only for 1.8% of GDP. Overall, Peru’s fiscal system relies heavily on indirect taxes and much less on direct taxes, which are usually easier to be levied. In sum, a more effective fiscal policy needs to be put in place to redistribute income and achieve a more equitable society. Indeed, Peru has one of the fiscal systems in the region that MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

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redistributes the least: the Gini Index barely changes after taxes and transfers (Figure 1.13). Fighting against fiscal evasion and tax erosion would also be crucial in building fiscal capacities and strengthening institutions. Figure 1.12. Tax-to-GDP ratio composition in Peru and selected benchmark countries Percentage of GDP Personal income tax Taxes on payroll

%

Corporate income tax Taxes on property

Other taxes on rent Taxes on goods and services

Social security contributions Other taxes

40 35

30 25 20 15 10

5 0

Source: OECD et al. (2019), Revenue Statistics in Latin America and the Caribbean 2019, OECD Publishing, Paris, https://doi.org/10.1787/25666b8d-en-es. StatLink 2 http://dx.doi.org/10.1787/888933995973

Figure 1.13. Impact of taxes and transfers on income distribution Market income

Disposable income

Gini coefficient 0.7 0.6

0.5 0.4 0.3 0.2 0.1 0

Source: OECD/CAF/ECLAC/EU (2019) and Commitment to Equity (CEQ) Institute at Tulane University, New Orleans. StatLink 2 http://dx.doi.org/10.1787/888933995992

Recent policies have been set up to strengthen the state-society link Peru faces a number of barriers to both moving towards a more transparent and open government and fighting corruption alongside the private sector and civil society. Peru MULTI-DIMENSIONAL REVIEW OF PERU © OECD 2019

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32  1. PERU’S PATH TO A HIGH-INCOME ECONOMY WITH BETTER WELL-BEING FOR ALL CITIZENS lacks a comprehensive strategy on open government data from the central government. Moreover, it does not regularly consult with users regarding data release. Therefore, Peru ranks amongst the LAC countries with the least government support for open data initiatives in 2015 (OECD/CAF/ECLAC, 2018). Yet, Peru is pursuing an agenda to connect citizens with public institutions and promote more inclusive development. This agenda focuses on citizen safety, the fight against corruption, better delivery of water and sanitation, and a citizen-oriented government service reform. Among other initiatives, the Information Analysis Unit created the AntiCorruption Observatory of Peru. The government also approved the creation of the Public Prosecutor’s office specialised in corruption-related crimes. Additionally, a high-level team was created to facilitate, co-ordinate and prioritise government actions that will enable it to provide its citizens with better services and care. All government entities have to carry out the Citizen Care Quality Assessment. This new framework also establishes a team that will continually focus on identifying and simplifying obsolete procedures in each sector, as well as reducing administrative burdens. To improve and simplify service delivery, the government wants to further expand the Centres of Better Attention to the Citizen. The country has promoted, together with Chile, the creation of the LAC Public Integrity Network with the support of the OECD and the Inter-American Development Bank. This network aims at supporting other countries in the region to exchange ideas, experiences and lessons learned. Together, the partners wish to find solutions to common challenges in the implementation of public integrity policies. The government of Peru recently launched gob.pe, a user-friendly version of its Portal of Services to Citizens and Companies that aims to group all state-run procedures related to services for both citizens and firms in one place. Furthermore, the government of Peru has been making the open data portal more accessible and operational. It has also enhanced the Digital Government Secretariat, which proposes national policies and strategies in the field of e-Government. Finally, Peru is developing data and studies nationwide to produce evidence-based policies, which are expected to improve effectiveness and efficiency in public organisations (OECD/CAF/ECLAC, 2018).

Conclusions Peru has recorded remarkable socioeconomic progress but significant challenges remain to overcome the development traps and to achieve greater well-being for all. Overcoming these challenges requires engaging in sound reforms and implementing structural policies to ignite new engines of inclusive and sustainable development. Policy priorities to boost competitiveness and well-being go beyond income and require a comprehensive approach for development. Following the multi-dimensional analysis realised in the first volume of this review, boosting productivity and economic diversification, improving transport connectivity and promoting job formalisation are determinant to improve lives of all Peruvians and achieve a higher level of development. In order to implement the policy recommendations for these three areas highlighted in the second volume of this review, specific policy actions are needed in these domains (see Chapter 2).

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Notes 1

OECD calculations following the methodology proposed by Felipe, Abdon and Kumar (2012). Estimations based on the GDP per capita 1990 PPP. 2

Vulnerable employment is defined as the sum of the employment status groups of own account workers and contributing family workers. They are less likely to have formal work arrangements, and are therefore more likely to lack decent working conditions, adequate social security and “voice” through effective representation by trade unions and similar organisations. Vulnerable employment is often characterised by inadequate earnings, low productivity and difficult conditions of work that undermine workers’ fundamental rights (Source: World Development Indicators, World Bank).

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References Casalí, P., O. Cetrángolo and A. Goldschmit (2015), Análisis Integral de la Protección Social en el Perú (Comprehensive Analysis of Social Protection in Peru), Office for the Andean Countries, International Labour Organization, Lima, www.ilo.org/wcmsp5/groups/public/---americas/---ro-lima/--sro-lima/documents/publication/wcms_392037.pdf. ESCALE (2015), Estadística de la calidad educativa (database), Ministerio de Educación, http://escale.minedu.gob.pe/. Felipe, J., A. Abdon and U. Kumar (2012), “Tracking the middle-income trap: What is it, who is in it, and why?”, Levy Economic Institute Working Paper, No. 715, Levy Economics Institute of Bard College, Annandale-on-Hudson, NY, www.levyinstitute.org/pubs/wp_715.pdf. Gallup (2017), Gallup World Poll database, http://www.gallup.com/services/170945/world-poll.aspx, (accessed July 2017). 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/---rolima/documents/publication/wcms_334089.pdf. INEI (2017), Producción y Empleo Informal en el Perú, Cuenta Satélite de la Economía Informal 20072016, INEI (Instituto Nacional de Estadística e Informática), Lima, Peru, http://www.inei.gob.pe/estadisticas/indicetematico/sociales/. INEI (2015), Estadísticas: índice temático sociales (database), INEI (Instituto Nacional de Estadística e Informática), Lima, Peru, http://www.inei.gob.pe/estadisticas/indicetematico/sociales/. Latinobarómetro (2017), Informe 2017, www.latinobarometro.org, Corporación Latinobarómetro, Santiago de Chile. ManpowerGroup (2017), 2017 Talent Shortage Survey, ManpowerGroup, Milwaukee, www.manpowergroup.com/wps/wcm/connect/db23c560-08b6-485f-9bf6f5f38a43c76a/2015_Talent_Shortage_Survey_US-lo_res. pdf?MOD=AJPERES. McKinsey (2013), An Assessment of the Competitiveness and Health of Peru’s Mining Industry, McKinsey & Company, available from www.mckinsey.com/client_service/metals_and_mining/latest_thinking. Melguizo, A., S. Nieto-Parra, J.R. Perea and J.A. Perez (2017), “No sympathy for the devil! Policy priorities to overcome the middle-income trap in Latin America”, OECD Development Centre Working Paper, No. 340, OECD Publishing, Paris, http://dx.doi.org/10.1787/26b78724-en. OECD (2016a), Multi-dimensional Review of Peru: Volume 2. In-depth Analysis and Recommendations, OECD Development Pathways, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264264670en. OECD (2016b), OECD Public Governance Reviews: Peru: Integrated Governance for Inclusive Growth, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264265172-en. OECD (2016c), “Avanzando Hacia una Mejor Educación en Perú”, Making Development Happen Series, Volume 3, OECD Development Centre, Paris. 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.

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OECD/CAF/ECLAC/EU (2019), Latin American Economic Outlook 2019: Development in Transition, OECD Publishing, Paris, http://dx.doi.org/10.1787/leo-2018-en. OECD/CAF/ECLAC (2018), Latin American Economic Outlook 2018: Rethinking Institutions for Development, OECD Publishing, Paris, http://dx.doi.org/10.1787/leo-2018-en. OECD/CAF/ECLAC (2013), Latin American Economic Outlook 2014: Logistics and Competitiveness for Development, OECD Publishing, Paris, https://doi.org/10.1787/leo-2014-en. OECD/CAF/ECLAC (2016), Latin American Economic Outlook 2017: Youth, Skills and Entrepreneurship, OECD Publishing, Paris, http://dx.doi.org/10.1787/leo-2017-en. OECD et al. (2019), Revenue Statistics in Latin America and the Caribbean 2019, OECD Publishing, Paris, https://doi.org/10.1787/25666b8d-en-es. Távara J. I., E. González de Olarte and J. M. Del Pozo (2014), “Heterogeneidad estructural y articulación productiva en el Perú: Evolución y estrategias”, in R. Infante and J. Chacaltana (eds.), Hacia un Desarrollo Inclusivo: El Caso del Perú, ILO/United Nations/CEPAL, Santiago de Chile, pp. 39-96. UNESCO/UIS (2015), UNESCO Institute for Statistics database, http://www.uis.unesco.org/Pages/default.aspx. Vostroknutova E. et al. (2015), Peru Building on Success: Boosting Productivity for Faster Growth, World Bank Group, Washington, DC., available at http://documents.worldbank.org/curated/en/2015/10/25122535/peru-building-success-boostingproductivity-faster-growth. World Bank (2019), LAC Equity Lab (database), World Bank, Washington, DC., www.worldbank.org/en/topic/poverty/lac-equity-lab1/overview (accessed in March 2019). World Bank (2018), World Development Indicators (database), Washington DC., https://data.worldbank.org. World Bank (2012), Country Partnership Strategy for the Republic of Peru for the Period FY2012FY2016, World Bank, Washington, DC.

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Chapter 2. Plan of action to become a high-income economy with greater well-being for all

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.

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38  2. PLAN OF ACTION TO BECOME A HIGH-INCOME ECONOMY WITH GREATER WELL-BEING FOR ALL 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.

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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.

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40  2. PLAN OF ACTION TO BECOME A HIGH-INCOME ECONOMY WITH GREATER WELL-BEING FOR ALL 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

Key Objective 2

Quality economic and social infrastructure

Strengthen human capital

Key Objective 3 Innovation, adoption and transfer of technological improvements

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Key Objective 4

Key Objective 5

Promote local and external financing mechanisms

Create conditions for a dynamic and competitive labour market towards decent employment for all

Key Objective 7

Key Objective 8

Facilitate conditions for foreign trade of goods and services

Strengthen institutions

Key Objective 6 Develop conditions for a productive business environment

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

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42  2. PLAN OF ACTION TO BECOME A HIGH-INCOME ECONOMY WITH GREATER WELL-BEING FOR ALL 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 semiand 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).

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Figure 2.3. Top 35 most likely Peruvian exports by level of processing and RCA index, 2014 RCA>1

RCA