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Macroeconomics, Neoliberal Policies and Livelihoods in Peru
Beginning in the 1950s, the Peruvian economy experienced a demographic explosion marked by
increased urbanization and economic growth. This urbanization of the Peruvian population generated a
large sustained demand for employment, education, health and other services and changed the geography of
poverty in Peru. While the rural population remained among the poorest of the country, since the 1970s poverty
and extreme poverty in Peru have become an urban problem, as most of the population lives in the main cities,
with 27.9% of the population living in and around Lima in 1990, mostly in marginal settlements called
Pueblos Jovenes.1 The combination of increased population and stagnant poverty levels also signals an increase
in the absolute number of poor Peruvians.
Economic growth after the "lost decade" of the 1980s has been stagnant, unable to provide employment,
education for large groups of minorities, and effectively reduce poverty. The adjustment programs and
neoliberal policies implemented since 1990, designed to combat hyperinflation and large fiscal deficits, brought
broad changes to the economy, including deregulated markets (goods, capital and labor markets), wide
spread privatization of public industries and drastically reducing the role of the state and public expenditure.
The policies controlled the hyperinflation and even introduced a short period of recovery in the early 1990s
but, today, income has yet to approach 1970s levels.
Income distribution studies have shown that even during periods of substantive growth, such as the 1970s,
Gini coefficients have been among the highest in the world.2 Income distribution levels have not
fluctuated substantially during the last couple of decades. Instead, studies have shown that the brief period of
growth in the early 1990s only served to decrease the rate at which people fell into poverty. The recession of the
late 1990s again resulted in increasing rates for both poverty and inequality measures. Moreover, the integration
of the Peruvian economy into the global economy, a goal of the stabilization programs, has made socio-
economic development dependent on foreign capital and more sensitive to external shocks.3 Due to the
acute distributive inequalities, poor sectors in Peru are highly susceptible to economic downturns and have the
least secured incomes and consumption patterns.
Source: UNDP 2002 Huan Development Rip o'Ifr Peru 'PR h, -iug ti' Potentkl'
Figure 1. Demographic explosion.
The adjustment policies of the early 1990s have failed to activate the economy and generate the
necessary employment to integrate workers who have no place within the labor market. Lack of substantive
growth since the 1980s and the stabilization policies implemented in 1990 have not only failed to increase
formal employment but have reduced it, by cutting both public and private employment. Public employment, once
an important source of work throughout Latin America, was immediately reduced under the stabilization program.
In this regard, the adjustment policies have perpetuated and worsened the employment crisis, where large
sections of the labor force are either unemployed or underemployed, with no choice but to find work in the
informal sector. Hyperinflation was curved, but inflation continued to make cost of living exorbitantly high. It is
not correct to assume that low income levels are equivalent with subsistence life styles and that the poor
are, therefore, shielded from price increases. The highly urbanized poor population is fully immersed in a
market economy in which they depend on money for the goods and services they need to ensure their reproduction.
1000 ---- 70
1940 1961 1972 1981 1993 2000
-a GDPiper capital * % Urban Pop.
Source: Cambios de la PobreSa en et Peri: 1991-1998
Figure 2. Poverty in Peru.
Unlike largely rural societies where household production shields the poor from the rising cost of living, the
Peruvian poor cannot control the cost of basic necessities such as food and daily services like transportation,
which have continued to rise while their incomes have declined or stagnated as opportunities remained limited.
Despite these negative signs, World Bank (WB) and other national statistics show little change in poverty levels
for the last decade. However, if the cost of living continues to increase, formal employment declines while
the informal sector increases substantially- with its lower and less secure incomes- how can poverty levels
remain stagnant? Below, a discussion of that question will examine the role of livelihood strategies at the
household level and the informal sector.
LIVELIHOODS AND SURVIVABILITY: THE STRATEGIES OF THE POOR4
Poverty estimates are constructed from household surveys and for this reason they reflect the sum of all
working members' incomes. Recognizing the centrality of the household for income protection, a "resources
of poverty" model was developed from 1980s data to reflect the implementation of survival strategies at
the household level. The model depicted the economic order in Latin America as inclusive to the extent that the
poor could generally find ways to survive. One common strategy to secure survival was diversification of
income generation, where household members find employment in different sectors to guard against
income fluctuations in specific sectors. Within the household, however, conflicts of interests exist, the distribution
of assets is unequal, and women often bear larger workloads.
The "Resources of Poverty" model was about addressing how the poor used their most valuable asset, labor, in
Poverty in Peru
16000 - 70%
14000 - 60%
12000 - -"50%
6000 - 30%
4000 - 20%
2000 - 10%
1971-72 1965-86 1991 1994 1997 2000
Absolute Numbers (thousands) * Percentage
ways that guarded them against deterioration of their income and living standards. With several sources of
income, the household was protected against temporary unemployment, illness or other loss. Members took jobs
in both the formal and informal sector to earn extra income. Steady income from the formal sector was
sometimes used for start up capital in small micro-enterprises and allowed the households to spare the income
to maintain healthy reciprocal social relationships with neighbors and family. In especially hard times, older
children and women, depending of the point in their domestic life cycle, could become employed outside the home.
Recent research results led Gonzalez de la Rocha5 to review her "resources of poverty" model, and its applicability
to livelihoods and poverty in Latin America for the last two decades. Considering how stabilization policies
have negatively affected employment and social services, she concludes that the livelihoods of the poor in
Latin America have evolved from the Resources of Poverty to the Poverty of Resources model, since the poor
have nearly exhausted all their resources. The years of crisis have exhausted the poor's labor resources,
intensified poverty and eroded social networks. Labor market reforms, instead of stimulating growth
and employment, have made employment less available and less secure. Whereas before the adjustment
programs, the poor found ways to supplement income with home-production, today the lack of disposable income
has made these ventures impossible. Women are seeing increased employment opportunities, but only because
they are considered a cheap labor force and are offered no opportunities for promotion. On the other hand,
formal employment for men has declined, pushing women to become main or important breadwinners.
Strategies that were developed to cushion short crises have become permanent, while resources available
to households are less, condemning them to bare survival techniques. The poor are working to exhaustion in
this unsustainable pattern.
For Peru, the pattern of continued, intensive crisis has lasted almost twenty years. The hyperinflation of the
late eighties was followed by a decrease of formal employment with high labor flexibility, an explosion in
informal sector employment, lower incomes and decreases of public services- most of them under the scheme
of raising user fees. All these changes have been detrimental for the poor's survivability.
While poverty levels may remain unchanged by traditional measures- relying on household income- what
remains hidden is the decrease in individual incomes and the social cost of maintaining household income levels.
Poor households have been able to maintain income only by making unsustainable use of all the household's
labor, threatening the very reproduction of these households and closing any opportunity to overcome poverty.
They are forced to use their children's labor at the cost of their education, health, and safety. A "participatory
poverty assessment" for Peru found that women are bearing most of the responsibility of household
reproduction, commonly facing long hours, abuse from employment and uncertain and low incomes were common.
It is often assumed that the poor can work as hard as it takes to survive, but this ability is not infinite. What is
at stake now is their own capacity to reproduce. Endless working hours for children, adult and elder
women, important cuts in food consumption, no time to rest, no recreation, etc. are not immediately translated
into shorter life spans, but instead have important long-term implications for their health and capacity to work.
THE THRIVING INFORMAL SECTOR
The size of the informal sector has doubled in Peru during the last forty years, to incorporate almost half of
the workforce. The data shows that growth in the sector reflected in the 1993 percentages follows an almost
equal decline in state employment, as fiscal austerity led to the loss of these jobs. The jobs that have in turn
been formed in the informal sector are the lowest paid with the exception of rural agriculture.6 The shift in the
labor market has meant Peruvian workers are earning less, receiving less benefits and often lack secure work.
Source: Qu6 mberms sabre el desemplea en el Peru?
Figure 3. Evolution of employment by sector.
However, the significant growth of the informal sector in Peru -parallel with the shrinking of formal employment
both in the private and public sector- clearly shows that informal employment has played an important role for
the working class in Peru, acting as a safety cushion preventing them from annihilation , saving the country the
levels of unrest experienced elsewhere. The flexibility of informal labor has allowed poor Peruvians to enroll
small children, women and elders in activities that can contribute to the household income -which is what
poverty surveys measure. Despite precarious levels and a high social cost, the growth of informal work is an
element that can explain why the levels of poverty have not increased or spread under the difficult
circumstances created by structural adjustment policies in Peru.
While most researchers consider the increase of informal sector and informal employment a symptom of the limits
Evolution of Employment by Sector
1998 46 1 196
1993 379 156
1981 28 2 29 1
1961 243 332
0 20 40 60 80 100 120
Percentage of EAP
m Salaried m State Employment Urban Informal 7 Rural Agriculture
of neoliberal policies as an adequate recipe for development, others, notably the Peruvian Hernando de Soto,
argue that the growth of the informal sector is showing an alternative path to development, one based on
local entrepreneurship which can seize upon local opportunities and generate, independently or underground
if necessarily, dynamic income-earning opportunities that should remain unregulated.7 Yet, the growth of
informal sector has not been able to absorb those displaced from public and private formal employment.
An unusual expression of informal work is the increase in crime and drug operations. Crime and victimization
rates have risen during the period of neoliberal adjustment for the entire Latin American region.
Reduced opportunities for formal employment and rising inequality, factors acutely present in the Peruvian case,
have created an environment where many disenfranchised poor youths have turned to petty crime for income and
as a reflection of mounting societal tensions. Aspects of drug operations and petty crime are providing income
and employment opportunities in a context of labor crisis. This rise in crime has also generate a demand for
private security services, ranging from specialized firms to the informal watchman (guachiman) hired by groups
of neighbors or small businessmen to prevent endless thefts or the threaten of kidnapping.8
RECONSDIERING THE MODEL
Although official figures report stagnant poverty rates, the human and social toll of survival in Peru has
intensified. The consideration of livelihood strategies, quality and available quantity of employment exposes a
harsher result of over a decade of macro-adjustments. Peruvians are struggling harder to maintain income
and, some, to survive. Adjustment policies stabilized macro indicators and restored fiscal balance but accentuated
the struggle to survive. This model of mediocre to negative growth and human capital exhaustion needs to
be reconsidered before the long-term cost of survival further diminishes the possibilities for development.
1. ECLAC, Statistical Yearbook for Latin America and the Caribbean (Chile: United Nations Publication, 2003).
2. Webb, R. F. A. La distribution del ingreso en el Peru (Lima: IEP, 1975).
3. Mauro, Raul, Cambios de la Probreza en el Peru: 1991-1998, Investigaciones BREVES 19 (Lima: Visual Service
4. Gonzalez de la Rocha, "From the Resources of Poverty to the Poverty of Resources? The Erosion of a Survival
Model," Latin American Perspectives, Issue 119 (July 2001): 72-99.
6. Institute Nacional de Estadistica e Informatica (INEI), Qu6 sabemos sobre el desempleo en el Peru? Familia,
trabajo, y dinimica ocupaciona, (Lima, INEI, 2001), 122.
7. Rakowski, Cathy A., "Convergence and Divergence in the Informal Sector Debate: A Focus on Latin America,
1984-92" World Development (Great Britain), Vol. 22 Number 1, (1994): 501-515.
8. Portes Alejandro and Kelly Hoffman. "Latin American Class Structures: Their composition and change during
the Neoliberal Era" Latin America Research Review, Volume 38 Number 1 (2003).
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