Economic growth matters, but it is just one facet of development. Policy makers focus their attention on ensuring that their country's development path is sustainable and that the lives of their citizens improve. This requires reconciling economic, social and environmental objectives.

Peru has experienced extraordinary progress in the past two decades. Significant improvements in economic growth, well-being and poverty reduction have been observed since the introduction of macroeconomic reforms and more effective social programmes in the 1990s and 2000s. The country has raised its per-capita income level, reaching the status of an upper middle-income country, and an expanding middle class now represents around a third of the population.

This document is the first report prepared in the context of the Multi-dimensional Country Review (MDCR) of Peru. The MDCR is undertaken to support Peru in achieving a sustainable path of development that continues to improve the well-being of its citizens and provide solid economic growth. The MDCR of Peru is being implemented in three phases, each leading to the production of a report. This first report aims to identify the main constraints on achieving sustainable and equitable improvements in well-being and economic growth. The second report will present in-depth analyses of the key policy areas identified in this first report in order to formulate recommendations for Peru. The final report will provide prioritisation, sequencing and a framework for measuring progress.

Peru has experienced significant improvements in growth, well-being and poverty reduction since the introduction of macroeconomic reforms, economic openness and more effective social programmes in the 1990s. However, the country still faces structural challenges if it is to escape the middle-income trap and consolidate its emerging middle class. The quantitative and qualitative analyses conducted as part of this Multi-dimensional Country Review offer a diagnosis of these barriers to sustainable and inclusive development. In particular, this chapter presents the results of the OECD well-being analysis, which paints a comprehensive picture of people’s material living conditions and quality of life in Peru. It also summarises the main bottlenecks to inclusive development, studied in more depth in the chapters that follow. These include health, education and skills, the labour market, innovation, transport infrastructure and logistics, governance, and trust in institutions. These dimensions have considerable implications for the levels of productivity, inequalities and labour informality in Peru.

This chapter focuses on three key aspects: health, education and skills, and work. Peru is underperforming relative to its upper-middle income status in these three areas, and they seem to be particularly important for the future well-being of Peruvians and essential for social inclusion. The access to the health system is unequal. Coverage in education has expanded widely, but quality remains poor across all levels and the most socio-economically disadvantaged, especially women and the rural and indigenous population, experience significant inequality. A mismatch between existing skills and the needs of the economy is a key barrier to development. Furthermore, informal employment is still widespread, albeit declining. To overcome the persistent inequalities, Peru needs to create the incentives to formalise the labour market extensively.

Most of the gap in GDP per capita between Peru and the OECD economies can be explained by Peru’s low labour productivity. The few economic sectors in Peru with high labour productivity, such as mining, create only a small number of jobs. Improving total factor productivity will be key for promoting inclusive growth. A national strategy needs to be implemented to take advantage of Peru’s natural resources to capture further valueadded. Upping the levels and quality of investment in research and development, innovation, transport infrastructure and logistics will boost competitiveness and increase efficiency. Continuing to improve the business environment, including contract and competition enforcement and support to small businesses will all help boost confidence and promote sustainable development.

Peru’s macroeconomic performance has been extraordinary over the last decade. This performance is in part the result of a very favourable external environment, but is also a consequence of a successful combination of sound fiscal policy and monetary credibility. While the former is based on a fiscal responsibility law, the latter is supported by an inflation targeting regime under a dual monetary system. This is a great achievement: a sound macroeconomic framework provides the foundations for a more competitive economy and greater social equity. However, there is still room for improvement. Peru still has a relatively underdeveloped and inefficient financial market. Also, the high level of dollarisation of the financial system increases the economy’s vulnerability to external shocks. Finally, a comprehensive fiscal reform is needed to improve the efficiency and equity of the tax system, and in particular to increase fiscal revenues. A more effective and progressive taxation system will be crucial to finance several structural challenges highlighted in the previous chapters, and to reduce income inequalities in Peru.

Peru should enhance its governance and state capacity to prioritise and effectively implement the policies highlighted in the preceding chapters. Better governance is not an end in itself but a means to achieve the policy objectives needed to boost inclusive development. In particular, tackling corruption should both increase the trust citizens have in their government and build state legitimacy. The governance of the judiciary and legislature should improve, while central government requires better co-ordination and enhanced leadership to drive long-term reforms. Much has been done to integrate the private sector in expenditures and investments, but better management of the process is needed to avoid inefficiencies and unexpected fiscal costs. At the regional level, the allocation of public resources does not contribute to reducing sub-national disparities, and local governments require more capacity to improve their policy making. Although the environmental institutional framework has improved in recent years, implementation of public policies to foster environmental sustainability remains weak.