As mentioned before, in Peru growth has had only a limited impact on poverty. After an almost unprecedented economic expansion over the past five years, poverty levels fell little and remain at just over 50 percent.23Extreme poverty has fallen more sub-stantially, especially in rural areas, but one in every five Peruvians still has to live in it. Inequality, which was not as bad as the Latin American average to start with, decreased slightly but is still extremely high by world standards—the average income of the rich (those in the top quintile of the distribution) is 15 times higher than that of the poor (those in the bottom quintile). And there are almost five million Peru-vians living on US$1 a day or less. It is important to translate these numbers into concrete human reality: compared to her rich peers, a poor girl in Peru is six times more likely to have been born without medical attention, four times more likely to die before the age of five, twice as likely to have no access to primary education, and only a third as likely to have running water ever in her life.
This rather grim picture of poverty and inequality is further complicated by two more subtle factors—low degree of social mobility and high degree of polarization.
Available studies show that, in Peru, the probability that a child of a poor or
illiter-ate parent will ever be nonpoor or literilliter-ate is unusually small. Similarly, the widening gap between groups that are growing internally more homogeneous is worrisome, especially in terms of race and geography: on average, an indigenous Peruvian living in a rural area has 10 times more probability of being extremely poor than a non-indigenous one living in a city. And, controlling for all other differences, the degree of racial “whiteness” has proven to be a powerful determinant of both access to serv-ices and salary premia.
Why has poverty in Peru been so slow to react to growth? Part of the answer is that, on average, growth has so far been concentrated on capital-intensive sectors—there are simply not enough jobs for the poor in the extractive industries. Policies that would
“widen” the growth base, as described earlier, would help deal with this. But the more fundamental reason is that the poor in Peru lack sufficient human capital and initial support systems. This condemns the absolute majority of them to work in the small and informal sector, where productivity is lowest, and makes it particularly difficult for them to recover when a shock (be it the illness of the household head or a natural dis-aster) strikes them. Thus, the problem of poverty cannot be solved through growth alone. The country needs to come to terms with the idea that eradicating poverty will require a different way of doing social policy, based on standards, results, and accountability—it will require a new social contract. To be clear, if Peru does not grow, and if it does not grow fast, no social contract will ever have much effect on poverty.
But growth, while necessary, will not be enough. The country has to set its public edu-cation and health systems free from the low-level equilibrium where a cobweb of vested interests has trapped them; it has to spend more on social assistance; it has to extend the benefits of its courageous pension reform to all the elderly, not just the rich; and it has to face up to the “youth boom” building in its demographic pyramid.
Lifting the Veil from Education Performance
Peru has for decades outperformed other Latin American countries, including much richer ones, in extending the coverage of its education system to all its citizens. This expansion of access has been costly—even though per student, per teacher, and per dollar of GDP, Peru spends less than comparable countries. But, while Peru has been remarkably successful in sending its children to school, once there, they learn remark-ably little. In the most recent international learning assessment in which the country participated and which included some 41 countries, Peru came 41st—last.24Even the best-performing Peruvian students performed only at the OECD average. More than half of Peru’s first and second graders cannot read at all. And the inequality of achievement across students of various social classes is stunning—it matches that of apartheid-marred South Africa. Not surprisingly, the data show that the country’s public secondary schools turn out graduates that, on average, have no learning or critical skills and are, thus, unemployable.
In other words, Peru is very well schooled but very poorly educated. There exist plenty of technical diagnoses of the problem, and plenty of policy recommendations
to fix it. The analysis points to six main factors: poor teacher and teaching quality;
limited actual time on task; the students’ unfavorable socioeconomic backgrounds;
inadequate curricula, infrastructure and materials; overcentralization of decision making; and lack of parental involvement. These factors are not unusual among developing countries. What is astonishingly unusual is that so little (and for so long) has been actually done in Peru to reform the system. Peruvian society seems to toler-ate the failure of its public education system. Why?
We argue that behind the low-quality equilibrium in which Peru’s education appears to be trapped, there is a fundamental lack of standards, of information on where the country stands vis-à-vis those standards and, ultimately, of accountability for the results. Take, for example, literacy, perhaps the easiest learning area around which a standard can be established. An average second grader in Chile is expected to read 60 words per minute, a level at which he would be considered “at risk” in the United States. The corresponding figure in Peru is lower than 30. But, since there is no official literacy standard, or actual official data to compare against the standard, there is no social pressure to improve reading skills either. And, when official stan-dards do exist, they are less than comprehensible—second graders should “...reflect the linguistic functioning of the texts, and systematize their findings to improve their reading and text production strategies.”25With this lack of clarity as to what Peru-vian children should be able to do (and can actually do), it is not surprising and somewhat ironic that most parents report to be happy with the schools, while teach-ers report to be aware that they are not meeting their classroom goals (when they have them at all). All this is, of course, even more complicated when the school in question is meant to provide intercultural and bilingual education. To be sure, a few public schools in Peru are excellent, but this is the result of random idiosyncratic fac-tors (like a brilliant teacher) rather than of any systemic structure of incentives.
It is that lack and asymmetry of information that has locked the state (govern-ment, politicians), the suppliers of education (teachers, administrators) and the con-sumers (pupils, parents) in a self-fulfilling cobweb of low compensations, low expectations, and low performance. Beyond technical reforms, a true change of cul-ture seems necessary—a new educational contract—ushered in by a new awareness of the system’s past failures. The country needs to lift the veil that has for so long cov-ered its educational performance. First and foremost, Peru needs to establish simple, specific, and grade-by-grade learning standards (at the very least in reading and numerical skills) as well as a secondary school-leaving certification exam. It should thereafter evaluate performance on a continuing basis and publish the results, disag-gregated by provinces, by schools, and by peer groups. Second, clear mechanisms for accountability should be put in place. Parents should have a statutory majority in school governing councils, and the councils should have approval powers over school budget allocations, principal and teacher selection and retention, and service out-sourcing. Third, in exchange for greater transparency and accountability, teachers should get a better support system. This should include a better, performance-based compensation package, quality pre- and in-service training, and upgraded learning
tools (especially reading materials). All the above will be expensive. It may cost an additional 1 to 2 percentage points of GDP per year in the long run. But, if (an important “if ”) it is spent as part of the introduction of standards and accountabil-ity in education, it will be one of the best investments the country has ever made.
The incoming government will have an unprecedented opportunity to leap onto that “higher-quality equilibrium.” As the decentralization of state functions unfolds, Peru will soon be faced with the devolution of responsibilities for education down to the local level. This will provide an appropriate political and fiscal context to estab-lish new educational standards and to hold local governments accountable for them.
Bringing Health to the People
A massive failure of accountability has kept Peru a lot less educated than it should be.
A similar failure has also made it a lot less healthy. Or so we think—for lack of data makes public health, and public expenditure in health, all but impossible to diagnose accurately and manage efficiently. This much is known, though: one in every two Peruvians has no health insurance; two out of every three poor Peruvians who fall ill get no professional help; and while infant mortality has fallen, maternal mortality rates are twice as high as the Latin American average. The health care industry is organized, financed, and run to suit an epidemiological profile that is disappearing:
there are five separate, vertically integrated suppliers (the Ministry of Health; which caters mostly for the poor; the insurance system for formal workers—EsSalud—; one system each for the armed forces and the police; and a growing universe of private for-profit and charitable providers). Each of them de facto has its own separate poli-cies, funding and facilities, thus failing to exploit economies of scale or pool risks.
This was suitable for mass coverage of first-generation diseases. It remains suitable for some of the illnesses that still affect the rural poor (malaria, dengue, tuberculo-sis). But it is out of sync with the new, more complex needs of the country’s aging population (tumors, circulatory, sexually transmitted diseases).
How should Peru adapt to a distribution of health needs that is becoming “bino-mial”—on one end, poor Peruvians requiring basic care and, on the other, richer ones seeking second-generation services? For the preventive and primary care of the poor, expanding the Ministry of Health’s existing models of health management seems the correct option. On the demand side, this would imply the expansion of the Seguro Integral de Salud (SIS), the state-funded insurance scheme that pays for some services to some of the poor. Ultimately, the SIS should become a means-tested universal health insurance—for all the poor and for all pathologies. On the supply side, the utilization of the so-called Comités Locales de Administración de Salud (CLAS)—nonprofit community associations that, by now, administer under con-tract with the Ministry of Health one in four of its clinics—has proven highly effec-tive. They have freedom to manage inputs (including labor) and thus can bypass many of the bureaucratic and union barriers that paralyze other parts of the system.
In return, they are instantly accountable to local citizens.
For more advanced health care needs, especially of its nonpoor population, Peru needs to break the silos across public sector systems (Ministry of Health, EsSalud, Armed Forces, Police). There is no technical reason why those systems could not compete to supply services to each other’s policyholders, pool their insurance risks, or consolidate their procurement. This should allow not only for obvious cost sav-ings but also for the joint coverage of more intricate, or more unusual, diseases.
Naturally, expansion of the SIS and the CLAS in the allocation of central govern-ment (that is, Ministry of Health) resources, and the pooling of functions among all public sector healthcare providers, will threaten the status quo in Peru’s health sector.
An array of vested interest (including unions) would be affected. As local associations take over the management of a larger number of the Ministry of Health’s clinics, and impose tougher standards of efficiency and accountability, idle or nonperforming medical personnel would become redundant. Similarly, consolidating procurement across public sector health systems would put price pressure on medical suppliers.
The political toll of these reforms will not be small. But here again, the country’s ongoing decentralization process provides a unique opportunity: as central govern-ment resources and responsibility for health care are devolved to local authorities (which so far they have not been), users will have a larger role in deciding how those resources are spent and what results are achieved—exposing the vested interests that block efficiency-enhancing reforms.
Investing in Social Assistance
It is clear that improving Peru’s health and education requires more reform than money. The opposite is true for its social assistance. The country 30-odd antipoverty programs deliver three types of transfers to the poor—basic food, temporary work, and community infrastructure. Food programs (notably, Vaso de Leche, Desayuno Escolar, and Comedores Populares) have an extensive coverage and, contrary to public perception, are fairly well targeted. They reach more than 9 million people—one in every three Peruvians. But, with a total budget of 0.4 percent of GDP, the average benefit per person is only about US$2 per month, an almost insignificant fraction of the extreme poverty line of US$1 per day. Similarly, the beneficiaries of the urban and the rural temporary work programs (A Trabajar Urbanoand A Trabajar Rural) are almost exclusively unemployed heads of households in the two poorest quintiles of the population. But the annual value of the program is less than 0.1 percent of GDP. And FONCODES, the social fund that finances demand-driven, community-executed, small infrastructure projects in the poorest rural areas, uses poverty maps to allocate its resources—regrettably, those resources are worth less than 0.15 of GDP per year.
To be sure, much could be done to enhance the impact of Peru’s antipoverty pro-grams within the existing budget envelope—consolidating their management from the scattered array of ministries, agencies, and levels of government currently involved; linking the programs to specific behaviors by the beneficiaries (for
exam-ple, children’s vaccinations); setting clear quantitative objectives (for examexam-ple, in terms of stunting); focusing on younger children (for example, by adopting age-related exit policies); lowering administrative costs (currently at 18 cents on the dol-lar for food programs); bringing efficiency and transparency to food procurement;
and so forth. However, what the country spends on social assistance is just too lit-tle—0.7 percent of GDP, which is less than half the Latin American average. Even if all of Peru’s antipoverty programs were perfectly and exclusively targeted on the extreme poor, the poverty gap (in essence, what the poor currently need to cross over the poverty line) would fall by less than 40 percent.
To make up for that shortfall, at least partly, the government has recently launched a conditional cash transfer program (Juntos) that, if continued, is expected to reach one in every 10 Peruvians by the end of 2006, at an annual cost of some 0.3 percent of GDP. The initial implementation of this program has been progressively targeted on rural regions with a high incidence of extreme poverty, and the monthly pay-ments of about US$30 per family are conditioned on children attending school and using preventive health services. The challenge will be in future implementation—
targeting beneficiaries in high-density urban areas will not be easy, and the risk of political capture will not be small. Hence, establishing a proper beneficiary identifi-cation system and setting clear quantitative objectives and lines of public accounta-bility priorto program expansion will be critical. Naturally, expanding Juntos (or an equivalent national program) to allthe poor will be costly; is there fiscal space for that? Suffice it to say that Peru spends almost the same on giving free university edu-cation to the children of the rich (that is, those in the top quintile of the income dis-tribution) as it does on all its social assistance programs put together.
Securing All the Old
If lack of income security is a problem for the active poor, it is all but a catastrophe for those in old age. Over the past 10 years, Peru has made excellent progress in rationalizing its pension system. A privately managed system of individual accounts was introduced for workers in the private sector that wanted to opt out of the go “National Pension System,” and many did. The fraud-riddled, pay-as-you-go pension system for civil servants (Cédula Viva), whose yearly cash deficit costs the state about the same as the whole of the annual public investment program (some 2.5 percent of GDP), was closed to new entrants. These reforms were not without glitches—for example, the issuance of the “recognition bonds” that made migration across systems possible was too slow; the limited initial level of competition among private pension administration companies resulted in high intermediation costs; and restrictions on overseas investments have kept pension funds excessively liquid. But as the market matured and regulation improved, those glitches have gradually disap-peared. On the whole, Peru’s pension reform has been good for the system’s partici-pants. The problem is that very few Peruvians participate—only one in 10 workers, the third worst participation rate in Latin America. More worrisome, the
participa-tion rate among the poorest 40 percent of the labor force is only 2 percent. Put sim-ply, poor Peruvians do not have pensions.
The central question is then how to extend income security to the poor. Admin-istrative measures will help, especially those that facilitate entry by self-employed workers and improve fiscalization of employers. However, administrative measures alone will not suffice. Peru needs to decide whether it will pay for a noncontributory benefit for the elderly poor. To be sure, such a benefit will not be free of problems, notably of focalization and moral hazard. So, if it is that difficult, why bother?
Because the country’s changing demographics and development pattern are quickly eroding the traditional, informal support networks on which the elderly poor rely.
Fertility rates have declined rapidly (30 years ago, the average Peruvian woman had more than seven children in her fertile life; today, she has fewer than three), reducing the number of family members that can look after the old. Similarly, because of rapid urbanization, fewer than one in three Peruvians lives now in rural areas, where com-munity networks are stronger. How much would it cost to give a noncontributory pension to all the old poor? Depending on design, we estimate that cost at some-where between 0.3 and 1.7 percent of GDP per year in the long run, substantially less than the deficit in the Cedula Vivascheme for public sector employees.
Making Room for the Young
The dual effect of the collapse in fertility rates and the rapid increase in life expectancy has brought Peru to a critical demographic point—over the next decade, the largest age cohort in its history (and, barring major societal changes, in its future) will pass from youth to adulthood. This will pose formidable challenges for policy makers—from education to employment, from culture to politics. Is Peru ready to accommodate this massive social transition? Probably not. One in every five young Peruvians (that is, those between the ages of 8 and 20) does not study or work, almost 2 of every 10 starts a family too early (that is, before the age of 18), and all are sadly and vastly overrepresented in crime statistics—as both perpetrators and vic-tims. Those who attend public school, on average, fail to meet basic international standards of learning. And those who try the labor market are twice as likely to be unemployed as the average worker. At the same time, the global economy is demand-ing ever more sophisticated skills—the proportion of world trade accounted for by medium- and high-technology goods almost doubled (to over 50 percent) in the last 25 years. More fundamentally, a discouraging sense of lack of opportunity dominates Peruvian youth—available evidence indicates that two-thirds of them would migrate abroad if given a chance.
These are of course long-run matters. As was discussed earlier, fixing Peru’s edu-cation system will take years, if not decades. The same will be true of the business and labor environments for micro enterprises—the usual entry point for young workers. Or of the judicial system, in whose hands too many young Peruvians find themselves. However, there is much that can be done in the short term to facilitate
the demographic transition, with relatively little investment. The country already counts with a plethora of public and private initiatives to give occupational and voca-tional training to the young—some, like PROJOVENor PERU ENPRENDEDOR, have been fairly successful. But there is little or no coordination, and much overlap, among them. They also lack a system of standards and certification, something that weakens their value in the labor market. An expansion of the now insignificant pub-lic program of secondary education scholarships, or even the introduction of condi-tional cash transfers, could make a major difference in retention rates (some 30 percent of the country’s youth does not finish high school). Similarly, the experience with “development marketplaces for the youth” (that is, grant-based funding of busi-ness projects on a competition basis) has been extremely successful and relatively inexpensive, and could be easily scaled up. Finally, but critically, the Peruvian young need to be heard to be understood. Although incipient, recent initiatives to consult youth from all social strata in the design and implementation of public policy and development projects have been excellent.26With a vibrant and growing community of civil society organizations ready to help, the next government will find fertile ground to create further spaces and forums to engage the next generation.