Cablegate: Poverty in Peru Decreasing Substantially

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DE RUEHPE #1453/01 2481206
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R 041206Z SEP 08
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 9270
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
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UNCLAS SECTION 01 OF 03 LIMA 001453

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E.O. 12958: N/A
TAGS: ECON SOCI PGOV ETRD PE
SUBJECT: POVERTY IN PERU DECREASING SUBSTANTIALLY

SUMMARY
-------
1. Poverty in Peru dropped in 2007 to under forty percent, a
substantial 5.2 percentage points below the 2006 level of 44.5%, the
GOP's National Institute of Statistics (INEI) announced recently.
The poverty reduction is consistent with high growth rates of recent
years, including 9% GDP growth in 2007. The poor numbered 10.9
million in 2007, 1.3 million less than the prior year. Despite
sustained high economic growth, poverty reduction had been slow over
previous years after peaking at 54.8% in 2001. Economists said
poverty in Peru had been rather inelastic to real growth, due
possibly to the large pool of unemployed, the relative isolation of
rural areas from markets, and the largely unskilled nature of the
labor force. However, observers suggest that continued strong
growth and foreign and domestic investment (encouraged by high
commodity prices), coupled with the government's focus on social
policies and infrastructure, will lead to the kind of dent in
poverty that occurred in Chile in the last decade and a half. END
SUMMARY.

FINALLY MAKING A DENT
---------------------
2. Robust GDP growth since 2001, coupled with strengthened social
policies, appears to be finally making a dent in poverty in the last
two years. The overall poverty rate decreased from 44.5% in 2006 to
39.3% in 2007, and extreme poverty fell from 16.1% to 13.7%. If
high private investment levels hold, Peru's economy appears set to
maintain some of the best growth figures in the hemisphere.
Economists say this will lead to further correlation between
economic successes and poverty reduction. Additionally, the
government is prioritizing social programs, with a focus on
improving education and infrastructure.

URBAN COASTAL AREAS BENEFIT THE MOST
------------------------------------
3. As usual in Peru, the areas better able to reap the benefits of
steady growth, trade and government social programs were the urban
and coastal areas. As the table below shows, both poverty and
extreme poverty recorded larger drops in urban than in rural areas.
The largest reduction was that of urban extreme poverty, 28.6%.
Although still high at 32.9%, rural extreme poverty also fell a
considerable 11.3% in 2007.

Peru: Poverty and Extreme Poverty, 2002-2007
--------------------------------------------
2002 2003 2004 2005 2006 2007
---- ---- ---- ---- ---- ----
(% of population)
Poverty 54.3 52.0 48.6 48.7 44.5 39.3
- Urban Areas 42.1 40.3 37.1 36.8 31.2 25.7
- Rural Areas 77.1 73.6 69.8 70.9 69.3 64.6
Extreme Poverty 23.9 20.7 17.1 17.4 16.1 13.7
- Urban Areas 9.7 8.9 6.5 6.3 4.9 3.5
- Rural Areas 50.3 42.7 36.8 37.9 37.1 32.9

(% annual change)
Poverty -0.9 -4.2 -6.5 0.2 -8.6 -11.7
- Urban Areas 0.2 -4.3 -7.9 -0.8 -15.2 -17.6
- Rural Areas -1.7 -4.5 -5.2 1.6 -2.3 -6.8
Extreme Poverty -2.0 -13.4 -17.4 1.8 -7.5 -14.9
- Urban Areas -2.0 -8.2 -27.0 -3.1 -22.2 -28.6
- Rural Areas -1.9 -15.1 -13.8 3.0 -2.1 -11.3
------------------ ---- ---- ---- ---- ---- ----Source: INEI,
Ministry of Economy & Finance (MEF)

POVERTY REDUCTION BY AREAS/DEPARTMENTS
--------------------------------------
4. At 23.6%, the Lima Metropolitan Area recorded the biggest
poverty reduction in 2007, closely followed by rural coastal areas
at 22.2%. The smallest poverty reductions took place at urban and
rural highland areas at 9.5% and 4.1%, respectively, as shown by the
table below. By Departments, poverty reduction was larger in those
that have developed modern farming facilities and non-traditional
export factories. Ica (southern coast), Madre de Dios (southern
jungle, benefitting from a large road project and high gold prices)
and Lima led with 36.7%, 28.3%, and 22.7% poverty reductions,
respectively. At the other end, Tumbes (northern coast) and Cusco
(southern highlands) recorded poverty increases of 14.7% and 15.0%,
respectively.

Peru: Changes in Poverty and Extreme Poverty
--------------------------------------------
Areas/Departments Poverty Rate (%) % Change
2005 2006 2007 2007/2006
------------------ ---- ---- ---- ---------

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Poverty by Area:
Lima Metropolitan 32.6 24.2 18.5 -23.6
Rural Coast 50.0 49.0 38.1 -22.2
Urban Jungle 53.9 49.9 40.3 -19.2
Urban Coast 32.2 29.9 25.1 -16.0
Rural Jungle 65.6 62.3 55.3 -11.2
Urban Highlands 44.4 40.2 36.3 -9.5
Rural Highlands 77.3 76.5 73.3 -4.1

Poverty by Department:
Ica 23.9 23.8 15.1 -36.7
Madre de Dios 30.8 21.8 15.6 -28.3
Lima & Callao 32.9 25.1 19.4 -22.7
La Libertad 43.0 46.5 37.3 -19.9
San Martin 54.1 54.3 44.5 -18.0
Loreto 71.5 66.3 54.6 -17.6
Ucayali 53.1 54.0 45.0 -16.7
Piura 58.6 54.0 45.0 -16.6
Junin 56.0 49.9 43.0 -13.9
Huanuco 75.8 74.6 64.9 -13.0
Ayacucho 77.3 78.4 68.3 -13.0
Puno 75.2 76.3 67.2 -11.9
Pasco 72.9 71.2 63.4 -11.0
Arequipa 24.9 26.2 23.8 -9.1
Apurimac 73.5 74.8 69.5 -7.1
Amazonas 68.6 59.1 55.0 -7.0
Moquegua 30.3 27.3 25.8 -5.7
Huancavelica 90.3 88.7 85.7 -3.5
Lambayeque 44.0 41.1 40.6 -1.1
Cajamarca 68.8 63.8 64.5 1.0
Ancash 48.4 42.0 42.6 1.6
Tacna 30.3 19.8 20.4 3.2
Tumbes 16.2 15.8 18.1 14.7
Cusco 55.6 49.9 57.4 15.0
-------------------- ---- ---- ---- ----- ----Source: INEI
"Technical Report - Poverty Measurement 2004, 2005 and 2006"

DATA CREDIBILITY QUESTIONED... AGAIN
------------------------------------
5. INEI's poverty statistics drew plenty of fire, mainly from
political quarters. Former President Toledo and former INEI head
Farid Matuk questioned the data's validity, arguing that INEI
distorted the results by changing the computation methodology.
Interestingly, these same two former officials were themselves the
target of abrasive criticism by President Garcia's APRA party in
early July 2006, just before the end of the Toledo Administration,
when INEI reported a poverty decrease from 54.3% in 2001 to 48.3% in
2006. For example, current Minister of the Interior Luis Alva
Castro, an APRA loyalist, had charged that INEI "grossly
manipulated" poverty statistics.

6. To preempt criticism leveled at the newly reported poverty drop,
the GOP held a press conference and summoned World Bank (WB),
Inter-American Development Bank (IDB), and other officials. INEI
had asked the WB and others to form an expert committee to review
the survey data and computation methodology, in order to obtain the
most accurate results possible. A few days after INEI released its
2007 poverty statistics, WB Representative Felipe Jaramillo told the
local media that a WB technical team audited INEI's methodology,
vouching for the reliability of the results presented by INEI.
Jaramillo added that the WB knew of problems with prior INEI
surveys, particularly those of 2004 and 2005. (Note: In July 2007,
the former WB representative told us that there was a significant
error in INEI's 2005 household survey, with a high nationwide 12.3%
non-reply rate to key survey questions. 2004 and 2005 figures were
revised slightly with WB help. End note.)

MALNUTRITION STILL HIGH
-----------------------
7. Notwithstanding the drop in poverty and extreme poverty, one of
the worrying statistics that reflects how parts of the country are
being left behind is the persistently high level of malnutrition.
Malnutrition rates for children under 5 years old in urban areas
have fallen from 26% in 1991-1992 to 10% in 2004-2005. But rates in
rural areas are still high, having fallen from 53% in 1991-1992 to
39% in 2004-2005. More and better GOP action in rural areas may be
the only way to reduce substantially this troubling indicator.

MORE POVERTY REDUCTION IN COMING YEARS
--------------------------------------
8. In its recently released medium-term policy and projections, the
"2008-2010 Multi-annual Macroeconomic Framework," the MEF projects
Peru's real GDP to grow an average of almost 7% annually from 2008
to 2011, a projection in line with those of most local economists.
The implied average real per capita GDP growth is of almost 5.7%

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annually, and this bodes well for further poverty reduction. GDP
growth in 2008 is on pace to total 10% by the end of the year.

COMMENT
-------
9. It is likely that Peru will keep reducing poverty until the
Garcia Administration concludes its term in July 2011, as
macroeconomic and trade policies, commodity prices, foreign and
domestic private investment, and growth are expected to remain
steady. Social policies continue to focus on ways to include
hard-to-reach segments of the population, particularly in the
highlands. With business confidence high, President Garcia has been
able to maintain prudent fiscal policies, with political allies
helping to thwart populist proposals. As the 2011 election draws
nearer, the Garcia administration needs to improve and increase its
social programs, so that their impact on poverty is sufficiently
large and rapid to meet rising expectations of important parts of
the population who, according to polls, still don't think Peru's
economic boom is benefiting them and don't expect to be better off
economically in the future.
MCKINLEY

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