Peru has been one of the most prominentperformers in Latin America in the last 25 years. Peru ischaracterized by a complex and diverse geography that holdswealth in natural resources and several spatial developmentchallenges.Peru has a remarkable cultural heritage and richethnic diversity. Peru’s geography, natural endowments, anddiverse population have shaped its unbalanced economicdevelopment.Geography and resource abundance have thus ledto a spatial concentration of economic activities andopportunities, creating large disparities in developmentacross the country’s territory and its population groups.Thevirtuous cycle of growth and shared prosperity can beexplained in large part by a combination of two main forces:favorable exogenous conditions and successful macrostructural reforms.The new headwinds indicate that the pastvirtuous cycle of growth and shared prosperity may havereached its limit.These new headwinds highlight twostructural challenges that have emerged from Peru’s specificendowments, and that constrain the opportunities for incomegrowth of the bottom 40 percent. First, the persistence oflarge spatial disparities in development consistentlyundermine the ability of certain population groups,particularly indigenous and Afro Peruvians, from overcomingpoverty. Moreover, the capital-centric development modelcontributes to imbalances within the urban sector.Peru’ssecond structural challenge relates to the largeproductivity gap of its private sector relative to itspeers, which is constraining the demand for better-payingjobs and income opportunities. Peru’s low aggregateproductivity stems in part from substantial misallocation ofcapital and labor as its more productive firms do notnecessarily hire more workers or invest more.The SystemicCountry Diagnostic (SCD) prioritizes policy constraints thathave the greatest impact on Peru’s structural challenges ofreducing the large spatial disparities and boosting privatesector productivity. The SCD uses the following selectioncriteria to identify the constraints with the largest impacton achieving shared prosperity going forward. First, itidentifies constraints that significantly affect one or bothof the two main structural challenges. Second, it identifiespolicy constraints that present synergies to overcome thesestructural challenges. Third, it identifies constraints thatsupport the sustainability of addressing Peru’s structuralchallenges. Applying the three criteria described above, theSCD identifies a set of constraints that are pivotal toaddress Peru’s two main structural challenges and shouldthus be the focus of policies in coming years.
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