Meeting with Fernando Villarán

How time flies! None of us can believe this is already the last day of this amazing and memorable trip. This long day began with a meeting with the former Minister of Labor of Peru, Fernando Villarán. Instead of meeting at his SASE office like the course group did last year, this year our meeting was held at a beautiful small Antonio Ruiz de Montoya University, where Mr. Villarán currently lectures as Dean of the Faculty of Engineering and Management.

Mr. Villarán is very knowledgeable and amiable. He emphasizes several times that we should feel free to interrupt him during his talk if there are any questions or ideas we want to share. His arguments were brought to life by his rich experience and myriads of reliable source of information. The topic of the talk was “Recent Development and the Dilemmas of the Peruvian Economy,” divided into two parts: a presentation on the orthodox view of Peru’s recent economic growth and a discussion about what Mr. Villarán argues are the actual sources of Peru’s economic growth.

There is no denying that Peru’s economy has been booming in recent years and under the current Ollanta Humala administration. Many commentators assume a trickle down macroeconomic strategy. In a sense, Peru has become a Latin American economic star. International studies rank Peru 8th in GDP growth from 2002 to 2013 compared with the rest of the world, which is a very good position. The number is even better when compared to Latin America alone: Peru rose from 3rd place to the very top within one year, according to a 2014 study. What is more, Peru enjoys a very high international reserve, especially in US dollars (32% of its GDP), and a very low public debt rate (18% in 2013).

The poverty reduction statistics are promising too. As the poverty rate has plummeted since 2007 (-16.6% in 2012), the rate for extreme poverty has also decreased 5.2% compared with 2007. It would be so easy to go along with this optimistic picture and get lost in the image shared by the World Bank and foreign investors that modern Peru is an economic paradise and star of Latin America.

However, nice macroeconomic performance is far from the whole story. Mr. Villarán soon burst this bubble by alerting us to several major challenges to the current Peruvian economy.

First, the poverty rate is, after all, an average number. If one wants the truth, one has to look at the details. When breaking it down into regions we can see that poverty is concentrated in some regions in particular; three in the southern mountain areas and one in the north. Take one of these regions, for example; it is a nice place for the lucrative mining business, but the people there live in conditions of severe poverty.

The next problem on the list is the poor quality of education in Peru. According to 2012 PISA test results, Peru is last in all measurements, a status that has remained for quite a long time now. The simple facilities and small scale of the university we visit today is a perfect example, especially when you know that this is already a quite decent and high-ranking educational institution in Peru.

Moreover, informality in Peru hurts this fledging economy in a more direct and brutal way. The informal sector in an economy may be a source of unfair competition to formal firms and also deprive governments of potential tax revenue and diminish a government’s capacity for regulatory oversight. More than 65% of the business in Peru is informal; the number may be as high as 80% when you consider how many people are actually involved in informal industries in Peru.

The Global Competitiveness Report (2012-2013) gives us a more proper and practical view on Peru’s economic position in the world. Seen below are the 12 pillars of competitiveness and stages of development of an economy. The report shows that Peru ranks in the middle, being in the second stage, which is currently an efficiency-driven economy. All in all, overconfidence and complacency at this moment are the biggest threats.

gcr

– Linlin Zhu

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