Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized 99400 Report No. 99400-PE PERU Building on Success Boosting Productivity for Faster Growth GMFDR Document of the World Bank © 2015 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@ worldbank.org. Cover and design credits: Florencia Micheltorena and Alejandro Espinosa (cover), The World Bank. Contents Background and acknowledgments 1 Executive summary 3 Introduction 13 Part I. Understanding Peru’s growth story 17 1. Peru’s growth success 19 2. Growth in Peru—drivers and challenges 24 Part II. Looking closely at firm productivity in Peru 31 3. Firm dynamics and productivity 33 4. Issues with factor allocation 40 Part III. Correcting misallocation of resources to raise productivity growth 45 5. Addressing regulatory and competition issues 47 6. Streamlining the labor market and building skills 53 7. Improving access to credit for enterprises 59 Part IV. Other opportunities to reduce misallocation and further boost productivity growth 65 8. Using spillovers from international trade 67 9. Unleashing innovation 77 Part V. Conclusions 85 Annex. Background papers prepared for this report 88 References 90 Abbreviations BCRP Banco Central de Reserva del Perú INEI Instituto Nacional de Estadística CAF Corporación Andina de Fomento e Informática CEBB Comisión de Eliminación IPR Intellectual Property Rights de Barreras Burocráticas LAC Latin America and the Caribbean Region CEDLAS Centro de Estudios Distributivos, LACPOV Latin America and the Caribbean Region Laborales y Sociales WB poverty database CENEC Censo Nacional Económico LHS Left-hand Side CEPAL Comisión Económica para América LPI Logistics Performance Index Latina y el Caribe MEF Ministerio de Economía y Finanzas CITE Centros de Innovación Tecnológica MFN Most Favored Nation Empresarial MIC Middle-Income Country CONCYTEC Consejo Nacional de Ciencia, NBFI Non-bank Financial Institution Tecnología e Innovación Tecnológica NTM Non-Tariff Measures EEA Encuesta Económica Anual OECD Organization for Economic Cooperation ENAHO Encuesta Nacional de Hogares and Development EVA Exports Value Added PISA Programme for International Student FIDEICOM Fondo de Investigación y Desarrollo Assessment para la Competitividad PMR Product Market Regulation FINCyT Fondo para la Innovación Ciencia PWT Penn World Table y Tecnología R&D Research and Development FOMITEC Fondo Marco para la Innovación, REDES Red de Ecología Social Ciencia y Tecnología RHS Right-hand Side GCI Global Competitiveness Index RIA Results Impact Assessment GDP Gross Domestic Product RICYT Red de Indicadores de Ciencia GFDD Global Financial Development y Teconología Database SEDLAC Socio-Economic Database for Latin GIPC Global Intellectual Property Center America and the Caribbean GMM Gaussian Mixture Models STRI Services Trade Restrictiveness Index GVC Global Value Chain SUNAT Superintendencia Nacional de IDB Inter-American Development Bank Administración Tributaria IMF International Monetary Fund TFP Total Factor Productivity INDECOPI Instituto Nacional de Defensa de la WDI World Development Indicators Competencia y de la Protección de la WEF World Economic Forum Propiedad Intelectual WITS World Integrated Trade Solution Background and acknowledgments This report has been prepared at the request of the Government of Peru, as part of the Road to Lima process leading to the Annual Meetings of the World Bank Group and the International Monetary Fund (IMF) in Lima, Peru, in October 2015. Other activities of the Road to Lima have been part of its preparation, as have intense technical consultations. The report, by design, is focused on diagnosing selected microeconomic constraints to accelerating productivity growth, while acknowledging that the country may also have other development challenges that are not covered. The report also tries to provide policy directions with the same focused approach. The report was prepared by a World Bank team led by Ekaterina Vostroknutova (GMFDR) under the guidance of Alberto Rodriguez (Country Director, LCC6C), Pablo Saavedra (Practice Manager, GMFDR), and John Panzer (Director, GMFDR). It is based on 25 background papers written by multi-sectoral and multi-Global Practice (GP) and Cross-Cutting Solutions Area (CCSA) teams (a full list of contributors is in the Annex). The following team members led work on the specific topics and sections of the report. Leonardo Iacovone (T&C GP) led a team working on firm-level and productivity analysis that included Trang Thu Tran, Roberto Fattal, Reyes Aterido, and Siddharth Sharma. Thomas Farole (T&C JP and Jobs CCSA) coordinated the team working on trade-related issues, which included Sebastian Saez, Denisse Pierola, Ana Fernandes, Guillermo Arenas, Bruce Fitzgerald, and Erik Van Der Marel. David Robalino (Jobs CCSA) led the team working on labor market issues that included Elizabeth Ruppert Bulmer, Reyes Aterido, Dino Merotto, Mathilde Perinet, Angela Elzir, Tamara Arnold, and Adrian Garlati; the human capital section was based on inputs from Ines Kudo and Miguel Székely; 1 Jennifer Keller was responsible for the corresponding section. Martha Licetti (T&C GP) and Donato de Rosa (MFM GP) led the work on competition and related regulatory policy issues; Alvaro Quijandria led the IFC team working on business regulation; Rong Qian was the main author of the corresponding section; this team included Lucía Villarán, Tanja Goodwin, Karina Rodriguez, Rachel Li Jiang, Congyan Tan, Ernesto Franco Temple, and Jessica Michelle Victor. The innovation section was produced by Rong Qian based on inputs from Ha Nguyen and Pluvia Zuniga; the team also included Patricio Jaramillo and Ekaterina Vostroknutova. The financial sector section was prepared by Daniel Barco (MFM GP) under the guidance and inputs of Steen Byskov (F&M GP). The macroeconomic and growth story was crafted by Ekaterina Vostroknutova and Faruk Khan drawing on inputs from Cristina Savescu, Daniel Barco, and Harry Moroz. Research assistance was provided by Melanie Laloum, Miguel Saldarriaga, and Teresa Peterburs. Administrative assistance was provided by Silvia Gulino and Patricia Chacon Holt. Writing and editing support was provided by Bruce Ross-Larson, Bruce Fitzgerald, and John Burgess. The report has benefited greatly from comments, advice, guidance, and technical discussions with Norman Loayza, Augusto de la Torre, Daniel Lederman, Carlos Silva Jauregui, Jorge Araujo, Marcelo Selowsky, Ivailo Izvorski, Vinaya Swaroop, Edgardo Favaro, and many others. The report owes a lot to the government agencies that supported the team with provision of data, comments, guidance, and advice; the list includes but is not limited to the Ministry of Economy and Finance, the National Institute of Statistics and Informatics (INEI), the Central Bank (BCRP), Ministry of Labor, Ministry of Production, and Ministry of Trade. Vice President: Jorge Familiar Country Director: Alberto Rodriguez Senior Practice Director: Marcelo Giugale Practice Director: John Panzer Practice Manager: Pablo Saavedra Task Team Leader: Ekaterina Vostroknutova Executive summary Executive summary Growth with shared prosperity improved labor incomes rather than redistribution 3 policies—the latter explain only 15 percent of the eru has emerged as a new growth star in the poverty reduction. Latin America and Caribbean (LAC) region. P The economy surged at an average of 6.4 These successes have been driven by strong percent per year during the last decade, the second- macroeconomic and structural reforms over the last fastest growth performance in the region. Over the 20 years, and supported by highly favorable external same period, Peru doubled its per capita income, conditions over the last decade. Beginning in the early well ahead of the region as a whole, which increased 1990s, Peru adopted an ambitious mandate of reform. this figure by only half. This has been an impressive Macroeconomic stabilization included a more flexible performance by global standards as well (Box ES1). exchange rate regime, inflation-targeting, fiscal discipline, and continued debt reduction. Structural The nation’s economic growth has been widely reforms covered areas such as financial liberalization, shared among its 30 million people. Since