Peru Country Brief

DEVELOPMENT PROGRESS

For the past five years, Peru has enjoyed economic stability, with an average annual growth rate of 5%, inflation of 1,5% in 2005, a stable exchange rate, and evident dynamic activity in the production sector, as well as the raw materials, and industrial sectors.  The country is now in a position to build on the impact achieved with economic growth and extend it to improving employment and narrowing the social gap. 

Peru has a singular opportunity to make a qualitative leap, to leave the years of volatility behind, and set out along a path of shared economic growth, which will bring the social and economic benefits that other countries have obtained in recent decades – countries such as Spain, Korea, Costa Rica, and Chile.  Peru – The opportunity of a different country,  Social Indicators , Poverty study 2006- Opportunities for all

Peru: Social Indicators  

• Infant mortality dropped from 33 per 1,000 live births in 2000 to 23 per 1.000 live births in 2005.
• Life expectancy rose from 69.2 years in 2000 to 70.7 years in 2005.
• High school registration rose from 86% in 2000 to 91.7% in 2005.

Peru: Economic Indicators

• Growth > 5% for 5 consecutive years;
• Diversification and growth of exports (35% growth from 2004 to 2005);
• Reduction of the country risk (21,2% reduction of basis points from 2004 to 2005);
• Peru ranked among the top 10 World Reformers in “Doing Business 2007”;
• Good management of the public debt (debt stood at 38.2% of GDP in December 2005);
• Total debt service (% of exports, goods and services, and revenues): 25.9% in 2000 and 26% in 2005.
• High liquidity in the markets (20.2% increase from 2004 to 2005);
• Improved tax collection (14.3% increase from 2004 to 2005); and
• Fiscal surplus for 2006 (0,2% – 0,4%).

CHALLENGES AHEAD

Like other Latin American countries, Peru faces the challenge of ensuring that the progress made benefits the whole population.  The country is therefore committed to sustaining its economic growth and accelerating social investment as a means of reducing poverty and inequality.  In 2006, the poverty figure for the country was 44,5%, a 4,2% drop from 2005. The poorest departments in Peru are: Huancavelica (88,7%), Ayacucho (78,4%), Puno (76,3), Apurímac (74,8), Huanuco (74,6), Pasco (71,2), Loreto (66,3), and Cajamarca (63,8%).  Poverty Measurement 2004, 2005, 2006 -INEI, 2007 s(554KB, pdf.)

Economic growth is a necessary, but not sufficient, condition for the success of Peru: not only must it be speeded up, but it is also important that it be spread to wider segments of the population.  As many as one out of two Peruvians lacks the human capital and initial support systems to make a living.  In comparison with her wealthier fellow countrymen, a poor Peruvian girl is more likely to die before she is five years old, twice as likely not to attend primary school, and a third less likely to have access to clean drinking water throughout her lifetime.

At present, the government has some 30 anti-poverty social assistance programs that offer three types of transfer to the poor: basic foodstuffs, temporary work, and community infrastructure.  The food programs have wide coverage, are well focused, and benefit more than 9 million people, that is, one out of every three Peruvians.  However, they have a total budget of approximately 0,4 per cent of the Gross Domestic Product (GDP), and the average benefit per person is about US$2 a month, and an insignificant percentage of the extreme poverty threshold of US$1 a day.

The urban and rural temporary work programs benefit unemployed heads of families for a value of less than 0,1 % of GDP per year.  FONCODES [Peru’s Social Development and Compensation Fund] finances small infrastructure projects in response to demand in rural areas and the communities themselves provide the labor for these projects; however, these funds represent less than 0,15% of GDP per year.

As for environmental issues, present and past problems associated, in particular, with agriculture, mining and fisheries, have been taking a high toll on human health and the country’s biodiversity.   Wealth and Sustainability: Social and environmental dimensions of mining in Peru , “Environmental Analysis of Peru: Challenges for sustainable development”

According to the World Bank’s analytical study, “A new social contract for Peru",  Peru has to extract its education and health systems from the low-level equilibrium; it needs to spend more on social assistance; it needs to extend the benefits of its courageous pensions reform to all the elderly, and it has to find a way to cope with the “youth boom” now occupying a more significant place in its demographic pyramid. Chapter 26, Basic Education – The Opportunity of a different Peru,  Chapter 28, Health – The Opportunity of a different Peru.

WORLD BANK ASSISTANCE TO PERU

In a series of consultations with the technical teams of President García’s administration, the Country Partnership Strategy for Peru was drawn up (CPS, Country Partnership Strategy) and this was presented to the Executive Board of the WB in December 2006.  The partnership offers the Government greater flexibility than the previous Country Assistance Strategy, in deference to Peru’s status as a medium-income fast developing country.  This flexibility is reflected both in the amounts of financing available from the Bank (up to US$700 million per year on average and a maximum of $3.5 billion on the total horizon of the CPS for the period 2007 to 2011), and in the contents and timeframes of different operations.  The present CPS places emphasis on association with the country, flexibility, and the results of the programs and projects.  In addition, the activities (loans, analytical studies (AAA), technical assistance, and investment of the International Finance Corporation (IFC) are grouped in six “clusters”: Macro-economic stability, growth, environmental sustainability, basic needs, social contract (social programs, health, and education), and governance.
 

The investment portfolio in Peru consists of 18 operations for total commitments amounting to US$886 million in 2007.     The graph shows the percentage distribution of the investment loans portfolio per sector.

PROJECT ACHIEVEMENTS

Equitative Development

The Bank’s support to competitiveness with emphasis on social development and inclusion was provided through a series of operations of adjustment, technical assistance, investment operations, and analytical work.

The  Health Sector Reform Program - HSRP successfully supported the extension of the Seguro Integral de Salud (SIS) [Integrated Health System (SIS)] to cover the poorest population in rural areas.   Throughout 2004, the SIS continued to expand, and by the end of the year it was covering 9 million 100 thousand registered members, including some 3 million 100 thousand under-five-year-olds and 656 thousand pregnant women and nursing mothers.  84% of members and 78% of patients attended to lived in rural or marginal urban areas, and more than 60% of members and 54% of patients attended to were in the top two quintiles of per capita income.

The Programmatic Social Reform Loans (PSRL) were also successful in supporting the provision of basic health services based on local community organizations.  After several years of rapid expansion, the growth of the Local Health Administration Communities (Spanish acronym: CLAS) has leveled off; they now represent approximately 35% of the primary health facilities and attend to more than 8 million patients, mainly in poor rural areas.  The future of this long-heralded innovation in health care is now unclear, though, because of the continual resistance among the doctors and the formalization of the positions of the doctors who work in these services, with a consequent reduction in their operational flexibility.

A project for investment in rural health financed by the Bank successfully helped to improve the health indicators in the selected areas, which are among the poorest in the country.  For example, in the project areas the number of deaths of children under 12 months per thousand births dropped from 33 in 2000 to 23 in 2004.  Since these areas are among the poorest in the country, the infant mortality rate is now closer to the national average.  The project also helped to improve the system of information on the health situation in the eight regions covered, and a follow-up project is now being prepared.

The World Bank provided support for drawing up a strategy and plan of action for the long-term reform of the pensions system focusing on the Ministry of Economy and Finance, including the gathering of information on the coverage and performance of the private pensions system.

The Bank completed a Peru Poverty Report in the fiscal year 2006.  Initial indications suggest that the impact of the country’s economic growth on poverty reduction may have been underestimated.  In 2007, the Bank provided INEI [National Institute of Statistics and Data Processing] with technical assistance for reviewing and clarifying the figures, together with a panel of experts.  Poverty Measurement, 2004, 2005, 2006 -INEI, 2007

Goal-setting has become an important institutionalized tool of the anti-poverty policy.  A recent study made by Peru’s Ministry of Economy and Finance (MEF) indicates that the regions with the highest incomes in the country continue to receive the highest subsidies on public health per capita, higher than the poor regions according to the SIS.  The Bank also made efforts to help ensure better inclusion of the poverty indicators in the rules governing transfers from the central government to the regions and municipalities through the adjustment operations.

The Bank provided support for land ownership titles in urban areas where poor people live.  The project helped to award 1,135.000 ownership titles, with an impact on approximately 5 million poor people; and with the high credit levels attained, the project’s success was assured.  A follow-up project is currently under way.  Consolidation of real property rights. 

The Bank also successfully helped modernize Lima’s public water company, SEDAPAL, with its project that came to an end during this period of the Country Assistance Strategy.  The project goal was met, namely to improve the availability of water through better management of both the demand and the supply.  Project for Rehabilitation of Drinking Water in Lima   The continuity of the service was increased from 11,5 hours per day in 1995 to 20,4 hours per day in 2002; and the total volume of water invoiced in 2002 was greater than the volume invoiced at the start of the project in 1994.  The coverage of the water service rose from 45% to 88%.  SEDAPAL’s financial stability substantially improved in the course of the project, and the company managed to triple its annual level of investments between 1995 and 2002; moreover, on average 50% of these investments were financed from the cash flow generated internally.  SEDAPAL also advanced in efficiency, increasing the productivity of its hand labor from 2,5 employees per thousand connections in 1994 to 1,8 employees per thousand connections in 2000.  In 2003, the Board of Directors approved US$20 million additional funding to construct the distribution network needed to connect approximately 130 thousand poor people, applying a different design and approach based on the use of condominial systems. Complement to Rehabilitation of Drinking Water Systems 

The Rural Roads Project to improve basic social services, and to integrate markets, infrastructure, and income-generating activities with a component of gender equity, managed to rehabilitate 2,614 km. of rural roads; and routine maintenance was carried out on 13,179 km. of roads by 600 micro-businesses with people who had been given relevant training, thereby providing employment for more than 6,000 men and women in rural areas.  In addition, more than 2,400 km. of community tracks and earth roads were improved, to enable people living in extreme poverty to improve their conditions of transportation. An assessment made in 2005 revealed a 68% reduction in traveling times: the impact of this on access to schools was reflected in an 8% increase in school registration; and the increase in visits to rural health centers was as much as 55%.  Also, an increase of approximately 16% was seen in agricultural productivity thanks to the larger areas of land being used for agriculture; and there was a 20% growth in rural incomes, measured in agricultural wages.  In the context of decentralization, 38 provincial road institutes have been created – and are operative – and another 72 are in the process of formation.  The government agency executing this project, Provías Rural, was publicly recognized by the civil society group Ciudadanos al Día for its achievements in the area of good governance.

The Bank made an analytical study of Peru’s social situation, which it published under the title “Un Nuevo Contrato Social”, [“A New Social Contract” PDF].  The studies included a diagnosis of the long-term developments of the social results, and identified limitations with a view to improving them.  “A New Social Contract” also proposes an agenda for the future, suggesting the need for a new social contract and calling for an alternative approach to reforms, based essentially on the clear definition and communication of measurable goals and the participation of all stakeholders.  In 2007, to contribute to the topic of improving the quality of education, the Bank published “Por una Educación de calidad para el Perú” [“Toward High-quality Education in Peru: Standards, Accountability, and Capacity Building”].

CONTACTS

Sandra Arzubiaga
Communication Officer
Phone: (511) 6150660 ext. 339
sarzubiaga@worldbank.org

Updated October, 2007