US embassy cable - 05LIMA4732

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