On February 23rd Peru’s Minister of the Economy boldly proclaimed that last year poverty rates had dropped by 2.5 percentage points, going from 44.5% of the total population in 2006 to 42.0 in 2007. This implies that 600,000 people have escaped from poverty (1). This is an achievement that merits warm congratulations, though perhaps not for the minister in question who seems to be self-attributing this feat.
What first comes to mind is that, as local newspaper La Republica points out, the minister said that “these figures are an approximation of the official results that the Peruvian National Statistics Office (INEI) will present in mid-2008, after completing the revision of the National Homes Survey.” (translated). In this way, he seems to be warning the head of the INEI, “Don’t go straying too far for the adjusted figures published by the ministry!” In the opinion of most, the economy ministry should not have made such declarations (having so many other important things to do!) until the definitive figures were published, something that, quite frankly, give one pause about how much one should take these people seriously.
Aside from the political debate arising from this, the policies and processes of how these people escaped from poverty and if this means they will never return to poverty (2), we will limit ourselves today to some simple numbers and elementary projections, as if this was a paper aimed at primary schoolchildren rather than at revealing the truths of economy.
This is because a simple approach is enough to debunk the claim that the number of Peruvians living in poverty has dropped by 600,000 and not only that, it will show that it is practically impossible to reduce Peruvian poverty levels to a modest and almost shameful 30% by 2011, something we have been repeatedly promised by the government. We can take as our starting point for this the speculations of the minister of the economy when, in full rhetorical flow and referring to 2007, stated that, “At this rhythm…the goal of the government to reduce poverty levels to 30% in the country by 2011 will be achieved” (trans).
But what does ‘at this rhythm’ mean? We believe it could refer to at least four different variables that could define the ‘rhythm’ specified and referring to 2007
a) Every year poverty rates are decreased by 2.5 percentage points
b) Every year poverty levels are decreased by 600,000 people
c) Every year, absolute poverty levels are decreased by 4.3%
d) Based on the economic growth of the next few years, and referring to the poverty/productivity elasticity in 2007, the goal will be reached
We will do a little calculation for each one of these possibilities, but first let us examine the “600,000 figure quoted by the minister; some exercises that your schoolchildren could perhaps try out in their spare time.
Exercise 1: The impossible 600,000
To determine the reduction in poverty 2006 to 2007, all we need to do is to take the total population number, and as we know the percentages of poverty in the two years we obtain the absolute number of people in poverty.
The results in Fig. 1 show that the number has dropped by around 528,000 people, 12% less than the 600,000 announced by the minister. He seems to have invented more than 72,000 people that are no longer poor, either by bad calculation or by sleight of hand.
However, seeing how Dr. Carranza is a willing enough student normally we will try to get him out of trouble. Let’s see if we can get the poverty decrease number to 600,000 for him. We can use one of two methods (but we will need the INEI’s complicity a little).
One possibility is to raise the population number from the 2005 census (a survey which has, in fact, been questioned from a multitude of perspectives already). But that doesn’t work because we would have to raise the 2005 census population by 4 million people. It would also mean that there were 14 million poor people in 2006 and 13.4m in 2007 (3), more than one million over official estimates. The other method would be to reduce the demographic growth rate to 0.75%. The problem here is that this growth rate would be almost exactly half the rate registered in every year during the period 1993 to 2005. Now although it’s true that many Peruvians have recently migrated, we would need to have seen over 700,000 leaving in 2007; the official figures are 342,000 migrants in 2007 and 414,700 in 2006.
We could, of course, try a mélange of the two methods, but that mélanges the brain of your author too much even to try. But there is a way that we can get to 600,000; all we need to do is adjust the poverty decrease percentage to 41.7% from 42.0% or increase the 2006 poverty figure from 44.5% to 45%. Maybe Carranza was just rounding off, as nobody seems to care about decimals and fractions these days anyway……
Now let’s move on, and try to get Peru’s poverty rate down to 30% by 2011. We should remember at this point that this is a math lesson, not an economics lesson.
Exercise 2: 2.5% less per year (lesson in subtraction)
This is the easiest case to study Minister Carranza’s prediction, as all we need to do is subtract 2.5% every year from the previous year’s percentage. The conclusion is that we do not get to reduce the poverty rate to 30% by 2011, but in March 2012.
This would still be an impressive achievement, and everybody would be happy. Everybody except President Garcia, perhaps, who would not be in office to fanfare it to the world. His clock is set on a countdown ending 28th July 2011.
Exercise 3: 600,000 less per year (extra lessons in subtraction)
In this case, the calculation is not that difficult either. While the first case could be tackled by a second year primary student, this would probably be left for the third year of classes.
In this case, we have to establish the population at the mid point of each year starting at 2005 (the INEI “official” census), and add a demographic growth of 1.4% per annum (5) as per the 2005 census (the two previous census showed rates of 1.5%). Then we establish the number of people under the poverty line for each year, assuming 2007 was 42% as proclaimed by our minister. Finally, we subtract 600,000 people year by year.
Although we reach the target with this method, we do it with just weeks to spare. And again, President Garcia misses the window. Bad luck, Alan.
Exercise 4: 4.3% less poor every year
In this exercise, all we need to do is to reduce the number of poor people by a determined percentage, i.e. 4.3% or maybe better said the ‘rhythm of the year’. As we see by the results in Fig. 4, the governmental goal is only reached in 2013, much longer than we are looking for.
Exercise 5: Growth and poverty
Our final possibility is rather more sophisticated and with more economics content, perhaps suitable for the first year of secondary education. It is the reduction of poverty via poverty/growth elasticity. In other words, estimating the percentage in which poverty decreases as a consequence of economic growth. For this we will use the 2006/2007 data.
From the previous table, we noted that poverty dropped by 4.3% in 2007, while economic growth was 9%. We shall therefore use an elasticity arc of -0.48 (4.3 divided by 9). This means that with each percentage point of GDP growth, poverty is reduced by nearly 0.5% (6). What we need to know now are the economic growth projections. We get these from our own government forecasts, according to which the economy will grow at the rates featured in a recent IMF publication and shown in Fig. 5. Finally, what we need to do is apply this relationship to the years following 2007, as shown in the table.
Judging by these projections, which are of course the most realist we have done, the goal of 30% will not be reached until at least 2015. It would seem that the euphoria radiated by the minister in his recent declarations comes only from the very successful economic growth registered last year, which in itself had more quantity than quality.
In conclusion the government better hurry up and work harder than in its first 20 months in office if it wants to reach the all-important 30% target (which is unlikely to transport us unto paradise either, but something is better than nothing, no?) in July 2011. But for that it will be necessary to follow some of the advise suggested by Francke and Iguiñiz in the abovementioned work, as well as other policies that are not under discussion here. And of course, it would not be a bad idea for high-ranking functionaries to start using a few basic mathematic operations with a little more dexterity. Once they have practiced a little, they will probably come to the conclusion that the poverty/growth elasticity should be at -1, the double of where it is right now. That is to say poverty is reduced at the same percentage rate as GDP growth projected. For that, well-focused social programs will be needed that prioritize development of small and medium sized businesses.
(3) In this case, poverty numbers would drop from 12.2m to 11.6m in 2007
(4) For those students who have not learned the difference between “percentages” and “percentage points”, we suggest the following article, which also includes other typical errors and would be useful for study by politicians and journalists (even some economists). www.lainsignia.org/2006/julio/econ_002.htm
(5) A 1.3% rate would also be possible, but as emigration seems to be slowing, apparently due to economic growth, we will assume 0.1% extra.
(6) This figure roughly coincides with the estimates of Pedro Francke and Javier Iguiñiz, “Crecimiento Pro-Pobre en el Perú”, Lima: CIES, febrero 2006. In particular, table 10 presented by the authors, in which they carefully estimate poverty/growth elasticity even in regions, by consumption and by economic strata. It is evident that these elasticities diverge, sometimes radically, according to each of these criteria and that they are relatively volatile with time.