in the Social Sectors
José R. López-Cálix
When public services fail poor people, a good place to start looking for the underlying problem
is almost always how the government spends money. If politicians and policymakers spend
more than they can sustain, services deteriorate. If budgets are misallocated, basic services
remain underfunded and frontline providers are handicapped. And if funds are misappropri-
ated, service quality, quantity and access suffer. The budget is the critical link on the long route
of accountability connecting citizens to providers through politicians and policymakers.
—World Development Report 2004
During the Toledo administration, Peru’s poverty reduction strategy has essentially relied on the trickle-down effects from economic growth. Successful efforts to restore fiscal discipline have been critical to promoting economic recovery. Fiscal discipline—reflected by lower fiscal deficits—has been obtained through a combination of dramatically reduced capital spending, modest increases in taxation, and some debt service savings from an active public debt management. Growth has averaged around 4.5 percent per year, but its impact on poverty reduction has been mitigated, at best. The question is, Why?
First, social spending remains low, at around 5.6 percent of gross domestic product (GDP), only modestly increasing by end-period. Economic growth by itself is a major determinant of poverty outcomes, but, according to international experience, it is public spending that makes most dramatic improvements possible. Thus, fiscal discipline has not translated into additional social outlays, and budget rigidities need to be explored.
Second, the particular mix of measures implemented for restoring fiscal discipline has resulted in a double-edged outcome for poverty. On one hand, lower deficits have led to low inflation, higher growth, and a strong external position, all of which have contributed to improving living standards—measured by income per capita levels—and by some social