1. Fiscal Crisis and
State Reform
Peru
(1987 - 2008)
Abel Canchari
Session 6 Governance for Development Class Exercise
12 November 2008

2. How important is the fiscal deficit in explaining
the pressure for reform?
 Fiscal deficit (11 % of the GDP in 1987). The
government's total expenditures exceeded the
revenue that it generated.
 1989-1990:The fiscal deficit plus hyperinflation
have been seen as a collapse of the state. So the
reform was a response to the problem.
 During 90’s: The premise was... If the
Government sells assets, downsizes the public
sector (and neglects the welfare system) it is
likely to reduce the fiscal deficit.
 (Good –clear link shown with fiscal deficit)

3. What are the main domestic forces promoting state
reform and how strong are they?
 Economic forces:
– Fiscal deficit
– Hyperinflation (3,399 % for 1989)
– The GDP fell 11% in 1989.
 Political forces:
– Fujimori’s regime (with majority in the Congress
and support from multilateral agencies)
– The presence of think-thanks and the private
sector with strong influence on public policies
(and right wing parties)
 Institutional reasons:State weakness: Inefficiency,
ineffectiveness.
 (Good – emphasises role of private sector. Media?)

4. Is the main reform thrust towards horizontal or
vertical transfer of service delivery responsibilities?
Both:Horizontal transfer (during 90’s) Market-oriented
structural reforms:
– 1992: Creation of COPRI (Commission for Privatisation)
– Privatization of public companies: telecommunications,
electricity, mines, airlines, etc. (75 companies for nearly $4
billion)
– Creation of “AFP’s”
– Partially privatised: education & health.
 Vertical transfer (mostly after 2001)
– 90’s creation of FONCODES (and other anti-poverty
programmes)
– After 2001, enhancement of sub-national governments
(Good – but did vertical transfer involve greeater fiscal
responsibility for local government?)

5. How effective has the state reform process been so far?
 Macroeconomic stabilization
– Fiscal deficit: 1% (2006), Inflation 2.4% (2004)
– GDP expanding at 8.9% (2007) & 10% (2008)
 Privatization: good service delivery but not enough regulation
(high prices)
 There are modern public institutions like the SUNAT (Tax Agency)
and others with highly skilled bureaucrats, but the state
ineffectiveness remains (overstaffing with unqualified civil
servants in some traditional institutions)
 However: Not a greater impact on poverty reduction.
- Small part of the population has been able to enjoy the benefits of
economic stability and growth (not enough trickle-down)
- There is a need of second-generation reforms (Human
development)
- (effective in solving fiscal deficit, right? SUNAT reform has not
spread to rest of public admin. Note that major public admin
reform was in FISCAL COLLECTION (i.e. SUNAT)!