Growth or Development: An Inspiring Lecture Given by Fernando Villarán

“Growth,” in an economic context, is oftentimes used interchangeably with “development.” Governments tend to prove their economic development by demonstrating strong growth macro/microeconomic indicators. However, growth does not necessarily mean and is not sufficient for development. In his lecture, this view was reiterated by Fernando Villarán, former Minister of Labor and current president of SASE Consulting and Dean of the Faculty of Engineering and Management of Antonio Ruiz de Montoya University.

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Villarán started his presentation with a humorous explanation for being late: he was caught in a traffic jam, which was an outcome of Peru’s skyrocketing increase in vehicle sales. That anecdote smoothly transitioned to his first part of the presentation: an overview of Peru’s strong economic growth in recent years. As statistics show, Peru was a leading performer among Latin American countries and even the whole world in terms of economic growth: Peru achieved a GDP growth rate of 5.1% in 2013, and a projected rate of 6.0% in 2014 (first among Latin American countries). One of the major contributors to Peru’s GDP growth is its soaring trade volume: from 2005 to 2013, Peru’s imports have grown from $980 million to $3390 million and its exports have also tripled. Peru also takes pride in its consistently low inflation rate, low public debt, very high international reserves, and ever-decreasing poverty rate, all indicating a stable, solid, and energetic macroeconomic environment.

So, is it safe to conclude that Peru has attained its development goals and increased people’s happiness? “Not necessarily.” Villarán expressed his own concerns during the lecture. He pointed out three major challenges that threaten Peru’s real development: great inequality, underperforming governance, and the shadow (informal) economy.

First, beneath the halo of Peru’s GDP growth are huge regional disparities. Lima and other major cities concentrate most of the country’s resources and greatly skew the income distribution. Behind the reduced overall poverty rate is the stagnantly high poverty rate in numerous regions. That translates into a shockingly high Gini Coefficient of 48.1 (World Bank, 2010). Second, the Peruvian government does not enjoy great confidence from its people, in spite of its economic achievements. During the past decade, the Peruvian government’s popularity among its people has been plummeting. The most criticized problems include corruption, inefficiency, and improper regulations. Last but most importantly, Peru’s massive and growing informal sectors complicate its socioeconomic development. For instance, illegal mining is a “prosperous” industry that employs numerous illegal workers and does not provide them with essential social welfare. The government’s inability to control the growth of illegal extraction, illegal logging, and planting will threaten social stability and curb real development in the long run.

Mr. Villarán’s lecture reminded me of Julio Guzman’s presentation “Why Peru Does Not Graduate,” held in the UMD School of Public Policy last year. Guzman posed a series of questions about development and concluded that development, apart from growth and social welfare improvement, also needs comprehensive second generation reforms. These reforms not only mean education of young Peruvians and training to low-skilled workers, but also diversification of resources and industries, which may be painstaking.

Inspired by Villarán’s lecture, I’ll summarize the challenges that Peru is facing. Externally, Peru lacks incentives and strategies for diversifying its exports. Internally, Peru is threatened by government corruption and a kind of natural resource trap (Dutch Disease). To achieve real development and graduate from its current status, Peru may need a “4-Go” reform: Go Transparent, Go Diversified, Go Privatized, and Go East (develop further the market in the Asia-Pacific Region).

– Jianing Wu

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