Peru’s economy is mired in middle-income trap – 06/07/2021 – Latin America21

In 1992, James Carville, Bill Clinton’s campaign strategist, hung a poster at his headquarters with three messages: “Change vs. More of the Same,” “Don’t Forget Health Care,” and “It’s the Economy, Stupid.” Bill Clinton would end up popularizing the discourse on the economy, because the phrase, as a policy, is convincing: the electorate tends to worry about the health of their economy.

The most tangible indicator of economic strength is the level of employment. A government’s ability to generate jobs remains the fundamental fact that predicts its potential for success or failure.

In the case of Peru, its economy is mired in what is called a middle-income trap, which means that this country does not have a supply chain that absorbs human capital from various high-productivity industries. But then, in Peru, what do people live on?

53% of the Peruvian economy is based on the services sector, according to the latest Statista report for the year 2020. Restaurants, hotels, shops, taxis and similar activities represent more than half of the country’s Gross Domestic Product. This sector is the largest employer in a country with high levels of informality (over 70%), a fact that has an obvious correlation with this phenomenon. Everyone sells what they can and how they can.

By 2024, 58% of the economically active Peruvian population is expected to work in the service sector. With the restrictive measures on citizens due to the pandemic a year ago and the crisis generated by the political polarization in the elections, we know in advance that another period of political and economic uncertainty is coming and that it will mainly affect this majority and vulnerable sector.

As long as informality persists, the perverse incentives that prevent greater sophistication in the development of this segment, and the precariousness of employment, the service sector seems to be doomed to stagnation. In this context, it is imperative to generate mechanisms to increase formalization, growth and productivity.

The highly heterogeneous service sector is labor intensive, especially in countries threatened by the middle-income trap, such as Peru, and it postpones indefinitely the postponement of automation that would increase productivity.

To solve part of this problem, we highlight the good practice carried out by Spain, through public institutions that promote the technification of foreign trade, such as ICEX Spain Export and Investment, an entity that has generated alliances between regional Spanish producers and major international players in the sector. logistics, as is the case with Amazon, to position themselves as premium brands.

Some of the companies benefiting from ICEX, sell volumes of hundreds of thousands of euros a month and have fewer than five employees, as e-commerce has allowed them to reduce costs.

Peru needs to strengthen its different production chains with bureaucracies that go beyond taking producers to international competitions and fairs, and generate agreements that allow them to sell larger volumes through designations of origin and with certified quality, that is, in blocks and for the international premium sector.

At Amazon, today we can see that, thanks to the joint management of producers and exporting companies, there is a section called “Products from Spain”, which shows the best of this country, and whose main buyers are abroad, generating productivity improvements due to entry foreign currencies such as the UK Pound Sterling, which is the main buyer of this section of Amazon.

Discussions between presidential candidates, and their respective proposals, often resemble shopping lists: they list wishes and we rarely hear or read about how such promises will be carried out, as citizens typically do not require further details to be provided to this respect.

From an economic point of view, it is known that there are few ways to increase productivity: technological shock or through training the economically active population and their education oriented to certain industries.

If we add to this the precarious level of aptitude of the Peruvian workforce, the outlook is, to say the least, challenging. For example, according to the PIAAC (International Program for the Assessment of Adult Skills) of the OECD, less than 0.5% of the Peruvian PEA has minimal working skills and less than 1% has minimal skills in logical mathematics for work .

So, with a million new people who will be added to the workforce between 2020 and 2024, we must ask ourselves: where and under what conditions will they work? What will they produce? What industries will they contribute to? How do they fit into a productive strategic structure? Is collaboration and knowledge transfer feasible?

One could, for example, include large global distributors like Amazon, to generate a chain with greater productivity and guarantee a better future for this million people, with paid jobs above the subsistence line, avoiding underemployment and promoting new ventures.

It is obvious to say that, in order to be able to export, it is necessary to have good relations with other countries and a globalist vision of the economy. Therefore, it is discouraging to hear electoral proposals to close trade borders in order to generate endogenous industrialization processes that have already proven to be ineffective in achieving greater productivity and improving human capital.

In Peru, unfortunately, the vocation to propose public policies without any evidence base abounds and those who lose, as always, are the ones who have the least. So, in order to improve the level of Peruvian political discussion, we recall the phrase with which this article started, but with one change: it’s the job, stupid.

www.latinoamerica21.com, a plural media committed to disseminating critical and truthful information about Latin America.

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