20060328 – Peru’s economic trickle down proves elusive

By Robin Emmott

AYACUCHO, Peru (Reuters) – Business has rarely been slower at Marlene Quispe’s underwear shop in the central Andes as the only thing that the rows of socks and bras seem to attract nowadays is dust from the street outside.

As Peru’s economy is set to record its fifth consecutive year of strong growth in 2006 — a feat almost unheard of in the country’s cyclical boom and bust history — ordinary Peruvians say they are seeing little or no benefit, making the economy a central issue in the upcoming April 9 presidential elections.

“There’s no prosperity here and we want change,” Quispe said as she sorted through piles of bras. “A lot of people are tired of waiting for this trickle down,” Quispe said.

That view is echoed around Peru despite encouraging signs such as new shopping centers and restaurants in Lima as well as robust commerce in towns near the country’s gold and copper mines. Yet job growth has proven elusive in an economy that expanded 6.7 percent last year.

Much to the chagrin of business leaders, presidential front-runner Ollanta Humala says the only way to bring the benefits of this growth to ordinary Peruvians is to increase state control over the economy.

He has received strong support from the poor as a protest vote for the country’s traditional economic policies.

“The idea that there is a trickle-down effect to the poor from economic growth is just an invention by Mister President (Alejandro Toledo),” said Omar Quezada, president of the Ayacucho region in central Peru, where 35 percent of the population is illiterate.

“We haven’t seen a large public works project in this region in the past five years,” he added.

Toledo, who took office in 2001 promising jobs and a better life for the poor, has argued that it is only a matter of time before the benefits of economic growth are widespread.

But economists say that despite average gross domestic product (GDP) growth of 4.5 percent over the past 15 years, the work force is growing at 3 percent a year, meaning new graduates are barely being absorbed into the job market.

“Peru’s poverty levels have barely fallen, the new jobs on offer are low-skilled and all we’ve really achieved is stability,” said Elmer Cuba, chief economist at Lima-based consultant Macroconsult. “People are exasperated.”


Many Peruvians say their frustration is heightened by the fact that since 1990, successive governments have done just what foreign economists told them to — privatize, liberalize and open the economy up to foreign investment.

Peru’s problem is that its mining and export-based sectors are the drivers of growth and people outside of those industries are not benefiting from high international prices for commodities and precious metals.

“The economy is simply not broad-based enough,” said Javier Zuniga, head of Lima University postgraduate business school.

Although Peru’s powerful mining sector generates more than half the country’s exports and accounts for 6 percent of GDP, it employs less than 1 percent of the working population.

According to Farid Matuk, head of the government’s National Statistics Institute, around 14 times more investment is required to create one job in the mining sector than in manufacturing, where Peru has traditionally been weak.

Partly as a result, the jobless rate in Lima, home to almost a third of the population, was 9 percent in February, or almost 1 percentage point higher than a low in Toledo’s government of 8 percent in October 2002.

Even that figure fails to take into account that half of Peru’s 13 million working population is underemployed, or not working the hours they want to, forcing them into lower-paid positions below their qualifications.

The solution that candidates pledge is red-hot growth over the next five-year presidential period and big job creation.


Most ambitiously, center-right lawyer Lourdes Flores, who is in second place in the polls, has promised GDP growth of at least 7 percent a year and 650,000 new jobs annually.

But center-left former President Alan Garcia, who is third in the polls, says meeting such goals are impossible.

“You would need to grow almost 14 percent a year to create 650,000 jobs annually,” said Enrique Cornejo, an aide to Garcia.

Nevertheless, he also promises annual growth of 7 percent, a figure Peru last reached briefly in 1998.

With Peru’s current economic structure, analysts say such a pace of growth would generate around 350,000 new jobs a year, or just enough to keep up with new entrants into the job market.

Humala, a former military commander who wants to restrict foreign investment in Peru, sees the solution in revising contracts in key mining and gas industries to increase state control, raise taxes and redistribute income to the poor.

Businesses and investors say that would scare off investment. A similar strategy employed by a Peruvian military government in the 1970s sent the economy spiraling into a 30-year slide.

Economists instead recommend measures such as cutting the bureaucracy that stifles entrepreneurship, helping unregistered businesses leave the informal sector, diversifying away from mining and cutting the bloated state payroll.

Around 90 percent of Peru’s budget goes to public sector salaries and debt servicing, leaving little room for government investment, which can help fuel economic growth.



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