Peru’s Economic Model and Poverty Reduction: Is It Working?

The relationship between Bolivia and Peru has deteriorated rapidly over the last year, in part because of disagreements on foreign trade issuess. Recently, Peruvian President Alan Garcia and his Bolivian counterpart, Evo Morales, engaged in personal attacks which served to increase tensions between the two Andean nations. On July 2nd, Garcia attacked Morales by saying the latter was jealous of Peruvian economic growth. Maybe Garcia has a point in observing that Peru’s economic growth is more robust than Bolivia’s, but economic growth is not necessarily the ultimate objective for a country; more important may be the satisfaction of its citizens, which in Peru is trending downward because of growing inequality.

In its chronic struggle against poverty, Latin America has experimented with various economic models. These have included the neoliberal policies of the 1980s and 1990s, which have led to increased inequality. Some see neoliberal failures as responsible for the leftist wave that has spread across the region. Peru, however, is one of the two countries in Latin America that have not been tempted recently by solutions calling for the abandonment of the neoliberal development model.

The Peruvian model has produced an exceptional economic growth over the last five years. In 2007, Peru’s GDP growth rate was more than eight percent. The following year, the U.S. ratings agency Fitch gave Peru an investment-grade rating, meaning that after thorough analysis of recent economic trends, the agency now considers Peru a safe and hospitable investment venture.

Profitable policies, but largely for the elite
Unfortunately, as the country’s economy grew, so did its inequality. This trend is especially evident in contrasting Peru’s coastal region with the Andes, with most of the increase in personal income being concentrated in Lima and other coastal urban areas. This can readily be seen in the luxurious beach clubs to the south of Lima, which epitomize the often fabulous wealth of the Peruvian elites. In contrast, Peru’s National Statistics and Information Institute (INEI) recently reported that rural highlands were the least succesful areas in reducing poverty during 2007. Many communities here still practice subsistence agriculture and suffer from extreme poverty, even though the region is rich in mineral resources – Peru’s main export.

During the Alejandro M. Toledo presidency (2000–2005), Peru’s Gini coefficient increased from 49.8 in 2000 to 52 in 2003, demonstrating a considerable rise in inequality. The significance of this injustice is not just statistical or ideological, because increasing economic inequality inevitably leads to public dissatisfaction, which in turn contributes to the country’s instability. Public dissatisfaction with uneven growth was manifested in Toledo’s approval ratings, which were the lowest in South America in 2004. This apparently has been recognized by the new president, Alan Garcia, who announced in May a budget increase of S./ 203 million (around $70 million) for the social program ‘Juntos’ which originally was launched by Toledo in 2005.

The ‘Juntos’ program: squandered genius?
The ‘Juntos’ program provides subsidies to poor families on the condition that they regularly send their children to schools and health centers. ‘Juntos’ is an attempt to recreate programs taken from Mexican and Brazilian models, which were designed to increase literacy rates and decrease economic inequality. Unfortunately, objective conditions in Peru make this program unlikely to succeed, because the nation’s primary education and healthcare systems are among the most inadequate in the world. Additionally, the program has targeted urban areas and neglected rural regions, which are most in need of government assistance.

It would not be surprising if ‘Juntos’ does not fulfill its purpose because Lima has proven extremely innefficient at implementing social programs in the past. The ‘Vaso de Leche’ effort in the 1990s failed to achieve its goal of reducing malnutrition in five-year-old children, even though it was the most widespread program of its kind in the country. Such examples reaffirm the challenge that would be involved in successfully expanding the ‘Juntos’ program. Ultimately, ‘Juntos’ expansion cannot contribute to sustainable development if the country’s education and healthcare structures are not first reformed.

Still, some statistics suggest that ‘Juntos’ may be helping to decrease overall poverty. The INEI recently announced a sizeable 5.2 reduction in poverty in 2007. However, many have questioned the validity of these numbers, including Farid Matuk, an ex-president of INEI, who guesses that such numbers might be forged. They suggest a poverty reduction rate of 0.6 percent per each point of GDP growth, which is three times higher than the average of previous years. At this rate, Peru would eliminate poverty completely in about 10 years, which strains credulity. Despite the surprising results, several institutions, including the World Bank and two Peruvian universities, supervised the study’s methods and verified the validity of the statistics. If they are valid, then ‘Juntos’ may yet be the reason behind the reduction in poverty, considering it was being implemented when the purported drop began to accelerate.

Development must be sustainable
Every effort must be made to continue to promote poverty reduction. In the past, social programs repeatedly have failed to create sustainable development within the Peruvian neoliberal model. The economic expansion experienced by Peru between 1991 and 1997 in factreduced poverty by several points. However, the subsequent 1998 to 2001 recession was a huge step backwards, suggesting that the social programs in the 1990s failed to create sustainable development at the time. Will the new expansion be different, or will a future recession negate all of the advances which have been made?

Peru’s Economic Minister, Luis Carranza, optimistically has predicted that Peru will experience 10 to 15 years of economic growth starting in 2008. This would represent the longest expansion cycle in Peruvian history and would lead to a significant reduction in poverty. ‘Juntos’ could potentially play a part in Peru’s economic success, but for Carranza’s dream to become reality, the government must first take aggressive steps in favor of sustainable development and adequately address the problems of inequality, healthcare and education. Without such reforms in these areas, programs like ‘Juntos’ cannot create sufficient opportunities for the poor, no matter how carefully they are nurtured.