The Percistence of Poverty in Peru: Possible Answers, their Limits and their lmplications for Latin America

In the 1990s, with economic liberalization at the beginning of the decade, and with the end of the extreme violence of Sendero Luminoso from 1992, the Peruvian economy went through a period of recovery and rapid growth up to 1997. In that period the incidence of poverty came down from 55 to 51 percent. But growth stopped again at that point, and did not show any signs of revival until 2002. The main frustration for Peruvians in the last decade has been the problem of finding employment that is sufficiently productive to enable them to get out of poverty. Even in the period of high growth from 1994 to 1997, employment conditions remained so weak that real wages of hourly paid production workers fell. One of the greatest disappointments of the 1990s was that economic liberalization, and better results with economic growth, did not do more to improve the balance between the overwhelming numbers of low-skill workers and the opportunities for productive employment. A major reason for this failure is that the structure of comparative advantage, led by the mining sector, holds down the power of growth to improve employment opportunities. That structural handicap could be lessened by using exchange rate management to raise incentives for exports and growth in manufacturing, non-traditional agriculture, and modern services. It was a costly mistake, from the viewpoint of efforts to reduce poverty, to allow an appreciation of the real exchange rate at the time of liberalization, and to maintain that unhelpful orientation until nearly the end of the decade. Many other factors have kept poverty at high levels. One of them is the low supply of arable land relative to the agricultural labor force. Another is the low quality of public education. A third is that the level of taxation is too low to provide sufficient financing for social investment.