IMF Director Christine Lagarde’s first visit to Latin America was not to Brazil or Chile, but to Peru.  While there, she said that “Peru is one of the most vibrant economies in the world,” but that it also needed to ensure more “inclusive growth.”  Both of these statements are backed by data.  The nation has enjoyed some of the highest economic growth rates in the Hemisphere over the past decade, in 2012 the economy grew 6%, and positive stable growth is expected to continue (compare this with the U.S. at 2.8% growth).  However, Peru’s GINI coefficient, which is a numeric explanation of income inequality, remains around .48 and a quarter of the country’s population is considered severely impoverished.  

 

These sorts of contrasts appear in many facets of Peru today.  It is now called an an upper-middle income nation by the World Bank, but has extraordinarily impoverished indigenous communities living in the Andes.  The Peruvian economy is widely touted as one of the Latin American economies most open to foreign business, but has ongoing social conflicts related to unfavorable conditions in the mines which are driving the nation’s growth and are responsible for 60% of all export revenue.  Its business climate is also ranked as one of the best, it takes 30 days on average to start a business, but it had nation-wide anti-corruption protests that turned violent this past summer. 

 IMF Director Christine Lagarde’s first visit to Latin America was not to Brazil or Chile, but to Peru.  While there, she said that “Peru is one of the most vibrant economies in the world,” but that it also needed to ensure more “inclusive growth.”  Both of these statements are backed by data.  The nation has enjoyed some of the highest economic growth rates in the Hemisphere over the past decade, in 2012 the economy grew 6%, and positive stable growth is expected to continue (compare this with the U.S. at 2.8% growth).  However, Peru’s GINI coefficient, which is a numeric explanation of income inequality, remains around .48 and a quarter of the country’s population is considered severely impoverished. 

These sorts of contrasts appear in many facets of Peru today.  It is now called an an upper-middle income nation by the World Bank, but has extraordinarily impoverished indigenous communities living in the Andes.  The Peruvian economy is widely touted as one of the Latin American economies most open to foreign business, but has ongoing social conflicts related to unfavorable conditions in the mines which are driving the nation’s growth and are responsible for 60% of all export revenue.  Its business climate is also ranked as one of the best, it takes 30 days on average to start a business, but it had nation-wide anti-corruption protests that turned violent this past summer.  While Peruvian cuisine is experiencing extraordinary popularity (The New York Times, Condé Nast Traveler, The Telegraph and Food & Wine have all profiled Peruvian restaurants and cuisine over the past few years) 50% of children in the department of Cuzco (in the Andes) suffer from malnutrition.  The nation has a free trade agreement with the U.S., and the U.S. is Peru’s second largest export market, but it is also the world’s largest grower and producer of cocaine according to the UN, a drug whose illicit import the U.S. government combats on a daily basis. 

 

Peru’s rapid economic growth, alongside continued inequality, is being studied both in Peru and outside.  For example, Inter-American Development Bank Principal Economist for the Trade and Integration Sector, Dr. Mauricio Mesquita Moreira, writes in “Too Far to Export,” that some of the inequality and dramatic contrasts could be caused by lack of infrastructure outside of the capitol city area.  Virtually all goods that Peru exports need to leave through Lima’s port because of lack of infrastructure elsewhere; this has concentrated economic growth around the capital city, particularly because goods coming from the interior need to travel over treacherous mountain roads in the Andes.  These transportation costs are capable of eating up smaller companies profits – or dissuading them from exporting entirely.  According to the IDB’s economic simulations, building paved roads to interior departments that export the least would, “reduce domestic shipping costs 15-40 percent and increase exports 10-23 percent.” This sort of investment could help smaller firms reach larger markets and potentially share in the growing economic prosperity. 

 

In a similar study by the Research Institute of Applied Economics in Barcelona, authors Castells and Royuela study income agglomeration around urban areas in developing nations.  They find that this agglomeration and the growth of inequality could explain why Latin American countries development has lagged behind many Asian nations, because although inequality doesn’t necessarily slow growth in the short-term, it is negatively correlated with long term growth.  They recommend that nations try to enable development out of main urban areas.  The authors used Peru in their working paper as an example of a nation with relatively high income that also suffers from deep inequality, and recommend that nations with this profile try to focus on developing small and medium sized cities so as to enable greater commerce and minimize inequality.   These actions should lead to better long-term growth prospects. 

 

Clearly Peru has made great strides; poverty has gone down, the Shining Path guerrillas are weakened, the business climate has improved, and the economy is growing steadily, but the nation still has improvements to make in combating inequality and poverty.  Improving infrastructure to enable greater market access and developing more secondary cities outside of Lima could help mitigate inequality, but it remains to be seen whether or not the political will exists to implement the necessary changes.  As Dr. Mesquita Moreira explained, corruption and powerful vested interests remain entrenched.  Other positive indicators can lead one to hope that this will change so the nation can realize its full potential.