Peru faces high levels of poverty and inequality. In 2004, just over half of Peru’s population was poor and about 20 percent were extremely poor. Although regional comparisons are difficult due to the use of different poverty lines across countries, Peru’s poverty levels are below those of  Ecuador and Colombia, but above those of Argentina and Brazil based on a US$2/day poverty line. Poverty levels are significantly higher in rural areas, while urban areas—most notably metropolitan Lima—are the most unequal.

Poverty has been slow to respond to the country’s impressive economic growth in recent years. After improvements during the 1990s, poverty increased in the wake of the 1998 economic crisis, while extreme poverty remained stable. The economic recovery since 2001 has had a strong positive impact in reducing extreme poverty, but progress on poverty rates has been limited to rural areas.

A main focus of this report is to explain why growth has not translated into more rapid poverty reduction. The first reason is simply that poverty reduction takes time, particularly considering the pattern of economic volatility in Peru over the past several decades, which makes business people reluctant to invest in job-creating endeavors. As well, in the wake of the high investment years in the 1990s followed by the 1998 crisis, many businesses have excess production capacity that is only now, after five years of growth, being worked out. Thus, the good macroeconomic management of recent years is beginning to show fruit in terms of poverty reduction and job creation, and this will likely accelerate if the government keeps in place sound macroeconomic policies.