Peru's economic growth and poverty reduction slowed markedly after the end of the commodity boom. After 15 years of remarkable growth, sources of shared prosperity were drying up as the external context became less favorable. The subsequent slowdown exposed two main structural challenges documented in the Peru 2017 Systematic Country Diagnostic (SCD): low productivity in the private sector, which hindered growth and the creation of quality jobs, and the persistence of large geographic disparities in development outcomes. The first is associated with low technology adoption and innovation, which reduces export diversification and constrains the creation of better-paying jobs and income opportunities for the bottom 40 percent. The second makes it difficult for particular population groups to overcome poverty given the poor quality of services and opportunities in certain parts of the country. To achieve higher productivity from a thriving private sector and decrease spatial disparities, the first SCD identified and prioritized key micro-structural reforms aiming to improve human capital, infrastructure, and the quality of public services and to reduce market rigidities. Five years later, these development challenges not only persist but have worsened. Productivity continues to be low, offsetting other sources of economic growth. Spatial disparities also persist, with new pressures brought to urban areas by a sharp increase in Venezuelan migration. The COVID-19 shock highlighted the structural shortcomings of the Peruvian economy. The pandemic led to a significantly higher number of deaths in Peru than in the rest of the world, a sharp economic contraction, steep poverty increases, and extensive learning disruptions. Concerns over long-term impact, particularly from human capital erosion, remain. And while macroeconomic management strengths prevented an even more profound impact and aftermath effects, the COVID crisis revealed the limitation of the country's buffers and its low capacity to respond to non-financial shocks and manage social conflict. This Update to the SCD argues that the root cause of limited progress toward addressing the two development challenges of low productivity and spatial inequality lies with the weak and declining capacity of public institutions. Institutional instability has substantially increased since the first SCD, further weakening the capacity of the state to design and implement needed reforms, let alone deliver quality services across the territory. An unprecedented turnover in high-profile civil servants has fundamentally disrupted the functioning of the state. At the same time, the business environment has deteriorated. Private investments have plummeted to record low levels, and capital outflows have persisted in the context of more binding regulatory burdens, rising transaction costs, and a volatile and uncertain political context
