Chapter 2. Towards higher economic diversification and productivity in Peru

This chapter analyses and provides recommendations to boost economic diversification and productivity in Peru. An analysis of Peru’s recent performance in productivity and economic diversification indicates a marked need to boost both in order to achieve a more inclusive development. Several opportunities emerge based on potential new products to export and recent experiences in both successful economic diversification and the promotion of start-ups and entrepreneurship. The chapter identifies policy focuses needed to seize these opportunities, including further innovation; small and medium-sized enterprise (SME) sustainability and reduced barriers to entrepreneurship; and increased regional integration. Better management of commodity-based revenues at the sub-national level and improvements in the taxation system are also relevant to Peru’s development goals. The chapter concludes with recommendations for the institutional framework to improve the design and implementation of Peru’s strategic development agenda.

  

Further economic diversification and productivity is needed in Peru to overcome the so-called middle-income trap (MIT) and increase well-being for all Peruvians. Gains in productivity have been slow in the past decade, and further economic diversification would increase formal job creation and reduce dependence on external demand for commodities.

Based on recent experiences and potential new sectors, recommendations and policy actions to increase economic diversification and productivity in Peru are indicated. Key among them is the need to enhance the institutional framework to promote better prioritisation and implementation of policies for greater competitiveness.

This chapter analyses economic diversification and productivity in five sections. First, the chapter analyses the recent performance in labour productivity and total factor productivity, and the external sector composition in Peru. Second, it identifies new activities contributing to further economic diversification based on international experiences. Given the recent growth in non-traditional exports in sectors such as agro-industry, tourism, metal-mechanics and forestry, the chapter also presents the pre-conditions and successful paths for further diversification in Peru. It also analyses recent programmes and initiatives implemented to enhance start-ups and entrepreneurship. Third, the chapter presents policy actions to increase productivity and economic diversification through several channels, including 1) boosting entrepreneurship, SMEs and innovation; 2) increasing regional integration; 3) improving management of commodity-related revenues; and 4) increasing fiscal revenues and implementing a better taxation structure to promote equity and entrepreneurship in Peru. Fourth, the chapter focuses on and provides recommendations for the institutional framework to improve the design and implementation of a strategic plan in Peru at both the national and sub-national level. The chapter concludes with the resulting main policy recommendations.

Peru needs to boost productivity growth and increase economic diversification

Peru’s recent period of high and sustainable growth in gross domestic product (GDP) per capita helped it to achieve upper middle-income status in 2008, but this success is not without the challenges of a MIT economy. Sound macroeconomic performance in the past decade has been favourable to high and sustainable economic growth and has been underpinned by better macroeconomic management and an exceptionally favourable external environment.

However, despite this impressive surge in GDP per capita performance, Peru has not been able to close the gap with other emerging markets, and formal job creation remains sparse. Boosting productivity and economic diversification are fundamental to overcoming the MIT and providing better jobs in Peru.

Productivity growth has been slow and heterogeneous across sectors and regions

Escaping the MIT will require increases in productivity and greater diversification of the economy. Like Brazil, the People’s Republic of China (China) and Korea, Peru features relatively high labour utilisation, which means that the key barrier affecting GDP per capita is labour productivity (OECD, 2015). Peru’s labour productivity represents close to 30% of the average for OECD member countries. Furthermore, although some progress has been observed in the past decade, the labour productivity gap has increased, compared to the 1980s (Figure 2.1).

Figure 2.1. Labour productivity gap in Peru and selected benchmark countries (% of OECD average), 1980-2016
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Note: Labour productivity per person employed in 2014 in USD (converted to 2014 price level with updated 2011 purchasing power parities [PPPs]).

Source: Based on The Conference Board (2016), Total Economy Database (database), The Conference Board, New York, www.conference-board.org/data/economydatabase/ (accessed on 1 July 2016).

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Improving total factor productivity and human capital will be key for promoting labour productivity. Labour productivity, calculated as the output per worker, can be broken down into human capital, physical capital and total factor productivity (TFP). Compared to the United States, Peru’s TFP alone accounts for 49% of the labour productivity gap; years of schooling accounts for 27% and quality of education accounts for 22%. Peru’s TFP has grown at an annual rate of less than 2% over the last two decades – not enough to close the gap with OECD economies and most of the benchmark countries (OECD, 2015).

Recent policies adopted in education are welcome and these efforts should continue in the years ahead to boost labour productivity and inclusive development. Some recent policies such as incentive mechanisms to improve the quality of teachers, the implementation of “jornada única” (full-time school model) to avoid the prevalence of two or even three-shift schools, the creation of SUNEDU (Superintendencia Nacional de Educación Superior Universitaria) as an independent body for supervision of the quality of higher education, further investment in school infrastructure, in particular in remote areas, and the development of platforms to increase information on labour demand such as “Ponte en Carrera” are determinant to improve the quality of education for all Peruvians. Further fiscal resources and improvements in the effectiveness of public expenditures are fundamental to close the educational gap in Peru (Chapter 4; OECD, 2016a). The importance of these issues is reflected in the OECD’s Country Programme for Peru, which includes various reports on these themes: first, a vocational education and training review, focusing on the functioning of the VET system and on ways to improve it. Second, an “Investing in Youth” review, which will deal with issues related to the school-to-work transitions of youth and provide policy options to improve this. Finally, the Country Programme also includes an OECD Skills Strategy for Peru, which provides a comprehensive assessment of the main skills challenges and needs in the country.

Labour productivity varies widely across firms and economic sectors in Peru. The few sectors with high labour productivity, such as mining and finance, create few jobs. By contrast, retail and restaurants, and agriculture create close to half the employment and remain the lowest productivity sectors in Peru (Chapter 4). Furthermore, the productivity of firms exhibits high heterogeneity, compared to other Latin American economies and especially to the United States. While in Peru, the ninetieth percentile of most productive firms are 500% more productive than the tenth percentile, in the United States, it is approximately 200%, highlighting significant disparities in the allocation of production factors in Peru (Vostroknutova et al., 2015).

The total change in productivity can be broken down into a “within-sector” effect (driven by technical change and capital accumulation), a “between-sector” effect (driven by reallocation of labour resources between sectors) and a “cross-sector effect” (driven by the interaction between productivity changes and employment shares).

Within-sector accounted for the largest proportion of total labour productivity growth in the last decade in Peru. Positive within-sector and between-sector largely offset the negative cross-sector (Kaldewei and Weller, 2013). This is the result of the closing productivity gap between growth in slow-growing sectors gaining employment share and fast-growing sectors, such as mining, losing employment share. In the period 2002-12, while cross-sector contracted by more than 2%, within-sector expanded by more than 34%, and between-sector expanded by more than 12%. Most of the within-sector gains come from services and agriculture (Figure 2.2). Regarding the mining sector, most of the labour productivity gains come from the reallocation of labour, while within-sector and cross-sector were negative.

Figure 2.2. Labour productivity growth (%) by economic sector in Peru, 2002-12
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Note: The total economy is the sum of the economic sectors and is represented as PERU in Figure 2.3.

Source: OECD calculations based on data provided by the National Institute of Statistics (Instituto Nacional de Estadística e Información [INEI]).

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Similarly, at the sub-national level, most of the productivity growth is owing to within-sector and, to some extent, between-sector. However, high heterogeneity in terms of productivity growth was exhibited across departments in Peru (Figure 2.3). Most of the departments abundant in commodities as a percentage of the gross value added (GVA) exhibit high labour productivity, accounting for most of the high levels of GDP per capita (OECD, 2015). However, most of these departments reported negative or low productivity growth in the past decade. In particular, within-sector were negative or close to zero for some of these departments, such as Ancash, Madre de Dios and Pasco. Aspects intrinsic to the natural resources market, such as the reduction of metal prices, are affecting labour productivity in this market.1

Figure 2.3. Labour productivity growth (%) by region in Peru, 2002-12
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Note:

* denotes the three most important departments producing mining in Peru as a percentage of the GVA: Pasco (44%), Madre de Dios (28%) and Ancash (26%).

Source: OECD calculations based on data provided by the INEI.

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Towards higher economic diversification

Hard commodities continue to represent a high proportion of the trade and capital accounts in Peru. Despite commodities only accounting for nearly 10% of Peru’s GDP in 2015, regarding the external sector, mining attracted about a third of foreign direct investment and represented 61% of Peru’s annual exports in 2015.2 These natural resources comprise several mining components and, to a lesser extent, oil and natural gas. With its abundant and diverse natural resource supply, Peru stands among the top global producers of some of these minerals (OECD, 2015).

Some of Peru’s agro-processed and metal-mechanical products have started to play a more significant role in world trade, but together they represent less than 10% of exports (Figure 2.7 below).3

Throughout 2015, 19% of exports were destined for China, Peru’s largest export destination (ADEX, 2015). By sector, 30% of exports to China were concentrated in primary production and 70% in natural resource-based products (OECD/Development Bank of Latin America [CAF]/Economic Commission for Latin America and the Caribbean [ECLAC], 2015).

Favourable exogenous conditions in the mining sector have been deteriorating. In the period 2004-14, the export value of commodities increased by 130%, due mainly to export prices rather than gains in productivity and production. Nowadays, terms of trade are decreasing. In the period 2012-15, terms of trade worsened by more than 15% (OECD, 2015; Reyes, 2016).

Furthermore, China’s demand for commodities should continue to contract as the country rearranges its imports composition. The “new normal” in China imposes new challenges on Peru to adapt its economic structure. Based on macroeconomic scenarios for China, Peru’s exports will slow down from an impressive 16% annual growth in the period 2001-10 to less than 3% up to 2030 in the baseline scenario (Figure 2.4). Under the low-investment scenario for China, mining exporters would face an even more challenging environment for job creation and investment in this sector, while manufacturing exporters would be more resilient (OECD/CAF/ECLAC, 2015).4

Figure 2.4. Projections for Peruvian and other Latin American exports to China, 2010-30
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Note: Baseline scenario and low-investment scenario refer to average annual exports growth in the period 2011-30. Clusters are defined as follows: agriculture (Argentina, Brazil, Guatemala, Honduras, Nicaragua, Paraguay, Uruguay); mining and ores (Chile and Peru); manufacturing and services (El Salvador, Costa Rica, Dominican Republic, Mexico); and fossil fuels (Bolivia, Colombia, Ecuador and Venezuela).

Source: OECD/CAF/ECLAC (2015), Latin American Economic Outlook 2016: Towards a New Partnership with China, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264246218-en.

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Aside from its greater vulnerability to fluctuating commodity prices and to Chinese demand for commodities, concentrated production in this sector also presents severe challenges to sustainability. These include long-term environmental impacts, lack of job creation capacity, weak links to local economic sectors and rising social conflicts (Swiss Economic Cooperation and Development [SECO], 2013). Overcoming growing dissent about mining requires a continuous relationship between communities and mining, with the industry making greater contributions at local, regional and national levels. This may be achieved by establishing and advancing environmental standards, as well as adopting technological improvements to production to monitor and reduce adverse effects, while offering the greatest opportunity for development progress. This is particularly relevant in artisanal and small-scale mining, where emissions and releases of mercury are a matter of great national concern (ECLAC/OECD, 2016).5

Because Peru specialises in primary products, it largely participates in the lower end of supply chains, providing inputs to other countries’ production processes (forward linkages), rather than receiving production inputs from abroad (backward linkages) (OECD, 2015). Consequently, Peru participates in global supply chains more as a provider of value-added than as a recipient and is among the top providers of domestic value-added used in foreign exports among Latin American and Caribbean (LAC) countries (Blyde, 2014).6

More accurate data are needed to analyse Peru’s opportunities in global value chains. The latest input-output table data are from 2007; given recent changes in the production structure, an update is needed. Moreover, in the context of the OECD Country Programme with Peru, the inclusion of Peru in the OECD-World Trade Organization (WTO) Trade in Value-Added (TiVA) is fundamental to providing further analysis and insights into Peru’s commercial relations.7

Productivity growth remains low. Along with a new international context in the demand for goods and services and the risks of being dependent on commodities, policy actions towards increasing economic diversification and productivity are pressing.

Opportunities to increase productivity and economic diversification

The experience of benchmark countries and international demand suggest some new products that would increase productivity and formal job creation. Instances of successful contributions to economic diversification in Peru, such as agro-industry and tourism, evidence the pre-conditions needed for greater diversification. This sub-section also highlights the recent development of two sectors: metal-mechanics and, to a lesser extent, forestry. Last is a summary of recent initiatives supporting start-ups and entrepreneurship in Peru.

Identifying promising exports

Peru has at its disposal a large set of products with unexplored potential to broaden economic diversification and boost productivity. Taking into account current global trends and domestic challenges, there are opportunities for new exports that have the potential to create formal jobs, boost productivity and produce more processed products.

Promotion of economic diversification should target industries that could profit from the latent comparative advantages of Peru’s economy. Industries that exploit comparative advantages become competitive in domestic and international markets, making them sustainable beyond government support (Lin and Monga, 2010). Comparing Peru’s current endowment structure to equivalent international economies is informative in identifying unexploited sectors.

In the case of Peru, international comparisons are based on OECD emerging economies, countries that have moved from middle- to high-income status in recent years and economies dependent on natural resources. The identification process builds on the benchmark countries, selected in conjunction with the Ministry of Economy and Finance (MEF) of Peru, in the OECD’s Multi-dimensional Review of Peru: Volume I. Initial Assessment (Chapter 1).

Within those parameters, identification of unexploited sectors proceeded through three stages (Annex 2.A1). First, only export products with a revealed comparative advantage (RCA) in at least one of the benchmark countries during country-specific periods were retained. These periods corresponded to five years of high GDP per capita growth and, when applied, to periods preceding an upgrade to high-income status. Second, only products with growth rates higher than world trade growth in the period 2010-13 were considered. Third, the resulting set of products were ranked according to key dimensions, such as the level of manufacturing, exports growth rate, labour productivity, labour and capital intensities, and the probability that Peru starts exporting the selected products.8

Peru can explore new products to broaden economic diversification and boost productivity

The resulting set of products indicate untapped opportunities for the export of more highly processed goods, as some benchmark countries have done in recent decades. Out of the 193 identified products, 150 of them were not exported with a RCA by Peru in 2013. Of that 150, 55% are fully-processed products, 22% are semi-processed and 23% are unprocessed. They range over diverse sectors, including agricultural and forestry machinery; operation of fish hatcheries and fish farms; vegetable and animal oils and fats; cocoa, chocolate and sugar confectionery; and textile fibre preparation and weaving. The large proportion of fully-processed goods shows that product diversification can be extended towards more manufacturing goods.

Nevertheless, Peru’s specialisation in unprocessed products is not unjustified, given that its capabilities make the production of unprocessed products more likely. The probability that a country starts to export a product can be estimated by measuring the proximity in the capabilities involved in the country’s current export basket and those needed to export a new product (Annex 2.A1; Hidalgo and Hausmann, 2009). The probability measure for the identified products for Peru shows that unprocessed products are 0.68 standard deviations more likely to be produced by Peru than semi-processed goods. Unprocessed goods are 1 standard deviation more likely to be produced than fully-processed goods.

Yet, various semi- and fully-processed products could be exploited by Peru. The difference in RCAs among products with equal probability defines unexploited sectors. In particular, there are 12 identified products with a RCA below 1 and with a probability to be produced higher than 1 standard deviation of the average. Peru would benefit from developing a RCA in unprocessed products such as edible nuts, greasy wool or fish fillets (fresh or chilled). Among those fully- or semi-processed products, Peru could profit from the production of wine from fresh grapes, olive oil, palm oil, sugar confectionery, smoked fish, liquefied butane, electronic switch boards or crocheted textile fabrics (Figure 2.5).

Figure 2.5. Top 35 most likely Peruvian exports by level of processing and RCA index, 2014
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Notes: RCA (revealed comparative advantage) is an index based on Balassa (1977); values larger than 1 suggest current specialisation in a product by the country. Products are classified according to the SITC rev. 3 at the 4-digit level (in parenthesis in X axis). Density is a measure based on Hausmann and Klinger (2007), which captures a country’s propensity to export a product (Annex 2.A1). Y axis = normalised values of the density measure (i.e. average set to 0 and standard deviation equal to 1). The categorisation of products according to manufacturing levels follows Rieländer and Traoré (2016).

Source: OECD calculations based on exports data from World Integrated Trade Solution (WITS)/United Nations (UN) Comtrade (database) (accessed on 1 June 2016).

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Information concerning labour productivity, labour and capital intensities, and output to value-added ratio is only available for manufacturing industries, which represent 151 products (78% of the selected products) and covers mainly semi- and fully-processed products.

On average, fully-processed goods amount to USD 54 550 of value-added per worker annually, compared to USD 10 1625 for semi-processed. On average, fully-processed goods are more labour intensive than semi-processed (4.2 percentage points higher participation of wages on output), but capital participates more on output in semi-processed (by 1.1 percentage points).9 Finally, fully-processed goods incorporate 2.89 percentage points more of aggregate value per unit of output than semi-processed.

Some new semi- and fully-processed goods could boost labour productivity and job creation in Peru. Potential products involve higher levels of labour productivity and labour intensity than Peru’s manufacturing sector (origin in Figure 2.6). Particular semi- and fully-processed products with a RCA below 1 emerge: for example, apparel (woven blazers and coats), sugar confectionery, wine from fresh grapes, olive oil, and inorganic bases and metal oxides, hydroxides and peroxides.10

Figure 2.6. Average value-added and labour intensity per worker for manufacturing sectors in Peru
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Notes: Origin = Peru’s average value-added (VA) and wage intensity in the manufacturing sector in 2007 (category D, International Standard Industrial Classification [ISIC], Rev. 3). Wage intensity is the fraction of output paid in salaries and wages. For each product, the average was calculated at the 4-digit level of the ISIC classification. Calculations based on the sample of benchmark countries using the time periods for which data are available (1990 to 2010). Panel A: RCA is an index based on Balassa (1977) that measures the ratio between the contribution a product makes to the exports of a country and the same product’s contribution to world trade. Values larger than 1 suggest specialisation of a product by the country. Panel B: The categorisation of products according to manufacturing levels follows the work of Rieländer and Traoré (2016), which is based on the classification of the WTO’s MTN.

Source: OECD calculations based on exports data from WITS/UN Comtrade (database) and United Nations Industrial Development Organization (UNIDO) (database) (accessed on 1 June 2016).

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Products identified with potential for further exploitation are heterogeneous, gathering sectors such as fish farming, the production of agricultural and forestry machinery, textile manufacturing, insulated wire and cable, and cultivating fruits and vegetables. The products also vary in their level of processing. Peru would benefit from developing a RCA in unprocessed products such as edible nuts, greasy wool or fish fillets (fresh or chilled). Among semi- or fully- processed products, Peru could profit from the production of wine from fresh grapes, olive oil, palm oil, sugar confectionery, smoked fish, liquefied butane, electronic switch boards and knitted textile fabrics.

The methodology for identifying products is only one element in determining those with potential to contribute to economic diversification. It should be complemented by other tools, analyses and considerations, such as Peru’s characteristics at the sub-national level, acknowledging its territorial diversity. Furthermore, geographical constraints should be taken into account in ruling out or exploiting identified products.11 Peru should continue efforts to design and execute diversification policies at the regional level.

Essential to exploiting these opportunities is a consideration of the tangible and intangible pre-conditions to produce more effectively in Peru – pre-conditions revealed from policies and private experiences at both the national and sub-national level. Recent successes in some sectors are informative for the development of potential sectors (see below). For instance, specific skills, targeted investment in research and development, efficient logistics services and effective co-operation with academia and international actors are some of these pre-conditions.

Products beyond commodities with lessons for greater diversification

However useful relative factor abundance is in identifying product markets, diversification goes beyond comparative advantages and involves a discovery process (Hausmann and Rodrik, 2003). This is illustrated by the incorporation of new products into Peru’s export bundle (Freund and Pierola, 2010).

Although the mining sector still represents close to 60% of total exports, new products for export have emerged in the past decade, notably in agro-industry. In the period 2004-14, asparagus, avocados and grapes in particular grew 20.8% annually on average, and their participation in total exports increased by 2.09 percentage points (Figure 2.7, Panel A). However, in 2015, it still only accounted for less than 5% of total exports (Figure 2.7, Panel B).

Figure 2.7. Export diversification in Peru
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Note: Grapes, mangoes, asparagus and avocados include mangosteens.

Source: Panel A: OECD calculations based on Central Bank of Peru data on textiles, mining, metal-mechanics and total value www.bcrp.gob.pe/estadisticas.html; and on INEI data for avocados, asparagus and grapes www.inei.gob.pe/media/MenuRecursivo/publicaciones_digitales/Est/Lib0774/libro.pdf and www.inei.gob.pe/media/MenuRecursivo/publicaciones_digitales/Est/Lib1253/compendio2015.htm. Panel B: OECD calculations based on Superintendencia Nacional de Aduanas y de Administración Tributaria (SUNAT) data.

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The success and development of two key sectors – agro-industry and tourism – and two nascent sectors – metal-mechanics and forestry – provide lessons for increased economic diversification in Peru. Among them are appropriate use of technology in different phases of production and distribution; efficient interaction between the private and public sectors; development of economies of scale through clusters; and favourable external demand.

The development of the agro-industry in Peru

The development of the agro-industry has been remarkable since the initial expansion of asparagus in the late 1980s. Mirroring that development, new products built on existing knowledge and infrastructure. Grapes and avocados, among other products, rapidly expanded as of the early 2000s. Others surging products include mandarins, mangoes, artichokes, paprika, passion fruit, citrus fruits and berries (Figure 2.8, Panel A). Expansion of agro-processing has made Peru the main exporter of asparagus for the past decade, accounting for 36% of world’s exports in 2013. Peru is also the third largest exporter of avocados, the fourth largest of chillies and peppers (world’s largest for Paprika), and sixth largest of grapes, mangoes, mangosteens, guavas, tangerines, mandarins, clementines and satsumas (based on FAO, 2014).

Figure 2.8. The development of agro-products in Peru
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Notes: Panel A: Averages for the periods 1980-89, 1990-99, 2000-09 and 2010-13. Paprika belongs to the category chillies and peppers, dry.

Source: Food and Agriculture Organization (FAO) (2014), FAO STAT (database), Food and Agriculture Organization of the United Nations, Rome, http://faostat3.fao.org/download/Q/QC/E (accessed on 1 July 2016).

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The emergence of the agro-industry provides valuable insights into key relationships for achieving higher productivity and economic diversification.12 These include external factors affecting the demand and supply of these products, private partnerships with both external actors and the public sector, reforms aimed at increasing land productivity and opening markets, and the development of domestic research and areas affecting agro-processing in Peru.

Taking advantage of external conditions

A key external driver of the Peru’s initial expansion of asparagus production in the 1980s was the decrease in production by Chinese Taipei, then the largest exporter. China and Peru were able to meet the unattended demand (Shimizu, 2006; Figure 2.8, Panel B). In addition, favourable temperatures in Peru yield two harvests per year versus one in the northern hemisphere. Thus, Peru can supply asparagus during northern markets’ off-season. Finally, asparagus would later benefit from the rising demand in emerging and developed markets for healthy food.

Co-operating with international actors

Several partnerships and co-operations with external actors favoured the adoption of international technology standards in the production process. In the 1980s, the partnership between the U.S. Agency for International Development and the International Co-operative Agriculture Association resulted in the creation of an asparagus seed variety and the promotion of asparagus exports to the United States. Later, drip irrigation technology would be adapted from Israel (Shimizu, 2009). Some recent instances of foreign influence include imports of plastic covers from Italy to create favourable micro climates,13 and imports of chemical fertilisers, new seed varieties and pest control mechanisms.

Favouring the interactions between the private and public sectors

Partnerships and associations between the public and private sector were fundamental in developing the agro-industry across different dimensions. The Chavimochic irrigation project was initiated under public-private association, amplifying the benefits of drip irrigation. The third stage of the Chivomochic project is currently in progress. In 2004, the Olmos irrigation project was licensed, and in 2014, it was inaugurated. Supported by public entities, private companies created associations to improve co-ordination and capacity building among these firms. Thanks to the Comisión de Promoción del Perú para la Exportación y el Turismo (PROMPERU) and the Ministry of Agriculture and Irrigation (MINAGRI), the Instituto Peruano de Espárragos was created in 1998 to raise phytosanitary standards and open new foreign markets.

Supported by the Comisión para la Promoción de Exportaciones (former PROMPERU), the creation of sectoral associations contributed to the development of new products. These include the Asociación de Productores de Uva de Mesa del Perú for grapes, Asociación de Productores de Palta Hass del Perú for avocados, and Asociación de Productores de Cítricos del Perú for citrus fruits. These institutions contributed to reaching new markets, notably Northeast Asian countries in the last years (Meade, Baldwin and Calvin, 2010).

Public reforms and initiatives to increase productivity and open markets

In addition to private initiatives, the public sector made reforms aimed at developing the agro-industry’s reach to international markets. From the mid-1990s, land tenure became unrestricted, changing Peru’s agrarian structure. Under the new reforms, nascent large corporations where able to integrate production and distribution processes. Furthermore, the trade agreements held with the United States were renewed in 2012, and new commercial treaties were signed with China in 2009.

PROMPERU’s role to promote Peru’s products and to inform on new trends in international demand has contributed to the expansion of new products and markets, in particular for micro and small firms (Carballo and Volpe Martincus, 2010).

Domestic initiatives to integrate innovation and technology

Despite the relevance of foreign expertise, some progress has been achieved at the domestic level to increase knowledge and innovation. For instance, the Asociación Civil Frío Aéreo (created in 1997) aims to improve the logistical capabilities to export fresh products and to promote research and development for effective logistics chains. In addition, the Instituto Nacional de Innovación Agraria, in co-ordination with universities, played a key role in developing fresh products, thanks to technology transfer. Owing to these initiatives, Peru could respond to European and US demand for fresh asparagus. Since 2002, exports of fresh asparagus exceeded those of processed asparagus; in 2016, they represent more than two times the exports of processed asparagus (ADEX, 2015).

Although domestic research and development remains sparse, there are useful examples. For instance, the Universidad Nacional Agraria La Molina has furnished research on the fulfilment of international quality standards and the development of new pesticides and other technologies. The success of the agro-industry has also fostered agro-engineering, as with the Universidad Privada Antenor Orrego’s School of Agronomy (Carnoy and Luschei, 2008).

The development of sustainable services: the case of tourism

The expansion of tourism in Peru is relevant since it is a powerful tool for promoting economic diversification and job creation. The number of tourists has increased by 9.5% annually in the period 2005-15.14 The tourism boom in Peru is high compared to other Latin American economies, such as Argentina, Bolivia, Chile, Ecuador and Mexico (World Bank, 2016). The resultant diversification is evident in the incorporation of 25 tourist products in 2014 and the 50 new products under development by the Ministerio de Comercio Exterior y Turismo (MINCETUR, 2014a).15 This boom translates equally into job creation. An increase of PEN 1 million (Peruvian soles) in the final demand for travel agencies and touristic operators services creates 34 new jobs, an equal increase in the demand for restaurants and accommodation-related activities creates 50 new jobs. By contrast, only 3.5 new jobs are created in mining. Demand for tourism also increases national production considerably, due to the high participation of domestic inputs in the production process (Palomino and Pérez, 2011).16

The public sector has played a key role in the development of tourism. Tourism policies expanded considerably from the 1960s with the creation of the Corporación del Turismo del Perú, which later became part of MINCETUR. In the 1970s, policies were implemented to promote the formation of a professional workforce, develop tourism infrastructure and promote Peru as a destination. The creation of PROMPERU at the beginning of the 1990s contributed to diversification in tourism by highlighting Peru’s archaeological heritage and natural and cultural diversity (Fuller, 2014).

PROMPERU, MINAGRI and MINCETUR policies and initiatives have also promoted Peruvian culture, such as gastronomy and craftworks, in foreign and domestic markets. In particular, Peruvian cuisine competes on par with the highest international standards, owing to 1) its geographic diversity and the variety of high-quality products from the Amazon, Andes and Pacific Ocean, and 2) its ethnic diversity (e.g. Quechua, European and Asian-Peruvian, mainly consisting in Chinese and Japanese ancestry). At the sub-national level, initiatives promoted by MINCETUR, such as “Arequipa, una experiencia Gastrónomica”, “La Ruta del Pisco” and “Turismo Gastronómico de la Quinua en Puno”, exploit the origin of gastronomy to boost tourism across regions.

MINCETUR has also advanced various initiatives to develop socially sustainable tourism, such as “Al turista, lo nuestro”, “De mi tierra, un producto” and “Turismo Rural Comunitario” (MINCETUR, 2013). The next step is to consolidate these projects and increase community participation in that process (MINCETUR, 2014b; Asensio and Pérez, 2012; Pérez, 2008).

The potential of processed goods: the case of metal-mechanics

Metal-mechanics are indispensable inputs for major economic sectors, such as mining, construction, energy, fishing and agriculture. Furthermore, the knowledge embedded in the production of these products is valuable for the development of other high value-added industries, providing opportunities for Peru to move up from a low value-added exports basket (Hausmann, 2012).

Driven by the mining boom, metal-mechanical exports grew by 10.8% annually between 2005 and 2015, achieving USD 534 million by 2015. However, the slowdown in domestic and regional demand led to a decrease in metal-mechanical exports’ participation in recent years.17

A key opportunity is to foster the demand for metal-mechanics beyond the mining sector. The sector currently relies on demand in development mining, hydrocarbons and infrastructure megaprojects, such as Tía María, Toquepala, Quellaveco, the Gasoducto del Sur and the refurbishment of Talara’s refinery (Horizonte Minero, 2015). Increasing the use of metal-mechanics in other sectors, such as fishing and agriculture, could ensure the sustainability and growth of the sector.

The external markets put additional pressure to modernise the sector. New trade agreements – particularly with Turkey, the eighth largest exporter of steel – and China’s subsidies to steelmakers deepen Peru’s dependence on metal-mechanical imports (Mendes de Paula, 2011). This dependence on imports impedes the knowledge spill-overs derived from the production of metal-mechanics – knowledge highly transferable to other activities, permitting further diversification. To remain competitive, Peru requires a more extensive use of software and process automation within the industry.

The potential of the forestry

The unexploited potential of Peru’s forestry industry is striking, compared to neighbour countries. Natural forests cover 53% of the country and represent the second largest naturally forested territory in Latin America. While Peru’s forest products exports amounted to USD 131 million in 2014, Brazil’s were USD 8 245 million, Chile’s were USD 4 691 million and Uruguay’s were USD 1 194 million (based on FAO, 2014). In 2014, forest products imports to Peru were 6.5 times more than domestic production and imports of forest products grew by 12% annually between 2004 and 2014 (MINAGRI, 2014).

Peruvian authorities are tackling the main challenges, such as the sector’s limited access to credit, the low processing of forestry products and the difficulties in property rights for use of forested areas (MINAGRI, 2014). The Ley Forestal y de Fauna Silvestre, approved in September 2015, created the Servicio Nacional Forestal y de Fauna Silvestre (SERFOR) to provide and execute plans for the use and conservation of forestry resources, to facilitate formalities linked with the use of forestry resources and to promote the access of forestry products to financial markets. Moreover, the approved law recognises tree plantations as crops, improving access to private and public financing programmes. The importance of the forestry industry was also formally recognised in the Plan Nacional de Diversificación Productiva, which contemplates subsidies to forestry and reforms to the sector’s regulations (Ministry of Production [PRODUCE], 2014).

Recent initiatives supporting start-ups and entrepreneurship

Promoting start-ups and enhancing entrepreneurship are key inputs to boost economic diversification in Peru. Recent initiatives by PRODUCE and the Council of Science, Technology and Technological Innovation (CONCYTEC) have bolstered the design and implementation of policy support to start-ups. Two key examples are StartUp Perú, part of the Innovate Perú programme from PRODUCE, and Ideas Audaces, part of the CienciActiva initiative from CONCYTEC. Both StartUp Perú and Ideas Audaces receive resources from the Fund Framework for Innovation, Science and Technology (FOMITEC). Start-up promotion is allocated 35.5% of FOMITEC’s total budget of 300 million soles (close to USD 86 million). In addition, Corporación Financiera de Desarrollo (COFIDE) development bank participates in financing private initiatives to support investment funds or to select start-ups.

StartUp Perú promotes dynamic enterprises. Its introduction in 2012 marked a milestone in public policies to support start-ups in Peru, since until then, only some private sector initiatives existed (e.g. the Wayra initiative of Telefónica). StartUp Perú operates with an assigned budget from FOMITEC of PEN 50 million (close to USD 15 million), to be executed in the period 2013-19, with residual activities in 2020. In the first four calls, from 2012 to 2016, StartUp Perú evaluated 2 054 proposals and 172 start-ups and 14 incubators received support. In addition, seven incubators benefited from the programme line for strengthening ecosystem. As of 2016, StartUp Perú incorporates support for networks of angel investors and line of business accelerators (OECD, 2016b).

Ideas Audaces finances projects of the scientific and technological base in key sectors. In the first phase, it co-finances contributions to feasibility studies and prototypes with seed capital. Technically and economically viable projects move to a second phase based on growth potential, whereby Ideas Audaces provides seed capital up to PEN 2.6 million (close to USD 780 000). In its first 2014 edition, 22 projects were selected for the first phase and 4 entered the second phase of production scale; in 2015, 40 projects were selected (OECD, 2016b).

Private resource mobilisation has also been useful to promote angel investment in Peru (OECD, 2016b). For instance, Alta El Dorado entrepreneurship is a joint venture between private equity institutions Alta Ventures and El Dorado Investments. Among other programmes, Alta El Dorado has Kickstart Peru, a capital fund sponsored by COFIDE. The fund provides capital and a network of mentors for early stage development of high-impact projects to facilitate start-ups obtaining seed capital. Another example is the network of angel investors Angel Ventures Peru, established in 2014. The network has a co-investment fund and provides mentoring, consulting and other services, such as infrastructure, for entrepreneurs through a business accelerator.

Universities have become relevant in supporting start-ups in Peru. The EmprendeAhora programme, organised by the Invest Institute in conjunction with the Center for International Private Enterprise and the University of Lima, seeks to promote entrepreneurship among young people by providing scholarships to outstanding students from regional universities. Recipients benefit from a four-month training programme in business management and mentoring support to develop a business plan. In 2014, the programme attracted 130 applicants from 40 universities in 24 regions (OECD, 2016b).

Public-private networks also support corporate development in Peru. Institutions are organised into networks to promote collaboration and entrepreneurial culture. PeruEmprende brings together institutions working on entrepreneurship and innovation in the public, private and academic spheres. Fifty-three institutions participated in the 2015 “Month of Entrepreneurship”, with over 100 events in 12 cities across the country, including workshops, conferences and fairs, among others (OECD, 2016b).

However, taking advantage of these recent policies is undermined by continued bureaucratic burdens on business creation (Global Entrepreneurship Monitor Perú, 2014). In particular, bottlenecks in product market regulation (PMR) and inefficiencies in the legal framework can impede the development of start-ups in Peru.

Policy actions to increase productivity and economic diversification in Peru

The following section presents four avenues for policy action to boost productivity and economic diversification in Peru: 1) increase support for innovation and SME sustainability and reduce barriers to entrepreneurship; 2) enhanced regional integration; 3) improve management of commodity-based revenues at the sub-national level; and 4) increase fiscal revenues and implement a fairer and more efficient taxation system.

Supporting innovation and SMEs

Low levels of investment in research and development are affecting innovation outcomes in Peru. Peru’s business expenditure on research and development (below 0.1% of GDP) remains significantly below the average for OECD member countries (close to 1.6% of GDP) and many other countries in Latin America (0.17% for the Latin American benchmark countries).18 Peru also remains well below benchmark and OECD member countries in intellectual property imports and exports, figuring into the country’s low contribution to global activity in research and development (OECD, 2015). One measure of innovation outcome is number of patents. Peru’s patent applications per million inhabitants are below all of the benchmark countries, as well as the LAC average (Figure 2.9). While patent applications have increased in recent years from 5.7 on average in the period 2005-10 to 13.4 in 2013, this number remains well below median for OECD member countries (close to 1 194 patents in 2013) (OECD, 2011).

Figure 2.9. Patent applications per million people in selected countries, 2013
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Source: Patent Cooperation Treaty, 2013 data; OECD Indicators on Patents (database), OECD, www.oecd.org/sti/inno/oecdpatentdatabases.htm (accessed on 1 July 2016).

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Greater investment in innovation is needed to increase economic diversification and competitiveness in Peru, which in turn support higher survival rates for new product exports outside the mining sector and for micro, small and medium-sized firms (Figure 2.10).

Figure 2.10. Survival rates of export firms in Peru, 2003-15 (%)
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Notes: The Kaplan-Meier estimator is used to estimate the survival function from lifetime data. Estimation of year-by-year survival probabilities for exports firms. Panel A: simple average of non-traditional sectors. Agriculture and fishing are the two non-traditional sectors with the highest survival probability after five years. Craft and metal-mechanic are the two non-traditional sectors with the lowest survival probability after five years. Panel B: Large = exports value over USD 10 million. Medium = exports value USD 1-10 million. Small = exports value USD 0.1-1 million. Micro = exports value under USD 0.1 million.

Source: Panel A: OECD calculations based on data from MINCETUR and SUNAT. Panel B: MINCETUR (2015), Plan Estrategíco Nacional Exportador: PENX 2025 (National Strategic Export Plan: PENX 2025), Ministerio de Comercio Exterior y Turismo, Lima, www.mincetur.gob.pe/newweb/Portals/0/transparencia/proyectos%20resoluciones/RM_051_2015_PLAN.pdf based on data from SUNAT.

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Peru has established institutions for the purpose of attracting private investment in research and development and innovation, and developing science, technology and innovation policies. CONCYTEC has introduced a series of instruments and funds to reduce bottlenecks in the innovation system and to increase business research and development. In addition, PRODUCE promotes industrial development and business innovation. PRODUCE manages two key policy instruments: the Research and Development Fund for Competitiveness, a competitive fund to co-finance projects aimed at promoting research and development for innovation; and technological innovation centres (Centros de Innovación Tecnológica [CITEs]) (OECD, 2015).

The creation of CITEs seeks to stimulate innovative and entrepreneurial behaviour in SMEs in manufacturing sectors by providing them access to the necessary knowledge, technical assistance, information and technology transfer to close productivity gaps. There are CITEs in several sectors, including agro-industry, aquaculture, leather and footwear, fisheries, mining, textiles, logistics and marketing, located across the country. The network of CITEs is co-ordinated by the Instituto Tecnológico de la Producción (ITP), a technical management entity from PRODUCE. ITP is responsible for bringing the different services of the CITEs into a harmonious and efficient relationship to serve the needs of the private sector across different regions and areas of specialisation.

Although PRODUCE foresees the creation of 44 public and private CITEs by July 2016 (37 public and 7 private), few existing public CITEs are achieving their objectives. Furthermore, some public CITEs – CITEs textile Camélidos in Cusco, Puno, Huancavelica and Arequipa; CITEs Forestal in Maynas and Pucallpa; and CITE Minero Ambiental in Madre de Dios – were only created in February 2016, too recently for informative assessment.

According to interviews with private and public actors, to achieve their main objectives, CITEs need increased technical capacity and further private sector involvement in research and development, as well as better communication with communities regarding their existence and potential benefits. The lack of information to firms regarding the main instruments to support innovation services and the absence of technology transfer are traditional inefficiencies hampering the benefits of CITEs (Cruzado and Tostes, 2015).

Tackling barriers to entrepreneurship

To promote innovation, policies should go beyond greater expenditure on research and development. As in other Latin American countries, the significant innovation gap is largely due to Peru’s framework conditions, which do not make innovation a profitable form of business investment (OECD/CAF/ECLAC, 2014). In addition to the scarcity of qualified human resources (Chapter 4), barriers to entrepreneurship hinder the long-term ability of firms to accumulate in-house innovation capabilities.

Over the last decade, Peru has taken action to simplify business regulations and strengthen legal institutions in order to promote formal business practices. Several World Bank Doing Business indicators indicate a better performance by Peru than the LAC average, but there is room for improvement to reach OECD member country standards (OECD, 2015).

The OECD’s Indicators of PMR (product market regulation) are a set of indicators that measure how policies promote or inhibit competition in areas of the product market. The three pillars are state control, barriers to trade and investment, and barriers to entrepreneurship (Barbiero et al., 2015).19 Peru’s PMR indicator was specifically developed in collaboration with the World Bank. Barriers to entrepreneurship in Peru remain above OECD member countries’ average and is the most restrictive of the PMR pillars in Peru.

Among the three components of barriers to entrepreneurship, complexity of regulatory procedures and administrative burdens on start-ups (e.g. number of procedures and bodies to contact to register a company) are the most restrictive in Peru (Figure 2.11).20 In particular, businesses operating in Peru face more complex regulatory procedures than in OECD member countries, both in licensing and permitting systems and in the general communication of rules and procedures. Sole proprietor start-up firms encounter significantly larger administrative burdens.

Figure 2.11. Barriers to entrepreneurship index in selected countries, 2013
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Notes: From least restrictive (0) to most restrictive (6). The figure includes OECD countries and selected benchmark economies. Barriers to entrepreneurship is one of the three components of the PMR (product market regulation) indicator. Complexity of regulatory procedures, administrative burdens on start-ups and the regulatory protection of incumbents are the three main components of the Barriers to entrepreneurship pillar. The PMR indicator for Peru was developed in collaboration with the World Bank.

Source: OECD (2013a), OECD Product Market Regulation 2013 (database), OECD, https://stats.oecd.org/index.aspx?DataSetCode=PMR (accessed on 1 July 2016).

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Adjustments to the legal framework in Peru are crucial to clearing these bottlenecks to entrepreneurship. In particular, the inefficiency of Peru’s current bankruptcy law means that Peru’s solvency regime currently takes over three years to process bankruptcies compared to 1.7 years in OECD economies (World Bank, 2015).

The informal sector accounts for over half of all labour activity in Peru (Chapter 4). In 2010, small and micro enterprises made up approximately 95% of all enterprises and employed over 9.5 million people (Torres, 2010). The government must continue to promote their proper growth and aid them in resolving hindrances to their expansion.

Increasing regional integration

Greater regional market integration with neighbour countries would allow Peru to benefit from regional economies with relatively large markets and sustainable growth. In 2012, Chile, Colombia, Mexico and Peru formed the Pacific Alliance (PA) to pursue regional integration. The PA now includes 30 observer countries, including China as of 2013.

Trade and investment flows between PA member countries are limited, representing less than 4% of total trade. In 2015, Peruvian exports to Chile, Colombia and Mexico represented only 4.1%, 2.1% and 1.2% of total trade, respectively (Reyes, 2016). This proportion remains well below intra-trade for Latin America (close to 20%), Asia (close to 45%) and the European Union (close to 60%) (OECD/CAF/ECLAC, 2015).

Peru, along with the rest of Latin American economies, should promote intra-trade of intermediate goods. Whereas the intra-trade between the United States and Canada of intermediate goods is almost 10 percentage points higher than for final goods, intra-trade of intermediate goods in Latin American economies is 4 percentage points lower than for final goods (OECD/CAF/ECLAC, 2015).

There is significant potential to strengthen intra-regional integration, underpinned by the PA’s ambitious programme of trade and investment activities. Although the PA started in 2011, the formalisation of different agreements has been implemented more recently, in the past couple of years. For instance, since May 2016, there is no tariff for 92% of the products traded among PA countries, and the objective is to achieve 100% by 2030.21 In order to promote trade across intermediate goods and foster the participation of PA countries in regional and global value chains, there is free trade of intermediate goods among these countries. They have also applied a “cumulative rules of origin”, which allows products of one country to be further processed or added to products in another PA country as if they had originated in the latter country. Next steps to better take advantage of the PA as a vehicle to integrate Peru with the rest of world include the mutual recognition of standards and building in further co-operation and communication of the current benefits of this alliance.22

The PA will need policies to support the development of new comparative advantages in the manufacturing and service sectors in order to broaden and deepen trade flows and enable a more active role for SMEs (OECD, 2015).

The Latin American Integrated Market (Mercado Integrado Latinoamericano [MILA]) represents a key opportunity for Peru to promote investment in productive areas and attract foreign capital. Started in 2011, today, this market integrates the stock exchanges of Colombia, Lima, Mexico and Santiago. This market allows investors to access these markets through one of the registered brokers that have access to the common trading platform. It also allows companies participating in MILA to increase their capacity to raise funds. However, challenges remain to taking full advantage of this unique market. A co-ordinated approach to remove these barriers is important (International Monetary Fund [IMF], 2016), including the adoption of the highest standards in pension and financial system regulation, regulatory collaboration, and a sufficient level of legal and tax harmonisation.

In addition to trade and financial initiatives with Chile, Colombia and Mexico through the PA and MILA, Peru has moved towards greater integration with Asia-Pacific countries. Peru is a member of the Asia-Pacific Economic Cooperation (APEC), which has benefited Peru by reducing barriers and impediments to trade with the largest economies in the world, such as China (Ministry of Foreign Affairs of Peru, 2015). Peru also signed a free-trade agreement with China in 2009, which came into effect in March 2010. Along with preferential treatment to enter the Chinese market, this agreement could integrate Peru into Asian supply chains and position Peru as a business centre in South America (MINCETUR, 2015). After three years, Peru exported 312 new products (97% non-traditional) to China, created 468 new exporting companies and doubled trade between the two countries (MINCETUR, 2015).

Towards better management of commodity resources at the sub-national level

Peru’s focus on commodities exports is not an isolated case, compared to OECD member countries and Latin American benchmark countries. Whereas Peru’s share of commodities is higher than the OECD and Latin American averages, other countries remain more reliant on natural resources. These include OECD member countries, such as Australia and Norway, and Latin American countries, such as Colombia and Ecuador (OECD, 2015). Furthermore, some OECD member countries, such as Australia, Chile and Norway, exhibit a higher concentration of products exported than Peru. Destinations for Peru’s exports are also less concentrated, compared to OECD and Latin American benchmark countries (based on WITS/UN Comtrade, 2013).

International experience shows that countries that have managed their raw resources appropriately have seen positive benefits. The experience of OECD member countries in particular shows that commodities can be a crucial source of revenues for increasing the productivity and competitiveness of their economies (OECD, 2009). Proper management of the extraction process and the revenues raised from commodities is needed to add value in Peru’s productivity.

At the national level, Peru’s fiscal rule has structural (i.e. cyclically-adjusted) fiscal balance as its target to manage the volatility of commodity-based revenues (OECD, 2015). However, at the sub-national level, the volatility of international commodity prices and the uncertainty of commodity production in Peru have affected revenue streams to these authorities. Transfers of natural resources to sub-national authorities depend on canon and royalties. From the early 2000s, commodity-based regional transfers to sub-national authorities increased considerably, from less than 0.5% of GDP in 2004 to close to 1.45% of GDP in 2014. Recent decreases in commodity prices are increasing the volatility of these revenues (OECD, 2015). A key challenge, therefore, is to avoid pro-cyclicality of these funds (Jiménez and Ter-Minassian, 2016). A fiscal rule to avoid pro-cyclicality of sub-national expenditures in boom periods is needed. Linked to this, following the experiences at the national level, sub-national authorities, in co-ordination with the national government, can establish the creation of a stabilisation fund to better manage these resources.

The two main sources of commodity-based revenues for sub-national authorities, canon and royalties (Korinek, 2015), are distributed exclusively to the regional and local governments where the minerals are extracted. Canon represents half of the corporate tax from mining companies (i.e. the other half is retained by the central government), and revenue from royalties is based on the companies’ profits. The fiscal transfers based on commodities per capita received by Cusco and Moquegua alone are greater than those obtained by 15 departments in Peru put together (OECD, 2015). Just 5 out of the 25 departments receive more than half of the total revenues from commodities (Figure 2.12).

Figure 2.12. Mismatch between regional commodity transfers (2014 data) and basic needs transfers (2013 data) per capita in Peru (in PEN)
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Notes: *The canon and royalties are transfers of natural resources. Canon is distributed exclusively to the sub-national governments where the minerals are extracted. Royalties are based on companies’ profits and canon represents 50% of the corporate tax from mining companies. Customs are also included. **The Municipal Compensation Fund (FONCOMUM) seeks to promote investment at the municipal level with a redistributive objective. It prioritises the poorest municipalities, particularly in rural areas and marginal urban areas. ***The components of unmet basic needs are quality of the house, non-overcrowding of the house, access to sanitary services, school attendance and economic dependency. No data for Callao.

Source: Unmet basic needs data from OECD calculations based on National Households Survey, Encuesta Nacional de Hogares [ENAHO]) from the INEI, www.inei.gob.pe/estadisticas/indice-tematico/sociales/. Mining royalties data from SUNAT, www.sunat.gob.pe. Hydrocarbon royalties data from PERUPETRO S.A., www.perupetro.com.pe/. FONCOMUN and canon data from MEF (2015), “Consulta de Transferencias a los Gobiernos Nacional, Regional, Local y EPS”, Transparencia Económica website, http://apps5.mineco.gob.pe/transferencias/cuadros/Hoja1_1.aspx.

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In addition, these revenues have not contributed to greater productivity and inclusiveness. The concentration of these revenues in a few departments and the lack of rules regarding their expenditures have negatively affected the efficiency of municipal districts (Muñoz, 2010). Furthermore, these mining transfers have only short-term positive effects, such as an increase in temporary public employment, which responds in part to the strategic behaviour of local politicians, rather than the quality of these investments (OECD, forthcoming; Maldonado, 2015).

In addition, these fiscal revenues do not target the poorest regions, exacerbating regional disparities. Using data at the department level, the correlation between the amount of fiscal transfers per capita and the percentage of the population with at least one unmet basic need is less than -0.3. For instance, commodity-based transfers to Cusco and Moquegua are more than eight times higher than those to Amazonas, Loreto and San Martin, where over 10% of the population have at least one unmet need, compared to only 2.6% in Cusco and 1.2% in Moquegua. Revenues from FONCOMUN are not enough to compensate for the high regional heterogeneity created by revenues from natural resources. They correspond to less than half of the commodity-based transfers at the sub-national level (OECD, 2015).

A key challenge is to improve the allocation of commodity-based transfers according to the level of development of Peruvian departments and the need to increase inclusive development, competitiveness and formal job creation at the sub-national level. As with Colombia before the 2011 Royalties Reform, Peru needs to increase diversification of these revenues across the regions (OECD, 2013b) – for instance, to finance education and skills systems, infrastructure development or research and innovation policies. Prioritising and planning these investments should be carried out with a dialogue between national and sub-national governments and private actors, civil society and academia. To improve the management of these revenues, support for governance capacity at the sub-national level is also needed. This is particularly relevant, since some authorities do not follow regulatory frameworks because they lack knowledge of the complete legal process required to adopt and implement policies (Muñoz, 2005). Equalisation mechanisms to compensate for inequalities (exacerbated by commodity-based transfers) are needed among sub-national governments.

Towards greater fiscal resources with fair and efficient taxation

Although tax revenues as a share of GDP in Peru increased by more than 6.7 percentage points between 1990 and 2014 to reach 18.8% of GDP in 2014, they remain low, compared to OECD member countries, representing 34.4% of GDP and Latin American countries, representing 21.7% of GDP (Figure 2.13; OECD/ECLAC/Inter-American Center of Tax Administrations [CIAT]/Inter-American Development Bank [IDB], 2016).

Figure 2.13. Tax revenues (% of GDP) in selected countries, 2014
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Note: 2013 data for OECD economies and OECD average, with exceptions of Chile and Mexico.

Source: OECD/ECLAC/CIAT/IDB (2016), Revenue Statistics in Latin America and the Caribbean, OECD Publishing, Paris http://dx.doi.org/10.1787/rev_lat-2016-en-fr.

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Peru must improve its tax policy to finance the investment necessary to increase productivity, achieve economic diversification and sustain socioeconomic progress. The current tax system does not raise sufficient revenues to finance needed research and development and innovation; transport infrastructure and logistics (Chapter 3); and education and skills (Chapter 4; OECD, 2016a). Tax reforms should take into account the synergies and trade-offs of policies targeted at each issue so as to achieve win-win policies that increase productivity and reduce inequalities (OECD, 2016c). Furthermore, to ensure the fiscal legitimacy to support tax reforms, Peru should continue improving its public governance and investments, by improving for instance the prioritisation and implementation of a strategic development plan and the management of commodity-based revenues.

Contrary to most OECD economies, Peru’s tax structure is characterised by a high dependence on indirect taxation that limits redistribution effects and hampers entrepreneurship. In 2014, taxes on goods and services (indirect taxes) represented nearly 44% of all taxes. While comparable to the average for Latin American economies (49.5%), this share is high, compared to the OECD member country average (32.7%). A key component of taxes on goods and services is the Value Added Tax (VAT), from which revenues increased 5.5 percentage points from 1990 to 2014.

The limited share of the most progressive tax does not offset the non-progressive VAT (Barreix, Bès and Roca, 2011; Jaramillo, 2014). Direct taxes, personal income taxes in particular, remain low. While personal income taxes represent close to 25% of total taxes in OECD economies on average, they represent only 11% in Peru, a slightly higher proportion than in Latin American countries (OECD/ECLAC/CIAT/IDB, 2016). Moreover, personal income taxes as a share of GDP represent close to 7 percentage points less than in OECD economies. The absence of an inheritance tax also undermines the progressiveness of the taxation system.

Taxes and social transfers do little to reduce income inequalities in Peru. While, in Peru, inequalities (measured by the Gini index) decline by only 1 percentage point after taxes and transfers, they decline by 2.2 percentage points in LAC economies and more than 15 percentage points in OECD economies (based on OECD, 2016d, for OECD economies; and Lustig, 2016, for Latin American economies).

To increase the tax base to finance broad-based policies to boost productivity and improve progressiveness, reforms should reduce elusion and evasion (with better institutional capacity to address the challenges), decrease generous tax exemptions and gradually increase the marginal personal income tax rate. As in other emerging markets, base erosion and profit shifting (BEPS) has major significance for Peru due to the country’s heavy reliance on corporate income tax, particularly from multinational enterprises. Peru’s further involvement in OECD work on BEPS would help to minimise it.23

Creating better planning and implementation frameworks to boost economic diversification and productivity

Implementing policies that tackle barriers to greater productivity and economic diversification requires a better institutional framework for the strategic development agenda. The role of the centre of government (CoG) can be strengthened by increasing leadership, co-ordination and long-term implementation of that agenda (OECD, 2016e). A key aspect is to execute, through public investment and other implementation policies, the prioritisation and planning of policies highlighted in the development agenda. Also identified are actions to increase the capacity of sub-national authorities in the design and implementation of their regional, provincial and district plans and to improve the co-ordination with the national government.

Towards the design and implementation of a development strategy

One of the four objectives of the National Accord (Acuerdo Nacional) is to promote competitiveness in Peru.24 The National Accord started in 2002 and is the set of state policies for sustainable development, developed and approved on the basis of dialogue and consensus after a process of workshops and consultations at the national level. Party to the accord are the government, political parties with representation in the Congress and organisations representing civil society at the national level.

In recent years, Peru has proposed many policies to promote economic diversification and productivity. Several ministries and public-sector entities have presented valuable analyses on current socioeconomic challenges and set out objectives for the medium term. Most include a component on productivity and economic diversification policies. Examples are the Plan Bicentenario: El Perú hacia el 2021 (and its Plan Estratégico de Desarrollo Nacional Actualizado); the Agenda de Competitividad 2014-2018; the National Plan for Productive Diversification; the National Strategic Export Plan (PENX); the National Strategy on Development and Social Inclusion: Incluir para Crecer; and Plan Estratégico Nacional de Turismo (PENTUR) 2008-2018.

The Plan Bicentenario: El Perú hacia el 2021 is the National Strategic Development Plan (Plan Estratégico de Desarrollo Nacional), launched in 2011 by the National Centre for Strategic Planning (CEPLAN) as part of the Presidency of the Council of Ministers (PCM) and with the participation of different ministries, sub-national authorities, the private sector and civil society (CEPLAN, 2011). An updated version of this plan was released in October 2015, renamed Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021 (CEPLAN, 2015). This updated version presents scenarios and targets for the Peruvian economy in 2021. Annex 2.A2 outlines components of this plan.

The formulation of strategic development plans, at both the sectoral and territorial level, takes as guidelines the objectives of the National Accord and the framework of the Plan Bicentenario (Figure 2.14). These strategic development plans suppose the defining of development plans at the horizontal level, among different sectoral ministries, and at the vertical level, among different levels of government, following the general principles highlighted in the Plan Bicentenario. These plans should also contribute to improving the quality of public investment by enabling prioritisation of projects requiring public investment.

Figure 2.14. Strategic and development plans in Peru at different levels of government
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Source: OECD based on National Accord, http://acuerdonacional.pe/ (accessed on 1 July 2016).; CEPLAN (2015), Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021, Centro Nacional de Planeamiento Estratégico, Lima; MINCETUR (2015), Plan Estrategíco Nacional Exportador: PENX 2025 (National Strategic Export Plan: PENX 2025), Ministerio de Comercio Exterior y Turismo, Lima, www.mincetur.gob.pe/newweb/Portals/0/transparencia/proyectos%20resoluciones/RM_051_2015_PLAN.pdf; and PRODUCE (2014), Plan Nacional de Diversificación Productiva, Ministerio de la Producción, Lima.

At the horizontal level, the PENX, led by the Ministry of Trade and Tourism, and the National Plan for Productive Diversification, led by PRODUCE, are among the key plans to boost productivity, competitiveness and economic diversification in Peru. In addition, the National Competitiveness and Formalisation Council (Consejo Nacional de Competitividad y Formalización [CNCF]) produces the Agenda de Competitividad 2014-2018 with short- and medium-term measures to increase competitiveness towards Peru’s successful immersion into the global market. Annex 2.A2 describes the objectives and topics of these plans.

Examples of other national sectoral plans on policies affecting productivity and economic diversification include the National Strategy on Development and Social Inclusion: Incluir para Crecer; the National Strategic Plan of Tourism 2008-2018, complemented by the National Plan of Tourism Quality; and the Development Plan of Logistics Services on Transport (Chapter 3).

While all these plans and agendas aim to tackle the main challenges in Peru, the country will need better co-ordination among public institutions to determine priorities and a better connection between the budgeting process and these agendas to adopt and implement reforms for inclusive development (Figure 2.14; OECD, 2016e). Peru should strengthen the CoG by better integrating and co-ordinating the PCM and MEF in the prioritisation process.

In particular, Peru lags behind benchmark countries in the co-ordination of public policies. Despite efforts to increase dialogue among different institutions in recent years, the lack of collaboration and co-ordination among ministries and within the administration is an obstacle to effective policy making and implementation. On a scale of 0 (very little co-ordination) to 4 (strong co-ordination), perception of co-ordination and collaboration between ministries and with administration in Peru scores 1 – below averages for both Latin America (2) and OECD member countries (2.5) (Institutional Profiles Database [IPD], 2012). This poor performance can be explained by a number of factors, such as weak prioritisation and implementation phases for policies involving several ministries, a direct consequence of which is the lack of trust in institutions and of fiscal legitimacy. Several institutions in Peru suffer from lack of public confidence. In particular, compared to benchmark countries, few citizens in Peru trust the national government (OECD, 2015).

Moreover, these plans are not binding, in terms of the implementation of regulatory or investment policies to achieve the objectives highlighted in the National Strategic Development Plan. These plans are also not linked with the two policy frameworks – the Multi-Annual Investment Plan and the Presupuesto por Resultados (results-based budgeting) – set by the MEF to increase coherence in the delivery of public policy, nor are they place-based.

Consequently, the CoG faces challenges related to leadership, co-ordination and long-term implementation of policies. The CoG is composed of the PCM, including CEPLAN, and the MEF. To increase the effectiveness of public policies, a country’s CoG needs to offer vision, leadership and innovation. This is especially difficult in Peru, as the country faces high levels of political and public-sector fragmentation. In addition, the lack of enforcement of a National Development Plan in the long term negatively affects both strategic policy-making capacity and service-delivery capacity. In that context, there is a lack of co-ordination of public policies in the medium and long term, and there is a high turnover of representatives in one of the main CoGs. In the period 2000-15, there were 20 different Presidents of the Council of Ministers, representing close to 6 appointments per presidential mandate. This high turnover owes primarily to political and corruption scandals (even those originating outside the PCM).

To provide further leadership, co-ordination and long-term implementation of policies, the CoG should improve the planning and prioritisation of polices while improving the implementation of the objectives. First, the strategic plan defined by the CoG must highlight the priorities to increase inclusive development. Given better co-ordination and leadership with the ministries, other plans and agendas should follow those priorities at the sectoral level. Second, the priorities should be binding at the implementation level, including the budget and changes in the regulatory framework. Regarding the former, the National System of Public Investment (SNIP) should be aligned with the priorities and policies defined in the plan. Linking strategic planning with the fiscal framework would create a greater incentive to produce coherent and actionable plans and to develop a more strategic approach to public investment.

Towards greater capacity and co-ordination in the design and implementation of the development agenda at the sub-national level

Strategic planning at the sub-national level needs greater consistency with national planning. The National Strategic Development Plan establishes a framework for national policy priorities, and Concerted Regional Development Plans provide a complementary framework for priority setting at a regional level ((Figure 2.15 above).25 However, national policies and priorities are not necessarily reflected or considered in sub-national planning (OECD, forthcoming; OECD, 2015).

To improve co-ordination between levels of government, an institutional framework for inter-governmental commissions was put in place as of 2007, but its implementation remains poor. Composed of representatives from national ministries and sub-national governments, these commissions are intended to manage the decentralisation process across different sectoral policies. However, by the end of 2015, only three such commissions were considered active by the Decentralisation Bureau: health, labour and education. The lack of implementation is partly due to lack of agreement about the mechanisms to elect representatives of local governments (OECD, forthcoming).

In addition, the poorest municipalities have limited capacity to execute an effective development agenda. Local governments lack the human resources and experience to fulfil their roles, resulting in poor management of municipal public services. Some authorities do not follow regulatory frameworks because they lack knowledge of the complete legal process required to adopt and implement policies (Muñoz, 2005). Sub-national authorities require effective support from the central government to improve the efficiency of expenditures from regional transfers (OECD, 2015). The central government should also consider implementing more asymmetric, place-based decentralisation (OECD, forthcoming). Currently, small municipalities have the same requirements as bigger ones, without the same capabilities, nor necessarily the same types of issues.

As such, Peru should establish more effective and strategic institutional support capacity that can facilitate a partnership-based approach to regional development between departments and the national government. There are two options to achieve this outcome. A deconcentrated agency of the PCM and MEF can work in partnership at a macro-regional level, or regional development agencies (RDAs) can be constituted as a partnership between departments and the national government (OECD, forthcoming).

Last, regional planning should be better integrated with the fiscal framework. While regional plans provide a platform to strengthen regional priorities in the design and execution of national sectoral policies, they are not totally integrated nor efficiently linked to the fiscal frameworks. The MEF (through the RDA or deconcentrated agency) could be required to work in partnership with departments to develop medium-term capital investment programmes that deliver on strategic priorities identified in Regional Concerted Development Plans (OECD, forthcoming). In addition, an established process to monitor the implementation of the Concerted Regional Development, aligned with department’s budget, would favour the execution of these plans.

Conclusions and policy recommendations

This chapter highlights opportunities and policy actions to boost economic productivity and diversification in Peru. In particular, sectors with potential for greater exploitation were identified based on international experiences and recent trends in international trade demand. Agro-industry, tourism and, more recently, metal-mechanics and forestry reveal underlying factors for successful economic diversification: appropriate co-operation with international actors, effective interactions between private and public sectors, domestic initiatives to integrate innovation and technology, and structural reforms.

A series of policy actions will promote further economic diversification and productivity, such as improving the quality of education for all Peruvians, supporting innovation and development of SMEs, tackling barriers to entrepreneurship, promoting greater regional integration, improving the management of commodity-based resources, and increasing tax revenues to finance effective broad-based policies.

To achieve these policy actions, Peru needs to improve the institutional framework in the design and implementation of a development agenda. In particular, the CoG needs to improve the co-ordination, leadership and implementation of long-term policies. Based on policy priorities presented in the National Development Plan, policies should be executed effectively at and among the national and sub-national levels.

Box 2.1 summarises the main policy recommendations and requirements for each area covered in this chapter.

Box 2.1. Main policy recommendations to increase economic diversification and productivity in Peru

1. Identify new products and sectors to contribute to further economic diversification and productivity

1.1 Determine main pre-conditions for the development of new sectors

  • Improve data to evaluate Peru’s potential benefit in global value chains (updated input-output table and inclusion of Peru in TiVA data).

  • Make technical assessments to determine future new sectors, taking into consideration comparative advantages, international and domestic demand and potential spill-overs (formal job creation and productivity).

  • Increase the effectiveness in the dialogue with academia, sub-national authorities, local communities, international actors and the private sector in the identification of new sectors and the pre-conditions for their development (e.g. effective investment in research and development, specific skills and efficient logistics services).

2. Promote education, innovation, entrepreneurship and regional market integration

2.1 Improve the quality of education for all Peruvians

  • Continue the implementation of incentive mechanisms (e.g. remuneration based on performance) to improve the quality of teachers and of the full-time school model.

  • Implement the Ley Universitaria and in particular the objectives fixed to SUNEDU (Superintendencia Nacional de Educación Superior Universitaria).

  • Continue to increase investment in school infrastructure, in particular in remote areas.

2.2 Increase investment in innovation

  • Increase investment in research and development; identify further areas of work shared between the private and public sectors.

  • Focus on the most relevant CITEs; improve the technical capacity, technology transfer and further involvement of the private sector in the CITEs.

  • Evaluate the benefits of recent start-up initiatives.

2.3 Eliminate existing barriers to entrepreneurship

  • Reduce the complexity of regulatory procedures by making more efficient licence and permit systems and by improving the communication of rules and procedures.

  • Eliminate administrative burdens on start-ups, in particular for sole proprietor firms.

2.4 Continue to promote regional integration

  • Take advantage of and better communicate recent advancements in aspects of the Pacific Alliance, such as tariffs and cumulative rule of origin.

  • Continue efforts towards greater financial market integration (e.g. MILA) by increasing standardisation and harmonisation in tax, legal and procedural rules.

3. Improve the use of commodity-based resources and enhance domestic resource mobilisation

3.1 Improve the use of commodity-based resources at the sub-national level

  • Consider a fiscal rule for sub-national commodity-based transfers to avoid pro-cyclicality of expenditures; consider the establishment of a stabilisation fund to manage these revenues.

  • Strengthen equalisation mechanisms to help compensate for inequalities between sub-national governments, which are exacerbated by commodity-based transfers.

  • Improve allocation system of these resources to invest effectively in areas contributing to inclusive development at the sub-national level.

  • Support sub-national authorities with further technical capacity in the management of these resources.

3.2 Increase fiscal resources to finance broad-based policies

  • Promote a higher dependence on direct taxation (personal income taxes) with a more redistributive and efficient taxation principle.

  • Gradually increase the tax base, the progressivity of personal income tax revenues and reduce elusion and evasion levels.

4. Develop an effective strategy to increase productivity and economic diversification

4.1 Design and implement a unique National Strategic Development Plan

  • Strengthen the role of the Centre of Government (CoG) by improving leadership and increasing co-operation and co-ordination between ministries and agencies.

  • Strengthen CoG effectiveness by better integrating and co-ordinating the PCM and MEF to improve the planning and prioritisation of polices.

  • Make binding strategic plan policies, both in budgeting (including SNIP) and adherence to the regulatory framework.

  • Monitor the outcomes and objectives of the plan periodically.

4.2 Improve prioritisation and execution of sub-national development plans

  • Ensure that objectives and guidelines presented in the National Strategic Plan are considered and reflected in the planning at the sub-national level.

  • Support capacity to sub-national authorities in the design and implementation of sub-national plans; consider implementation of a more asymmetric, place-based decentralisation.

  • Facilitate a partnership based approach to regional development by considering the creation of a deconcentrated agency of the PCM and MEF or RDAs constituted as a partnership between departments and the national government.

  • Develop medium-term capital investment programmes that deliver on strategic priorities identified in Regional Concerted Development Plans.

  • Monitor the implementation of Concerted Regional Development Plans to ensure alignment with the department’s budget.

These recommendations were informed by the three future-state scenarios outlined in Chapter 1. The chapter concludes with an assessment of their implications to incentives, trade-offs and prioritisation of policy reforms.

In “Scenario 1: A new commodity super cycle”, the commodity boom would provide opportunities for diversification of the Peruvian economy. Peru could focus on diversifying in areas linked to the mining sectors, such as metal-mechanics. New demand for commodities and food products by China’s expanding middle class would consolidate ongoing efforts to diversify and expand Peruvian agro-industry. With mining and extraction industries thriving, improvements in the allocation and use of commodity-based transfers across departments in Peru would be particularly important to increase competitiveness and economic diversification.

“Scenario 2: Increasing technology and mechanisation” could position Peru as a hub for technological innovation in the region. At the regional level, CITEs would play an important role in disseminating and co-ordinating the diffusion of technology and in adapting new technology to the Peruvian context based other countries’ experience, as was done, for instance, with asparagus. Increasing investment in research and development and removing barriers to start-ups with more efficient license and permit systems would be policy priorities. Trade and financial regional integration would be especially important both to increase Peru’s participation in global value chains and to raise funds from external investors.

In “Scenario 3: Rising expectations of the middle class”, good management of broad-based policies affecting productivity, such as education and skills, innovation, and infrastructure, would be increasingly important to consolidate the middle class and respond to its expectations. Improving the redistributive quality and efficiency of the tax system will also be important to underpin fiscal legitimacy by ensuring that Peru’s development is inclusive and benefits all.

ANNEX 2.A1. Methodology to identify new potential sectors in Peru

The initial list of new potential sectors in Peru included 1 034 products at the four-digit level of the Standard International Trade Classification revision 3 from the WITS/UN Comtrade database. The selection process then unfolded in three stages.

First, only export products with a RCA by at least one of the benchmark countries during country-specific periods were retained. Only products exported with a RCA were considered as they are a stronger predictor of development than marginal exports (Rieländer and Traoré, 2016). The analysis used a 5-year period for each benchmark country. These intervals were defined by periods of high GDP per capita growth and, when applied, periods preceding an upgrade to high-income status. This last case is particularly relevant due to the current MIT challenge Peru is facing.

The countries, periods and reasons for inclusion are the following: Australia (1994-98), Canada (1997-2001) and Norway (1994-98) due to the prominence of natural resources sectors in their economies; Portugal (1992-96) as one of the OECD member countries to move from middle- to high-income status in recent years (1996) and exhibiting high GDP per capita growth before achieving high-income status; Korea (1991-95) due to its remarkable transition towards an open, high-income economy, distinguished by high-tech exports; Brazil (2008-12), Chile (2003-07), Colombia (2009-13) and Mexico (2001-05) as they experienced high GDP per capita growth in these years, while relying on commodities exports; Turkey (2007-11) as one of the few OECD emerging economies to have experienced a high, five-year-long GDP per capita growth in the 2000s; Costa Rica (2003-07) as successful in attracting foreign investment and tourism; and Panama (2007-14) as a Latin American economy exhibiting one of the highest GDP per capita growth in the past years.

Second, only products with an increasing international demand were included. To select promising products and to avoid identifying irrelevant products in world trade, this analysis only considered products whose compound annual growth rates in the period 2010-13 were higher than world trade growth.

Under these criteria, 193 products were identified. Products were ranked according to five dimensions: 1) annual exports growth rate in the last decade in world trade in the period 2003-13; 2) labour productivity, measured as value-added per worker; 3) labour intensities; 4) capital intensities, measured as participation of labour and capital used in output; 5) output to value-added ratio; and 6) probability that Peru starts exporting the selected products, given Peru’s current exports. Data regarding the dimensions on value-added, labour and capital intensities were derived from UNIDO at the 4-digit level of ISIC (INDSTAT4), which only provides information regarding the manufacturing sector.

Measuring the probability to export selected products based on benchmark country exports

The probability that Peru starts exporting a new product can be estimated by measuring the “proximity” in the capabilities involved in Peru’s current export basket and those needed to export a new product (Hidalgo and Hausmann, 2009). Following this analysis, the proximity between a pair of goods can be approximated by the percentage of countries that export both products with a RCA out of the total number of countries that export one of them in a given year.

However, the resulting conditional probabilities increase when the product in the conditional is scarcer. Thus, exporting goods that are specific to a country (e.g. ostrich eggs to Australia) imply a conditional probability equal to 1 for the event of exporting the rest of products exported by the country (Hausmann and Klinger, 2007). This problem can be avoided by taking the minimum of the two conditional probabilities formed by each pair of goods (equations 1 and 2) (Hausmann and Klinger, 2007). This measure is called proximity (ϕi,j). Conditional probabilities were calculated using 2013 data for all countries.

ϕi,j = min {P (xi | xj), P (xj | xi)} (1)

Where,

picture (2)

otherwise

Finally, the probability that Peru starts exporting each potential product given its current exports may be calculated in two alternative ways. The traditional approach adds up all the capabilities available to Peru for producing the new good, adjusted by the total number of capabilities related to the new good. That is, the sum of all the proximities between the potential good and the goods produced with comparative advantage by Peru divided by the sum of all proximities associated with the new good, known as the measure of density (Hausmann and Klinger, 2007; equation 3). The alternative approach is an estimator of the highest proximity (ϕi,j) of those linking the new product and the set of products exported by Peru with a RCA (equation 4).

picture (3)

picture (4)

Where j represents the set of all possible products and S represents the set of products for which Peru has a RCA.

The measure of density is informative regarding the probability that Peru starts exporting each potential product given its current exports. Within the selected set, products currently exported by Peru with a RCA index greater than 1 have, on average, values of density 1.1 standard deviations larger than those without a RCA. Such difference of means – significant to 1% confidence – argues in favour of density’s predictive power of RCAs.

This analysis is useful to determine the feasibility of the new exports given Peru’s exports structure, while taking as a starting point international experiences from benchmark countries (OECD, 2015). This methodology should be considered as an input among others to determine possible ways to promote economic diversification in Peru.

ANNEX 2.A2. Overview of main national plans and agendas to boost economic diversification and productivity

This annex presents the main topics covered in the following five plans and agendas: 1) the Plan Bicentenario: El Perú hacia el 2021; 2) the Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021; 3) the PENX; 4) the National Plan for Productive Diversification; and 5) the Agenda de Competitividad 2014-2018.

The Plan Bicentenario: El Perú hacia el 2021 is the National Development Strategic Plan (Plan Estratégico de Desarrollo Nacional), launched in 2011 by CEPLAN (CEPLAN, 2011) as a long-term plan covering national development policies to 2021. As highlighted in the plan, it is not an action plan but rather an orientation plan, requiring a multi-annual programme to implement it. Although all six strategic axes of the plan affect policies to boost productivity and economic diversification, the strategic axe on “economy, competitiveness and employment” specifically touches on several objectives to improve these policies, some of which affect sectoral policies in areas such as agro-industry, tourism and gastronomy, and mining.

The Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021 (CEPLAN, 2015) is an updated version of the Plan Bicentenario, released in October 2015. It presents scenarios and targets for the Peruvian economy in 2021. In particular, it presents specific key objectives to increase the diversification of productivity and to boost the manufacturing sector with improved technology, qualified workers and lower informality. The objectives cover participation in global value chains, strengthening technical and management skills, labour conditions to improve formalisation, macroeconomic stability, financial development, doing business and innovation. The key indicator targeted is to achieve a GDP per capita of USD 12 852 in 2021 at the constant prices of 2005. This target presupposes that the Peruvian economy will have tackled the MIT in 2021. Also included are other quantitative targets, such as the economic complexity index, changes in traditional exports, higher education, informality, sovereign ratings, access to finance, doing business, and exports in high-tech.

The trade promotion strategy at the national level is raised in the PENX. The main target of this plan is to foster competitiveness, diversification and value-added on goods and services exports. Components of the PENX were defined by a joint public and private agenda directed to promote the development of exports and trade facilitation, among other objectives. In its latest version, the Plan Estratégico Nacional Exportador 2025’s main objective is to internationalise Peruvian firms within a ten-year horizon (MINCETUR, 2015). Focusing on firms, the plan brings policy objectives related to instruments supporting entrepreneurship under four key pillars: market diversification; competitiveness and sustainability of the exports; trade facilitation and efficiency in the international logistics chain; and capacity building to create an “export culture”.

The main objective of the National Productive Diversification Plan (Plan Nacional de Diversificacion Productiva) is to promote new engines of economic growth by improving economic diversification and economic sophistication. The plan emphasises reduced dependence on a natural resources, greater productivity, increased formal jobs and sustainable economic growth as fundamental in that direction. Similar to the GDP per capita targets indicated by the Plan Estratégico de Desarrollo Nacional Actualizado: Perú hacia el 2021, the plan would allow Peru to tackle the MIT and to reach a GDP per capita of USD 17 000, adjusted by PPPs, by 2021.

The National Productive Diversification Plan comprises 3 key axes and 11 action lines. The first axe is to promote productive diversification, and its main lines of action are integration into global value chains, attracting foreign direct investment, and innovative entrepreneurship. The second axe is to simplify administrative barriers and to promote adequate regulations. The third axe is to expand productivity, and its main lines of action are to extend knowledge and technology. Fundamental is the development of CITEs and other initiatives to enhance the productivity of micro, small and medium-sized enterprises (MSMEs) (analysis below). Others aspects include implementation of a national innovation policy, the national quality policy (Instituto Nacional de Calidad), development and promotion of modern industrial parks, and reduction in financing costs for MSMEs. One year into the plan, several concrete measures have already been implemented, including expansion of the network of CITEs, creation of the National Quality Institute, tax reform to promote research and development, and design of several industrial parks. The three axes also address horizontal policies linked to health, education, infrastructure and state modernisation.

In addition to the mentioned National Strategic Plans, the CNCF developed the Agenda de Competitividad 2014-2018 (MEF/CNC, 2014). The CNCF was created in 2002 as a co-ordinating committee on policies related to competitiveness and recently formalisation was included as a key component in its agenda. The board of directors includes representatives from the public and private sectors and is supported by a technical secretariat attached to the MEF. Since its creation, the CNCF has promoted inter-sectorial and inter-governmental co-ordination and provided accountability and monitoring for previous work. Notably, the CNCF endeavours to form integrated teams with representatives from the private and public sectors and different levels of government to address the thematic areas included in the agenda.

The main objective of this agenda is to boost competitiveness in Peru towards increasing job formalisation and well-being in the population. The main targets in the period 2014-18 are to increase labour productivity by 15%, reduce informality by 5% and reduce logistics costs from 32% to 23% of product value. For each of the following areas, there are specific goals and policy actions to achieve them: productive and business development; science, technology and innovation; internationalisation of firms; infrastructure; logistics and transportation (Chapter 3); information, technology and communications; human capital; business facilitation; and natural resources and energy.

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Notes

← 1. Furthermore, at regional level, the limited impact of labour productivity convergence on poverty has been explained by the fact that poorer people are employed in sectors where convergence across departments has been slower (such as agriculture), and there is very little labour reallocation towards converging sectors (such as manufacturing) (Lacovone, Sánchez-Bayardo and Sharma, 2015).

← 2. Based on data from Superintendencia Nacional de Aduanas y de Administración Tributaria (SUNAT), http://ww2.mincetur.gob.pe/comercio-exterior/reportes-estadisticos/exportaciones/ (accessed on 1 July 2016).

← 3. These include asparagus, grapes, mangoes, avocados, paprika and calcium-related products. Metal-mechanical products include, for example, mechanical and electrical apparels and their components, and components of automotive, air and water vehicles.

← 4. Two scenarios for China’s economy up to 2030 were modelled based on the projections analysis for China 2030 in investment and GDP growth (World Bank-Development Research Centre of the State Council [DRC], 2013): a normal-pace transition (baseline scenario) and a high-pace transition (low-investment scenario). The high-pace transition scenario shows a lower GDP growth, especially evident in the period 2021-30. None of these scenarios assume specific external or internal shocks to China’s economy, only different trajectories for China’s transition from a middle-income, investment-driven economy towards a high-income, consumption-based one (OECD/CAF/ECLAC, 2015).

← 5. The Operational Framework on Public-Private Collaboration for Resource-based Value Creation being developed as part of the OECD Policy Dialogue on Natural Resource-Based Development (included in the OECD Country Programme with Peru) is a reference to help Peru address these challenges.

← 6. LAC countries are Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Mexico, Panama, Peru, Uruguay and Venezuela.

← 7. The OECD Initiative on Global Value Chains, Production Transformation and Development is another OECD platform that could help Peru to promote development through greater participation in and upgrading of global value chains.

← 8. The RCA index, based on Balassa (1977), measures the ratio between the contribution a product makes to the exports of a country and the same product’s contribution to world trade. Values larger than 1 suggest specialisation of a product by the country. Density is a measure based on Hausmann and Klinger (2007), which captures a country’s propensity to export a product. The measure reflects the closeness between the capabilities needed to export a new product and the capabilities already incorporated in a country’s export basket (Annex 2.A1).

← 9. Some semi-processed goods are characterised as commodity-related products, with high labour productivity but little job creation.

← 10. Furthermore, within the identified products, exploratory regressions do not show an association between Peru’s RCAs and labour (or capital) intensities, value-added to output ratio or value-added per worker, showing potential to increase economic diversification with productivity and job creation.

← 11. Twenty-three percent of the identified products are currently exported for values less than USD 10 000, which suggests geographical constrains for their production. In this regard, the National Productive Diversification Plan privileges the use of regional studies to delineate region-specific agendas to address each of the plan’s objectives. Similarly, another study identifies opportunities in five regions: north, centre, south, jungle and Lima (Consorcio Cluster Development, Gaia and D’ávila Quevedo, 2013).

← 12. For instance, measured as kg per acre, in 2013, Peru more than doubled the world’s average production of asparagus and grapes, and was a quarter higher for avocados (based on FAO, 2014).

← 13. Based on discussions and interviews with economic actors of this sector.

← 14. Compound annual growth rate, 2005-15.

← 15. However, tourism revenues are largely concentrated in Lima (65% of the aggregate value of the restaurants and hotels sector in 2012), and only a few sites capture most visitors. Machu Picchu represents 32.5% of places visited in Peru in 2015. Based on data provided by the Directorate-General for Research and Studies about Tourism and Crafts of the Ministry of Trade and Tourism (MINCETUR).

← 16. Based on the input-output table of 2007.

← 17. OECD calculations based on data provided by the Central Bank of Peru (Banco de la Reserva del Perú), webpage, www.bcrp.gob.pe/estadisticas.html (accessed on 1 July 2016); the INEI, webpage, www.inei.gob.pe/estadisticas/indice-tematico/economia/ (accessed on 1 July 2016); and ADEX Inteligencia Comercial (2015), Exportaciones News, Dic 2015, Asociación de Exportadores, Lima, www.adexperu.org.pe/index.php/exportaciones-news.

← 18. Based on OECD Main Science and Technology Indicators (database), www.oecd.org/sti/msti (accessed on 1 July 2016); and Red de Indicadores de Ciencia y Tecnología –Iberoamericana e Interamericana (accessed on 1 July 2016).

← 19. www.oecd.org/eco/growth/indicatorsofproductmarketregulationhomepage.htm for more information.

← 20. The third component is the regulatory protection of incumbents through legal barriers to entry and antitrust exemptions.

← 21. Only a few agriculture products are not included.

← 22. Other key challenges are linked to logistics process and transport infrastructure (Chapter 3).

← 23. www.oecd.org/tax/beps/ for further information.

← 24. http://acuerdonacional.pe/ for further information on the National Accord (Acuerdo Nacional).

← 25. www.ceplan.gob.pe/planes/planes-desarrollo-regional-concertado for Concerted Regional Development Plans in Peru.