Macroeconomics, Neoliberal Policies and Livelihoods in Peru

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Macroeconomics, Neoliberal Policies and Livelihoods in Peru
Acosta, Sara
Espinosa, M. Cristina ( Mentor )
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University of Florida
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Macroeconomics, Neoliberal Policies and Livelihoods in Peru

Sara Acosta

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.

Demographic Explosion

1200 80

1000 ---- 70

- 20.
200 10

0 0

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.


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%
10000 '0%
8000 -3
6000 - 30%
4000 - 20%
2000 - 10%
0 0%
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 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


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

SRL, 2002).

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.

5. Ibid.

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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