This paper presents a growth diagnostic exercise for Peru. It notes that although Peru has recently enjoyed high rates of economic growth, this growth is actually a recovery from a significant and sustained growth collapse that began in the 1970s. Income per capita has barely recovered to its historical peak, despite significant improvements in education, infrastructure, the financial system, political stability, institutional quality, and macroeconomic sustainability. The growth collapse was caused by a decline in export earnings due to the fall in international prices and an inadequate investment regime in export activities that led to a fall in market share. This situation led to collateral damage in the form of a balance of payments, fiscal, and financial crisis, accompanied by hyperinflation and violence, but these aspects were corrected in the 1990s. However, the transformation of the export sector has been surprisingly small: the same activities that declined – mining and energy – are the ones that are leading the current recovery in exports to levels that in real per capita terms are similar to those achieved 30 years ago. The authors argue that the lack of structural transformation is associated with Peru’s position in a poorly connected part of the product space and this accentuates coordination failures in the movement to new activities. In addition, Peru’s current export package is very capital intensive and generates few jobs, especially in urban areas where the bulk of the labor force is now located. This limits the welfare benefits of the current growth path. The key policy message is that the public sector must act to encourage the development of new export activities that better utilize the human resources of the country. This involves action on the macro front to achieve a more competitive real exchange rate, improvements in the capacity to solve coordination failures in the provision of specific public sector inputs, and programs to stimulate investment in new tradable activities.
