The poverty assessment evaluates social progress in Peru from 1994 to 1997. It carries mainly good news but also reports several worrisome developments. The good news is that social welfare improved over the three years — and this is true when looked at from a variety of angles. The poverty rate, the percentage of the population not able to finance a basic basket of goods, has declined by several percentage points and now stands at 49 percent — roughly 12 million Peruvians are, therefore, considered poor. Severe consumption poverty — an extremely austere measure — has also declined, from about 19 percent to 15 percent. This does, nevertheless, leave three and a half million Peruvians in the immediate danger of hunger and deprivation. In line with consumption poverty rates, school attendance has risen slightly, literacy rates increased from 87 percent to 90 percent, and the population is healthier. Most important among the latter, the rate of malnutrition for children below the age of five has further declined. About 600,000 children younger than five, or one in every four, were malnourished in 1997.
These improvements are without doubt due to the favorable overall economic environment, with per capita real growth rates from 1994 to 1997 at about 3.5 percent. Contrary to public belief, this growth did create jobs. About 1.3 million additional jobs were created in the economy, absorbing both a population increase and a higher participation rate in the labor force. Many of these new jobs are informal jobs, however, so workers are without formal contracts, pension insurance, or health insurance. Informality in Peru remains at a constant rate of about 45 percent of urban employment, even higher in rural areas. The positive social welfare trends are also due to substantial government efforts: from 1994 to 1997, more than half a million households received water, electricity, and sanitation connections; the public health sector attended more than one million additional ambulatory patients per month; and 200,000 more children were in school in 1997 compared to 1994.
But there are also some worrisome developments to report, and most of them are closely knit together. Economic growth and government programs have not been spread equally and have not benefited everybody. First, regional disparities have grown, with some regions showing enormous progress, especially Lima, and other regions falling relatively behind, especially the rural areas in the highlands. In the rural Sierra, overall poverty remains stagnant while its severity has declined. Of the total reduction in poverty, almost 80 percent stemmed from two regions alone: Lima and the urban Sierra. In international comparisons, Peru remains one of the countries with an extremely high variation of regional income.
Second, with regional disparities increasing we also find some evidence that inequality has risen in the three years under study — a small increase in inequality can be observed when using several measurement methods and when looking at the distribution of income or wealth alike. This increase in inequality comes after a decrease over a long time period — from 1985 to 1994. And although it is not at all certain that inequality will continue to rise, policymakers should closely watch it. Evidence now exists that more unequal societies tend to be more violent societies. Economic progress also depends on equality, with more unequal societies showing a worse growth record. And, clearly, inequality and poverty are also directly linked: for any given national income, the more unequal the society, the higher the poverty rate. We find two factors behind these inequality increases in Peru. The more educated Peruvians profited more from the current upswing than the less educated. Obviously, this means that improving the quality of primary and secondary education would decrease inequality. Additionally, regional development varied strongly and contributed to the small rise in inequality. This different regional development is also mirrored in the distribution of major public investments: While the government has made an effort to reach out more to the marginal rural population, this effort has only partially translated into measurable benefits. Of the large achievements in education, health and infrastructure, about 70 percent have been in cities.
Third, Peru's development in the past years has been inclusive for many but exclusive for others. While we find gender differences narrowing and vulnerable groups such as migrants and the landless sharing the benefits of development, certain groups appear to have fallen further behind or remain highly at risk of deprivation. One group is clearly the indigenous population. Their social and political integration is still far from achieved. And we now find that, even economically, the native population has fallen further behind: while in 1994 an indigenous family was 40 percent more likely to be poor than a non-native family, in 1997 they were almost 50 percent more likely to be poor. Additionally, observing hundreds of the same families from 1994 to 1997, the indigenous families have clearly done worse, even if we control for their lower educational training, lower access to services, and lower land or housing ownership compared to the non-native population.
The social situation of children remains bleak. The youngest in Peruvian society continue to have far higher poverty and severe poverty rates than any other age group. And although poverty rates decreased, the drop was slight and much less than for other groups. Also, the survey data tell a sad story about child labor as more and more youngsters between the ages of 6 and 14 work. In addition to children, many young adolescents are not faring well in Peruvian society. Youth unemployment is very high, 18 percent for females and 14 percent for males in Lima in 1996, and shows a rising trend. In international comparison, while Peru reduced infant mortality from 54 (1990) to 42 deaths per 1,000 live births in 1996, it is still lagging behind the regional achievements for countries of its income level and it places Peru among the worst in the Latin American region.
The poverty assessment does not aim to describe the situation of the poor in Peruvian society — to sketch a "poverty profile". Many other studies have done this. Rather, it assesses what determines whether families get ahead or fall behind over time. This is of special relevance to policymakers. For example, a static view might tell us that informal employment is a strong correlate of poverty. But a view over time will show whether the depth of poverty increases if a household is linked predominantly to the informal market.
What Helps Households Advance?
A number of factors have influenced household welfare over time, in both positive and negative ways. First, surprisingly, households were more likely to advance if their income stemmed from the informal sector than from the formal sector. This is true in urban areas as well as in informal off-farm employment in rural areas. Second, household size matters. Larger families have done worse than smaller ones — this relationship can work through higher dependency ratios that can limit the ability of households to save. Third, more education means faster advancement. Finally, savings and access to basic services like water, electricity or sanitation not only immediately supports households but helps them advance faster in ways not just directly connected to services access. We also find that bundling of such services matters: providing two services jointly has a more positive effect than the sum of providing each one separately.
The poverty assessment also includes some findings about the incidence and impact of urban violence on the families of the poor. While we cannot link insecurity directly to welfare developments, violence is one of the main preoccupations of the urban poor. The incidence of various types of violence differs by poverty group, the poor being about twice as likely to be exposed to physical aggression as the better-off in society. Consequently, their feeling of insecurity is higher.
Prospects for Poverty Reduction — Growth and Employment Links
One of the biggest concerns in the Peruvian public debate on poverty is whether growth has created employment and whether this has led to poverty reduction. We find that growth has indeed created employment; about 1.3 million more people have been in remunerated employment in 1997 compared with 1994. The majority of jobs were created in the informal sector but they were not necessarily low-paying jobs. A worrisome trend is that urban productivity does not seem to be rising and, consequently, real wages are flat at best.
On face value, Peru's growth path in past years was pro-poor because the sectors where workers and their dependents are most likely to be poor (construction, commerce and agriculture) grew fastest. This appears to have helped the poor in construction and commerce. In agriculture, however, poverty reduction was slower than could have been hoped for. Employment creation as a corollary to agricultural growth was not strong. This could be due to a productivity backlog stemming from the recession at the beginning of the 1990s, implying that agricultural growth first led to more intensive work, i.e., longer hours per employed person.
A number of simulations show how important growth remains for poverty reduction in Peru. The simulations are very simple and, for example, do not take into account that workers will move between areas and sectors or that the employment effect of growth will differ between sectors. The simulations do show, however, that the type of growth and its regional distribution will matter — the more growth is based in agriculture, construction and commerce, and the more its impacts filter through to the rural highlands and lowlands, the more poverty will be reduced in the short run. While the growth pattern should not be artificially tilted towards such sectors, investment in these sectors will depend on a continuation of non-discrimination policies.
The distribution of social and anti-poverty expenditures has been disappointing. The distribution of 7.6 billion soles (about 40 percent of the total public budget in 1996) is mildly tilted towards the better-off in Peruvian society; i.e., the poorest obtain less of these expenditures than their population share. In large part this is due to the anti-poor distribution of higher education and hospital expenditures.
Several specialized government programs reach only a small proportion of the poor and direct public transfers play a significantly smaller role than private transfers do. The nutrition program PRONAA and the social fund FONCODES have the highest coverage and lowest leakage rates, but the housing credit programs as well as the infrastructure programs of COOPOP, FONAVI and INFES reached only few of the poor. Food aid has the largest positive effect in rural Peru, where the severe poverty rate would have been 3 percent higher had these programs not existed in 1997. However, private transfers generally play a significantly more important role than public transfers in the rural and urban areas alike.
From Individual Sector Strategies to a Consistent and Broad-based Anti-poverty Focus
The report does not aim to provide detailed recommendations as to how poverty can be eradicated in Peru. Rather, it presents a quick feedback about social developments and poverty based on the new Living Standard Measurement data from the Instituto Cuánto released in June 1998, and on policy-relevant analysis of growth patterns and the distribution of social expenditures. While strategies to reduce poverty are necessary and important, they do carry the risk of oversimplifying a very complex and difficult task. In Peru, with about half of the population in poverty, poverty eradication will take a long time and require the coordinated efforts of all parts of society — the public, private, and voluntary sectors — and the international community.
The report also does not recommend the creation of new programs, nor does it make a statement about the appropriate size and mix of programs. In broad lines, we find that the Peruvian anti-poverty programs with their mix of emergency help, nutritional focus, and infrastructure emphasize the right areas. However, we believe that a much bigger impact could be achieved with available funds.
First, economic and social policymaking would need to be more closely integrated, informed by sound technical analyses and advice. Today, the many social policy programs operate independently; they try to reach their beneficiaries with different means and lack stringent evaluation. The Ministry of the Presidency alone has six programs in the education sector — outside and in addition to those of the Ministry of Education. Nutrition programs are plenty and administered by the ministries of Finance (Vaso de Leche), Women and Human Development (PRONAA), Health (Basic Health Program, PACFO), and Education as well as the Ministry of the Presidency (FONCODES). Expenditures of many of these programs, although well intended, do not reach the poorest in society and are often isolated in nature. Many different poverty maps and targeting mechanisms are currently employed, and these need to be harmonized. We find that poverty is reduced most effectively when interventions are integrated, that is provided jointly and in a coordinated way. In Peru, conflicting decrees empowering the Ministry of the Presidency and the Social Coordination Council (CIAS) currently exist — but neither institution has true power or manpower. Without integrating social ministries into the much more powerful council for economic policymaking, weak coordination of social programs is likely to continue.
Second, and closely linked to the above, pro-poor policy formulation needs to be accompanied by thorough and good evaluation. This goes beyond the need for targeting and prioritization. It includes, for policymakers, the ability to assess whether certain interventions did indeed help or not. It also implies that policymakers and technicians are able to assess how changes in program nature and how changes in expenditures are distributed and what effect these changes have.
Third, central coordination promises to be effective if it goes hand-in-hand with decentralized execution, involving other partners in the fight against poverty. Examples from other Latin American countries show that private-voluntary-public partnerships in poverty reduction at the local level can be extremely successful. One reason is that each organization brings its comparative advantage to the table: central government brings finance and organization; municipal government brings local knowledge; and non-governmental organizations (NGOs) often bring a good and direct understanding of the problems of the poor. For this latter point the report has some evidence: In 1996, NGO-administered programs had a significantly better targeting record than most public programs and matched the good targeting results of FONCODES and PRONAA.
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