# #DevTalks: Economic Policy During COVID-19 in Peru - Addressing Old and New Challenges

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The Growth Lab's "Development Talks" is a series of conversations with policymakers and academics working in international development. The seminar provides a platform for practitioners and researchers to discuss both the practice of development and analytical work centered on policy. In this seminar, María Antonieta Alva, Former Minister of Economy and Finance in Peru, will discuss the challenges of implementing economic policy in Peru during the COVID-19 pandemic.

### Transcript

Patricio Goldstein: [00:01:37] Now, without further ado, I would like to introduce today's speaker. Maria Antonieta Alva served as Minister of Economy and Finance of Peru from 2019-2020. Before Maria Antonieta served as minister she had worked in public administration for more than 10 years. She was Director General of Public Budget at the Ministry. And before that she worked in various positions not only in the Ministry of Economy and Finance, but also in the Ministry of Education and the Ministry of Development and Social Inclusion. Also worth noting for our Kennedy School audience, Maria Antonieta has not only BA in Economics from Universidad Pacifico, but is also a graduate from the Master of Public Administration and International Development at the Harvard Kennedy School. We are honored to have her today. [00:02:21][43.8]

Patricio Goldstein: [00:02:22] The format for today will be the following: I have a couple of questions here to kickstart the conversation and then we will take some questions from the Growth Lab team. And finally, if we have some time, we will open up for questions from the broader audience. If you have questions you would like to ask Maria Antonieta and I will ask you to please sign them in this Q&A button that appears right below in the Zoom window as well as your name, affiliation, and country so we read it out loud and we'll keep some of these and ask Maria Antonieta. [00:02:50][27.7]

Patricio Goldstein: [00:02:51] So now that we have a full house, let me just start. So Maria Antonieta, Peru has shown an exceptional economic performance over the last two decades, resilient to global headwinds such as the global financial crisis and the end of the commodity supercycle. Nevertheless, as the COVID-19 crisis hit Peru, the country has suffered major economic losses amongst the highest in the Latin America region and has particularly struggled containing the spread of the virus. More recently, the recent polarized election after four presidents in the last five years has shown significant democratic malaise. I want to take this opportunity to ask in this context my first question. Do you think the Peruvian economic model has been a success so far? [00:03:38][47.4]

Maria Antonieta Alva: [00:03:41] Hi, I'm very glad to be here, so first I want to... because what we have here, people from different countries, when we talk about the Peruvian economic model, maybe I am oversimplifying but I think that we need to consider that this model has three major components. First is the macroeconomic stability management, a huge compromise with discipline in the public finance management. The second is an open economy to trade, and the third is a proactive promotion to private activity. So I think that to be fair, I think that the model has concrete results, but the results of the last elections show that the model has its limits. If we just think about economic growth, I think that it's a model very dependent on commodity price and we have not fostered sectors with high value added. So, for instance, in Peru, the agro-experts boom this miracle that they call about the export sector is more an exception than a rule. To the model, I think that there are three major limitations. First is that notion and this really probably is not specific to the model but I think to the common understanding that we have to advance I think that's the first a limitation is that there is an idea that economic growth was sufficient. What we goal in Spanish 'el chorreo economico'. Definitely the economic growth of the country in the last years has not been inclusive and there was a huge incapacity of the state to distribute wealth. We always see that we have this circle where you have economic growth that brings high tax revenue and this should be translated into better public services for citizens. But that is not the reality in Peru because the state has a huge incapacity to deliver concrete results to the citizens and think that's what we have seen in the last COVID crisis. How can this economic star of Latin America have less than 100 intensive care beds for 3,000,000 Peruvians when the COVID started? So this is just is an example that basic services has been neglected for the majority of Peruvians. This is the first limitation I see. The second is, I think that there is a lack of a real commitment with regulating markets. So sometimes when we say that we embrace the free market, but we haven't built the institutions and the tools for ensuring competitiveness in the market and for sanctioning the cases that we have power abuse of this dominant position in the market. And also during the COVID crisis, we saw how concentrated markets such as the Oxygen market or the pharmaceutical market generated a lot of frustrations in citizens so, in fact, I think that in last Christmas we had collusion in the price for turkey in the supermarkets where you have a lot of these abuses of dominant positions in the market. We say we love the market, but in practice, there is no free markets in many markets that are relevant for the citizens. And the third one, I think that there is an absence of institutions that represent the vast majority of Peruvians, that represent their concerns, that put their concerns in the agenda, but also that intermediate every time that we have social conflicts. I don't know if this happens in other countries, but the office of the Prime Minister in Peru has a big social conflict office. Most of the most troubling times the Prime Minister has is because of the social conflicts. And here I am not just talking about political parties. These political parties is just a feature. We have lots, for instance, of informal workers than in other countries. And Argentina, they have like a body that represents them. So, I think that this is also a major problem - not being able to represent the majority of Peruvians in the agenda. So I think that's... the results of these elections, as you already mentioned, has shown these problems and the limits of the model. [00:08:00][259.2]

Patricio Goldstein: [00:08:01] I think that's extremely interesting. And I think the three points that you bring up: both in capacity for the state to manage wealth and provide public services, for the lack of commitment to regulate the markets, and the absence of institutions to represent the mass majority. We can only link them to the provision of quality public services such as health and education vis a vis in this tool. So on a prospective basis, what do you think could be done differently to improve the quality of health, education, public or private? [00:08:32][30.6]

Maria Antonieta Alva: [00:08:35] I have thought a lot about this in the last year, I think that if we review what has happened in the last decades in Peru within public sector institutions, let's think, for instance, about macroeconomic stability and fiscal management, we decided after this huge crisis by the end of the 80s that we wanted stability and we build those institutions that bring us stability. We have a central bank. And in fact, Julio Velarde has for many years been considered the best central banker of the world. We put some rules and laws for compliance with fiscal rules within the Ministry of Finance. We also built Superintendencia de Bancos y Seguros, is the agency that oversees the financial services. I have been thinking a lot about this, we build these institutions, these strong institutions because I think that the establishment needed those institutions. So they generated a lot of pressure to have these and create these institutions because there is a simple notion that you cannot privatize those services. You cannot ask the private sector to give you policy or monetary policy, or you can't ask the private sector to bring you fiscal policy. So there is no coincidence that we have these institutions that provide services that cannot be provided by the private sector. We generated really, really good institutions. We generated all the conditions to have the best civil service. So the central bank and the SBS have special regimens that are there are OK, there are meritocratic, they have better salaries. They are some stability. So this is not bad. This is just understanding that in order to provide good public services, you need the best people there. But what happens with other services? I will say that in comparison to these ones that bring you macroeconomic stability. What happens to those services that bring you like, social stability or social development? What happened with education, what happened with health, even security? I think that the establishment realized that they can consume those services in the private sector. So we have no pressure in the public sector to deliver good public education, good private education. But we went to the private sector and now you have a huge segmentation when you have families that can really buy very good education, but very expensive and you have families that do huge efforts to pay $20 or$30 each month for a school fee. And they have really, really bad education because these are schools that work really good for the elite they decided, "OK, we are fine like that. We don't want you state." And every time the state wants to improve the agenda of regulating the private services, the private provision of schools, we have huge problems there because the elite doesn't want them to be regulated. So I think that we are in a very, very terrible equilibrium where we have normalized privilege. We have normalized the fact that if you want to have really good education and you want to have really good health, you need to have money and consume that in the private sector. So I think that the government in some point or the public sector has resigned to provide good public services, but it has also resigned to supervise the quality of the private sector. So I think that we are stagnating in this equilibrium and we need to get out of there. [00:12:25][229.4]

Patricio Goldstein: [00:12:27] And do you think we're heading to a political moment where change can happen better? [00:12:30][3.2]

Maria Antonieta Alva: [00:12:34] To be honest, I think that my huge concern is that improving living conditions for Peruvians is never in the agenda, never. I don't know, like we are stuck in the last, I think, month about elections and a lot of fragmentation. But nobody is very conscious about what is happening with the anemia, what is happening with learning outcomes. So I think that the population is very frustrated with the outcomes, but I don't see really a commitment to improve significantly the delivery of public services. [00:13:21][46.5]

Patricio Goldstein: [00:13:23] Definitely. I want to change the topic to COVID-19 since its the title of the conversation, and you took over office in the Ministry of Economics and Finance in October 2019 and five months later, we have the first confirmed COVID-19 case in Peru. And then suddenly the entire policy world and our teams at the Growth Lab really know this. And it's not just health ministers, the finance ministers, pretty much everybody. We're all forced to learn an entire new vocabulary. We learned what a lockdown was, what a non pharmaceutical intervention was, what flattening the curve, and testing and tracing. And I wonder, as a Finance Minister, you also have to adapt to this new reality. So I wonder, what was the hardest thing about it? How did you go through it? [00:14:10][47.2]

Patricio Goldstein: [00:17:23] That's very interesting, and we heard from our work at the Growth Lab with all our counterparts, a lot of countries have very similar conditions in the developing world. I was wondering, particularly regarding lockdown's and I know that lockdown's and non pharmaceutical interventions such as closure of borders and schools have been a big part of Peru's mitigation strategy, as you say, in order to avoid a collapse in health system. And given low numbers of beds and doctors to begin with. Peru was effectively the first country in Latin America to implement a lockdown that was followed by others, Argentina, Chile, etc. And I wonder, what do you think, one year later, about how lockdowns have worked? Do you think they worked in practice? Do you think something could have been done differently? [00:18:11][48.1]

Patricio Goldstein: [00:21:26] If I could just follow up, like I think it's interesting that it happens in a lot of countries where we work where there's high degrees of informality, so like curfews generally are not as effective in preventing people who need to make a day to day living particularly high levels of self employment, or people need to go to something everyday. I think I saw a question in the Q&A about that. How do you think this interacted in Peru's case, with Peru's high levels of informality? [00:21:49][22.6]

Maria Antonieta Alva: [00:21:55] I think that the most important tools that the government designed for reacting to the crisis. Were not like that. In respect of 100 percent of effectiveness, we didn't get that because of informality. As an example, for instance, because of this informality, we decided to implement a massive program of cash transfers to households. And when we approved very quickly all the laws that were required for that. When you start with the implementation, you face these structural barriers, such as like in Peru, only four of ten adults have a bank account. The infrastructure of the National Bank had less than 1,000 ATMs at that moment for all the country. So even though we had this idea of giving liquidity to the households, it was very slow because of these structural problems, informality here, we didn't have even the data sets, we don't have any information of the citizens. We have to build a data set on that. So I think that yes, informality was a huge barrier for implementing all our tools and all our response to the crisis. [00:23:18][83.3]

Patricio Goldstein: [00:23:21] You mentioned that the transfer to households, I think for some of our non-Peruvian audience might not know this, but Peru has one of the largest fiscal packages in the region. And I understand there's long discussions about the implementations of some of these programs within the public sector, within the private sector, particularly regarding the loan guarantee. But even with all these as we are going through these discussions, I wonder if you could tell us a little bit for the audience, what measures did the government when you were Finance Minister took in response to a pandemic, economic or social? And I even have like a question here that ask about what did Peru do to improve public services during the pandemic? And is there anything that you think that could have been done differently as well to minimize the effects of the crisis? So two parts first informative just to get us all up to speed and second what do you think about that? [00:24:13][51.8]

Patricio Goldstein: [00:34:42] I think we can take up that point because I have two questions in the Q&A exactly about small and medium enterprises. So maybe I'll just read I have one from Andrea R. who asks us, "The Reactiva program... some people criticize the program because it mainly benefitted big business and there was little to no support of small or medium enterprise, what do you do to support businesses who are not benefiting from Reactiva?" And I have another anonymous question that talks about the high tax burden for small businesses and also what has been done for small businesses? So perhaps just spend a minute or two talking about what was done for small business. [00:35:16][34.1]

Patricio Goldstein: [00:37:40] Thank you. And so eventually vaccination will advance and Peru and the rest of the world will all reach herd immunity and the COVID-19 crisis will be left behind, hopefully for everybody. Nevertheless, there are enormous challenges ahead for the rest of the world, for pretty much everybody. In the case of Peru, we know at least from private and multinational projections, that Peru is not expected to recover its 2019 income per capita until 2023. And of course, the current election leaves a lot of uncertainty about the country's political future. So I was wondering in this context, what do you think will be the most important political and/or economic challenges in the year ahead? [00:38:24][44.4]

Maria Antonieta Alva: [00:38:27] Yes, I see like when we see the results of this election and when you see social media, when you see what is happening in the country, I see that we have two extremes. The first extreme is defense of the status quo, that for me, it doesn't make sense. The actual system is functional for only a minority of Peruvians. So defending the status quo is not a possibility. But you have some one extreme that wants that and then you have the other extreme radical change that they don't even want to maintain what already works like the country has demonstrated that we know how to be disciplinary in our public finances. Of course, that has enormous good results every time we want to issue bonds in international markets. So there are things that we have done right that we have learned how to do. So you cannot just destroy that so my real concern is that the country, politically and economically, I think that is part of the discussion. I always remember Andres Velasco saying that economy and policy go down the same road. I think that the huge challenge for Peru now is to reach growth and development that includes the population and not only work in that line, but I also think that we need to build a political party that represents responsible change, that represents the middle, like you have extremes. But I think that we don't have institutions or spaces that represent what most of us think, because if you see like numbers, I think that less than four million Peruvians voted for one option or the other. So I think that's the challenge for next year is to build on this story about responsible change, about development that really includes much more people and also to build a political force that represents that. And the political force that values pluralism, and I think that this is very relevant in Latin America because we are seeing lots and lots of populism, and I think that populism sometimes wants to sell themselves as they are pursuing the public interest, but they are not. So I think that and to be honest, it's very difficult. And it was a position I had sometimes, like there are these popular laws, for instance, getting money from your pension fund. That sounds amazing. That sounds very popular. And you have to be the one that stands there and says, "No, this is not good. I am not going to support this initiative." So I think that it also takes having a political representation that really thinks about the center and really things about, "OK, let's do a responsible change." [00:41:35][187.5]

Patricio Goldstein: [00:41:37] Thank you, Maria Antonieta. I would change a bit the topic and ask you one question and then I'll open up for Q&A. If anybody wants to start writing down questions, we will get to them in just a few minutes. So you became Minister of Economy and Finance with more than 10 years of experience in the public sector. But you are still the youngest person to be in this position. You are also the third woman in the Finance Ministry in a country that had 270 Finance Ministers (I had to check that out). I wanted to ask did ageism or sexism ever come into play during your time as Minister? [00:42:14][36.8]

Patricio Goldstein: [00:45:08] And I guess given all that we talked about like the experience through COVID-19 it must have been incredible work hours and presented challenges. So I have to ask this: would you go back to public office in Peru? [00:45:19][11.5]

Maria Antonieta Alva: [00:45:23] Yes, yes, I think that's my vocation was to be a public servant, I am trained for that. And in fact, since I started my professional career, the only two opportunities I have not been serving in the public sector was my two years at the Kennedy School. And now that I as you know, I had to leave office because the president was impeached. I really and I have two reflections here. The first is that I really think that more ministers in the country have to have to come from the public sector. In the public sector, you are trained to stand after the country's interest and you are trained to look for the common interests. And if you compare this to experience in the private sector, imagine like the most important bank of the country in order to select their CFO, they will never think about someone that has never work in the financial system. So I really don't understand why when we sometimes appoint ministers, we think, like in the private sector, will never put someone that doesn't have experience there. Why when you have to appoint a minister, you need to put someone from there? And I have a lot of critics. In Spanish we say like revolving doors. I am very critical about those people that is minister then goes to the private sector, to the bank and then come back. I really think that the government needs ministers that are trained in the public sector. And the other important thing that I have to tell also is that it's very difficult nowadays to be a public servant in Peru. I think that there is a huge disincentive because sometimes you are dealing with a judicial system that is not necessarily operational. You don't know how they're going to react so you have lots of preventive operations to former presidents, not necessarily with all the reasons. And I think that we are also in a very perverse equilibrium where you have media that reproduces fake news and sometimes disinformation is used by the prosecutor of the government. So you have there a lot of things that you can be acting right. But you don't know at the end of the day what the judiciary system, how they will react. And I think that is really relevant. I was thinking the other day that, of course, in doing the crisis, public servant had to take risks. For instance, in Chile, they bought cineback that I am sure that when they bought it, they really wanted to ensure that the country had the most amount of vaccines. And then you have that is not as effective... If you do that in Peru, I am sure that the Minister that was part of that decision will have the prosecutor attorney of the government. So I think that it's very risky now for a public servant to take decisions because you have this perverse incentive. [00:48:46][203.6]

Patricio Goldstein: [00:48:48] I think both comments are extremely accurate for many of the countries we work with. I have a last question and then I'll give Ricardo the microphone but I have to ask this because we are at the Harvard Kennedy School, at least virtually right now. And you were a graduate of the MPA/ID, the International Development Program at the Harvard Kennedy School in 2014. And I wanted to ask, how did your experience in this program prepare you for the challenge of public office? [00:49:14][26.2]