Peru’s Mickey Mouse National Accounts?

This is brief comment on my review of Peru’s national accounts, which I found most
interesting and telling.

Peru’s economic growth surge and deceleration, with the various sectors’
contribution to GDP growth, resembles the shape of an American football (see
picture below). The surge in economic growth and its deceleration mirrors the surge and
deceleration of investment and total consumption, which coincided with similar trends in
imports of goods and services. Many consumer and capital goods are still imported, thus
the correlation between imports, investment (i.e., imports of machinery and equipment)
and other consumption goods.

Total consumption is now gradually converging to its long-term growth of 2 percent

(see chart below), which is probably the low-end for the growth of the economy in
2015. Assuming that investment also converges to its long-term growth rate of 1 percent,
the Peruvian economy may be growing by 2.5% to 3% in 2015. That may be a reasonable
assumption in the absence of any econometric analysis and deeper knowledge of the
economy.
A policy question (for further discussion and analysis) is why did the authorities did
not react (or have not reacted?) to these obvious trends on growth on a timely basis.
What could be done to “inflate” back the American football is the million dollars
question.

An even further issue is the underlying contribution to growth of the various

economic sectors, with the services sector being the main driver of growth during
the last decade. Growth in services, particularly trade, transportation and other services
has been the key engine of growth. The growth in trade and transport has paralleled the
growth in private consumption, which in turn has paralleled the growth in taxes. While
the growth in trade and transport can be explained by the growth in total consumption,
the growth of “other services” (explaining about 0.70 percentage points of economic
growth during the period) is rather challenging and needs to be backed by strong
evidence. In short, out of an average growth rate of 6.2% during the last 10 years, the
growth of “other services” contributed 0.66 percentage points. Indeed, without “other
services”, the Peruvian economy would have grown by 5.5%, on average. The
contribution of other “difficult to measure” sectors, such as the financial sector, for
example, has been also significant (0.3 percentage points), notwithstanding the low level
of nominal interest rates in the economy. That may also need to be checked by the
experts.

Most surprising is the reported limited contribution to growth by the primary

sector. On average, during the last decade, growth of the primary sector explains just
0.74 percentage points in the economy’s overall growth rate of 6.2 percent. In short, the
primary sector’s contribution to growth is almost the same as that of “other sectors”
(0.66). For an economy that is perceived by many as “resource based,” the information
from the national accounts suggests otherwise! This is food for thought.
The analysis of the sectorial contributions to growth is important as it highlights
caveats to the years required to double the income per-capita of an economy. The
rule of thumb is that it takes (72/average growth rate) years to double the economy’s
income. As such, it would take 10.3 years (72/7) to double China’s GDP, if its economy
continues to growth at 7 percent. In the case of Peru, excluding the reported growth
contribution to growth of “other services” and “financial services,” it would take 13.7
years (72/5.24) to double the economy’s income. If the growth rate succumbs to 3.5%, it
would take 21 years to reach the goal of doubling the economy’s income. Way too long,
for sure.

Gonzalo Pastor
May 19, 2015