Rural structural change, poverty and income distribution: evidence from Peru

Abstract

Some rural regions of Peru showed remarkable rates of poverty reduction and inequality reduction between 2004 and 2012, while others lagged behind. Using microsimulation-based decompositions, we analyse the driving forces behind these trends, finding that rural poverty and inequality reductions are mainly attributable to increasing labour incomes in Peru’s agricultural sector and, to a smaller extent, increasing public transfers. In earlier years, higher returns to experience drive these results, while in later years, increasing staple-crop yields and prices are of key importance. Further, remuneration of working hours increases in reaction to labour-supply shortages in rural areas. The accompanying rising incomes and non-agricultural job creation is less pro-poor than would be ideal, as they benefit more highly skilled workers. Further, shrinking farm sizes hampers poverty reduction and income-inequality reduction. Policies should target the participation of the poor in high-value (non-)agricultural activities, especially if positive trends in commodity prices are only transitory.