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Cablegate: Gop Revision Shows Poverty Declines In

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RR RUEHWEB

DE RUEHPE #3477/01 2971517
ZNR UUUUU ZZH
R 241517Z OCT 07
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 7170
INFO RUEHBO/AMEMBASSY BOGOTA 5200
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RUEHLP/AMEMBASSY LA PAZ OCT QUITO 1531
RUEHSG/AMEMBASSY SANTIAGO 1556
RUEHBS/USEU BRUSSELS
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHDC

UNCLAS LIMA 003477

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USTR FOR BHARMAN AND MCARRILLO
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E.O. 12958: N/A
TAGS: ECON SOCI PGOV ETRD PE
SUBJECT: GOP REVISION SHOWS POVERTY DECLINES IN
2006 FASTER THAN ANTICIPATED


1. SUMMARY. A National Statistical Institute
(INEI) technical revision, supervised by the
World Bank, indicates that PeruQs poverty rate
declined more significantly than the government
had previously calculated - by 4.2 percentage
points, to 44.5 percent, from 2005 to 2006.
Extreme poverty decreased also, but by only 1.3
percentage points in 2006, to 16.1 percent. The
government welcomed the news. The new numbers,
reflecting more accurate 2004 data, showed that
the administration of former President Toledo was
even more successful than it had been given
credit for on this important front.

2. Overall, the new figures for poverty are
consistent with various indicators that show
strong domestic demand (septel), booming private
consumption and investment since 2006, like
manufactured food goods sales; beverage sales;
appliances imports; consumer loans; home
building, etc. While the global figures are
positive, some areas in the country such as
Huancavelica and Ayacucho - where support for the
government remains weak - showed little
improvement. END SUMMARY.

3. Peru's National Statistical Institute (INEI)
released July 19, 2007 new figures that revised
poverty levels significantly downwards. (The new
figures reflect data from 2004, 2005 and 2006.)
While the 2004 figures had previously pegged
poverty at 51.6, the revision now shows it at
48.6. On that basis, the 2006 figures drop to
44.5 percent. In its May 2007 medium-term
economic report (MMM 2008-2010), the GOP's
Ministry of Economy and Finance had set the
GOP's goal to reduce the poverty rate by ten
percentage points to a 40 percent rate by 2011.
President Garcia used that figure in his July
state of the union address.

4. The new poverty estimates have shaken the
prevailing contention that Peru's impressive
economic growth in the last five years has failed
to reduce poverty by any significant measure.
The new figures, which reflect progress made
during the Toledo Administration, show a decline
of almost ten percentage points. Ironically,
President Garcia has sought to differentiate
himself from his predecessor by promising in his
state of the union address to reduce poverty by
10 points. These new figures suggest that, while
some of the work suddenly appears to have been
done for the government, the political bar for
further progress on poverty reduction has been
significantly raised.

POVERTY SIGNIFICANTLY LOWER
---------------------------

5. The table below shows that poverty in 2006
went down by 4.2 percentage points, to 44.5
percent from the prior year. On the other hand,
extreme poverty decreased only 1.3 percentage
points in 2006, to 16.1 percent. The new figures
for poverty are consistent with various
indicators that show booming private consumption
and investment since 2006, like manufactured food
goods sales; beverages sales; appliances imports;
consumer loans; home building, etc., and recent
surveys by private polling companies, like one by
Ipsos Apoyo for nine cities.

Peru: Poverty and Extreme Poverty, 2001-2006
Percent of total population)
----------------------------
2001 2002 2003 2004 2005 2006

----------------------------------Poverty
54.3 53.8 52.2 48.6 48.7 44.5
Previous 2004 Poverty) (51.6) of which:
Urban Areas
50.0 46.4 44.1 37.1 36.8 31.2
Rural Areas
77.1 77.7 75.7 69.8 70.9 69.3
Extreme Poverty
24.1 24.2 21.9 17.1 17.4 16.1
Previous 2004 Extreme Poverty (19.2)
Of which:
Urban Areas
16.7 14.6 13.9 6.5 6.3 4.9
Rural Areas
49.8 51.7 45.9 36.8 37.9 37.1

Source: Based on INEI.

6. The newly released poverty indicators
surprised many local economists, who largely
agreed with the prevailing thinking that poverty
in 2005-2006 hovered around 50 percent, with
extreme poverty around 20 percent. As recently
as May 31, 2007, the Ministry of Economy and
Finance (MEF) stated that the Garcia
Administration aimed to reduce total poverty by
ten percentage points - to 40 percent - by 2011,
and to reduce rural poverty by twenty percentage
points - to around 50%. The new data indicate
that, with poverty down to 44.5%, much of this
work has already been done by the previous Toledo
administration.

WINNERS AND LOSERS
------------------

7. Progress in poverty reduction has been far
from evenly distributed in a geographic sense.
Generally, departments with natural resources
industries (mining, petroleum or lumber) or
export-oriented crops or apparel (mostly on the
coast) have fared much better than those without.
In Tumbes and Moquegua, poverty decreased by
about one third, while in Arequipa, Lima, Ancash,
Tacna and Madre de Dios, the reduction was about
one fifth. Conversely, poverty actually
increased in six departments. In four of these
cases - Ayacucho, Apurimac, Pasco and
Huancavelica - the reversal wiped out earlier
progress made in reducing poverty there. Not
coincidentally, those areas strongly supported
nationalist candidate Ollanta Humala in the 2006
elections and remain deeply skeptical of, and in
some cases hostile toward, the government today.

8. Extreme poverty rates follow a similar
pattern. Reductions have been significant in
departments in which extreme poverty levels were
already low. For example, extreme poverty fell
by one half or more in Tumbes, Moquegua, Arequipa
and Lima, but increased in Ayacucho, Apurimac,
Huancavelica and Pasco, as shown in the table
below.

URBAN IMPROVEMENTS, RURAL STAGNATION
------------------------------------

9. Poverty decreased sharply in urban and
coastal areas, to 31.2 percent and 28.7 percent
respectively in 2006, while it remained steady in
rural and highland areas, at 69.3 percent and
63.4 percent respectively in 2006. A similar
situation took place in the case of extreme
poverty.

- Peru: Changes in Poverty and Extreme Poverty,
-2004-2006

--------------------------------------------- --
Selected Poverty Rate (Pct) Percent Change
- Departments/Areas
2004 2005 2006 2006/2004 (*)
---------------------------------------
- Poverty
Tumbes
24.2 16.2 15.8 -34.7
Moquegua
38.7 30.3 27.3 -29.5
Arequipa
34.2 24.9 26.2 -23.4
Lima (**)
32.2 32.9 25.1 -22.0
Ancash
53.3 48.4 42.0 -21.2
Tacna
24.7 30.3 19.8 -19.8
Madre de Dios
27.1 30.8 21.8 -19.6
Pasco
65.7 72.9 71.2 8.4
Apurimac
65.2 73.5 74.8 14.7
Ayacucho
65.9 77.3 78.4 19.0

Urban Areas
37.1 36.8 31.2 -15.9
Rural Areas
69.8 70.9 36.9 -0.7

Extreme Poverty
Tumbes
1.3 1.3 0.4 -69.2
Moquegua
10.9 5.4 3.9 -64.2
Arequipa
6.5 3.8 3.4 -47.7
Lima (**)
2.5 2.5 1.4 -44.0
Madre de Dios
6.3 9.4 4.3 -31.7
Huancavelica
64.6 76.2 72.3 11.9
Apurmac
28.0 34.7 39.7 41.8
Ayacucho
27.8 38.6 41.3 48.6

Urban Areas
6.5 6.3 4.9 -24.6
Rural Areas
36.8 37.9 37.1 0.8

Source: Based on INEI's "Technical Report -
Poverty Measurement 2004, 2005 and 2006" (in
Spanish).
(*) A negative sign is a reduction in the poverty
rate; a positive sign is an increase.
(**) Includes the Province of Callao

SURVEYING PROBLEMS, DATA REVIEW
-------------------------------
10. The last official poverty data survey was
that of 2004, as INEI withheld publication of the
one for 2005. John Newman, local representative
of the World Bank, told us that there was a
significant error in INEI's 2005 household
survey, with a high nation-wide 12.3 percent rate
of non-reply to key questions. The problem was
even more serious in Lima, with a partial non-
response rate of about 30 percent. (Note: This
error tends to over-estimate poverty.)

11. To address the situation, INEI called on the
World Bank, Inter-American Bank, the French

agency IRD, U.N.'s ECLAC, as well as a number of
several local GOP agencies, universities and
think tanks to assist it in the review process.
Newman said an ad-hoc commission was set up with
experts from those organizations, which worked
five months on number-crunching and survey data
review. Once a figure for 2005 was obtained, the
commission needed to review the 2004 survey, and
finalized with the processing of the 2006 survey.

WHO GETS CREDIT?
----------------
12. INEI's poverty figures reported during the
Toledo Administration were harshly rebuked in
mid-2006 by several top APRA leaders just before
APRA took office at the end of July 2006.
Current Interior Minister (and former Garcia
Economy Minister during his first term) Luis ALVA
Castro, then an APRA Congressman, accused INEI of
"grossly" manipulating poverty statistics
downwards, which showed that poverty was below 50
percent in 2005.

COMMENT
-------

13. In various speeches at the beginning of his
term, President Garcia promised to reduce the
poverty rate significantly by the end of his term
in 2011. Obviously, with the revised figures
from the Toledo years showing marked progress,
his job has just become harder politically. But
economists say the goals seem achievable as the
economy is forecast to continue to grow strongly.
However, these goals do require maintaining a
favorable investment climate and demand more
efficient government poverty-reduction policies.
Continued forays of the government (APRA) partyQs
ministers and politicians into populist policies
in key areas like labor, mining, energy prices
and the like, might impact negatively on the
investment climate and on the governmentQs
progress.

McKinley

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