Peru: Selected Issues Paper

International Monetary Fund

doi:10.5089/9781463940423.002.A003

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Peru: Selected Issues Paper

Author: International Monetary Fund

Publication Date:: 01 Feb 2012

eISBN:: 9781463940423

Language:: English

Keywords:: ISCR; CR; Peru; commodity price; GDP; central bank; expenditure envelope; poverty ratio; poverty program; poverty rate; extreme poverty; Income inequality; Personal income; Poverty reduction; household income

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Peru’s fiscal framework embedded in the Fiscal Responsibility and Transparency Law (FRTL) has proved to be effective in reducing debt. The FRTL embodies some countercyclical elements in response to output or commodity price shocks. The combination of a provision for a moderate deficit on the downside, and a current expenditure cap on the upside, allows for some countercyclical policy. It still has pockets of procyclicality in the face of large shocks to output or commodity prices.

Abstract

III. Advances and Challenges in Social Policies¹

A. Introduction

1. Peru’s solid economic performance in the past ten years lead to significant poverty alleviation and improvements in income equality, but some challenges remain. Rapid income growth and employment creation facilitated strong social outcomes in the last decade. However, despite the substantial progress, there are still important gaps to be closed, particularity in further reducing intra-country social disparities, enhancing the efficiency of social spending through better targeted social programs, and raising more resources to increase social expenditure.

2. This chapter reviews progress as measured by different social indicators in Peru, compare them with its regional’s peer and examines the policy challenges in achieving more social inclusive growth. Section B reviews the performance of Peru’s key social indicators, in comparisons with other emerging market economies in Latin America and other peer countries. Section C reviews Peru’s key challenges in further reducing intra-country or regional disparities in poverty level and meeting basic needs. A snapshot of public social expenditure in Peru is presented in Section D. Section E summarizes the authorities’ recently announced priorities and action plans to achieve key social target by 2016 and highlights the efforts needed to increase the size and efficiency of social expenditure inputs. Section F provides some conclusions.

B. Peru’s Performance in Social Indicators—Some Comparisons²

3. Growth and macro-stability in the past ten years have contributed to a significant reduction in poverty. Peru’s economic growth has been one of the strongest among the LA6 countries in the region, with PPP GDP per capita expanding on average 6½ percent 2001–10. Against this background, poverty in Peru, as measured by the international benchmark of the share of population at $2 (PPP) per day, was reduced by half during 2001–09. This largely reversed a large increase in poverty during 1990–2000—as poverty reduction was slow in response to economic expansion in the 1990s and poverty increased in the wake of the Asian crisis which affected Peru. Among the LA6 economies, Peru’s poverty levels are below that Colombia, but above those of other LA6 based on a $2 (PPP) per day poverty line.

4. Peru has also achieved important progress in reducing income inequalities. Income inequality declined steadily as per capita income rose with the Gini coefficient declining to 46 percent in 2010, representing an improvement of 12 percentage points for the period 2001–10. Peru ranks the second lowest among LA6 in the measure of income inequality by the Gini coefficient, although Latin American countries are among the more unequal in the world.³

5. Strong improvements are also observed in the performance of a large number of key social indicators. Peru has made steady progress in human development. It ranked 80^th out of a total 187 countries (43^th percentile) in the Human Development Index (HDI) in 2011, classifying it within the second highest category. In terms of relative ranking, the latest score represents a slight improvement compared to its relative performance in 2005 (46^th percentile) but on par with that in 2000 (43^th percentile). Peru’s performance of other social indicators, especially health and education, are also comparable to LA6 countries and other countries in the upper income category (Figure 1). For instance, Peru achieved impressive progress in reducing infant mortality, by about half to 15 per thousand live births in 2010 from 2000. However, Peru has still rooms for improvements compared to other LA6 countries in terms of access to improved rural water sources (only available to 61 percent of rural population), and adult literacy rates (Figure 1). Secondary and tertiary education enrollments are not particularly low when compared with other countries but progress in the last decade has been slow.

C. Intra-Country Disparities

6. Peru has much room for improving gender inequalities. Peru ranked 72 out of a total of 146 countries (49th percentile) in 2011 in the human development gender inequality index—a composite measure reflecting inequality in achievements between women and men in reproductive health, empowerment and the labor market. In particular, Peru’s maternal mortality rate at 98 per 100,000 live births is the highest among LA6. Also, only 83 percent of child-birth is attended by skilled health personnel in Peru, the lowest among LA6 (Figure 2).⁴

7. Reducing wide spread rural poverty remains a major policy challenge. Rural population accounts for a third of Peru’s total population but 60.2 percent of the poor are concentrated in the rural areas in 2010.⁵ There are 5.6 million poor in the rural areas, of which 2.5 million are extremely poor.⁶ While one in ten of the national population fell below the extreme poverty line in 2010, close to a quarter of Peruvians in rural areas were still living in extreme poverty compared to less than 3 percent of the population in urban areas. By geographical distribution, 55.1 percent of the poor are concentrated in the highlands (Sierra), followed by coastal areas 29.2 percent and forest (Selva) 15.7 percent in 2010. In 2010, 14 out of the 24 regions/departments recorded poverty rates above the national average of 31.3 percent, of which 6 regions/departments have poverty rates well above 50 percent.

Peru: Distribution of Poor and Extreme Poor Population

(In percent)

Source: INEI Evolucion de la Pobreza al 2010.

Peru: Distribution of Poor and Extreme Poor Population

(In percent)

		Poverty		Extreme poverty
		2005	2010	2005	2010
Area of residence		100.0	100.0	100.0	100.0
	Urban	49.1	39.8	23.6	16.9
	Rural	50.9	60.2	76.4	83.1
Geographical region		100.0	100.0	100.0	100.0
	Costa	36.1	29.2	11.3	10.4
	Sierra	47.5	55.1	69.2	72.4
	Selva	16.4	15.7	19.5	17.2

Source: INEI Evolucion de la Pobreza al 2010.

Peru: Distribution of Poor and Extreme Poor Population

(In percent)

		Poverty		Extreme poverty
		2005	2010	2005	2010
Area of residence		100.0	100.0	100.0	100.0
	Urban	49.1	39.8	23.6	16.9
	Rural	50.9	60.2	76.4	83.1
Geographical region		100.0	100.0	100.0	100.0
	Costa	36.1	29.2	11.3	10.4
	Sierra	47.5	55.1	69.2	72.4
	Selva	16.4	15.7	19.5	17.2

Source: INEI Evolucion de la Pobreza al 2010.

8. While still high, there has been a significant decline in extreme poverty in rural areas over the past ten years. The national population living below extreme poverty dropped by 15 percentage points during 2001–10 to about 10 percent. Extreme poverty in rural areas has declined more rapidly, by 28 percentage points from 51 percent in 2001 to 23 percents in 2010. On the other hand, the national population living below poverty line declined by close to 24 percentage points over the past 10 years from about one-half to about one-third in 2010. Similar pace of reduction is seen in the share of rural population living below the poverty line, declining from 78 percent in 2001 to 54 percent of the rural population in 2010.

9. Poverty is particularly high among the indigenous population, the self-employed and primary sector workers and population with lower education attainment. The incidence of poverty is found to be higher at 35.9 percent in households which their heads are native (including Quechua, Aymara and Amazonian origin) in 2010 even though this ratio has declined from 55.4 percent in 2005 (INEI (2010)). For 2010, 43.4 percent of the poor (45.9 percent of the extreme poor) are self-employed compared to a lower 34.4 percent for the non-poor. In addition, 60.4 percent of the economically active poor (80.1 percent of the extreme poor) are working in the agriculture, fishery and mining sector whereas only 21.9 percent of the non-poor are employed in this sector. Low education attainment contributes directly to poverty incidence. An adult of 25 years and above, if poor has 6.7 years of formal education, 5.4 years if he or she is extreme poor and 10.1 years if non-poor (INEI (2010)).

10. Employment growth has had a strong positive impact in reducing poverty. Household income has increases through higher employment and higher wages. For the period 2001–09, employed economically active population grew by 24.4 percentage points, with a higher growth of 30.3 percentage points in Metropolitan Lima (INEI (2010)). Real per capita income of population in third, fourth and fifth deciles increased by more than 50 percent between 2005 and 2010. Other studies, such as ECLAC (2010) have found that poverty reduction in Peru during 2002-09 was mainly due the growth effect (78 percent) whereas the distribution effect (22 percent) has a smaller impact.

11. The macroeconomic management success of recent years has helped poverty reduction and job creation, and this will likely continue with sound macroeconomic policies. A large number of studies have examined the reasons why economic growth has not translated into more rapid poverty reduction.⁷ Beside geographical and endowment differences, growth has been focused on natural resource extraction industries—which are highly capital-intensive and small in job creation, and in the rural agricultural and urban informal employment sectors, which are characterized by relatively lower productivity and low wage growth. Therefore, strengthening the linkage between growth and employment creation would require microeconomic reforms to achieve higher productivity levels and a more diversified economy including more labor-intensive sectors In addition, increasing the efficiency of public investments would reduce the regional gaps in physical and human capitals and bring about greater redistribution over the medium term.

D. Public Spending Comparison

12. Peru has lower public expenditures on education and health than other LA6 countries. Comparable data from the World Bank Development Indicators show that Peru’s total public expenditures on education and health are at slightly above 5 percent of GDP, the lowest among the LA6, in part due to the smaller size of its government revenue only at 20 percent of GDP. This suggests that greater effort at government revenue mobilization would help to provide the additional resources to increase social spending beyond current level.

13. Fiscal policy has a limited effect in lowering inequality in Peru. OECD (2012) shows that cash transfer has been effective in reducing income inequalities in non-LA OECD economies. However, in the case of Peru and other LA6 countries, transfer appears to have only a limited impact on lowering income inequality.

14. Targeted social programs have attempted to alleviate poverty and promote development of low-income population. In Peru, universal coverage of health and education accounts for about 40 percent of social spending, followed by non-target social programs representing 35 percent of the total. Targeted social programs for the purpose of mitigating extreme poverty showed the largest increase among universal education and health and non-targeted social programs by an average of 14.5 percent during 2005–10, accounting for 1.7 percent of GDP or about 16 percent of total social expenditure in 2010. There are a total of 22 social programs conducted by state agencies, including major programs such as Juntos, PIN (Comprehensive Nutrition Program), SIS (Seguro Intergral de Salud), the Glass of Milk and PRONIE (National Education Infrastructure). Results focused budgeting has been implemented since the 2007 Budget Act.

Peru: Public Sector Social Expenditure

Source: Ministry of Economy and Finance.

^{^1/}Net of spending on education and health already included in the extreme poverty programs. Includes social expenditure of the 3 levels of government: national, regional and local.

^{^2/}Includes basically other social expenditure of the local and regional government.

Peru: Public Sector Social Expenditure

					Share of GDP		Average increase	Share of general government expenditure		Share in total
			2005	2010	2005	2010	2005-10	2005	2010	2005	2010
			(In mil. of Nuevos Sole		(In percent)
Total social expenditure and pensions			28,607	46,367	10.9	10.7	10.1	57.8	52.3	100.0	100.0
	Universal coverage (Education and Health) ^1/		10,587	18,979	4.0	4.4	12.4	21.4	21.4	37.0	40.9
		Education	7,527	11,292	2.9	2.6	8.4	15.2	12.7	26.3	24.4
		Health	3,060	7,687	1.2	1.8	20.2	6.2	8.7	10.7	16.6
	Targeted programs (Extreme Poverty)		3,711	7,300	1.4	1.7	14.5	7.5	8.2	13.0	15.7
	Non-Targeted Social Programs		12,951	16,215	4.9	3.7	4.6	26.2	18.3	45.3	35.0
		ESSALUD	3,626	5,609	1.4	1.3	9.1	7.3	6.3	12.7	12.1
		Pensions	9,324	10,605	3.6	2.4	2.6	18.8	12.0	32.6	22.9
		Housing Development Program (FONAVI)	1	0	0.0	0.0	…	0.0	0.0	0.0	0.0
	Other Social Expenditure ^2/		1,358	3,873	0.5	0.9	23.3	2.7	4.4	4.7	8.4

Source: Ministry of Economy and Finance.

^{^1/}Net of spending on education and health already included in the extreme poverty programs. Includes social expenditure of the 3 levels of government: national, regional and local.

^{^2/}Includes basically other social expenditure of the local and regional government.

Peru: Public Sector Social Expenditure

					Share of GDP		Average increase	Share of general government expenditure		Share in total
			2005	2010	2005	2010	2005-10	2005	2010	2005	2010
			(In mil. of Nuevos Sole		(In percent)
Total social expenditure and pensions			28,607	46,367	10.9	10.7	10.1	57.8	52.3	100.0	100.0
	Universal coverage (Education and Health) ^1/		10,587	18,979	4.0	4.4	12.4	21.4	21.4	37.0	40.9
		Education	7,527	11,292	2.9	2.6	8.4	15.2	12.7	26.3	24.4
		Health	3,060	7,687	1.2	1.8	20.2	6.2	8.7	10.7	16.6
	Targeted programs (Extreme Poverty)		3,711	7,300	1.4	1.7	14.5	7.5	8.2	13.0	15.7
	Non-Targeted Social Programs		12,951	16,215	4.9	3.7	4.6	26.2	18.3	45.3	35.0
		ESSALUD	3,626	5,609	1.4	1.3	9.1	7.3	6.3	12.7	12.1
		Pensions	9,324	10,605	3.6	2.4	2.6	18.8	12.0	32.6	22.9
		Housing Development Program (FONAVI)	1	0	0.0	0.0	…	0.0	0.0	0.0	0.0
	Other Social Expenditure ^2/		1,358	3,873	0.5	0.9	23.3	2.7	4.4	4.7	8.4

Source: Ministry of Economy and Finance.

^{^1/}Net of spending on education and health already included in the extreme poverty programs. Includes social expenditure of the 3 levels of government: national, regional and local.

^{^2/}Includes basically other social expenditure of the local and regional government.

15. The authorities have highlighted the need to further improve the quality and targeting of social expenditure. Social expenditure effectiveness is hindered by the presence of imperfect targeting—leakage (benefiting non-target population) surpasses 40 percent in four out of five major social programs and undercoverage (not benefiting target population) ranges from 46 percent in the program with the smallest rates of exclusion to 97 percent in the worst case. The cost of leakage in these five programs is estimated by the government to represent more than one-third of their total budget.⁸ In this context, better utilization of the household targeting system—SISFOH (Sistema de Focalizacion de Hogares) could help to achieve greater delivery efficiency. For instance, the ongoing application of the National Identity Document (DNI) to the age group made up of minors has enabled a total of 11 million children—the recipients of the bulk of social programs—to be identified.⁹

E. The Government’s Key Priorities and Action Plan

16. The authorities are committed to deliver more social inclusive growth. The draft 2012 Budget allocates additional resources for strengthening human capital and social inclusion (see Box below). The government has also released a set of key quantitative social targets which include reducing the overall poverty ratio (national definition) to 20 percent, and reducing by a half extreme poverty to 5 percent and rural poverty to 27 percent, respectively, by 2016. In addition, a new Ministry of Social Development and Inclusion has been created with the objective to better coordinate social programs currently managed by the Ministry of Women’s Affairs, the Ministry of Economy and Finance, and the cabinet.

Peru: Social Indicators-Outcome and Goals

(In percent)

Sources: Macroconsult; and Fund staff estimates.

^{^1/}Completion.

^{^2/}Coverge of homes.

Peru: Social Indicators-Outcome and Goals

(In percent)

		2010	Goal 2016
Poverty
	Poverty rate	31	20
	Extreme poverty	10	5
	Rural poverty	54	27
Health
	Chronic infant malnutrition	18	5
	Neonatal mortality (per thousand)	9	5
Education
	Coverage of intital education	70	95
	Rural elementary education ^1/	8	40
Social services ^2/
	Rural electrification	60	85
	Rural water supply	39	57
	Rural sanitation	11	45

Sources: Macroconsult; and Fund staff estimates.

^{^1/}Completion.

^{^2/}Coverge of homes.

Peru: Social Indicators-Outcome and Goals

(In percent)

		2010	Goal 2016
Poverty
	Poverty rate	31	20
	Extreme poverty	10	5
	Rural poverty	54	27
Health
	Chronic infant malnutrition	18	5
	Neonatal mortality (per thousand)	9	5
Education
	Coverage of intital education	70	95
	Rural elementary education ^1/	8	40
Social services ^2/
	Rural electrification	60	85
	Rural water supply	39	57
	Rural sanitation	11	45

Sources: Macroconsult; and Fund staff estimates.

^{^1/}Completion.

^{^2/}Coverge of homes.

17. Priorities include greater focus on the poorest districts and expanding the coverage of successful social programs. The authorities are prioritizing their programs on the 800 poorest districts through the household targeting system. Other key measures include expanding successful social programs, such as the Juntos cash transfer program to additional districts, and increasing the coverage of targeted programs for elderly over the age of 65 in extreme poverty and who have not received state benefits through expanding the coverage of Pension 65. The program is targeted to expand from the current coverage of S/. 47 million to 70 thousands persons, to S/. 241 million to 170 thousands persons in 2012, and S/. 400 million to 267 thousands persons in 2013.

• Key Policy Priorities on Growth with Social Inclusion

Source: Presentation by the Minister of Economy and Finance to the Congress in August 2011

18. Further enhancing social spending programs and raising more resources to increase social expenditure are necessary. While the current expenditure envelope allows for initial increases in social spending, additional fiscal space need to be created for higher spending in outer years through increasing revenue mobilization efforts. In this context, the new mineral taxation regime, consisting of profit margin-based royalties, a new special mining tax as revenue for the central government; and a special voluntary levy on profits targeting companies holding stability contracts, are expected to generate an addition $1 billion (about 0.5 percent of GDP) each year at current metals prices. This will help fund infrastructure and social expenditure. In addition, increasing the efficiency of public investments would reduce the regional gaps in physical and human capitals and bring about greater redistribution over the medium term.

F. Conclusions

19. Peru has achieved steady progress in reducing poverty and income inequality in the past 10 years but several challenges remain. However, while Peru compares well with its regional peers in key social indicators despite low levels of social spending, it has much room for improvement in specific areas such as gender inequality. Importantly, large regional and rural-urban disparities persist and further reduction of rural poverty remains a key policy challenge. While economic growth and macro stability remain the prerequisites for poverty reduction, further enhancing social spending efficiency and raising more resources to increase social expenditure are needed. In addition, increasing the efficiency of public investments would reduce the regional gaps in physical and human capitals and bring about greater redistribution over the medium term.

References

ECLAC (Economic Commission for Latin America and the Caribbean), 2010, Social Panorama of Latin America 2010 (Santiago: ECLAC).
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INEI (National Institute of Statistics and Informatics), 2010, Perú: Evolución de los Indicadores de Empleo e Ingresos por Departamentos, 2001–2009 (Lima: INEI).
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INEI (National Institute of Statistics and Informatics), 2011, Evolución de la Pobreza al 2010 (Lima: INEI).
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Llanos, D. and Rosas, N., 2010, “Cry Over Spilled Milk: Improving Targeting Outcomes in Social Programs in Peru” (Cambridge: Harvard Kennedy School of Government).
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MEF (Peru Ministry of Economic and Finance), 2011, “Macro Macroeconómico Multiannual, 2012–14,” May 2011 (Lima: MEF).
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OECD (Organization for Economic Co-operation and Development), 2011, Latin American Economic Outlook 2012 (Paris: OECD).
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Prepared by Yu Ching Wong (WHD).

For cross-country comparison of Peru with other LA6, social indicators data from the World Bank and UNDP are used.

Peru ranks 27^th in income inequality out of 129 countries with data on the Gini coefficient. In fact, for the top 55 countries with the highest income inequality, 22 are countries from the Latin America and Caribbean region (UNDP (2011).

In fact, Peru ranked the sixth lowest (Haiti 26 percent, Honduras 67 percent, Bolivia 71 percent, Nicaragua 74 percent, and Paraguay 82 percent) among countries in Latin America and the Caribbean.

With increasing urbanization, 65.2 percent of the population resides in the urban areas and only 34.8 percent in the rural areas (INEI (2010)).

By national definition in Peru, households are classified as poor if their total expenditures are lower than the cost of a basic food basket plus an estimate of nonfood expenditures and as extremely poor if their total expenditures are lower than the cost of a basic food basket. In 2010, the threshold is defined at 263.8 nuevos soles per capita per month for poverty and 148.6 nuevos soles per capita per month for extreme poverty (INEI 2010).

For example, World Bank (2005) and (2011).

Llanos and Rosas (2010), p. 4.

MEF (2011).

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