Peru is one of the region’s fastest growing economies. Between 2002 and 2013, the average growth rate was 6.1% in a context of low inflation (2.6%, on average). A favorable external environment, prudent economic policies and structural reforms in different areas combined to create a scenario of high growth and low inflation. Nevertheless, the country may be entering a challenging period since growth slowed in 2014 as a result of adverse external conditions, a corresponding decline in domestic confidence and fewer investments. However, at 2.4%, the 2014 GDP growth rate remained above the regional average (0.8%) and inflation was only slightly above the target rate for the year (3.2%).
In the external context, difficulties stem mainly from the decline in raw material prices, largely caused by the economic slowdown in China, one of Peru’s two main trading partners, together with the United States. Additionally, in 2014, adverse climate conditions affected the fishing industry and the public budget could not be fully spent. Consequently, private investment and exports decreased in real terms by 1.6% and 0.3%, respectively. Nevertheless, growth in Peru is expected to remain solid over the next few years at more than 4%. Large mining projects are expected to begin in the next two or three years. Additionally, the country will implement a countercyclical fiscal policy to support aggregate demand and the ongoing application of structural reforms will assure the continued confidence of private investors. On the international front, the U.S. recovery and lower oil prices may partially compensate for the impact that China’s slowdown is having on the Peruvian economy.
The effects of strong growth on employment and income have significantly reduced poverty rates and boosted shared prosperity. Between 2005 and 2013, poverty rates fell by more than half, from approximately 55.6% to 22.7% of the population (INEI). It is estimated that in 2013, nearly half a million people escaped poverty in the country. Additionally, the share of the population living below the official extreme poverty line declined dramatically between 2005 and 2013, from 15.8% to 4.7%. Extreme poverty is highly rural and is concentrated in 8% of the districts in Peru, which are located in the regions of Cajamarca, Piura, La Libertad and Apurímac. A key feature of growth in Peru is its wide base. This is evidenced by the decline in the Gini Index, from 0.49 in 2004 to 0.44 in 2013, although income inequality remains high in the country. The improvement in total inequality hides significant geographical differences. Whereas the Gini Index in rural areas decreased by just 2 points between 2004 and 2013 (from 0.44 to 0.42), urban inequality declined by 5 points (from 0.45 to 0.40).
Looking ahead, major challenges will include: (1) achieving sustainable economic growth; and (2) further strengthening linkages between growth and equity. To achieve sustainable, balanced growth, Peru should develop public policies that accelerate decentralized growth, with an emphasis on its mid-sized cities. To ensure economic growth with equity, the focus should be on the segment of the Peruvian population that continues to be vulnerable to economic shocks and that could fall back into poverty, which would reverse the progress made over the past decade. The Government of Peru has identified priority areas to prevent this from occurring. These include closing infrastructure gaps, increasing the quality of basic services such as education and health, and expanding access to markets for the poor and vulnerable segments of the population.
The Government of Peru’s current program aims to expand access to basic services, employment and social security; reduce extreme poverty; prevent social conflicts; improve the surveillance of potential environmental damage; and reconnect with rural Peru through an extensive inclusion agenda.
Last Updated: Apr 15, 2015