Executive summary

This is the second volume of the Multi-dimensional Country Review (MDCR) of Peru. It builds on the results of the first volume, which identified the main constraints to achieving well-being and sustainable and inclusive development, and provides recommendations in three key areas to address those constraints: promoting economic diversification and productivity, improving transport connectivity, and tackling informal employment. A forthcoming volume will propose 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 high-income economy. Transitioning from a middle-income to a high-income country and overcoming the so-called “middle-income trap” will require economic diversification away from natural resource dependency and higher levels of productivity across sectors. 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 connectivity, education and skills training.

Economic diversification, better transport connectivity and tackling informality are thus crucial in Peru’s inclusive growth agenda.

Promoting economic diversification and productivity

Peru’s labour productivity is only about one-third that of OECD countries. Significant gains are then required for Peru to further boost growth and reach high-income status. Even if Peru were able to sustain the strong macroeconomic performance of recent years – 4.6% average per capita GDP growth rate in the past ten years – it would take Peru until 2029 to become a high-income country. In this scenario, the country would have been a middle-income country for more than 80 years. By comparison, OECD countries cruised the middle-income range in around three decades on average.

To design and implement a development agenda for diversification and productivity for all Peruvians, policy actions in several domains should be implemented. These include: market regulation and openness; development of new competitive industries; innovation strategies; taxation and the use of commodity-based resources; enhancement of the strategic institutional framework. First, more efforts are needed to further regional integration with other countries in the region and also to tackle regulatory barriers, such as constraints to entrepreneurship. Second, some pre-conditions, such as specific skills, efficient logistics services, and effective co-operation between private and public sectors, academia and international actors, must be in place to facilitate the development of new competitive sectors. Experiences in agro-industry, tourism, metal-mechanics and forestry are useful for that purpose. Third, increased public and private investment in research and development and more effective interactions with the private sector are needed to promote innovation. Fourth, the allocation of commodity-based fiscal transfers should target all regions in Peru according to their socioeconomic challenges. Fourth, to finance broad-based policies affecting productivity, Peru should move towards comprehensive tax reform by increasing the share of direct taxes (specifically the personal income tax), assessing the impact of some tax benefits and tackling tax evasion and erosion. Finally, Peru needs to adopt more strategic and implementation-oriented public planning for development at both national and sub-national levels. This requires a detailed action plan and highly co-ordinated public administration to improve Peru’s institutional framework and fiscal legitimacy.

Improving transport connectivity

Improved connectivity is particularly relevant for Peru, where the ratio of transport costs to 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 Peruvians. 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. First, Peru should design a national transport plan that has clear transport policy priorities. Second, the creation of a “logistics observatory” to better assess logistics would help monitor and reduce transport costs. Third, a national urban transport policy should be developed and a lead agency should be identified for its effective implementation. Finally, Peru needs to improve multi-modality transport policies at local levels, particularly in Lima-Callao, to unlock the benefits of walking, cycling and public transport. The limitations created by the lack of coherent policies and investment decisions across administrative boundaries in Lima-Callao highlight the value of creating a single mobility authority for the metropolitan area.

Tackling informal employment

Informal employment remains too high, involving more than 70% of total workers, despite a decline in recent years. Informality and socioeconomic vulnerability go hand-in-hand in Peru: close to 80% of informal workers belong to the so-called vulnerable class and work in low-productivity 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. First, the pervasive impact of informality on working conditions should be mitigated, without reinforcing the incentives to remain informal or, even worse, creating the incentives to move towards informality. 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-contributing pensions to gradually move towards universal coverage. Second, strengthening inspection and supervision systems, reducing costs of formal hiring, and communicating more effectively about the benefits of formalisation should contribute to job formalisation. Third, to promote the formalisation of firms, Peru should reduce incentives to remain small by simplifying taxation regimes and reducing some administrative and fixed costs of being formal. Finally, to promote more 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. Increasing skills levels and closing skills gaps are crucial in that context for Peru.