1 Table of Contents Acknowledgements................................................................................................................................. 3 Abbreviations .......................................................................................................................................... 4 Executive Summary................................................................................................................................. 5 Section 1. Introduction ........................................................................................................................... 6 Section 2. Peru’s Development Challenges Persist and Have Worsened ............................................... 8 2.1 Low productivity that undermines growth ................................................................................... 8 2.2 Enduring spatial disparities ......................................................................................................... 10 2.3 Structural vulnerabilities revealed by global shocks................................................................... 14 Section 3. Limited development progress stems from significant institutional weaknesses ............... 16 3.1 Increased institutional instability ................................................................................................ 16 3.2 A deteriorating business environment that hinders private investment ................................... 18 Rigid, costly labor markets and a complex regulatory landscape................................................. 18 Inefficient land markets due to lack of institutional coordination ............................................... 19 Inefficient regulation and institutional weaknesses hinder sustainability and social inclusion ... 20 3.3 Worsening institutional capacity to deliver quality, equitable services .................................... 21 3.4 Fewer buffers and limited capacity to deal with shocks and social conflict ............................... 23 Physical risks and climate change ................................................................................................. 23 Need for improved disaster risk management ............................................................................. 25 Risks to social protection, health care, and education ................................................................. 27 Section 4. The Way Forward: Policy Priorities ...................................................................................... 28 Appendix A. Framework of the 2017 Systemic Country Diagnostic ..................................................... 33 Appendix B. Evolution of Development Outcomes: Access to Services and Human Capital ............... 34 Appendix C. Knowledge Gaps ............................................................................................................... 39 Appendix D. Additional Policy Priorities ............................................................................................... 41 References ............................................................................................................................................ 45 2 Acknowledgements This Systematic Country Diagnostic (SCD) Update for Peru is the work of a team led by Daniel Barco (Senior Economist, ELCMU), Maria Davalos (Senior Economist, ELCPV), and Nancy Lozano (Lead Economist, SLCDR) under the guidance of Marianne Fay (Country Director, LCC6C), Anna Wellenstein (Regional Director, SLCDR), Ximena del Carpio (Practice Manager, ELCPV), and Doerte Doemeland (Practice Manager, ELCMU). The SCD team benefited from consultations in Peru with key public institutions, civil society associations, private sector associations, and academia. The team would also like to thank the peer reviewers for their advice and guidance: Stefano Curto (Senior Economist, EECM2) and Ellen Hamilton (Lead Urban Specialist, SCUR). The SCD team included the following staff and consultants: Griselle Vega, Eirivelthon Lima, and Michael Morris (Agriculture); Ciro Avitabile (Education); Janina Franco, and Ines Perez (Energy); Maria Jose Carreras and Jian Ru (Environment and Natural Resources); Douglas Randall, Thomas Haven, and Jade Salhab (Finance, Competitiveness, and Innovation); Kjetil Hansen and Carolina Vaira (Public Sector); Juan Carlos Serrano-Machorro (Financial Management); Selene Rocio la Vera and Daniel Arguindegui (Procurement); Gabriel Aguirre, Marcelo Bortman, and Malva Baskovich (Health, Nutrition, and Population); Gaston Blanco (Social Protection, Jobs, and Development); Daniel Barco, Bledi Celiku, Paulo Chavez, Anjali Shahani, Geryll Granda, and Leslie Arroyo (Macroeconomics, Trade, and Investment); Maria Davalos and Luciana de la Flor (Poverty); Kennan Rapp (Social Development, Gender, Fragility, Conflict, and Violence); Gabriel Arrisueño (Urban, Land, and Resilience); Felipe Targa and Irene Portabales (Transport, Infrastructure, and Public Private Partnership); Axel Rifon (Digital Development); Carmen Yee-Batista (Water); Juan Jose Miranda and Ana Bucher (Climate Change); Pilar Maisterra and Karina Olivas (CMU Guidance); and Juan Pablo Celis, Elizabeth Ann Marcano, and Ana Maria Torres (International Finance Corporation). The team also counted on the invaluable support of Luisa Yesquen and Desiree Gonzalez. The team benefited from the overall guidance of Carlos Felipe Jaramillo (Vice President, LAC) and Bill Maloney (Chief Economist, LCRCE). 3 Abbreviations CCDR Country Climate and Development Report CSA Climate-Smart Agriculture DRM Disaster Risk Management ENAHO Encuesta Nacional de Hogares sobre Condiciones de Vida y Pobreza (National Household Survey on Living Conditions and Poverty) GDP Gross Domestic Product INDECOPI Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (Defense of Competition and the Protection of Intellectual Property) INEI El Instituto Nacional de Estadística e Informática (National Institute of Statistics and Informatics) INIA Instituto Nacional de Innovación Agraria (National Institute of Agrarian Innovation) LAC Latin America and the Caribbean NPL Nonperforming Loan OECD Organisation for Economic Co-operation and Development PCM Presidency of the Council of Ministers PISA Programme for International Student Assessment R&D Research and Development SCD Systemic Country Diagnostic SENASA Servicio Nacional de Sanidad Agraria del Perú (National Agricultural Health Service of Peru) TFP Total Factor Productivity 4 Executive Summary 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 impacts, 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. In this more challenging environment, policy priorities defined by the 2017 SCD continue to be valid but have acquired more urgency. Strengthening institutions across sectors is necessary to achieve significant progress and to adopt the reforms needed for inclusive development. Addressing the policy priorities identified in this SCD requires a state with higher capacity to regulate markets, provide services, and manage shocks. Peru needs strengthened institutions that can (i) provide a regulatory environment conducive to quality economic opportunities and increased private sector investment; (ii) deliver quality public services to citizens across the territory; and (iii) develop systems, processes, and resources to improve resilience to shocks. This diagnostic thus calls for strengthening institutional capacity. This includes adopting reasonable and well-evaluated regulation, increasing public sector coordination, improving civil service capacity, efficiency, and continuity, and enforcing a meritocratic civil service system. Stronger institutions will provide the foundation for a path to poverty reduction and shared prosperity. 5 Section 1. Introduction Following over a decade of fast economic growth and significant progress in reducing poverty and inequality, GDP growth and poverty reduction in Peru slowed markedly after the end of the commodity boom. Between 2002 and 2013, Peru’s economy grew at an average rate of 6.1 percent per year, supported by external conditions and certain domestic factors. Externally, high commodity prices favored the country, a major exporter of minerals. Domestically, macro stability, as evidenced by a sustainable fiscal position and low inflation, as well as trade and financial openness, generated confidence in investors. Between 2014 and 2019, however, mining prices were less favorable, and growth slowed to an average of 3.1 percent (Figure 1). In parallel, after a substantial improvement in welfare indicators since the early 2000s, lower economic growth has slowed progress in poverty and inequality reduction since 2013 (Figure 2). Although an average of 1 million people escaped poverty annually between 2004 and 2013, only 90,000 did so between 2014 and 2019.1 Moreover, in 2019, the poverty rate among indigenous and Afro-Peruvian groups was almost double that of non- indigenous groups.2 Figure 1. Favorable terms of trade are not Figure 2. A recent reversal of the declining trend in sufficient to spur high growth (GDP and Terms of the poverty rate (US$5.5/day, 2011 Purchasing Trade Growth, average annual growth) Power Parity, 2005–20) 12.0 10.5 60% 52.5% 10.0 50% Poverty (percentage points) 8.0 6.1 5.9 6.0 40% 32.9% 4.0 3.1 30% 1.3 20.6% 2.0 20% 0.0 -2.0 -1.2 10% 2002-2013 2014-2019 2020-2021 0% GDP Growth Terms of Trade Growth Peru LAC Source: Central Bank of Peru. Peru’s post-commodity boom slowdown exposed two main structural challenges: the persistence of large geographic disparities in development and the low productivity of the private sector. These were identified as the main roadblocks to reducing poverty and shared prosperity in the World Bank’s first Systematic Country Diagnostic for Peru (SCD1), carried out in 2017 (see Annex A). It argued that the first made it difficult for certain population groups to overcome poverty. The second was associated with limited technology adoption and innovation, which reduced export diversification and constrained the supply of better-paying jobs and income opportunities for the bottom 40 percent. SCD1 also documented that although past policies had been successful and it was necessary to sustain them, they were no longer sufficient to keep the country on the path to high, inclusive, and sustainable growth. SCD1 proposed that micro-structural reforms would increase productivity and reduce geographic disparities, unleashing a virtuous cycle of shared prosperity. To achieve these goals, SCD1 identified and prioritized key micro-structural requirements, including improving human capital, enhancing infrastructure and the quality of public services, and reducing market rigidities. In addition, 1 Estimates are based on national poverty rates and on total population estimates and projections from the National Institute of Statistics and Informatics. 2 Estimates from ENAHO (2019) using the national poverty line show that poverty was 27.8 percent among the indigenous and Afro-Peruvian population and 15.5 percent among the non-indigenous and non-Afro-Peruvian population. 6 to sustain the growth model over the long term, it was crucial to implement three supporting conditions: environmental risk management, public sector coordination and the rule of law, and the creation of fiscal space to increase public spending (see Annex A). Finally, it also identified areas of public policy that needed to be reinforced to overcome these obstacles and achieve the desired objectives (see Section 4). The COVID-19 crisis led to a deep economic recession in 2020, revealing the country’s difficulties in dealing with non-financial shocks. Peru’s economy contracted by 11 percent in 2020, the second sharpest contraction in the region. Between 2020 and 2021, accumulated growth had been close to zero, even with a renewed rise in export prices. The national poverty rate increased by 10.1 percentage points, reaching 30.1 percent3 in 2020, despite the rollout of generous emergency cash transfers that mitigated a further increase of 4 percentage points in poverty. The size of the middle class4 also fell dramatically, from 36.7 percent in 2019 to just 24.7 in 2020. The modest progress in reducing inequality between 2014 and 2019, when the Gini coefficient went from 0.43 to 0.42, was more than offset due to the shock. Thus, by 2020 the coefficient had reached 0.44, surpassing the 2014 level. These impacts were driven by a severe labor market shock, involving the loss of 2.4 million jobs in 2020 and an increase in informality. The high levels of informality put a substantial proportion of workers at risk of job and income loss during the pandemic. At its peak (the second quarter of 2020), it is estimated that employment dropped by 39 percent (approximately 6 million fewer workers). The shock was more pronounced for women, who lost their jobs disproportionately as they were more represented in the industries hardest hit by the crisis. Women also left the labor force at a higher rate. In 2020, the National Institute of Statistics and Informatics (Instituto Nacional de Estadística e Informática [INEI]) estimated that female labor force participation dropped by 10 percentage points, while male labor force participation dropped by 6 percentage points. Although the recovery in terms of employment was fast, it was led by the informal sector.5 Beyond the monetary dimensions of well- being, the long-term effects of the pandemic on future labor productivity and food insecurity could be significant,6 including through the impacts of school closures on learning outcomes. This SCD Update revisits the two core challenges and the priorities identified in the 2017 SCD and explores the root causes of these challenges and the roadblocks to implementation of the policy priorities. Using recent data and knowledge and based on internal and external consultations,7 the SCD Update explores whether the challenges of low productivity and territorial disparities have improved, worsened, or stayed the same (Section 2). In Section 3, the Update argues that the root cause of these challenges and the lack of progress in resolving them lie in (i) public sector inefficiencies and the sector’s limited capacity to advance the development agenda, and (ii) increasing institutional instability that has further weakened the capacity of the state to implement the needed reforms. These have affected the performance and delivery of the public sector’s main functions, which include regulating and enforcing the law, providing services, and setting the processes and means to deal with shocks. In Section 4, the SCD Update builds on the policy priorities identified in SCD1, focusing on the institutional and capacity bottlenecks laid out in Section 3 to put forward an updated rod of actions needed to achieve the desired long-term development outcomes. 3 The increase is higher using the US$5.5/day line, reaching an increase of 12 percentage points and a poverty rate of 32.9 percent, with 4.2 million new poor individuals in one year. 4 This refers to those with an income between US$13 and US$70/day. 5 By 2021, informality was 4 percentage points higher than the previous year, affecting women, youth, and minorities the most. In urban areas, informal employment among women was 73.7 percent, and among youth it was 87 percent, both higher than the average of 71.4 percent (according to the World Bank High-Frequency Phone Surveys). 6 Data from the World Bank High-Frequency Phone Surveys. 7 Consultations with the private sector, civil society, youth, academia, implementation units working with the World Bank and other development agencies were held to determine views on country priorities. 7 Section 2. Peru’s Development Challenges Persist and Have Worsened This section revisits the two main structural challenges identified in Peru—low productivity and large geographic disparities in development outcomes—and finds that they not only persist but have worsened. Five years after the first SCD, productivity continues to be low—it was low even before the pandemic—pushing economic growth down, and spatial disparities persist, with new pressures brought to urban areas by a sharp increase in Venezuelan migration. 2.1 Low productivity that undermines growth In Peru, a few large firms with high labor productivity coexist with an overwhelming quantity of small firms whose labor productivity is low.8 Micro and small firms represent 98 percent of total firms in Peru, a larger proportion than in other countries in Latin America and the Caribbean (LAC).9 Also, the labor productivity differential of large companies relative to micro, small, and medium-sized companies is larger in Peru than in other LAC and in Organisation for Economic Co-operation and Development (OECD) countries (Figure 3).10 Firms in Peru grow slowly, if at all: while companies in the United States with 40 years of activity are eight times larger than those with five years or less, they are only two times larger in Peru. 11 Complemented by the fact that the number of medium-sized firms is lower than that of big firms, it can be presumed that the probability of a small firm becoming larger is rather slight. This reflects an entrepreneurship ecosystem where (i) labor regulations are too costly for firms that grow, (ii) simplified tax regimes creates incentives for firms to atomize around maximum thresholds, (iii) costs of enforcing property rights are large, (iv) access to financing is costly and restricted, (v) the quality of public services, such as security, justice, and transport, is unequal, even in the capital city of Lima, and (vi) quality human capital is scarce, which is reflected in low management capabilities.12 Low labor productivity continues to be linked to a misallocation of the factors of production, and the situation has worsened in recent years. Employment is overwhelmingly concentrated in small firms, whose labor productivity is low. Moreover, in 2021, these low-productivity firms employed a larger share of the labor force than in 2015 (Figure 4). Sectoral data also point to a greater misallocation of the factors of production in the past several years. From 2014 to 2018, workers were mobilized to sectors with low labor productivity, such as services, related mostly to trade and transport (Figure 5). These low-productivity services employed 40 percent of the workforce in 2018 and are 30 percent less productive than the economy’s average. 13 This misallocation also has a geographic dimension. The most productive and largest firms are disproportionately concentrated in Lima and other coastal regions (89 percent of large firms are in Lima, Callao, Trujillo, and Arequipa). This territorial disparity is also reflected in these regions’ competitiveness: the coastal region is the most competitive (where the greatest share of consolidated agriculture is also concentrated), and the Amazon (Selva region) is the least competitive, according to the Regional Competitiveness Index 8 Labor productivity reflects the value added per worker. See also World Bank, “Peru – Building on Success: Boosting Productivity for Faster Growth Boosting” (Washington, DC: World Bank, 2015), which reports that firms’ total factor productivity (TFP) correlates negatively with their size. This evidence is a puzzle that needs further analysis. 9 Ten workers or fewer. 10 M. Ruiz-Arranz and others, “Creciendo con Productividad: Una Agenda para la Región Andina” (Washington, DC: Inter-American Development Bank, 2018). 11 World Bank “Peru Building on Success.” 12 World Bank (2021). Also, McKenzie and Woodruff (2017) find evidence that for small firms, improving business practices, such as marketing, stockkeeping, record-keeping, and financial planning, could explain the variation in bigger TFP, labor productivity, and sales. Also, owners with higher human capital, children of entrepreneurs, and firms with employees employ better business practices. 13 There is abundant international evidence that correlates labor productivity with capital intensity. In this sense, higher labor productivity in big firms and in certain sectors, such as utilities and mining, might be related to their higher capital intensity. This evidence points to a higher accumulation of capital and a better environment for investment as instruments to increase labor productivity. Nor should it be overlooked that other ways of increasing labor productivity are technological improvements and the accumulation of human capital. 8 2021.14 The lack of productive firms in the highlands (Sierra) and the forest (Selva) is associated with higher levels of informality (78 and 83 percent of informal employment, respectively, in 2021).15 Figure 3. Gap of labor productivity between formal Figure 4. Least productive firms employ the largest firms of different size is large in Peru (Relative share of the labor force (Share of Employment by Productivity, % of large firms’ productivity, by firm Firm Size between 2015 and 2021) size) 100% 86% 80% 70% 73% 81% 70% 80% 68% 60% 60% 57% 60% 50% 50% 44% 41% 40% 40% 30% 21% 19% 16% 19% 20% 20% 8% 7% 6% 5% 10% 0% 0% Peru Ecuador Colombia OECD 1-10 workers 11-50 workers >51 workers Medium (11-50 workers) Small (6-10) Micro (0-5) 2015 2021 Source: Ruiz-Arranz and Deza (2018). Source: Instituto Nacional de Estadística e Informática (INEI). Note: OECD countries include Germany, Spain, France, and Italy. Innovation is limited in Peru, the result of low investment in research and development (R&D). Between 2002 and 2020, spending on R&D was just 0.1 percent of GDP, well below the average of 0.7 percent for LAC and 1.2 percent for upper-middle-income countries. Peruvian firms invest on average 2.5 percent of their sales in innovation, whereas their peers in Chile invest 3.5 percent. Moreover, technology adoption (acquired through licenses of new technology and imported capital goods), which is a way to move closer to the innovation frontier, is scarce. Only 7 percent of Peruvian firms have licensed technology from abroad, half the LAC region average and 2.5 times less than in OECD countries. One important factor is the inability of small and medium-sized enterprises to embrace skills and new technology. A forthcoming report by the World Bank16 provides evidence that between 2008 and 2017, growth of firms’ total factor productivity (TFP) in the manufacturing sector was hardly explained by within-firm productivity growth 17 or by the entry of new firms; rather, some of the growth in this specific sector occurred because of the reallocation of factors between firms. Consistently, international assessments of innovation place Peru in the lower half of the rankings and list access to infrastructure, conditions for investment in venture capital, and knowledge diffusion as the most problematic obstacles to innovation.18 This might be reflecting a mismatch between the costs to innovate on one side, and the small scale of firms and their access to financing and technology, on the other. 14 The Regional Competitiveness Index is computed by the Peruvian Institute of Economics (Instituto Peruano de Economía). 15 These two regions are home to large numbers of small-scale producers. Working modest pieces of land, producing mainly traditional crops using ancestral techniques, and consuming a significant share of their production, these regions typically do not have access to credit, do not possess much capital, rarely use irrigation, and source much of their labor from family members. Although agricultural productivity and growth have been stagnant in these two regions, they have been very robust in the coastal region (Costa), where larger and export-oriented producers are concentrated. 16 World Bank, “Competition and Growth Report in Latin America” (Washington, DC: World Bank, 2022/Forthcoming). In this report, the concept used for productivity is TFP, which reflects the residual of output growth not explained by labor and capital accumulation. See World Bank, “Gaining Momentum in Peruvian Agriculture: Opportunities to Increase Productivity and Enhance Competitiveness” (Lima: World Bank, 2017). 17 Productivity growth by the firm itself due to better managerial skills, innovation, or product innovation. 18 WIPO, “Global Innovation Index 2021: Tracking Innovation through the COVID-19 Crisis” (Geneva: World Intellectual Property Organization, 2021). 9 Figure 5. Least productive sectors have been Figure 6. Total factor contribution to GDP growth increasing their share of total employment (Change in has become negative Employment Share and Deviation from Average Value Added per Worker) 4.0 7.0 6.0 Real estate 3.0 5.0 1.6 Log(avg. Prod. Sect./ avg. Total Prod) Mining 4.0 2.0 Utilities 3.0 1.1 3.7 Financial services 2.0 Manufacturing 1.0 1.0 2.5 2.5 Business 0.9 Construction Transport services 0.0 -0.6 -0.8 0.0 services -1.0 -0.4 -1.00 -0.50 0.00 0.50 1.00 1.50 -2.0 Trade Government Other 2002-2013 2014-2019 2020-2021 -1.0 services services services Growth=6.1% Growth=3.1% Growth=1.3% Agriculture -2.0 Total Factor Productivity Capital Stock Labor GDP Change in employment share 2014-2018, percentages Source: The Conference Board. Total Factor Productivity Source: Groningen Growth & Development Centre (GGDC). Data Base. Informality, which increased during the COVID-19 crisis, is a constraint to the more efficient use of labor, capital, and land and thus to productivity growth. Informality in 2021 reached 76.8 percent of total employment, increasing 4 percentage points since 2014. Close to 90 percent of informal employment is in micro and small businesses. Informality is higher among women, who are also overrepresented in nonremunerated family work, 19 and 62 percent of informal employment is concentrated in commerce, transport, and other services. This limits aggregate productivity growth (informal firms innovate less and have limited access to credit, foreign technology, trade facilitation, and global value chains) and contributes to the misallocation of production factors. Informal sector workers are much less productive: wages are only half and productivity one-fifth of that of formal workers. Informality, small-scale agricultural activities, and lack of secure land rights have also been linked to increased deforestation.20 Recent estimates suggest that for each 1 percent increase in the share of informality in agriculture in a district, forest cover decreases by 0.5 percent. In the Amazon districts, this translates into a 6.2 million square meter (624 hectare) forest cover decrease per year. 21 As a result, the contribution of productivity to GDP growth has been negative on average during the post-boom period. The contribution of TFP to GDP growth was low but positive until 2013 but has been negative since, counteracting the positive effect of labor and capital accumulation (Figure 6). Negative TFP and lower (and then negative) capital accumulation account for most of the reduction in GDP growth in the 2014–21 period. 2.2 Enduring spatial disparities At the household level, the subnational convergence in welfare observed during the boom has weakened. Slower poverty reduction resulted in a much more muted subnational convergence as well as increases in poverty in some of the poorest departments (Figures 7 and 8). District-level poverty rates for 2013 and 2018 (latest poverty map) show that districts across Peru are following different 19 World Bank, Peru Gender Scorecard 2021. 20 Lack of secure property rights can exacerbate informality and increase the risk of expropriation, and through that discourage long-term investments that could contribute to increased productivity and improved and more sustainable land management practices (for a discussion see, for example, S. Navarro-Castañeda and others. “Land Tenure Security and Agrarian Investments in the Peruvian Highlands,” Land Use Policy 109, no. 1 (2021). Recent econometric evidence confirms strong links between informality and small-scale agricultural activities with deforestation (see Pokorny et al. 2021). 21 World Bank’s Country Climate and Development Report (CCDR) Forthcoming. 10 development trajectories, with many already poor districts seeing a deterioration in their living standards (Figure 9, districts in red). Figure 7. Poorer departments were reducing Figure 8. Post-commodity boom, convergence poverty faster during the commodity boom weakened, with increases in very poor places (Poverty Reduction between 2009 and 2015 at the (Poverty Reduction between 2015 and 2021 at the Department Level vs. Initial Conditions) Department Level vs. Initial Conditions) 3.0 Poverty rate change(average annual change, 2009- Poverty rate change(average annual change, 2015- 2.0 3.0 Lima 1.0 Tacna Ucayali Tumbes Junin Puno Madre de Dios 1.0 0.0 Tacna Lima Arequipa Cusco Pasco Moquegua Ica La Libertad Madre de Dios Huanuco Loreto Ancash -1.0 Ancash Tumbes Piura Huancavelica Ica Arequipa Pasco La Libertad -1.0 Ayacucho 2015) 2021) Moquegua San Martin -2.0 Cajamarca Junin Piura Lambayeque Apurimac Puno Amazonas Cajamarca Amazonas Ucayali -3.0 Lambayeque Ayacucho -3.0 Loreto San Martin Cusco Huanuco -4.0 -5.0 Huancavelica -5.0 Apurimac -6.0 -7.0 -7.0 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 10% 20% 30% 40% 50% 60% Poverty rate 2009 Poverty rate 2015 Source: Data from the National Household Survey on Living Conditions and Poverty (Encuesta Nacional de Hogares sobre Condiciones de Vida y Pobreza [ENAHO]). Notes: Bubble size represents population size. The graph shows the starting point in terms of poverty rate on the x-axis and change over the period on the y-axis. (Negative changes or below zero in the x-axis means a decline in poverty.) Access to basic services varies widely across the country. Between 2015 and 2020, Peru made progress in access to electricity, water, and sanitation, yet access continues to be below the average for the Latin America region and among upper-middle-income countries, especially for sanitation. Gaps between groups and between urban and rural areas are high and persistent, particularly for access to water and sanitation (Figure 10) and internet. Disparities in access to services also persist within cities, and the abovementioned demographic patterns have placed increasing pressure on urban areas. It is estimated that 1.9 million housing units countrywide are affected by a housing deficit (69 percent qualitative and 31 percent quantitative). Four out of 10 households in the poorest population quintile experience a housing deficit compared to one out of 10 households nationally. And despite great improvements in malnutrition (chronic child malnutrition was halved to 13.1 percent compared to its level in 1996), malnutrition remains common in remote rural areas in the Sierra and Amazon regions, where stunting continues to be extremely high (33.4 percent) and has not decreased in the past 10 years.22 22 World Food Programme, “WFP Peru Country Brief,” July 2022. 11 Figure 9. Poor districts have seen living standards Figure 10. Gaps in infrastructure services persist deteriorate across time 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Socio-ec gap Socio-ec gap Socio-ec gap Socio-ec gap Urban-rural gap Urban-rural gap Urban-rural gap Urban-rural gap Safe water Sanitation Electricity Secondary enrollment 2010 2015 2019 2021 Source: Lavado (2020). Source: Encuesta Nacional de Hogares (ENAHO) 2010, Notes: Group 1, in red, includes districts whose poverty rate was 2015, 2019 and 2021. above the rate in 2018 and whose condition has deteriorated since Note: The socioeconomic gap is defined as the difference 2013. Group 2, in orange, includes districts that were above the in access between the richest and the poorest five regions. national poverty rate in 2018 and whose condition has improved since 2013, although with a slow pace of progress. Group 3, in yellow, includes districts that were above the national poverty rate in 2018 and whose condition has improved since 2013 at a fast pace of progress. Group 4, in green, includes districts that were below the national poverty rate in 2018. Districts in blue are the 40 poorest districts in Peru. Spatial disparities linked to persisting connectivity challenges and a complex geography remain large. In 2019, the Global Competitiveness Report ranked Peru 97th out of 114 countries in terms of transportation infrastructure. Peru also has one of the most unequal distributions of infrastructure in the region, representing a development barrier for most secondary cities as transport costs to reach international markets are 50 percent higher than in Lima. In the Amazon regions, transport costs can be almost double Lima’s, increasing barriers to development. The poor quality of Peru’s transport infrastructure further undermines trade competitiveness. Thus, secondary cities and regions with high production of exported goods (principally mining and agriculture, which represent 12 and 6 percent of GDP, respectively) have some of the lowest connectivity in the country, resulting in the highest transport cost to reach international markets. Spatial disparities also affect digital access. In 2022, only 19 percent of households in rural areas had internet access compared to 61 percent in urban areas. 23 Disparities in access to transport services also persist within cities, where the majority of the low- income population is served by inefficient and unaffordable transit services. Low-income households live predominantly in the urban periphery, with poor transport access to centers where jobs, education, health, and other services are concentrated. The cost of poor connectivity increases as cities grow and motorization rates increase. 24 Most Peruvian cities suffer from a severe lack of infrastructure and facilities, such as bus priority lanes, safe and connected bicycle lanes, intermodal transfer facilities, adequate street design, and signaling. International Telecommunication Union, “Individuals Using the Internet,” 2020; and Telegeography, March 2022. 23 Congestion costs are estimated at 1.8 percent of Peru’s GDP. The cost of road traffic injuries and fatalities is estimated at 4.5 percent of 24 GDP. 12 Important gaps in human capital outcomes Figure 11. Learning gaps persist between urban and continue to be a concern. Access to education rural areas has increased (Appendix B), but quality of education remains lower than most other 3.0 2.6 countries participating in the Programme for 2.5 International Student Assessment (PISA) (on 2.1 2.0 which Peru was 64 of 70 countries in 2015 and 2.0 1.7 1.6 65 of 77 countries in 2018) and uneven across 1.4 1.5 1.3 1.2 1.3 the territory. Peru’s Human Capital Index stood at 0.61 in 2020,25 suggesting that an average 1.0 Peruvian child will reach 61 percent of his/her 0.5 potential in terms of productivity and lifetime income—or at least did so prior to the 0.0 2012 2015 2018 2012 2015 2018 2012 2015 2018 pandemic (expectations are that that this has substantially worsened after two years of Math Science Reading school closures). This national index hides Note: The graph shows differences in learning between urban large geographic differences; estimates using and rural areas using PISA scores. PISA scores of 30 points are estimated as the equivalent of one year of schooling. See 2015–17 data show that a child in Loreto will Woessmann (2016). Urban schools are in cities (>100,000 reach 49 percent of his or her potential (similar people). Rural schools are in towns, villages, hamlets, or rural to Honduras), whereas one in Tacna will reach areas (<100,000 people). 69 percent (similar to Luxembourg). 26 The urban-rural gap in learning was equivalent to 1.4 years of schooling in math and 1.6 years in reading in 2018, with little change (and actually a slight deterioration) since 2015 (Figure 11). This is in addition to a persistent gap among socioeconomic groups: as in 2015, Peru in 2018 continued to have one of the highest PISA scores on socioeconomic differences in student learning outcomes of the participating countries. The situation is even worse in indigenous communities, which account for one- fifth of the country’s population. The COVID-19 pandemic likely widened the inequalities in human capital accumulation, as World Bank simulations suggest that learning losses for the bottom income quintile might be almost double those in the top quintile. Finally, health outcomes continue to trail those of other countries in the region and of upper-middle-income countries, particularly maternal mortality (Appendix B). Poverty has been urbanizing over the past decade, a trend that has accelerated with the pandemic. In 2009, 46 percent of the poor were urban, increasing to 57 percent in 2019 (Figure 12). COVID-19 has further exacerbated this trend: poverty rose sharply in greater Lima and other urban areas from 14.6 percent in 2019 to 22.3 percent in 2021, whereas in rural areas the poverty rate returned to its pre-pandemic level of 40 percent. 27 During the peak of the pandemic, and as a result of reduced opportunities, urban to rural migration took place in Peru. According to Fort, Espinoza, and Espinoza (2021), roughly 250,000 Peruvians migrated from the cities to rural areas in 2020. Despite this reverse migration, net migration continued to be toward urban areas. In 2019, the urban population was 78.6 percent of the total population, and by the end of 2021, it had increased to 79.6 percent. 25 World Bank data. 26 The Human Capital Index measures the potential of a young person to reach his/her full income potential and combines measures of survival, schooling, and health. 27 Calculations based on ENAHO’s National Poverty Rate. 13 Venezuelan migration to Peru has sharply Figure 12. Since 2019, poverty has been urbanizing increased over the past seven years, predominantly to urban areas. It is 90.00% 75.0% estimated that 1.32 million Venezuelans 80.00% 70.0% lived in Peru in 2022—close to 1 million of 70.00% them in Lima and Callao—compared to about 7,000 in 2015. 28 The labor 65.0% Urban poor (share of total poor) 60.00% 60.0% participation and employment levels of Poverty rate 50.00% Venezuelan migrants are higher than those 40.00% 55.0% of the average Peruvian in Lima,29 yet their 30.00% 50.0% labor conditions are more precarious: they 20.00% earn 30 percent less than Peruvians, and less 10.00% 45.0% than 20 percent of Venezuelans living in 0.00% 40.0% Lima had signed a contract, a proxy of 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 formality, 30 compared to 50 percent of Rural poverty rate Urban poverty rate Urban poor (share of total poor), right axis Peruvians. Moreover, roughly three out of Source: ENAHO 2004–21. four Venezuelan migrants do not have a Note: Poverty is estimated using official lines. health insurance. Part of their vulnerability stems from not having regular migration permits:31 35 percent of Venezuelan migrants do not have an up-to-date migration permit, such as a Temporal Permit, Foreigners’ Card, Visitor’s Visa, Humanitarian Visa, or national ID, limiting their access to health insurance and other services. 2.3 Structural vulnerabilities revealed by global shocks The COVID-19 shock highlighted the structural shortcomings of the Peruvian economy . Peru was among the countries in the world most affected by the pandemic. Public laboratories’ lack of capacity to provide timely Polymerase Chain Reaction (PCR) testing at scale (in the initial months of the pandemic, capacity was 500 daily tests when demand was at 20,000) prevented appropriate case detection and subsequent containment. The strong centralization of the public health approach to testing prevented a timely response in Peru’s 25 regions. The inability to deploy a nationwide response amplified the country’s health crisis, with the laboratory of the National Institute of Health (Instituto Nacional de Salud [INS]) in Lima overcrowded and unable to support the regions. As a result, contact tracing, quarantines, and other efforts to minimize transmission were much less effective in Peru. According to the World Health Organization, the cumulative mortality rate reached 654 deaths per 100,000 population—the highest in the entire world. Although data on actual learning losses for Peru are not available, World Bank (2022) simulations suggest that the combined effect of school closures and income drop due to COVID-19 may lead to a decline in the learning-adjusted years of schooling from 8.6 to 6.9. This drop is larger than the regional average (from 7.8 to 6.3). Systems across many sectors were not ready to respond to this unprecedented shock, revealing their fragility. The response capacity of health services was low because of a lack of facilities, equipment, and personnel, as well as regulations and bureaucratic requirements that created obstacles to obtaining or deploying the needed resources. In terms of the immediate response to the pandemic, the health sector was unprepared in surveillance capacity—it lacked not just the necessary 28 Venezuelan migrants have mainly settled in the northern coastal regions of Peru, closest to the point of entry by land into the country, and in Lima. The regions of Tumbes, Piura, La Libertad, and Lima host the most Venezuelans. 29 According to the ENPOVE Survey [Survey Directed to the Venezuelan Population Residing in the Country/ Encuesta Dirigida a la Población Venezolana que Reside en el País] performed by INEI in 2022, labor participation among Venezuelans living in Lima is 82 percent and unemployment only 2.1 percent. Peruvians living in Lima have lower labor participation and higher unemployment (ENAHO 2021). 30 ENPOVE Survey [Survey Directed to the Venezuelan Population Residing in the Country/ Encuesta Dirigida a la Población Venezolana que Reside en el País] conducted by INEI in 2022. 31 Access to SIS (Seguro Integral de Salud) is free for all migrants with a regular migration permit. 14 laboratory infrastructure, but also the adequate emergency procurement norms to purchase the needed PCR tests. Installed hospital capacity was insufficient, and once contagion spread, ICU occupation reached its maximum capacity of 276 units nationwide in March 2020, preventing hundreds of COVID-19 patients from receiving appropriate care. This was aggravated by a lack of knowledge about resource availability, which was most notorious when the government was unable to track stocks of medical oxygen to accurately estimate demand and production needs. In parallel, the government shut down the first level of care due to fear of infections, thus weakening its capacity to effectively track the virus at the community level and to continue care of patients with medical conditions other than COVID-19. Furthermore, procurement of vaccines was slow, with Peru one of the last countries in the region to close vaccine contracts with international laboratories. Despite these challenges, vaccination eventually took off: by June 2022, some 27.5 million people (84 percent of the target population) had received two doses of the COVID vaccine, and 18.1 million (64 percent of the target population) three doses. On the education side, although the Ministry of Education promptly reacted to the school closure by launching Aprendo en Casa, a multiplatform distance learning program, its take-up was affected by the fact that fewer than 50 percent of primary education students had a computer at home and only one in four households had access to the internet.32 Recent global food and fuel price increases are exacerbating existing challenges. Global supply chain disruptions precipitated by the COVID-19 pandemic and made worse by inclement weather patterns and the war in Ukraine have severely disrupted food, fuel, and fertilizer markets, which are closely connected. As a result, by August 2022, annual increase of food and energy prices was about 17 percent in Peru. Annual inflation accelerated to 8.4 percent in the same month, reflecting the increase in fuel, fertilizer, and food prices and, as the international experience suggest, reflecting also the previous domestic demand stimulus to support the recovery during the COVID crisis.33 Annual food price inflation was close to 15 percent, leaving many families struggling to afford adequate amounts of safe and nutritious food. Rising inflation undermines efforts to reduce poverty and inequality as household purchasing power erodes, and it also increases concerns about food security. For households that depend on agriculture for their livelihoods in rural areas, higher fertilizer prices are pushing farmers to produce crops with less nutrients, which will reduce crop yields and the availability of food in local markets. All of these challenges existed before but have deepened because of the pandemic.34 In addition, higher inflation, particularly higher food price inflation, increases the risks of social unrest and corruption.35 36 Finally, climate change and natural hazards expose Peru to severe economic and welfare losses. Between 2003 and 2019, Peru experienced 61,708 emergencies caused by natural phenomena (intense rain, floods, droughts, earthquakes, landslides), with many people exposed (Map 1). Average annual asset losses from all hazards are estimated at 0.57 percent of GDP, 37 although considering households’ limited capacity to recover, annual well-being losses are almost 10 times as high, estimated at 5.2 percent of GDP. 38 Climate change is expected to drive more frequent extreme weather events in Peru. Temperature changes, interacting with socioeconomic vulnerabilities, can significantly increase risk and impacts on well-being: a 1.5°C increase would result in a 400 percent increase in the number of people affected by floods in Peru.39 Accelerated warming is also reducing glaciers—halving glacier surface under a low-emissions scenario by the end of the century—and decreasing water flow to several basins, causing water scarcity.40 By 2030, considering all the impacts 32 World Bank, UNICEF, and UNESCO, “Two Years After: Saving a Generation” (Washington, DC: World Bank, 2022). 33 BCRP (2022), Chart 63; Alvarez and Barrett (2022). 34 The World Bank High Frequency Phone Surveys revealed that 21 percent of households reported running out of food before the pandemic, increasing to 30 percent at the end of 2021. 35 One of the triggers for the protests and looting in the city of Huancayo last April was the rise in food prices. 36 “A Wave of Unrest is Coming. Here’s How to Avert Some of It,” The Economist, June 23, 2022. 37 UNISDR (2015). 38 Hallegatte et al. (2017). 39 Rama et. al (2022). 40 Schauwecker et al. (2017). 15 of climate change, the income of the bottom 40 percent in Peru could be 5.2 percent lower, and an additional 0.6 percent of the population could be pushed into extreme poverty.41 Map 1. There is wide spatial variation on the exposure to earthquakes and flooding Earthquakes Fluvial flooding Pluvial flooding Source: Riddell et al. (2020). Section 3. Limited development progress stems from significant institutional weaknesses This section argues that the root cause of limited progress toward addressing the two development challenges of low productivity and spatial inequality lies with the low and declining capacity of public institutions to: (i) promote a regulatory environment conducive to providing more quality economic opportunities to the private sector (workers and entrepreneurs); (ii) provide access to quality public services across the territory, and (iii) have systems, processes, and resources in place that improve resilience to shocks. 3.1 Increased institutional instability Political turbulence has characterized the country since 2016, driven partly by higher political fragmentation. In the past decade, the number of political parties participating in congressional, presidential, and subnational elections has been increasing. This is manifested in the high fragmentation of the National Congress, where 10 political parties are represented and the four parties with the highest representation have fewer than 50 percent of the total number of seats (Figure 14), compared to more than 70 percent in the past. In this context, threats of presidential impeachment and the dissolution of Congress have become frequent, and Peru has had five presidents in the past six years. This fragmentation could be reflecting a long-standing crisis of representation, yet it is one that has been worsening in recent years, with an increasing number of political parties that have progressively limited territorial influence. Conversely, regional movements are increasingly dominating subnational elections, with national parties losing ground (Figure 15). Trust in government is well below the region’s average (Latinobarometro data for 2020). 41 B. Jafino and others, “Revised Estimates of the Impact of Climate Change on Extreme Poverty by 2030,” Policy Research Working Paper 9417 (Washington, DC: World Bank, 2020). 16 Figure 14. Fragmentation of congressional Figure 15. Political parties are losing ground to representation is increasing over time regional movements (Number of Elected Mayors from Political Parties and Regional Movements, 2002–18) 994 907 844 839 845 754 557 502 463 197 2002 2006 2010 2014 2018 Political Party Regional Movement Source: National Office of Electoral Processes (Oficina Source: Infogob. Nacional de Procesos Electorales [ONPE]). Short-termism, cabinet turnover, and political fragmentation act against effective policy coordination and implementation capabilities. Constant cabinet changes, especially in the Presidency of the Council of Ministers (PCM), affect the capacity for both vertical and horizontal coordination. Since July 2021, there have been 68 changes of ministers, equivalent to a change every six days, the highest rate in the past two decades. The PCM (prime minister) is among the ministries with the highest turnover, with four heads in one year, an average of a new prime minister every three months. Such high turnover affects coordination across public sector entities, given the central role of the prime minister in communication between ministries and with subnational authorities. Further, political appointments (advisors, secretaries, and directors) tend to rotate with new ministers, which affects the capacity of agencies to manage resources efficiently and achieve goals. According to the Bertelsmann Transformation Index, Peru’s capacity to manage reforms effectively and achieve policy priorities has declined over the past decade.42 Low levels of budget execution in key areas, such as education, health, and security, follow from structural difficulties in policy implementation, themselves often due to procurement delays (linked to either the inexperience of new officials or to ministerial changes that slow decisions on resource allocation). Policy implementation issues were made evident during the coronavirus pandemic, particularly those related to the deployment of cash transfer programs and the health care approach to contain the outbreak. Civil service capacity and efficiency are affected by a high cabinet turnover and the lack of enforcement of a meritocratic system. According to a recent survey conducted by the Ministry of Economy and Finance (Ministerio de Economía y Finanzas [MEF]), 90 percent of civil servants have capacity gaps and require training, particularly within regional and local governments. Despite efforts to improve the country’s civil service capabilities, the state’s compliance with the Civil Service Law (Ley 30057 del Servicio Civil, 2013) is still incomplete. The recent Law 31419 (2022) 43 attempts to remedy this problem by imposing higher professional and work experience requirements for senior public officials, including deputy ministers and secretaries. However, the high ministerial turnover only accentuates the absence of a solid civil service, which includes a professionalized career track, 42 https://atlas.bti-project.org/. 43 Law that establishes provisions to guarantee suitability in the access to and exercise of public service of officials and directors subject to free appointment and removal (Ley que establece disposiciones para garantizar la idoneidad en el acceso y ejercicio de la función pública de funcionarios y directivos de libre designación y remoción, as per its title in Spanish), https://busquedas.elperuano.pe/normaslegales/ley- que-establece-disposiciones-para-garantizar-la-idoneidad-ley-n-31419-2039240- 2/#:~:text=La%20presente%20ley%20tiene%20por,y%20ejercicio%20de%20su%20funci%C3%B3n. 17 competitive recruitment mechanisms, adequate training, merit-based promotion, competitive salaries, and autonomy from undue political influence. Governance indicators show restrictions on the capacity to deliver public services effectively. The country’s institutional capital is weak in areas that are critical for good public sector performance and effective service delivery. Efficiency of public spending is one of the lowest-scoring areas in the World Economic Forum’s Global Competitiveness Index (GCI). The country ranks 104 out of 137 countries assessed (GCI 2017–18). Similarly, the capacity of the public sector to enforce and implement regulations in a fair and effective manner is limited. Peru ranks 77/139 in the world and 19/32 in the region on regulatory enforcement in the 2021 World Justice Project’s Rule of Law Index. Especially low scoring are the subcomponents related to unreasonable delay and violation of due process in administrative proceedings. 3.2 A deteriorating business environment that hinders private investment44 The limited capacity to address market distortions through effective regulation hinders the ability of the private sector to become more productive. The World Bank’s Country Private Sector Diagnostic for Peru (World Bank forthcoming) identifies the main opportunities for and barriers to private investment. It documents that first, rigid and costly labor market regulations widen the quality divide between formal jobs in large productive firms and informal jobs in micro and small firms and among seasonal agricultural workers. Second, inefficient land markets stifle public and private investments. Third, ineffective procedures for environmental and social safeguards in investment projects and sector regulation offer limited environmental and social protection while hindering investments. Finally, as described in Section 3.3, low subnational capacity limits private sector development and delivery of the public goods and services needed to attract investment. Peru’s political instability is discouraging private sector investment. Despite continued prudent macroeconomic policies, business confidence has consistently been pessimistic since April 2021, signaling that more than 50 percent of firms that participated in the survey consider that the economy will weaken in the future. The 16 months that have elapsed since that date are the longest period that firms have been pessimistic about the economy since 2002, when the data were first available.45 In this context, an outflow of US$10 billion of portfolio investments was recorded last year and private investment was stagnant in the first half of 2022. The frequent government and cabinet reshufflings that have taken place over the past five years have made it more difficult for Peru to present a comprehensive reform agenda to address the country’s structural challenges, including its rigid labor market discussed below. Rigid, costly labor markets and a complex regulatory landscape Most Peruvian firms cite labor regulation as a factor that hinders business development and growth, according to World Bank Enterprise Surveys. The index of labor market rigidity, which considers aspects of hiring, working hours, redundancy rules, and redundancy costs, ranks Peru worse than neighboring countries, other developing regions, and advanced economies. In addition, non-wage labor costs are high: Peru is one of the three countries in LAC with the highest non-wage costs (Figure 16) (Alaimo et al. 2017). 44 This section draws from the forthcoming Peru Country Private Sector Diagnostic. 45 The business confidence index is collected monthly through business surveys by the Central Bank of Peru. In the data of the Central Bank it appears as confidence in the economy in the upcoming three months. 18 Rigidity and high costs are the Figure 16. Peru ranks high in the region in non-wage costs (Non- result of a complex regulation Wage Costs of Average Salaried Worker by Country, 2017) system that affects workers differently. The sheer length (1,800 pages) and complexity of Peru’s labor code make it difficult and costly for firms to comply. Dismissal procedures must adhere to some of the strictest regulations. Dismissal of workers with open-ended contracts requires approval of a third party and a cause identified in the labor codes. Failure to prove cause leaves open an opportunity for a judge to request the worker’s Source: Alaimo et al. (2017). reinstatement. These provisions Note: Mandatory contributions include health and pension contributions. not only do not protect informal For Peru, this includes compensation for the worked time that employers workers, but they also actively must pay to workers as savings for unemployment. discourage formalization, thereby limiting opportunities for better- quality jobs—particularly for youth and women. Reducing informality requires an integral strategy aimed at encouraging firms’ growth. Reducing informality requires a combination of more flexible labor regulation (including the detachment of social protection schemes from the labor market), the simplification of business and tax regulation, reduced operative costs to firms by improving public services (such as transport, security, justice), and support for labor productivity through the accumulation of human capital. However, the political economy of regulatory reform is challenging, especially for the labor market. Although a reform of labor regulation could create more job opportunities, its benefits would be diffuse and its costs concentrated on a vocal minority. Inefficient land markets due to lack of institutional coordination Informality is also a problem in the inefficient land and housing markets, which suffer from a lack of transparency and weak property rights. In 2018, it was estimated that only 16 percent of all urban parcels were recorded in a cadaster. 46 Moreover, fewer than 20 percent of municipalities had an updated planning instrument as of 2015. Most urban residents live in housing of poor quality with limited access to basic services; they also lack secure property rights and are vulnerable to natural hazards because of location or inadequate construction. In rural areas, there is also wide variation in the security of land tenure, with areas in the coast having a clearer definition of property rights compared to areas in Sierra and Selva, where subsistence and informal farming dominates. Inefficient land markets are linked to a complex land management system, which involves multiple agencies with overlapping mandates. The land regime in Peru consists of more than 1,800 land and urban regulations granting overlapping functions to various administrative authorities. Urban land regularization is the responsibility of provincial municipalities, while urban cadasters are the responsibility of district municipalities and rural titling and cadasters the responsibility of regional governments. Multiple ministries share responsibility for territorial governance. All levels of 46 Ministerio de Vivienda, Construcción y Saneamiento (Ministry of Housing, Construction and Sanitation), “Indicadores Brecha, Valores Numéricos de los Indicadores, Diagnóstico de Brechas y Criterios de Priorización para la Programación Multianual de Inversiones 2022 – 2024.” 19 government have responsibilities for environmental territorial organization. Added to the lack of clarity on responsibilities for land management are limited technical capacity and financial resources. Inefficient land markets, especially the lack of land titling, also increase poverty and vulnerability. The current land markets underpin deficiencies in housing markets that are unable to provide solutions to lower-income families. With no other option, informal settlements continue to grow, mostly in high-risk areas, and are composed of inadequately built housing units, which leaves a significant portion of the population living in unhealthy conditions, exposed to natural hazards, and vulnerable to poverty. Providing opportunities for affordable, sustainable housing (new housing and improvement of existing units) is crucial to reduce incentives for further informal occupation of land and to promote sustainable urban growth. Inefficient regulation and institutional weaknesses hinder sustainability and social inclusion 47 Environmental and social evaluation procedures for investment projects remain bureaucratic, offer limited social and environmental protection, and represent a hurdle to investments . All investment projects with public, private, or mixed capital require a socio-environmental evaluation. This process is guided by the National Environmental Impact Assessment System (Sistema Nacional de Evaluación de Impacto Ambiental [SEIA]). A complex institutional structure in SEIA, limited interagency coordination, and a lack of technical capacities deepen the challenges. The SEIA is the leading instrument for socio-environmental management issues, and despite its importance as a unique system for social and environmental risk management, it has become increasingly bureaucratic, creating unnecessary hurdles, delays, conflicts, and costs for projects. Further, the process of evaluation and assessment of socio-environmental impacts of projects that go through the SEIA also involves multiple agencies that are often not coordinated. The SEIA law suggests that the environmental and social units of line ministries are responsible for evaluations of the social and environmental impacts of projects in their sector. Yet, numerous other government actors must also provide technical evaluations, certification of projects, and permits. As a result, a typical project in the transport sector can require the intervention of over 15 public agencies. Limited interagency coordination exacerbates the challenges posed by the multiplicity of actors.48 The environmental and social legal frameworks remain outdated or have not been fully implemented, opening the door to social and environmental concerns . The current environmental legal framework, including decrees for sector-specific environmental protection, need updating.49 The same is true for the social inclusion regulatory framework. The norms for citizen participation are weak and, in many cases, do not require the mapping of vulnerable groups. And although Law 29785 50 establishes the process for consultations with indigenous groups, its regulation leaves the door open for a violation of international standards, such as those of the International Labor Organization and the World Bank. The forestry sector provides an example of how poor coordination and a weak institutional framework can exacerbate sustainability and social challenges. Between 2001 and 2020, 2.6 million hectares were deforested, reaching a peak of 203,000 hectares in 2020, the highest in 20 years and equaling one hectare lost every three minutes51. The sector is highly complex due to its extension and diversity, both geographic and cultural. For its proper development, a high level of articulation is required between national, regional, and local institutions. However, coordination is limited, since the institutional framework at the three levels of government is weak and has worsened with the lack of implementation of the National Forest and Wildlife Management System (Sistema Nacional de Gestión 47 Banco Mundial (2021). “Repensar el Futuro del Perú. Notas de Política para Transformar al Estado en un Gestor del Bienestar y el Desarrollo.” Grupo Banco Mundial, Lima. 48 Ibid. 49 Examples include those for transport (D. S. 004-2017-MTC) and the extractive industries (D. S. 042-2017-EM, D. S. 04-2014-EM y D. S. 039- 2014-EM). 50 Ley del Derecho a la Consulta Previa a los Pueblos Indígenas u Originario. 51 World Bank (Forthcoming). 20 Forestal y de Fauna Silvestre [SINAFOR]) created in 2011 by the Forestry and Wildlife Law ( Ley Forestal y de Fauna Silvestre). Both at the national and regional levels there is a lack of human resources and budget allocated, which affects the ability to enforce the existing law regulating the forestry sector. 52 Challenges in the forestry sector are directly linked to agriculture, which drives 90 percent of the total deforested forest cover. 53 Informality and illegal activities, a transport system that promotes deforestation, the absence of an integrated planning system, and a general lack of awareness of the potential value of the forest’s goods and services are additional enablers of deforestation (Muñoz 2014). 3.3 Worsening institutional capacity to deliver quality, equitable services 54 State institutions dealing with macroeconomic and financial management have been resilient to recent institutional instability and are recognized as efficient. Key macro-fiscal institutions, such as the Ministry of Economy and Finance and the Central Bank, have remained largely immune to the political crisis in “‘islands of effectiveness,” explained to some extent by the high capacity and continuity of experienced career staff (Levy 2014). The public financial management framework at the national level is consistent with international standards, budgeting practices adhere to most of the principles of the International Monetary Fund’s Fiscal Transparency Code at a good or advanced level, and the country ranks 76 of 100 on the Open Budget Survey, above most of its regional peers (OBS 2019). As a result, the fundamentals of macroeconomic and fiscal policy have not undergone radical change, and the country appears to be returning to pre-pandemic growth rates. Yet, the performance of key macro-fiscal institutions has not permeated to other sectors and levels of state. Limited state capacity in several instances at the national and subnational levels is hampering the delivery of quality services and infrastructure. Poor performance in public investment management, lack of coordination between different levels of government, and capacity gaps in the civil service are some of the key challenges the country faces. 55 At the local government level, municipalities that receive significant revenues through the mining canon that are earmarked for infrastructure are not able to spend it, and those with the highest share of revenue from the canon have the lowest levels of budget execution. 56 According to World Bank (Forthcoming.a), canon had only mild long-term impacts (from 1993 to 2017) on poverty and households’ access to basic services (water, sewage, and electricity) at the local level. Moreover, the allocation of resources to subnational entities does not respond to objective criteria. A clear disconnect between operating costs and revenues limits the ability of service providers to improve and expand service provision. Rural and peri-urban areas especially require innovative technical solutions and planning and management practices that respond to the geographic and socio-cultural complexity involved. In the education sector, despite the country’s efforts to professionalize teaching, the availability of trained teachers remains a challenge. In 2012, Peru approved the Teacher Reform Law, focused on the professionalization of teachers and improvements in their working conditions. The government has also implemented salary incentives to attract the most qualified teachers to remote areas, where the needs of students are greater, but the Ministry of Education is still having difficulty filling vacancies. For example, in 2020, only 28 percent of available positions were covered in urban areas and 11 percent in rural areas (MNEDU, 2020). Salary incentives might not deliver short-term results and might not be enough to attract talent to areas in need. Lack of investment in school infrastructure also makes it difficult to attract talent. This is particularly challenging in rural areas where lower educational quality results from a lack of well-trained teachers, deficits in school management, and limited access to basic services, technology, and educational materials. 52 Ibid. 53 Godínez-Zamora (2021) and De La Torre Ugarte et al. (2021). 54 This section draws from World Bank (Forthcoming) 55 World Bank (2021). 56 World Bank team analysis using https://datosabiertos.mef.gob.pe/home and the Socio-Economic Database for Latin America and the Caribbean (SEDLAC). 21 Education management could benefit from greater integration of available information systems. The Ministry of Education has implemented various information systems over the past years, but better use of this data could lead to more efficient management of educational resources and programs and increase access to education and service quality. Better integration and interoperability of the Ministry’s own systems and with those of other public entities (which requires protocols for collaboration and exchange of information) are needed to enable data driven management. Lack of quality, integrated information systems, combined with high fragmentation of the health sector, has limited the effectiveness of the response to the pandemic. The shortcomings of the Peruvian health system in the coverage and quality of services, that were made clear during the COVID-19 crisis, are the result of years of low investment and unaddressed structural problems. The pandemic revealed the weakness of information systems, which precluded the efficient, strategic use of available resources and thus an effective response to the emergency, while the fragmentation of the sector generated coordination problems between levels of government and subsectors of the health system, which prevented efficient decision making. The expansion of health insurance coverage without an accompanying investment in capacity resulted in an overwhelmed, outdated health management system and low-quality services . The percentage of the population with some form of insurance increased from 27 percent in 2004 to 77 percent in 2019 (INEI 2020), while the health system’s capacity to deliver remained the same. Moreover, resource allocation to Seguro Integral de Salud (SIS), the health insurance scheme that covers 62 percent of the insured population and, most specifically, the poor, is highly inefficient. Financing under this scheme follows line-item input financing based on historical allocation instead of results-based allocation to encourage better efficiency and quality of care. Furthermore, the health management systems have not adapted to the epidemiological transitions of recent decades. Chronic and noncommunicable diseases now dominate the health burden but are not treated at primary care facilities, resulting in a saturation of hospitals (secondary and tertiary care). Access to safe water and sanitation continues to be a problem in Peru, despite progress in the regulatory framework and increased investments in infrastructure . The country has declared universal access to water and sanitation to be a priority and has adapted its institutional and regulatory framework to meet that goal. However, implementation has been limited, and the country's performance remains considerably below its peers. The pandemic made it evident that limited access to safe water and sanitation affects the provision of other services, such as health and education, creating a vicious cycle. Half of the health centers in the country do not have access to water, and only a few have sanitation. Two-thirds of public schools do not have access to adequate water and sanitation, and where infrastructure exists, limited maintenance has led to its deterioration. Fragmentation of service provision among a multiplicity of providers, many too small to be viable, exacerbates coordination challenges.57 In the urban transport sector, the lack of sound governance and institutional capacity has limited the development of quality transit infrastructure and services. Lima, with 11 million habitants, has a very small mass transit network: a 33-kilometer rapid transit bus corridor and one elevated rail line. Together these two systems carry about 1 million trips in the city (just 9 percent of all public transport trips). Many road intersections in Lima lack proper traffic lights; others have an obsolete system not connected or integrated with a traffic control system, and many streets lack proper signaling to protect vulnerable users or manage speed limits. Moreover, the city does not leverage the use of traffic data analytics to predict and anticipate events or react to incidents on the streets. The poor provision of public services has important effects on the productive sectors, as in the case of agriculture. In the agriculture sector, many challenges need to be addressed to increase 57 Fifty sanitation service providers (empresas prestadoras de servicios de saneamiento) provide services to 62 percent of the country’s population, 315 small municipalities provide services to 14 percent of the population, and the remainder is served by close to 25,000 communal organizations. 22 productivity, climate change resilience, and sustainability. Agriculture innovation, land administration, agriculture health and food safety services, and connectivity and access to markets are limited, affecting productivity, poverty reduction, food security, and climate resilience in rural areas. Public spending on research and technology transfer in Peru amounts to around 0.17 percent of agricultural GDP, well below the average for Latin America (1.14 percent). Technology transfer through technical assistance delivery (public and private) reaches only 12 percent of farmers. The provision of agriculture health services (plant and animal) as well as food safety has made significant progress in the Costa region, but it is still lacking in the Sierra and Selva regions. Simply redistributing public expenditure from private goods to agriculture public goods would boost agricultural value added, help to reduce poverty, and improve management of natural resources.58 3.4 Fewer buffers and limited capacity to deal with shocks and social conflict59 A large stimulus package did not prevent Peru from being among the countries most affected by the COVID-19 crisis. Peru’s long history of good macroeconomic management meant it had the resources to deploy one of the world’s strongest financial packages, amounting to 21 percent of GDP. Yet Peru was one of the countries hardest hit in terms of the health and economic impact, revealing the state’s limited capacity to deal with non-financial shocks. The lesson here is that to safeguard development, Peru would need to prepare for, mitigate, and adapt to a wider range of risks and uncertainties beyond financial shocks and recessions, to include conflict and violence, natural hazards, climate change, and pandemics driven by zoonotic diseases. Physical risks and climate change The country’s high dependance on Figure 17. When compared to other countries, Peru ranks as high natural capital and its complex risk in 10 out of 15 indicators geography require more than sound macro-fiscal management for resilience. 60 Peru covers the second largest share of the Amazon after Brazil and is among the 10 most biodiverse countries in the world. However, growth has come at the cost of natural capital, affecting deforestation rates and fisheries resources. Further, Peru ranks as high risk in 10 out of 15 different indicators, including exposure to natural hazards and vulnerability of people, Sources: CCDR report based on data from Climate Analytics; Kulp and Strauss (2019); Rentschler and Salha (2020); UNHCR (2018a); UNISDR infrastructure, and economic (2015); World Development Indicators; and the World Bank Climate activity (Figure 17). It faces some Change Knowledge Portal. transition risk, with oil and gas Notes: These are a selection of drivers of risk in a country. Countries are reserves potentially at risk of rated using a benchmark approach. Countries in red are in the upper risk becoming stranded assets and a tercile, those in yellow are in the middle risk tercile, and those in blue are in the lowest risk tercile. The scores for LAC and upper-middle-income need for agriculture to minimize countries reflect the average of all countries in those groups. and monitor its impact on deforestation to stay competitive in a decarbonizing world. Anticipating and planning for the medium 58 M. Gautam and others, “Repurposing Agricultural Policies and Support: Options to Transform Agriculture and Food Systems to Better Serve the Health of People, Economies, and the Planet” (Washington, DC: World Bank, 2022). 59 This section draws from World Bank (Forthcoming) 60 World Bank (Forthcoming). 23 and long-term macroeconomic impacts of both climate change and decarbonization policies and transition can help Peru maintain its macroeconomic stability. The credit portfolio of banks is significantly exposed to physical risks, but no requirements exist for them to assess and integrate risks into their business processes and portfolios . The risks from landslides and costal floods: nearly 6.2 percent of the credit portfolio of banks in Peru has high exposure to landslides and flash floods, 61 5.5 percent is highly exposed to earthquakes, and 12.5 percent is exposed to floods but with a lower hazard level (Figure 18). The heavy rains caused by El Niño in early 2017 led to a cumulative increase of about one percentage point in nonperforming loans (NPLs) three quarters later compared to the last quarter of 2016 Calice and Miguel, 2021)). These risks have implications for financial stability. A key step in mitigating the risks of natural hazards to the broader financial sector would be to introduce specific requirements for banks, insurers, and large investors to systematically quantify physical risks, perform stress tests to assess the resilience of their portfolios to climate change, and include risks identified in their business processes and portfolios. Figure 18. Exposure of the banking sector to physical risks is high Region Floods Coastal Floods Landslides Drougths Very Low Low Medium High Very Low Medium High Low Medium High Very Low High Lima 10.90 0.03 0.04 10.85 4.24 2.29 Arequipa 0.52 0.02 0.03 0.33 0.01 0.17 Ica 0.50 0.01 0.02 0.08 0.24 0.15 La Libertad 0.04 0.43 0.45 0.24 0.02 0.00 0.18 Piura 0.03 0.31 0.01 0.03 0.12 0.01 0.01 0.15 Cusco 0.26 0.03 0.02 0.00 0.00 0.18 0.07 Junin 0.21 0.05 0.02 0.03 0.12 0.04 0.04 Lambayeque 0.00 0.23 0.23 0.11 0.02 0.07 Cajamarca 0.15 0.07 0.01 0.06 0.06 0.01 Puno 0.01 0.08 0.08 0.01 0.09 0.01 0.00 0.04 Other regions 0.66 0.07 0.05 0.26 0.11 0.11 0.11 0.13 0.27 0.20 0.04 13.29 1.28 0.17 0.30 0.02 0.16 11.71 0.33 0.86 4.99 0.99 2.79 All Regions 15.04 11.89 6.18 3.78 Source: Calice, P., & Miguel, F. (2021). Low export diversification makes Peru highly vulnerable to external shocks. Compared to OECD countries, Peru’s diversification remains low for its income level, 62 with exports concentrated in minerals and agriculture and fishery products and tax income highly dependent on these sectors. The high reliance on agriculture and fisheries exports (5.6 percent of GDP, 20 percent of exports, and 27 61 Called huaicos in Peru. 62 https://atlas.cid.harvard.edu/countries/173. 24 percent of employment) makes the country particularly vulnerable to climate change impacts. 63 Climate change is estimated to reduce productivity by 5 percent on average by 2050. 64 Estimates suggest 30.8 percent of the agriculture sector’s tax revenue and 0.37 percent of all tax revenue is at risk from natural hazards (floods, El Nino, landslides, and frosts), with no available estimates for other extractive sectors.65 Currently there is no long-term strategy to diversify taxes away from disaster- vulnerable sectors. The global transition to low carbon may also bring positive effects through increased demand (and hence prices) for copper. Therefore, good understanding of the possible risks and opportunities will be key. The Ministry of Economy and Finance publishes debt sustainability assessment (DSA) exercises every year but has not included scenarios associated with disaster risks. The most recent multiannual macroeconomic framework (2023–26) already recognizes the need to identify and quantify these risks, a first step to be included in the DSA exercises. Assessing the proportion of taxes from high-vulnerability sectors, devising a plan to diversify tax revenues, and including climate and disaster impacts in debt sustainability assessments would contribute to ensuring sustainability of growth. Need for improved disaster risk management Clear institutional arrangements for public financial management during emergencies are in place, but there is no comprehensive assessment of the physical risks to the country’s fiscal sustainability. The Law on Climate Change and regulations in force for the National Disaster Risk Management (DRM) System entrust the Ministry of Economy and Finance with the responsibility of evaluating and identifying financial mechanisms to respond to large-scale disasters. The current processes to manage ex post financial assistance inflow are clear, and delivery mechanisms are flexible and efficient. When it comes to fiscal policies, the Medium-Term Fiscal Framework (Marco Macroeconómico Multianual 2023–26) has general references to climate risks, albeit not quantified. The National Debt System regulates contingent financing and instruments to obtain resources in the event of disasters. So, although budget documents and fiscal policies are starting to include DRM, there is lack of clarity on how these are assessed. At the national level, effective climate services and an established disaster risk management system have strengthened capacity to respond to emergencies. Peru has a national DRM system (SINAGERD) that has formally incorporated climate adaptation and DRM into national, regional, and local government plans and actions. 66 Moreover, Peru has updated the “National Disaster Risk Management Policy to 2050” to be implemented by all relevant public administration entities.67 The National Center for Disaster Risk Estimation, Prevention, and Reduction (CENEPRED) has the capacity to produce information on hazard maps throughout the country, and the information available is publicly accessible. SENAMHI, the national hydromet agency, prepares hourly hydrometeorological forecasts for all provincial centers. Although the recent adoption of a legal framework for urban planning is an important step in reducing informal expansion in areas of high risk, the associated regulation remains to be developed. The recently enacted Sustainable Urban Development Law 68 mandates that DRM and climate should play an integral role in urban planning, but the regulations that will enable its implementation are still under preparation. For example, in 2019, only 26 percent of all homes had a building license (INEI 2019). Further, lack of clarity in roles and responsibilities among public sector 63 At the beginning of 2017, the high rainfall produced by the El Niño Costero caused the loss of 19,722 hectares of cultivated areas and affected an additional 85,507 hectares, impacting an estimated 1.5 million farmers. At the same time, the increase in sea surface temperature of up to 0.13°C every 10 years could generate cumulative losses in fisheries by 2100 of up to 10 percent of the 2010 GDP. 64 World Bank (Forthcoming.a) 65 Calculations of the MINAM. Physical risks included floods, El Nino, landslides, and frosts. 66 The National Disaster Risk Management System Law (Law No. 29664) and its regulations (Supreme Decree No. 048-2011-PCM ) laid down the general DRM principles in Peru. There is an approved National Disaster Risk Management Plan (PLANAGERD) 2014–2021, community emergency plans are in place, and there are formal training programs for emergency response actors. Currently, the government is preparing the next PLANAGERD (2022–2030), which will be approved by a Supreme Decree in 2022. 67 Supreme Decree No. 038-2021-PCM. 68 Law 31313, 2021. 25 institutions creates duplication and overlapping of functions and limits accountability. For example, there is lack of clarity about the role played by the PCM, the Ministry of Environment, and the Ministry of Housing, Construction and Sanitation regarding how their responsibilities on territorial organization relate to each other. As a result, despite recent improvements in identifying areas where risk cannot be mitigated, informal construction continues, often in areas at risk (CAPECO 2018). Building resilience to climate change will also require that sectoral institutions, data, and policies be strengthened. Efforts will be needed, for example, in the water sector to bolster water resource Figure 19. Regions that are more exposed to climate risks lack institutions and policies, preparedness ensuring the availability of reliable data and information for decision making. Peru has a water law69 that integrates the principles of integrated water resources management (IWRM). However, current realities in Peru show major challenges in implementing IWRM mechanisms and policies. In the agriculture sector, the launching of the National Plan for Risk Management and Climate Change Adaptation for the Agricultural Sector 2012–2021 Source: CPSD report based on data from INEI. was a good first step in Notes: The vertical axis measures the number of natural and human-induced strengthening the resilience of disasters in 2019. Natural events include heavy rain, extreme temperature, the sector, but the National strong wind, floods, earthquakes, volcanic activity, storms, droughts, and others. Human-induced disasters include wildfires, fires in urban areas, spills, and others. Plan now requires updating. The horizontal axis measures the share of municipalities in the departamento Farmers are struggling to without any DRM systems. The size of each bubble is proportional to the poverty adopt resilience-building rate in the departamento (US$5.5 poverty line) in 2019. agriculture technologies and good farming practices given the limited availability of technology and local innovation, as well as the constraints in access to credit markets. When it comes to the electricity sector—which is highly privatized, with about 80 percent of the electricity production from private companies—there is not yet a national framework for DRM within the sector; rather, each electricity company prepares its own contingency plans. However, the national DRM office within the Ministry of Energy and Mines is preparing an energy sector emergency operations plan. 70 Furthermore, investment lags by public distribution companies have undermined the resiliency of many electricity systems both to meet electricity demand in a reliable manner and to withstand the risks of natural climate shocks. Updated data to assess delays in infrastructure project implementation and their impacts on reliability and quality of service could help improve resource management and ensure that investments in sub- transmission are promptly done. Implementation of early warning systems and development of financial mechanisms to support farmers can help strengthen their resilience and that of the agriculture sector as a whole. Efforts are ongoing to develop an early warning system that produces and disseminates trend and forecast information on crop and livestock price information to producers, weather and climate forecasts, and 69 Ley de Recursos Hídricos 29338. 70 Plan de Operaciones de Emergencia del Sector Energía y Minas (POESEM), https://www.coes.org.pe/Portal/portalinformacion/generacion. 26 pest/disease information, but no fully functional system is in place yet. Progress has also been made in increasing the penetration and geographic coverage of agricultural insurance schemes; the agriculture-specific catastrophic insurance scheme, known as the SAC (Seguro Agrícola Catastrófico [Catastrophic Agricultural Insurance]), covered only 14 out of 25 regions in 2019, and reached coverage of all regions in 2020.71 Risks to social protection, health care, and education The social protection system is well established but is limited to rural areas and not designed to be responsive to shocks. Peru’s existing social protection programs are well established, with advanced social assistance programs and delivery systems as well as solid financing arrangements. However, they have traditionally been focused on rural areas and are not designed to “adapt” to disasters. 72 A more responsive social protection system would require clear regulations, guidelines, and triggers that would activate an expansion of benefits before and/or during the crisis and a contraction once the crisis has subsided, as well as the interoperability of social protection and DRM data. Important lessons can be learned from the COVID-19 pandemic and other shocks. This includes the need to update the social registry (SISFOH) used for cash transfers (during the COVID-19 pandemic, some 20 percent of the data in the social registry were found to be outdated, especially in urban areas) and incorporate vulnerability criteria that can identify households in transitionary poverty (such as households exposed to a natural disaster or vulnerable groups, such as refugees and displaced people). Also, recent increases in food and fertilizer prices as a result of the pandemic, the war in Ukraine, and weather shocks have highlighted the need for better coordination between the Ministry of Agriculture and the various social assistance programs to develop smart input subsidy interventions that complement current social protection measures in rural areas. The health system has insufficient capacity to respond to sudden surges in demand for care. Peru has a health sector emergency response plan and a national health adaptation plan, but these are outdated and do not cover all relevant hazards. Its climate-driven forecast model for dengue and an extreme heat and cold early warning and alter system score low on health risk communication relative to its peers (Bell and Nuzzo 2021). As made evident during the pandemic, the health system lacks the capacity to respond to sudden surges in demand for care (GFDRR 2021). Peru has 1.7 doctors, 2.2 nurses, and 1.5 hospital beds per 1,000 people (INEI 2019), substantially lower than the 2.5 ratio advised by the World Health Organization for doctors and nurses, and these are mostly concentrated in Lima and the coast. Further, simulations indicate that in the event of an 8 Mw earthquake affecting Lima’s metropolitan area, more than 90 percent of hospitals in the city would not be able to sustain operations and only between 1 and 15 percent of demand for care within 60 minutes from the time of injury would be satisfied (GFDRR 2021). More can be done to avoid learning disruptions and equip children with the skills needed for resilience. When it comes to education, disaster risk reduction has been integrated into school infrastructure planning and investments since 2017. Whether this has also led to disaster-proof schools is not clear. More can be done to ensure a continued learning environment and to equip children with the skills needed for resilience. This includes ensuring that all pupils have the resources to enable remote learning—for example, current internet access rates are low, making it harder for students to keep up with lessons should schools have to close. During the COVID-19 pandemic, Peru experienced extremely high dropout rates: 400,000 students, or 20 percent of the student population, dropped out of school (IPE 2021). 71 The SAC, implemented in 2009, is a catastrophic insurance instrument that insures low-income growers (mostly subsistence farmers) against all relevant hazards. Coverage is extended when farmers suffer a yield reduction of approximately 50 percent of the expected yield. It covered about 200,000 farmers on average each year between 2009 and 2019 (8.9 percent of small and medium-sized farms) and 58,000 hectares of agriculture area (0.21 percent of total). 72 Due to historically geographic targeting (only districts with 40 percent or higher poverty can enter into the social targeted programs), the coverage of the poor in urban areas is limited. Juntos, the conditional cash transfer program and one of the main social assistance programs in the country, covers only 14 percent of eligible households in urban areas compared to 56.6 percent in rural areas. 27 Finally, increasing the uptake of financial instruments and building the insurance sector can improve firm and household capacity to manage residual risks. Savings (only 8.4 percent of the population has formal savings) and insurance penetration (0.76 percent premiums to GDP) among households are low. Among firms, Peru’s large informal economy is likely to be hardest hit by emergencies, as this sector does not have access to coping instruments such as insurance. In addition, access to emergency borrowing remains low. Strengthening the catastrophic insurance sector will be needed to increase supply: of the 18 active insurance companies, only five offer catastrophic insurance. 73 Section 4. The Way Forward: Policy Priorities The development challenges and policy priorities defined in the first SCD remain valid and, if anything, have become even more urgent. However, overcoming these challenges in the current post-COVID context will require addressing some critical cross-cutting issues (Figure 20). Figure 20. Peru’s Updated Systematic Country Diagnostic (SCD) Goals of ending extreme poverty and boosting shared prosperity Development Increased productivity Improved spatial equity Challenges 2017 SCD 1. Increased access to quality High-Level 2. Improved access to quality public economic opportunities for 3. Increased resilience to shocks Outcomes services across the territory workers and entrepeneurs 1. Improve connecting 6. Improve access to water and 14. Improve social protection and infrastructure sanitation assistance 2. Streamline labor and tax 7. Improve quality of education services 15. Improve climate and disaster regulations 8. Improve quality of health services risk management 3. Relax regulatory barriers to 9. Improve territorial and urban 16. Enhance natural resource competition management, including access to management 4. Enhance rule of law affordable and resilient housing 5. Increase trust and social capital 10. Increase efficiency of public spending Policy Priorities 11. Increase tax collection 12. Reboot decentralizacion 13. Improve government coordination Cross- Cutting Issues Increased State efficiency in regulating markets, delivering quality services and coping with shocks Addressing the identified policy priorities requires a state with higher capacity to regulate markets, provide services, and manage shocks. As discussed above, weaknesses in institutions and increased institutional instability are an obstacle to achieving progress across the identified policy priorities, which require (i) a regulatory environment conducive to providing more quality economic opportunities to the private sector (workers and entrepreneurs); (ii) access to quality public services across the territory, and (iii) systems, processes, and resources that improve resilience to shocks. Peruvian citizens aspire to a higher quality of life provided by better economic opportunities, better public services, and a well-functioning social protection system. Within the framework of the consultations that were held for the SCD Update, participants highlighted the need for labor regulations to be simplified; the provision of public services, especially health and education, 73 https://www.sbs.gob.pe/. 28 increased; and public sector capabilities strengthened, especially at the local and regional levels. Such improvements are indeed critical to addressing the two development challenges identified in the 2017 SCD: low productivity and high spatial inequality. The successful implementation of the 16 policy priorities identified here would not only reduce poverty but also promote more equitable and sustainable growth (or shared prosperity) than Peru has known in the past. It would do so by pursuing three high-level objectives: (i) Increase access to quality economic opportunities for workers and entrepreneurs. Promoting a conducive environment for private sector investments and the creation of quality formal jobs and better economic opportunities is necessary to achieve inclusive and sustainable economic growth. This calls for removing barriers and disincentives to private sector investment and job creation, including barriers related to an undue regulatory burden, lack of institutional coordination, and uncertainty. (ii) Increase access to quality public services across the country. Access to quality public services for people across the country and at all socioeconomic levels would improve the population’s quality of life, provide greater equality of opportunity, and also promote private sector investments. To serve citizens more efficiently, the public sector needs to be closer to them; yet Peru’s decentralization framework remains a work in progress, and reforms are needed to introduce more transparency, predictability, and fairness into this system. E-government reforms and the digitalization of government services can also contribute to increasing accessibility to public services across the territory. (iii) Increase resilience to shocks. Public policies can be designed to build resilience and prevent anticipated and unexpected events from affecting citizens’ quality of life. Good macro management in recent decades allowed for the accumulation of the buffers, resources, and tools necessary to implement these policies. This should be preserved by making a consolidated effort that considers the need for better services and is cautious with the use of windfall resources. But additional policies are required for the state to be able to protect citizens against the impacts of natural disasters and other shocks. Strengthening institutional capacity and reducing instability will be key to achieving these objectives. Table 1 provides an illustrative and non-comprehensive list of measures, with examples from across several sectors, that could contribute to strengthening institutional capacity and could thus help to advance progress in many other relevant policy areas. 29 Table 1. Examples of Policy Priorities and Actionable Measures to Strengthen Institutions and Capacities to Achieve Development Objectives74 High-Level Examples of Policy Priorities Examples of Actions to Strengthen Institutions and Outcomes Capacities  Enhance subnational governments’ governance and institutional capacity for management of urban transport operations and traffic management.  Promote access to safe, clean, and gender- Improve connective infrastructure. inclusive urban transport to job and education opportunities, along with sound traffic management for efficient operations.  Promote a new generation of productive rural infrastructure programs to support Peru’s territorial development.  Strengthen institutional coordination and capacity by giving autonomy to the National Greater access Institute for the Defense of Competition and the to quality Protection of Intellectual Property (Instituto economic Nacional de Defensa de la Competencia y de la opportunities Protección de la Propiedad Intelectual for workers and Streamline labor and tax regulations. [INDECOPI]) and mandating it to regulate entrepreneurs enterprises.  Improve the supervision tools and performance of the National Superintendence of Labor Inspection (Superintendencia Nacional de Fiscalización Laboral del Perú [SUNAFIL]) to ensure implementation of the law.  Improve the use of technology and performance- oriented culture for the control activities executed by the supreme audit institution Enhance the rule of law and the (Contraloría General de la República [CGR]). oversight of public funds.  Promote the adoption of international standards for the supreme audit institution and provide training to CGR auditors.  Modernize and improve the efficiency of WSS utilities (Entidades Prestadoras de Salud [EPS]). Increase access to water supply and  Strengthen norms/regulations to promote sanitation (WSS) and improve the aggregation of service providers. quality and sustainability of service  Strengthen norms and regulations to improve providers. wastewater treatment management and its reuse within a circular economy approach. Greater access Increase energy access and improve  Modernize and strengthen public distribution to quality public the quality of electricity service. companies. services across the country  Improve initial teacher training. Improve the quality of education Continue with a licensing process for universities services. and pedagogical institutes.  Integrate health centers into sector policies and strategies. Improve the quality of health services. Strengthen the health management information system. Consolidate atomized health networks. 74 Additional priorities are included in an expanded table in Annex D. 30  Strengthen the National Institute of Agrarian Innovation (Instituto Nacional de Innovación Agraria [INIA]) and other public research, development and extension organizations.  Leverage and strengthen the National Strengthen agricultural innovation Agricultural Health Service of Peru’s (Servicio systems, improve access to public Nacional de Sanidad Agraria del Perú [SENASA]) goods, and improve delivery of capacity to provide training and extension extension services. services for smallholders for the adoption of climate-smart agriculture (CSA) and export promotion.  Implement a national aquaculture policy/ regulatory framework that includes spatial planning regulation and a business perspective.  Strengthen municipal capacity through technical assistance by the Ministry of Housing, Construction and Sanitation. Integrate housing policies into urban planning, regularization, and upgrading. Improve territorial and urban  Improve the coordination of and streamline management. performance-based financing programs to incentivize and support local and regional governments in completing and updating the registry and cadasters.  Promote property regularization in rural areas, especially for native and peasant communities.  Establish a methodology to clearly define spending responsibilities with four aspects of Increase the efficiency of public service provision: stewardship, planning, spending. financing, and implementation and provision of the service.  Eliminate the discretion with which ordinary Increase tax collection. resources are granted to promote municipal collection.  Delimit the functions of the various government levels.  Provide regional governments with their own resources and rule-based transfers. Introduce fiscal capacity into the Municipal Compensation Fund formula. Reboot decentralization.  Introduce clear rules of responsibilities for expenditures and measures of fiscal capacity to allocate revenues across regional and local governments.  Implement a stabilization fund for canon revenues to reduce their volatility.  Establish a mechanism of coordination between the central government and regions for decision- making processes.  Establish standards and protocols for internal Improve government coordination. collaboration, interoperability, and information exchange between entities.  Develop a framework to increase cooperation between public entities. 31 Improve social protection and  Increase coordination between institutions assistance. leading DRM and social assistance programs.  Increase the capacity of public employees in DRM. Improve climate and disaster risk  Condition the allocation of resources to the management. formulation and periodic updating of risk Greater management plans. resilience to shocks  Strengthen institutional capacities on socio- environmental management and evaluation.  Improve governance of natural resource Enhance natural resource management, with an initial focus on the management. Amazon (e.g., support silvopastoral systems, sustainable timber concessions, plantation for restoration). Monitoring progress toward these high-level development outcomes could be done through the use of multiple indicators over time. Potential indicators may include: greater access to quality job opportunities; proportion of workers with formal jobs; average labor productivity; greater access to quality public services across the country; PISA results; out-of-pocket expenditures on health services; percentage of population with access to quality water; own resources and rule-based transfers as percentage of total transfers to subnational governments; percentage of low-income families with a housing deficit; percentage of small-scale farms accessing extension services; debt over GDP; estimated GHG emissions intensity; and proportion of poor families receiving regular cash transfers. 32 Appendix A. Framework of the 2017 Systemic Country Diagnostic 33 Appendix B. Evolution of Development Outcomes: Access to Services and Human Capital Figure B.1. Indicators of access to services and human capital in Peru and comparators Access to electricity (% of Access to electricity, rural (% of Access to electricity, urban (% population) rural population) of urban population) 105 150 101 99 99 99 99 97 99 98 99 97 94 99 100 100 100 77 89 100 96 84 100 99 99 99 94 100 99 95 56 99 88 99 98 90 50 85 98 0 80 97 2010 2015 2020 2010 2015 2020 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income People using at least basic drinking water People using at least basic drinking People using at least basic services (% of population) water services, rural (% of rural drinking water services, urban population) (% of urban population) 100 97 96 96 99 94 94 85 86 90 91 99 93 100 81 82 81 100 98 98 98 98 95 91 73 90 80 66 98 97 90 87 60 95 96 94 85 40 94 20 92 80 0 2010 2015 2020 90 2010 2015 2020 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income People using at least basic People using at least basic People using at least basic sanitation services, rural (% of rural sanitation services, urban (% of sanitation services (% of urban population) population) population) 100 100 100 86 86 89 92 86 95 82 80 79 77 95 93 71 75 80 72 92 80 67 66 90 60 60 90 88 88 60 60 53 45 84 85 82 40 40 80 80 20 20 75 0 0 2010 2015 2020 2010 2015 2020 70 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income 34 People using safely managed People using safely managed People using safely managed drinking water services (% of drinking water services, rural drinking water services, urban population) (% of rural population) (% of urban population) 100 83 87 82 90 81 91 100 75 72 75 74 75 76 100 58 59 59 49 50 51 45 49 53 18 20 22 50 0 0 0 0 0 0 2010 2015 2020 2010 2015 2020 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income People using safely managed People using safely People using safely managed sanitation services (% of managed sanitation sanitation services, urban (% population) services, rural (% of rural of urban population) population) 100 100 64 67 41 28 47 53 58 36 27 47 49 33 57 40 30 23 35 34 100 52 5340 49 20 19 22 29 22 0 0 2010 2015 2020 0 2010 2015 2020 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income School enrollment, pre- School enrollment, secondary Maternal mortality ratio primary (% gross) (% gross) (modeled estimate, per 100,000 live births) 150 150 103 111 79 74 89 92 89 88 98 95 91 150 104 100 75 71 77 78 100 94 8874 57 85 77 100 49 43 41 50 50 50 0 0 2010 2015 2020 0 2010 2015 2017 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Caribbean Latin America & Caribbean Upper middle income Upper middle income Upper middle income 35 Mortality rate, infant (per Mortality rate, neonatal (per Mortality rate, under-5 (per 1,000 live births) 1,000 live births) 1,000 live births) 30 15 11 30 25 19 10 9 10 9 20 19 8 18 16 20 15 15 16 14 10 7 7 20 16 14 12 12 6 13 11 10 9 10 5 10 0 0 0 2010 2015 2020 2010 2015 2020 2010 2015 2020 Peru Peru Peru Latin America & Caribbean Latin America & Latin America & Caribbean Caribbean Upper middle income Upper middle income Upper middle income Source: World Development Indicators. Table B.1. Evolution in Access to Services and Human Capital Indicator 2010 2015 2019 2021 Basic services (%) Water 74.6 83.9 88.1 87.2 Drinking water 0.0 75.9 81.8 80.5 Safe water 26.0 28.7 39.5 38.2 Water with inadequate chlorine 23.1 22.8 15.6 16.9 Water with no chlorine 50.9 48.5 44.9 44.8 Sanitation 64.1 68.8 73.5 72.1 Electricity 88.1 94.3 95.9 95.9 Telephone 77.0 90.8 95.1 96.6 Education (%) Enrollment in pre-primary 42.7 59.2 60.5 56.6 Enrollment in secondary 52.2 58.3 60.0 59.3 Maternal and infant health Infant mortality rate 5.1 10.0 7.7 9.8 Child mortality rate 19.0 16.3 14.1 18.1 Maternal mortality rate 71.6 63.2 52.0 104.3* Stunting rate (under 5) (%) 23.3 14.4 12.2 11.5 Prevalence of anemia (6–36 months) (%) 50.3 43.5 40.1 38.8 *2020. Source: Basic services and education indicators are authors’ estimations based on the National Household Survey. Maternal and infant health indicators are estimations based on the Demographic and Family Health Survey. The maternal mortality rate is calculated based on the number of maternal deaths reported by the National Center for Epidemiology, Disease Prevention and Control and the number of births reported by the National Institute of Statistics and Informatics. 36 Table B.2. Geographic Disparities in Access to Services and Human Capital, 2021 Indicator National Rural Urban Poorest 5 regions Richest 5 regions Basic services (%) Water 87 71 91 83 88 Drinking water 81 32 88 50 91 Safe water 38 2 46 12 38 Water with inadequate chlorine 17 8 19 12 23 Water with no chlorine 45 90 35 76 39 Sanitation 72 13 84 53 79 Electricity 96 81 99 93 98 Telephone 97 90 98 95 98 Education (%) Enrollment in pre-primary 57 55 57 56 54 Enrollment in secondary 59 59 59 59 57 Maternal and Infant Health Infant mortality rate 10 11 9 8 6 Child mortality rate 18 21 17 16 11 Maternal mortality rate 104.3* Stunting rates (under 5) (%) 12 24 7 18 6 Prevalence of anemia (6–36 months) (%) 39 49 35 49 38 *2020. Source: Basic services and education indicators are authors’ estimations based on the National Household Survey. Maternal and infant health indicators are estimations based on the Demographic and Family Health Survey. The maternal mortality rate is calculated based on the number of maternal deaths reported by the National Center for Epidemiology, Disease Prevention and Control and the number of births reported by the National Institute of Statistics and Informatics. 37 Table B.3. Inequalities in Access to Services and Human Capital Indicator Indigenous Afro-Peruvians Others Venezuelan migrants Basic services (%) Water 84 86 87 Drinking water 67 74 77 Safe water 31 22 27 Water with inadequate chlorine 16 16 17 Water with no chlorine 54 62 56 Sanitation 63 63 67 Electricity 93 95 96 Telephone 94 96 96 Education (%) Enrollment in pre-primary 55 55 55 Enrollment in secondary 58 58 58 Maternal and Infant Health Infant mortality rate 11 16 * Child mortality rate 23 28 * Maternal mortality rate Stunting rates (under 5) (%) 13 12 * 6 Prevalence of anemia (6–36 months) (%) 50 35 * 31 *There were not enough observations in the survey data to report for this group. Source: Basic services and education indicators are authors’ estimations based on the National Household Survey. Maternal and infant health indicators are estimations based on the Demographic and Family Health Survey. The maternal mortality rate is calculated based on the number of maternal deaths reported by the National Center for Epidemiology, Disease Prevention and Control and the number of births reported by National Institute of Statistics and Informatics. Notes: Indicators for education and maternal and infant health for the Indigenous, Afro-Peruvian, and other groups were constructed based on the child belonging to a household in which the head belongs to one of those groups. 38 Appendix C. Knowledge Gaps High-Level Outcomes Policy Priorities Knowledge Gaps Road safety in urban and nonurban roads (number of accidents, Improve connecting traffic fatalities) infrastructure. Infrastructure availability mapping Assessment of digital value chain Streamline labor and tax Typification of procedural infractions in which lawyers incur to Greater access regulations. delay legal processes to quality job opportunities Relax regulatory barriers to Technical and financial resources necessary for effective competition. application of the law against anticompetitive practices Enhance the rule of law. Increase trust and social capital. Improve access to water Requirements and effects of service providers’ formal merge and sanitation. Legal and regulatory changes needed to modernize and decarbonize energy sector Improve energy access. Effect on competitiveness of renewable energy resources’ incorporation into system Digital abilities of households Improve the quality of Technical and financial resources to establish communication education services. and data-sharing protocol between the Ministry of Education and the public sector Quality of public health services Improve the quality of Greater access Real-time information on local disease burden health services. to quality Availability of human resources at local level public services Mapping of roads in poor condition across the Detailed information on urban occupation and household territory characteristics Opportunities for integration of geographic and urban Improve territorial and information mechanisms urban management. Innovations for green, climate-resilient social housing Production of granular, actionable information on the state of the housing stock Alternatives to home ownership to reduce quantitative and qualitative housing deficits Increase the efficiency of Current state of public expenditure and financial accountability public spending. Assessment of quality of institutions Opportunities for local government revenue generation (e.g., Increase tax collection. land value capture instruments) Reboot decentralization. Civil service capacity 39 Improve public sector Best platform for communication between public entities coordination. Best modality for sharing data across entities Household distribution and income effects due to surging global Improve social protection food prices and assistance. Subnational productivity levels of agriculture Greater Improve climate and Assessment of environmental emergency responses resilience to disaster risk management. Assessment of environmental services provided by agriculture shocks Costs of environmental degradation Enhance natural resource Least-cost environmental pollution management solution management. Technical and financial requirements to achieve biodiversity targets 40 Appendix D. Additional Policy Priorities High-Level Policy Priorities Actions Outcomes Modify the broadband law to make the most of the existing National Fiber Optic Backbone Network toward improving broadband penetration. Improve connective Promote an integrated public transportation system and introduce infrastructure. electric buses. Enhance management capacity and the communication and operation strategy of the Urban Transport Authority. Grant powers and autonomy to INDECOPI to regulate enterprises. Promote greater flexibility for job separation, facilitate temporary hiring (e.g., seasonal agricultural workers), and extend its maximum duration. Greater access Streamline labor and Implement labor reform to improve working conditions while to quality tax regulations. continuing to allow seasonal hiring (for example, in agriculture and economic tourism). opportunities Unify the tax regime for small and medium-sized enterprises. for workers Promote and facilitate a transition from the small business tax regime and to the general tax regime through support services. entrepreneurs Review the law that criminalizes anticompetitive practices and restore Relax regulatory the power of the leniency program. barriers to Create incentive mechanisms to promote the elimination of restrictive competition and regulations. investment. Assess key bottlenecks that the environmental and social regulatory framework might be creating for investment projects and sectors. Reduce the length of court proceedings. Enhance the rule of Improve the internal control activities of the supreme audit institution. law. Provide training to supreme audit institution auditors. Increase trust and Accelerate implementation of the Digital Government Plan 2022–2022 social capital. Foster innovation and technology adoption. Promote sector-specific reforms to unlock private sector investments75: Agriculture-specific: • Promote market-oriented- and value chain–specific Public-private dialogue to identify constraints on fresh food exports in lagging regions or facilitate productive alliances to link local smallholders in the Sierra to coastal exporters/off-takers. Promote private • Leverage SENASA and other institutions in Peru to i) enhance sector investment. training and extension services for smallholders that aim to export or supply exporters; and ii) scale up the adoption of CSA among smallholders. • Establish infrastructure and services (e.g., testing facilities, collection points, product tracing) to connect new agricultural regions to global supply chains. Tourism-specific: • Streamline certification and formalization, and revise standards to meet ecotourism and specialized adventure needs. 75 The sectorial policy recommendations are based on the Peru Country Private Sector Diagnostic (World Bank, forthcoming). 41 • Provide capacity to local and regional governments and destination management organizations, starting with pilot regions. • Develop integrated tourism destination development master plans, in consultation with the private sector; include analysis of constraints on air travel. Aquaculture governance: • Implement a National Aquaculture Policy/regulatory framework that includes spatial planning regulation and a business perspective. • Foster the provision of funds for research on climate change adaptation measures; support adaptation to geographic conditions. • Foster investment to adopt intensification practices and promote the creation of centers for genetic seed optimization. The digital economy: • Select a new operator for RDNFO [the fiber optic network] based on a sound, financially sustainable business model that allows for adjusting to new technology and market changes and ensure implementation of last mile connectivity projects with a focus on underserved rural areas. • Introduce a comprehensive legal, regulatory, and supervision framework for digital financial inclusion based on experience from successful peer countries. • Foster regional integration of digital start-ups and venture capital. Identify the most vulnerable areas and their characteristics. Increase access to Invest in water and sanitation services in the most vulnerable areas water and sanitation. according to their needs. Invest in rural electrification to close the access gap, prioritizing productive electricity investments. Increase energy Modernize and strengthen public distribution companies. access and improve Invest in priority sub-transmission investments, including substations the quality of and transmission lines (new and repowered). electricity service. Integrate variable renewable energy and distributed energy resources into the system. Improve school infrastructure. Greater access Improve the quality Improve initial teacher training. to quality of education Continue with the licensing process for universities and pedagogical public services services. institutes. across the Provide technological resources to ensure distance learning. country Integrate health centers into sector policies and strategies. Strengthen the health management information system. Improve the quality Create a strategy based on the most recent epidemiological needs of of health services. the population. Consolidate atomized health networks. Strengthen Implement the draft national agricultural innovation policy. agricultural Strengthen INIA and other public R&D&E organizations. innovation systems, Boost water security through public-private partnerships (PPPs) to improve access to develop new water storage facilities and improve the operation of public goods, and existing ones. improve the delivery of extension services. 42 Reduce inequalities in access to basic services by focusing on lagging areas. Strengthen municipal capacity through technical assistance by the Improve territorial Ministry of Housing, Construction and Sanitation. and urban Produce urban cadasters. management. Use new techniques and software to forecast growth. Increase access to affordable, sustainable, and resilient housing. Integrate housing policies into urban planning, regularization, and upgrading. Establish a methodology to clearly define spending responsibilities Increase the with four aspects of service provision: stewardship, planning, efficiency of public financing, and implementation and provision of the service. spending. Improve targeting of housing subsidies to support lower-income households. Eliminate the discretion with which ordinary resources are granted to Increase tax promote municipal collection. collection. Implement a cadaster office for better management and valuation of property. Delimit the functions of the various government levels. Provide regional governments with own resources and rule-based Reboot transfers. decentralization. Introduce fiscal capacity into the Municipal Compensation Fund formula. Establish a mechanism of coordination between the central government and the regions for decision-making processes. Improve government Establish standards and protocols for internal collaboration, coordination. interoperability, and information exchange between entities. Develop a framework to increase cooperation between public entities. Consolidate an integrated social registry that includes the largest Improve social possible number of vulnerable households and their life conditions. protection and Improve the synergies between the agriculture development (smart assistance. subsidies for asset and inputs transfer) and social protection (contingent cash transfer) policies and programs. Condition the allocation of resources to the formulation and periodic updating of risk management plans. Improve climate and Improve the geographic coordination of investments in resilience. disaster risk Promote the uptake of CSA practices and technologies. management. Further develop rural financial services (credit and insurance) to facilitate the adoption of CSA. Improve land administration (registry and cadaster) and land tenure security with a focus on the Sierra and Selva regions. Greater Integrate the forest, marine, and coastal management of Peru’s resilience to natural capital. shocks Strengthen institutional capacities on socio-environmental management and evaluation. Allocate rights in uncategorized forests. Enhance natural Create sustainable value chains to support the forestry, agriculture, resource and fisheries sectors (e.g., support agroforestry systems for coffee and management. cacao). Improve governance of natural resource management, with an initial focus on the Amazon (e.g., support silvopastoral systems, sustainable timber concessions, plantation for restoration). Reduce informality and improve access to extension services, with a focus on small producers (agriculture, forestry, fisheries). 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