Front Matter

Front Matter Page

2001 International Monetary Fund

March 2001

IMF Country Report No. 01/51

Peru: Selected Issues

This Selected Issues paper on Peru was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on February 23, 2001. The views expressed in this document are those of the staff team and do not necessary reflect the views of the government of Peru or the Executive Board of the IMF.

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Front Matter Page



Selected Issues

Prepared by Saul Lizondo (Head), Andrew Wolfe, Dale Chua, (all WHD), Juan Pablo Córdoba (FAD), and Andrea Richter (PDR)

Approved by the Western Hemisphere Department

February 23, 2001


  • Basic Data

  • Overview

  • I. Peruvian Labor Markets and the Impact of Economic Activity in the 1990s

    • A. Introduction

    • B. Employment, Unemployment, Growth, and Labor Market Participation In Peru in the 1990s

    • C. Policy Recommendations

  • Text Tables

  • I. 1. Employment, Unemployment, Underemployment, and Real Wages

  • 2. Informal and Formal Employment

  • 3. Real Wage Developments

  • 4. Determinants of the Total Underemployment Rate

  • 5. Demographics of the Rate of Labor Force Participation

  • 6. Labor Market Comparators with Andean Community

  • 7. Additional Labor Market Comparators with Andean Community

  • Figures

  • I. 1. Labor Market and Real Sector Indicators

Peru: Basic Data

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Sources: Central Reserve Bank of Peru, and staff estimates.

Urban unemployment.

Flows in foreign currency are evaluated at program exchange rate.

Numerator includes goods and services.

Based on Information Notice System.

Program definition. Includes financial system’s foreign currency deposits in central bank as reserve liability.


1. This paper presents four studies on selected issues of the Peruvian economy. The first study analyzes developments in the labor market during the 1990s. The second assesses the relationship between the orientation of economic policy and export performance, in particular, export diversification over the last four decades. The third looks at the two-tier pension system and evaluates the long-term fiscal burden of this system. The last study reviews the design and implementation of monetary policy in Peru over the last decade.

2. Chapter I reviews labor market developments in Peru in the 1990s and observes that strong output growth in this period generated high growth in the level of employment and reduced the rate of total underemployment, defined as the sum of unemployment and underemployment (the latter includes those working few hours a week or receiving very low wages). However, owing to growing rates of labor-force participation, total underemployment remained at very high levels by the end of the decade. The study notes that the high rate of labor taxation in Peru and costly legal requirements on severance pay are likely to have adversely affected the level of employment and have contributed to the maintenance of a large informal sector. The degree of labor market informality, however, has not changed substantially over the 1990s. The paper also finds that in the 1990s there has been a significant widening of the earnings gap between skilled and unskilled labor.

3. The chapter argues that to reduce total underemployment and improve wages for lower-skilled workers, policies should be aimed at promoting high growth and increasing the employment-growth elasticity. This would require the maintenance of sound macroeconomic policies, the elimination of structural impediments to growth in labor-intensive industries, the development of human capital through better education, the reduction in high labor taxes, and the abolition of costly labor-market regulations.

4. Chapter II notes that dependence on traditional exports has long been a concern of Peruvian policymakers, who have introduced a variety of measures aimed at reducing this dependence over the last four decades. Efforts in the 1970s and 1980s to diversify exports relied on protectionist policies and did not work, as traditional products still represented roughly two-thirds of total exports by the start of the 1990s. The study argues that rich endowment of natural resources shapes Peru’s comparative advantage, and that targeted public sector efforts to diversify the export base which run counter to the underlying characteristics of the Peruvian economy will likely fail. In fact, Peru’s exports have generally performed better under conditions of liberal economic policies, rather than when restrictive trade and industrial policies attempted to promote particular sectors or industries.

5. The research concludes that a further diversification of Peru’s exports would require Peru to raise the level of education and training, which would only in time translate into a sustained rise in productivity that would allow Peru’s manufacturing sector to become internationally competitive.

6. Chapter III analyzes the Peruvian two-tier pension system, which includes a defined-benefit, pay-as-you-go, public system together with a defined-contribution, fully-funded, private system. The chapter highlights pending issues in the pension reform agenda such as improving transparency of the special public-sector arrangements, limiting the expected fiscal costs of the present system over the next few decades, and the need for the private pension system to provide adequate retirement income to participants.

7. The paper compares the expected benefits under the present public and private systems and quantifies the expected fiscal cost of current pension arrangements through 2050. The projections point to an increase in public outlays for pensions, from 2.5 percent of GDP in 1999 to around 3–3.5 percent of GDP over the next few decades. The study recommends that the public system be closed to new entrants to limit the future fiscal cost, that the contribution rate to the private system be increased to improve expected replacement rates, and that some administrative changes be introduced to reduce the operating costs of the private pension funds.

8. Chapter IV reviews the design and implementation of monetary policy in the 1990s and finds that the central bank was largely successful in reducing inflation during the period. However, there was a lack of transparency in monetary policy, and local-currency interbank interest rates were highly volatile in reflection of the central bank’s decision to conduct monetary policy by targeting base money. This volatility is seen to be an impediment to the development of a market for long-term sol-denominated financial instruments in the highly dollarized Peruvian economy.

9. The central bank’s recent effort to make monetary policy more transparent in 2001 is welcomed. The paper notes that publishing monthly monetary reports and updates of the annual monetary program report in May and September is a major step forward. The study argues that this improvement in transparency is consistent with the central bank’s consideration of a move to a formal inflation-targeting framework for monetary policy. In this connection, the chapter mentions some benefits that could be derived from adopting inflation targeting.


  • II. Export Performance and Economic Policy in Peru

    • A. Policy Framework and Export Performance During the 1960s to 1980s

    • B. Policy Framework and Export Performance During the 1990s

    • C. How Diversified Have Peru’s Exports Become Since the 1960s?

    • D. Can Other Policies Be Effectively Used for Promoting Export Growth and Export Diversification?

    • E. Concluding Remarks

  • Text Tables

  • II. 1. Growth Rate of Exports, 1991-2000

  • 2. Selected Latin American Countries; Changes in Manufacturing Sector Competitiveness

  • 3. Composition of Exports, 1962-1999

  • 4. Exports Ranked by Traditionality Index, 1962-99

  • 5. Additional Indicators of Export Diversification, 1962-1999

  • 6. Composition of Exports, 1990-2000

  • Figures

  • II. 1. Exports, 1962-2000

  • 2. Annual Export Growth, 1991-2000

  • 3. Export Price Index, 1990-2000

  • 4. Exports of Textile Sector Products, 1962-98

  • III. The Fiscal Burden of the Peruvian Pension System

    • A. Introduction

    • B. Background

    • C. Demographic Transition

    • D. Public Versus Private System Pensions

    • E. Estimating the Fiscal Costs of the Public Pension System

    • F. Conclusions and Recommendations

  • Text Tables

  • III. 1. Private Pension System Estimated Replacement Rates for an 8 Percent Contribution

  • 2. Estimated Fiscal Costs of the ONP Baseline Simulation, 1999-2050

  • Figures

  • III. 1. Estimated Dependency Ratios 2000-50

  • 2. ONP Balance 2000-50

  • IV. The Design and Challenge of Monetary Policy in Peru

    • A. The Design of Monetary Policy

    • B. Monetary Policy Implementation

    • C. Effectiveness of Monetary Policy

    • D. Inflation Targeting as a Framework for Monetary Policy

  • Text Tables

  • IV. 1. Selected Financial Indicators, 1990-2000

  • 2. Unpublished Average Annual Base Money Growth Target Versus Outturn

  • 3. Publicly Available End-Period Annual Base Money Growth Target Versus Outturn

  • 4. Interbank Rate Volatility, 1997-2000

  • 5. Percent of Outstanding Bank Credits to Sectors by Types of Currency

  • Figures

  • IV. 1. Target Versus Measured CPI, 1994-2000

  • 2. Average Bank Reserves at BCRP in Soles (October 1997-June 2000)

  • 3. Average Interbank Rate in Soles (October 1997-June 2000)

  • 4. Interbank Overnight Rates, 1997-2000

  • Annex

  • I. Summary of the Tax System as of December 2000

  • Statistical Appendix Tables

  • National Accounts and Production

  • 1. Aggregate Supply and Demand

  • 2. Saving, Investment and External and Fiscal Balances

  • 3. National Accounts at Current Prices

  • 4. National Accounts at Constant Prices

  • 5. Sectoral Origin of Gross Domestic Product at Constant (1994) Prices

  • 6. Growth in Agricultural and Livestock Production

  • 7. Agricultural Production

  • 8. Production, Consumption, and Exports of the Fishing Industry

  • 9. Mineral Production by Major Products

  • 10. Sources and Uses of Petroleum and Petroleum Derivatives

  • 11. Manufacturing Production

  • 12. Population and Labor Force Statistics

  • 13. Strike Activity by Sector

  • 14. Private Sector Wages and Salaries in the Lima Metropolitan Area

  • 15. Prices of Public Goods and Services

  • 16. Consumer Prices in the Lima Metropolitan Area

  • 17. Social and Economic Welfare Indicators

  • Public Sector

  • 18. Fiscal Operations of the Combined Public Sector (in millions of new soles)

  • 19. Fiscal Operations of the Combined Public Sector (in percent of GDP)

  • 20. Fiscal Operations of the Central Government (in millions of new soles)

  • 21. Fiscal Operations of the Central Government (in percent of GDP)

  • 22. Central Government Revenue (in millions of new soles)

  • 23. Central Government Revenue (in percent of GDP)

  • 24. Central Government Expenditure (in millions of new soles)

  • 25. Central Government Expenditure (in percent of GDP)

  • 26. Operations of the Rest of the General Government (in millions of new soles)

  • 27. Operations of the Rest of the General Government (in percent of GDP)

  • 28. Operations of the Public Enterprises (in millions of new soles)

  • 29. Operations of the Public Enterprises (in percent of GDP)

  • 30. Functional Classification of Central Government Expenditure

  • Banking System

  • 31. Monetary Survey

  • 32. Money and Quasi-Money

  • 33. Selected Interest Rates on Domestic Currency Operations

  • 34. Selected Interest Rates on Foreign Currency Operations

  • 35. Summary Accounts of the Banking System

  • 36. Banking System Credit by Type of Bank and Currency Denomination

  • 37. Net International Reserves of the Central Reserve Bank

  • External Sector

  • 38. Balance of Payments

  • 39. Trade Volume and Terms of Trade

  • 40. Exports f.o.b. by Group of Products

  • 41. Traditional Exports f.o.b. by Commodity

  • 42. Imports f.o.b. by Economic Category

  • 43. Direction of Trade

  • 44. Services and Transfers

  • 45. Investment Income

  • 46. Scheduled Debt Service Payments on Medium- and Long-Term Debt

  • 47. Nonfinancial Public Sector External Borrowing

  • 48. Medium- and Long-Term External Debt of the Nonfinancial Public Sector

  • 49. Private Sector Long-Term Capital Flows

  • 50. Private Sector External Debt Stock

  • 51. Import Restrictions and Tariffs

Peru: Selected Issues
Author: International Monetary Fund