UNCLAS SECTION 01 OF 03 LIMA 004732

SIPDIS

SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/OMA, EB/TPP
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR RVARGO AND BHARMAN
USAID FOR MIKE KARBELING

E.O. 12958: N/A
TAGS: ETRD ECON EINV PGOV PREL PE
SUBJECT: ECONOMIC EXPANSION BEGINNING TO REDUCE POVERTY


1.(U) Summary: The Instituto Nacional de Estadstica e
Informtica (INEI), Peru's equivalent of the U.S. Census
Bureau, released a study showing that poverty in Peru
declined from 54.3% to 51.6% between 2001 and 2004.
Although the drop in poverty was small, only 5% or 2.7
percentage points, it came as welcome news to the Toledo
Administration, whose generally sound economic policies have
spurred steady economic growth, but, until now, have been
unable to show that the benefits have been reaching the
segment of the population most in need. We are struck by
how this study validates the success of the USG's approach
to poverty reduction in Peru. The provinces that
experienced dramatic reductions are those that have
experienced expansion of export industries under ATPDEA and
those targeted by USAID market-based development programs.
Poverty reduction will likely continue, as the economic
expansion that has gone on for more than 50 consecutive
months is expected to persist for the next several years.
However, local economists and the GOP believe that the
economy needs to grow at 6% or higher for an extended period
before Peru will see Chile-like poverty reduction. End
Summary.

Poverty Report
--------------

2.(U)Peru's Census Bureau equivalent, INEI, released on
October 24 the results of its four-year study of poverty,
which found that poverty in Peru has declined 2.7 percentage
points, from 54.3% to 51.6%. This represents an overall
decline in poverty of 5%. The level of reduction varied
from region to region. Two departments saw dramatic
reductions. Lima, on the other hand, saw its poverty rate
increase. Analysts have only begun to study the data to
determine the causes for the decreases and increases.

3.(U) Nearly 70,000 interviews were conducted during the
course of the survey, with more than 19,000 three-hour home
interviews taking place in 2004. INEI used a poverty index

based on the amount of calories consumed. The overall
margin of error was 2.8%, but the margin varies region-by-
region, depending on the sample size.

Booming Economy Starts to Trickle
--------------


4. (U) Since mid-2001, Peru's economy has grown about 4.5%
annually, and growth in 2005 will be close to 6%. The
expansion has been broad based. Construction, personal
consumption and private investment are up. Exports have
more than doubled, driven in part by record high mineral and
trade preferences provided by the Andean Trade Promotion and
Drug Enforcement Act (ATPDEA).

5.(U) The economic expansion and resulting poverty reduction
have occurred mostly in areas outside Lima. The costal
areas are experiencing a mini-agricultural boom. The
asparagus industry, a primary ATPDEA beneficiary and located
mostly in Ica, Lambayeque and La Libertad, exported $235
million in 2004. Poverty declined in those regions by 37%,
28% and 9.2%, respectively.

6.(U) The regions along the sierra are starting to
experience a spillover effect from the agricultural boom on
the coast, as the agro-industry looks for more arable land.
Poverty reduction in those regions should pick up as exports
of products such as paprika, papaya, melons, onions and
artichoke, where USAID also has played a fundamental role,
begin to accelerate. The expected growth and resulting
poverty reduction will depend on either continued ATPDEA
preferences or entering into force of the free trade
agreement. The study found that rural poverty declined from
77.1% to 72.5%.

Growth Leaders: Mining/Energy and Apparel
--------------

7.(U) The boom in Peru's mining and hydrocarbon industries,
which has seen both the value and volume of its exports
rise, is taking place entirely outside of Lima. In Cusco,
the leading destination for Peru's booming tourism industry
and home of the large, controversial Camisea natural gas
project, poverty dropped by 18%, from 72.7% to 59.2%. Cusco
and the other regions with mining and energy projects will
get a large boost in the near future when the central
government begins distributing the royalty tax revenues
generated by the projects. Royalty funds distribution has
been held up because of the lack of capacity in the regions
to administer the funds. Once the funds begin to flow, some
regions may see as much as $100 million annually.

8.(U) The textile and apparel industry, which is primarily
located around Lima, has seen its exports more than double
since ATPDEA came into effect. ATPDEA allowed Peru to
maintain its share of the U.S. market despite the removal of
textile quotas and the subsequent surge in Chinese exports.
Despite the success of the textile industry, Lima was one of
the few departments where poverty actually increased, from
31.8% to 36.6%. INEI noted that the poverty rate is likely
to decline this year due to the continued economic
expansion.

Two Regions Cut Poverty in Half, Others Lose Ground
--------------

9.(U) The study found that poverty was reduced by more than
half in two districts, Madre de Dios in the jungle and
Tumbes on the far north coast. According to the report,
these two remote regions now have the lowest poverty rates
in the country. The cause of the dramatic reductions is
unclear. The city of Madre de Dios has emerged as a second-
tier tourist destination -- but that is not likely to
account for a dramatic reduction in poverty -- and the
surrounding area supports a large and often illegal logging
industry. It seems most likely that a very low sample size
led to an inaccurate estimation. Tumbes may have benefited
from several conditions; demilitarization along the border
and the subsequent bi-national development projects;
favorable terms of trade created when Ecuador dollarized;
and an overall increase in exports.

10.(U) Besides Lima, three other areas saw poverty increase;
the southeastern region of Puno, where poverty increased
from 77.3% to 79.2%; the southern region of Moquegua, which
saw an increase from 28.5% to 37.2%; and Hunuco, where
poverty increased from 76.6% to 77.6%. Huancavelica remains
Peru's poorest region. Poverty there inched down from 86%
to 84.4%.

The Gap Closes
--------------

11.(U) With poverty declining in many of the provinces but
rising in Lima, the poverty gap between the provincial
cities and Lima was cut by more than half, from 18% to 6%.
The emerging economic rise of the provincial cities may help
stem migration to Lima, which in turn could lead to poverty
reduction in the capital. Overall, urban poverty declined
14%, while rural poverty declined 6%.

USAID Efforts Paying Off
--------------

12.(U) USAID's bilateral assistance program has played a
pivotal role in Peru's success in reducing the poverty gap.
From employment generation and business development to
microfinance and food security, USAID interventions
traditionally focus in some of the most poverty-stricken
areas of the jungle and highlands in Peru. USAID's Poverty
Reduction and Alleviation (PRA) project has generated over
18,500 new jobs and more than $88 million in new sales over
the last four years. Most importantly, USAID work opened
markets for non-traditional products from those rural poor
areas; those products in turn are becoming a motor for their
sustainable growth. Technical support and loan capital to
microfinance institutions expanded financial services to
nearly 300,000 clients of whom 98% are living below the
poverty line. Technical assistance and studies have
influenced and helped government to focus badly needed
infrastructure investments on those areas.

13.(U) Continued work in USAID assisted regions is expected
to contribute to a more rapid decline of poverty during the
coming years. In Cusco and Ayacucho, where poverty declined
by 18% and 8.3% respectively, USAID has increased
competitiveness and opened up markets for red peppers,
handicrafts, ceramics, organic coffee and cacao, now the
flagship crops for those regions. In San Martin and Ucayali
regions, poverty has declined by 16.2% and 21%
respectively. The recently completed rehabilitation of the
Fernando Belaunde Terry highway, USAID's current single
major investment in San Martin, will boost the regional
economy, and forest concessions in Ucayali will start
producing certified timber with USAID assistance.

Comment
--------------

14.(U) The Toledo Administration deserves much credit for
creating the economic environment that led to sustained,
broad-based economic growth and the subsequent poverty
reduction. However, the 5% decrease in poverty, in the face
of nearly a half-decade of solid economic growth, is less
than satisfying. To harness the extra growth needed to
achieve Chile-like poverty reduction, Peru is going to have
to tackle some large structural problems, such as education,
health and judicial reform.

STRUBLE