“No more poor in such a rich country.” Pedro Castillo’s campaign slogan, who won the majority of the votes in Peru’s presidential elections on June 6, although his victory has not yet been officially recognized, was catchy for what it was true. The country that shares the world’s main copper reserves with Chile is also the place where 30.1% of the population, more than three million people, does not have an income of $ 100 per month.
What remains to be seen, as in any election, is whether or not Castillo will fulfill his promise. In its favor it has what appears to be the beginning of a new upward cycle for raw materials, with copper at record highs thanks to the rise of renewable energies and electric motors. Against it, a pandemic that has taken hold of Peru: the country holds the sad record of having more deaths per capita related to the coronavirus than any other. It has also done terribly badly economically: one in ten Peruvians owes to the pandemic having joined the ranks of those who live below the poverty line.
The history of Peru was not always like this. In fact, he came from being the applied student of macroeconomic stability and poverty reduction. According to the data of The Economist, between 2001 and 2016 its economy grew at an annual average of 5.6% and its percentage of poor went from 60% to 21% of the population.
According to economist Carolina Trivelli, part of the explanation for the change in trend has to do with the fact that the model was already exhausted when the coronavirus arrived. “In recent years, the ability to reduce poverty was already greatly diminished,” says Trivelli, who during the Ollanta Humala government was Minister of Development and Social Inclusion. Improving the relative position of the poor in the first three decades of the century was possible, he says, thanks to a combination of monetary transfers (non-contributory pensions and food support programs, among others) with an aggressive policy of public investment in infrastructure. “That made growth opportunities reach the most excluded populations,” he explains.
Thus, an expansion in consumption capacity was generated, which in turn opened up opportunities, “quickly taken advantage of by the informal sectors of the economy.” In order to finance it, it was not necessary to raise taxes because a large part of the money came from the mining canon, whose collection increased at the rate of the increase in mineral prices; as well as VAT, which also grew with the activity. The problem, according to Trivelli, is that this model, which is so dependent on the outside world, has already given everything it could and has not invested in the development of new sectors that “increase the country’s potential GDP.”
The development of a sustainable timber industry, the professionalization of agriculture with financial products and weather forecasting services, the transition from fishmeal for animal feed to a fishing industry for human consumption or the expansion of the tourism sector are for Trivelli axes growth possibilities that would complement mining revenues and give the country more stability.
So far the reasons for the stagnation, but what explains a vulnerability that has left Peru among the countries most affected by the pandemic? According to Hugo Ñopo, economist at the Peruvian think tank Group for Analysis for Development, the problem lies in the “dysfunctionality” of the labor market, “responsible for 80% of household income”, and its relative inability to translate “bonanza macro in micro wellbeing ”. “In Peru, four out of ten people are self-employed, and what for a long time was seen as a romantic solution, in the Peruvian way, results in very low productivity,” he says.
According to Ñopo, the productivity of these microenterprises with almost no capital and created by people who cook cookies at home, make deliveries or sell ice cream, is up to 16 times lower than that of companies with more than 100 workers. “We have opted for this history of informal microenterprises and we have very few large productive companies,” he says.
Informality is related to the lack of presence of the State. According to Ñopo, many people do not seek work in large companies for fear of being exploited. “It is not that there is no legislation that protects them, but that in a job market of 18 million people, the agency in charge of ensuring compliance with labor legislation only has about 4,000 inspectors.”
This insufficiency in the bureaucratic apparatus is also the reason for another genuinely Peruvian phenomenon: the inability to execute the entire budget. As Roberto Chang, professor of Economics at Rutgers University in New Jersey, says, it is true that Peru still has a lot to improve on issues such as educational spending and health, as the pandemic has shown, but also “there is a lot of talk about reforming the structure tax when a very important problem in the Peruvian economy is that of the items that remain unspent ”.
From the association that groups the mining companies, they speak of up to 39% of taxes, paid by their members, which were pending execution. Although those calculations come from interested parties, Trivelli acknowledges that the problem of delay in execution is real. In part, because the corruption scandals carried out by the Brazilian construction company Odebrecht ended many political careers and people now “are afraid to sign anything.” But also because the State is among the smallest in the region, with a tax pressure that oscillates around 15% of GDP, when in countries like Brazil or Argentina the percentage does not drop below 30%.