GOP REVISION SHOWS POVERTY DECLINES IN

UNCLAS LIMA 003477 SIPDIS SIPDIS USTR FOR BHARMAN AND MCARRILLO COMMERCE FOR 4331/MAC/WH/MCAMERON USEU FOR DCM E.O. 12958: N/A TAGS: ECON SOCI PGOV ETRD PE SUBJECT: GOP REVISION SHOWS POVERTY DECLINES IN 2006 FASTER THAN ANTICIPATED ¶1. SUMMARY. A National Statistical Institute (INEI) technical revision, supervised by the World Bank, indicates that PeruQs poverty rate declined more significantly than the government had previously calculated - by 4.2 percentage points, to 44.5 percent, from 2005 to 2006. Extreme poverty decreased also, but by only 1.3 percentage points in 2006, to 16.1 percent. The government welcomed the news. The new numbers, reflecting more accurate 2004 data, showed that the administration of former President Toledo was even more successful than it had been given credit for on this important front. ¶2. Overall, the new figures for poverty are consistent with various indicators that show strong domestic demand (septel),booming private consumption and investment since 2006, like manufactured food goods sales; beverage sales; appliances imports; consumer loans; home building, etc. While the global figures are positive, some areas in the country such as Huancavelica and Ayacucho - where support for the government remains weak - showed little improvement. END SUMMARY. ¶3. Peru's National Statistical Institute (INEI) released July 19, 2007 new figures that revised poverty levels significantly downwards. (The new figures reflect data from 2004, 2005 and 2006.) While the 2004 figures had previously pegged poverty at 51.6, the revision now shows it at 48.6. On that basis, the 2006 figures drop to 44.5 percent. In its May 2007 medium-term economic report (MMM 2008-2010),the GOP's Ministry of Economy and Finance had set the GOP's goal to reduce the poverty rate by ten percentage points to a 40 percent rate by 2011. President Garcia used that figure in his July state of the union address. ¶4. The new poverty estimates have shaken the prevailing contention that Peru's impressive economic growth in the last five years has failed to reduce poverty by any significant measure. The new figures, which reflect progress made during the Toledo Administration, show a decline of almost ten percentage points. Ironically, President Garcia has sought to differentiate himself from his predecessor by promising in his state of the union address to reduce poverty by 10 points. These new figures suggest that, while some of the work suddenly appears to have been done for the government, the political bar for further progress on poverty reduction has been significantly raised. POVERTY SIGNIFICANTLY LOWER -------------- ¶5. The table below shows that poverty in 2006 went down by 4.2 percentage points, to 44.5 percent from the prior year. On the other hand, extreme poverty decreased only 1.3 percentage points in 2006, to 16.1 percent. The new figures for poverty are consistent with various indicators that show booming private consumption and investment since 2006, like manufactured food goods sales; beverages sales; appliances imports; consumer loans; home building, etc., and recent surveys by private polling companies, like one by Ipsos Apoyo for nine cities. Peru: Poverty and Extreme Poverty, 2001-2006 Percent of total population) -------------- 2001 2002 2003 2004 2005 2006 -------------- Poverty 54.3 53.8 52.2 48.6 48.7 44.5 Previous 2004 Poverty) (51.6) of which: Urban Areas 50.0 46.4 44.1 37.1 36.8 31.2 Rural Areas 77.1 77.7 75.7 69.8 70.9 69.3 Extreme Poverty 24.1 24.2 21.9 17.1 17.4 16.1 Previous 2004 Extreme Poverty (19.2) Of which: Urban Areas 16.7 14.6 13.9 6.5 6.3 4.9 Rural Areas 49.8 51.7 45.9 36.8 37.9 37.1 Source: Based on INEI. ¶6. The newly released poverty indicators surprised many local economists, who largely agreed with the prevailing thinking that poverty in 2005-2006 hovered around 50 percent, with extreme poverty around 20 percent. As recently as May 31, 2007, the Ministry of Economy and Finance (MEF) stated that the Garcia Administration aimed to reduce total poverty by ten percentage points - to 40 percent - by 2011, and to reduce rural poverty by twenty percentage points - to around 50%. The new data indicate that, with poverty down to 44.5%, much of this work has already been done by the previous Toledo administration. WINNERS AND LOSERS -------------- ¶7. Progress in poverty reduction has been far from evenly distributed in a geographic sense. Generally, departments with natural resources industries (mining, petroleum or lumber) or export-oriented crops or apparel (mostly on the coast) have fared much better than those without. In Tumbes and Moquegua, poverty decreased by about one third, while in Arequipa, Lima, Ancash, Tacna and Madre de Dios, the reduction was about one fifth. Conversely, poverty actually increased in six departments. In four of these cases - Ayacucho, Apurimac, Pasco and Huancavelica - the reversal wiped out earlier progress made in reducing poverty there. Not coincidentally, those areas strongly supported nationalist candidate Ollanta Humala in the 2006 elections and remain deeply skeptical of, and in some cases hostile toward, the government today. ¶8. Extreme poverty rates follow a similar pattern. Reductions have been significant in departments in which extreme poverty levels were already low. For example, extreme poverty fell by one half or more in Tumbes, Moquegua, Arequipa and Lima, but increased in Ayacucho, Apurimac, Huancavelica and Pasco, as shown in the table below. URBAN IMPROVEMENTS, RURAL STAGNATION -------------- ¶9. Poverty decreased sharply in urban and coastal areas, to 31.2 percent and 28.7 percent respectively in 2006, while it remained steady in rural and highland areas, at 69.3 percent and 63.4 percent respectively in 2006. A similar situation took place in the case of extreme poverty. - Peru: Changes in Poverty and Extreme Poverty, -2004-2006 -------------- -- Selected Poverty Rate (Pct) Percent Change - Departments/Areas 2004 2005 2006 2006/2004 (*) -------------- - Poverty Tumbes 24.2 16.2 15.8 -34.7 Moquegua 38.7 30.3 27.3 -29.5 Arequipa 34.2 24.9 26.2 -23.4 Lima (**) 32.2 32.9 25.1 -22.0 Ancash 53.3 48.4 42.0 -21.2 Tacna 24.7 30.3 19.8 -19.8 Madre de Dios 27.1 30.8 21.8 -19.6 Pasco 65.7 72.9 71.2 8.4 Apurimac 65.2 73.5 74.8 14.7 Ayacucho 65.9 77.3 78.4 19.0 Urban Areas 37.1 36.8 31.2 -15.9 Rural Areas 69.8 70.9 36.9 -0.7 Extreme Poverty Tumbes 1.3 1.3 0.4 -69.2 Moquegua 10.9 5.4 3.9 -64.2 Arequipa 6.5 3.8 3.4 -47.7 Lima (**) 2.5 2.5 1.4 -44.0 Madre de Dios 6.3 9.4 4.3 -31.7 Huancavelica 64.6 76.2 72.3 11.9 Apurmac 28.0 34.7 39.7 41.8 Ayacucho 27.8 38.6 41.3 48.6 Urban Areas 6.5 6.3 4.9 -24.6 Rural Areas 36.8 37.9 37.1 0.8 Source: Based on INEI's "Technical Report - Poverty Measurement 2004, 2005 and 2006" (in Spanish). (*) A negative sign is a reduction in the poverty rate; a positive sign is an increase. (**) Includes the Province of Callao SURVEYING PROBLEMS, DATA REVIEW -------------- ¶10. The last official poverty data survey was that of 2004, as INEI withheld publication of the one for 2005. John Newman, local representative of the World Bank, told us that there was a significant error in INEI's 2005 household survey, with a high nation-wide 12.3 percent rate of non-reply to key questions. The problem was even more serious in Lima, with a partial non- response rate of about 30 percent. (Note: This error tends to over-estimate poverty.) ¶11. To address the situation, INEI called on the World Bank, Inter-American Bank, the French agency IRD, U.N.'s ECLAC, as well as a number of several local GOP agencies, universities and think tanks to assist it in the review process. Newman said an ad-hoc commission was set up with experts from those organizations, which worked five months on number-crunching and survey data review. Once a figure for 2005 was obtained, the commission needed to review the 2004 survey, and finalized with the processing of the 2006 survey. WHO GETS CREDIT? -------------- ¶12. INEI's poverty figures reported during the Toledo Administration were harshly rebuked in mid-2006 by several top APRA leaders just before APRA took office at the end of July 2006. Current Interior Minister (and former Garcia Economy Minister during his first term) Luis ALVA Castro, then an APRA Congressman, accused INEI of "grossly" manipulating poverty statistics downwards, which showed that poverty was below 50 percent in 2005. COMMENT -------------- ¶13. In various speeches at the beginning of his term, President Garcia promised to reduce the poverty rate significantly by the end of his term in 2011. Obviously, with the revised figures from the Toledo years showing marked progress, his job has just become harder politically. But economists say the goals seem achievable as the economy is forecast to continue to grow strongly. However, these goals do require maintaining a favorable investment climate and demand more efficient government poverty-reduction policies. Continued forays of the government (APRA) partyQs ministers and politicians into populist policies in key areas like labor, mining, energy prices and the like, might impact negatively on the investment climate and on the governmentQs progress. McKinley