Peruvia

High growth masks Peru's diverging economies

By Hal Weitzman in Lima, FT.com site
Published: Jul 27, 2007

Elsa Palacio is struggling under the weight of four big shopping bags, but she is beaming. "I always come here to check out the special offers," she says, pointing a thumb behind her towards the Max department store at the Megaplaza mall in Los Olivos, a district of northern Lima.

Mrs Palacio, a nurse from San Martin de Porras, a poor neighbourhood nearby, says she feels woefully underpaid, but with the wages from her husband and son, the family has an income of about 1,500 soles (about $484, €355, £239) a month – enough, she says, to get by and enjoy the occasional shopping spree.

Sandwiched between the Pan-American highway and the dusty hillside shanty town of Independencia, the giant Megaplaza mall, constructed in 2003, is testament to Lima's growing middle class. In the past five years, 10 per cent of the city's residents have emerged from poverty, the biggest growth being in households earning an average income of $408 a month.

With 72 consecutive months of economic growth and with gross domestic product expanding 8 per cent last year, Peru is enjoying its most sustained growth since the 1950s. But while the growth of a new middle class suggests that is trickling down to poorer Peruvians, the effects are geographically patchy. Official figures show that poverty increased between 2004 and 2006 in the impoverished rural highlands. "We have two economies, heading in two very different directions," says Ismael Muñoz, of the Catholic University in Lima.

At Megaplaza, the pace of purchasing activity is frantic. The most popular items seem to be clothing at Max, mobile telephones and fast food, but there are also banks, a cinema, estate agents and even a branch of Gold's Gym.

Megaplaza is a good example of how globalisation has enhanced the new middle class's purchasing power. Low-cost imports – from Chinese-made suede jackets to "Great Wall" vehicles – offer new opportunities for conspicuous consumption. Combined with long-term payment plans, this makes items such as a laptop made by Olidata, the Italian company – available for monthly payments of 87 soles – affordable for most Lima residents.

Alan García, who marks his first year in office today, owes his presidency to this emerging middle class. Its support in Lima, where more than 30 per cent of Peruvians live, proved decisive in last year's election.

Mr García also did well on the north coast, which has benefited from the boom in Peru's export-led growth. The value of annual exports has increased threefold over the past five years and is expected this year to reach a record of $27bn. Much of this is due to higher metals prices, but growth has been diverse. Agriculture, textiles, manufacturing and construction have all expanded impressively and look set to continue to do so: the economy is likely to grow this year by 7.5 per cent, while conservative estimates are that growth will average 6.5 per cent a year until the end of the decade.

The US Congress has stalled on approving a trade agreement between Washington and Lima, but is expected to do so by October.

But economic progress could yet be undone by social upheaval. In recent weeks many of Peru's regions have been hit by violent protests over a range of gripes from education reform to fears of inflation. The worst affected areas have been the highlands, which have largely not benefited from economic growth. In rural highland areas of Peru, the proportion of people living on the equivalent of $1 a day or less rose from 44 per cent to 46.5 per cent between 2004 and 2006, according to a report re-leased last week by the National Institute of Statistics. Many remote Andean communities have no proper roads, electricity, telephone or running water.

While the government has made some moves to tackle the "infrastructure gap" caused by longstanding underinvestment, few analysts think it will be very successful. "We have fiscal surpluses, so the problem isn't so much resources as the ability to spend them, the lack of expertise," says Fritz Dubois, an economist in Lima. "The result is that while the coast is living in the modern globalised world, the highlands remain in the 19th century."