The Biggest Challenges Facing the Peruvian Economy

On Wednesday, March 22nd, we had the privilege of meeting with Fernando Villarán, a professor and dean at the Antonio Ruiz de Montoya Jesuit University and former Minister of Labor of Peru. Mr. Villarán enlightened us regarding the economy of Peru. He began the presentation with a discussion of Peru’s macroeconomic status in both the Latin American and global context, explaining that the country has made great strides on increasing GDP growth, reducing poverty and income inequality, and opening up to the global market. The second half of his presentation, however, was a rebuttal of this notion as he described the biggest challenges facing the Peruvian economy. Some of the major challenges he discussed were Peru’s regional inequality, poor education system, low productivity in many sectors, and what is perhaps the most significant issue: high economic informality.

While some regions of Peru have thrived, others remain very poor, which has led to stark regional inequalities. The poorest departments of the country are often the ones that are the most rural. In the north these include Amazonias and Cajamarca. In the south, the poorest departments are Huancavelica, Ayacucho and Apurimac. The wealthier regions of the country are Ica, Arequipa, Moquegua and Madre de Dios, which we visited. The economic activity in many of these regions is driven by large informal sectors, namely the highly lucrative activity of illegal gold mining, as we witnessed in driving through a gold mining town outside of Puerto Maldonado. Generally, the regions in which mining is the dominant economic activity are the ones that are the least poor. The lack of a diversified economy and the high profitability of the informal sector, however, have created vast regional income inequalities in Peru. Such disparities lead to economic instability and can create market distortions that favor certain sectors of industries over others.

Another challenge facing Peru is its poor education system, which is holding back economic growth and causing the country to be underdeveloped. Mr. Villarán explained how Peru scored last on the international PISA test, which measures education quality in countries throughout the world. Public education in Peru is poor because the government does not adequately invest in its school system. Peru invests only around 3 percent in education compared to the 4 percent average for the rest of Latin America.[1] Investing in education leads to improvements in human capital, which can boost labor productivity and promote growth. Another problem concerning the education system is inadequate infrastructure. Only 51.2 percent of educational institutions are in good condition, while 13.3 are in poor condition and 35.5 percent are in decent condition.[2] The lack of quality educational infrastructure creates negative consequences for students who often need an engaging environment to learn and develop. Improving Peru’s education system through greater investments in infrastructure would go a long way to improve the country’s economic outlook and reduce incentives for informal economic activity.

Low productivity is another issue facing the Peruvian economy. Some of Peru’s largest and most important economic sectors are its least productive. Mr. Villarán specifically mentioned agriculture and mining in this category, stating that both sectors have unnecessarily large employment for the amount of GDP that they produce. Low productivity per worker partly stems from the aforementioned poor education system that does not properly equip workers with the skills to thrive in the marketplace. It is also a result of poor and inefficient technologies that slow down production. These issues increase costs and dig into profits. Improving productivity in these vital sectors and throughout the economy can be done through properly training workers, providing them with efficient technologies, and increasing access to credit for business ventures. There is a lot of untapped potential in the Peruvian economy that can be realized if the government is able to improve on any one of these issues.

The biggest challenge facing the Peruvian economy is its vast informal sector. Mr. Villarán indicated that recent estimates show roughly 60 percent of Peru’s GDP is comprised of informal economic activity. What is even more concerning is that 75 percent of the workforce participates in the informal sector, which not only means that they do not receive any social benefits but also that the government misses out on potential tax revenue. While illegal gold mining is often the most talked about of Peru’s informal economy because of its human rights aspects, informal agriculture and fishing contribute a larger share to overall informality in the country. Informality is a persistent problem in Peru because it is by far the most lucrative economic opportunity for poor citizens. Moreover, compared to the scope of the problem, the Peruvian government has not done nearly enough to tackle informality. Illegal gold mining especially, is an open secret that the government hasn’t done enough to address. While the government has raised awareness about the issue and destroyed many gold mining towns to reduce the scope of the activity, it still remains the most attractive economic activity in some areas for poor, uneducated Peruvians. The long-term key to reducing informality in Peru is to improve quality of and access to education and to train workers in order to make participation in the formal economy more lucrative. Improving education would also improve competitiveness and boost productivity while alleviating many of the chronic economic problems that have held back economic growth and development in the country.

Photos are of La Pampa, an illegal gold mining town in the Madre de Dios department

For further readings about challenges facing Peru’s economy please see:

http://www.limaeasy.com/peru-info/peruvian-economy

http://www.humanosphere.org/world-politics/2016/06/poverty-and-other-challenges-ahead-for-perus-new-president-kuczynski/

[1] Marino, Eleni. “The State of Education in Peru.” The Borgen Project. March 20, 2017.

[2] Fernandez, Alfredo. “Challenges of the public education system in Peru.” Social Policy UPF. May 14, 2015.

– Mirish Shah

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s