Peru’s Recovery From El Niño

A look at how a natural disaster affected Peru’s economy

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When El Niño struck Peru earlier this year, it left a line of destruction that must be revived for the country to continue to prosper.  To be able to reconstruct, the Ministry of Economy and Finance (MEF) must dig into public sector budget. This will cause the fiscal deficit to increase with the higher amount of public spending that is being used to fix the city.

Since the government’s previously set deficit goal of 2.5% of GDP had been exceeded by February, a necessary change is needed to prevent the loss of regular expenditures to reconstruction costs. Although the government is hesitant to extend this deficit budget, an economist argues that it is necessary and won’t reflect poorly on the MEF because caring for a natural disaster can be clearly justifiable.

Comparing this natural disaster to an earthquake the country endured previously, there is reason for caution in efficient spending by the government for reconstruction. When the earthquake hit, the country worked to rehabilitate over the course of multiple years. The difference that can be made to make this situation better is to react as soon as possible. An economist, Flavio Ausejo, comments that the state should work on creating a disaster management plan and work on creating preventative measures.

The MEF is already working to accommodate those affected by El Niño. Local governments that have already spent at least 75% of the 100k Sol that had been given before the disaster were transferred an additional 100k Sol. They also gave 1000 Sol bonds per hectare to farmers who were affected. As pointed out by the president of Conveagro, a group of Peruvian agrarian producers, these payments are not completely satisfactory because each hectare planted comes with a generous amount of investment. The type of crop produced by the individual farmer should be taken into account.

Although those efforts have been criticized, the MEF has positively made use of other resources that directly affect the damaged areas. They have created a disaster care budget program that amounts to about 1,088.1 million Sol; they have an intervention fund equaling about 321 million Sol as well as a line of credit worth about $3.7 billion US dollars. There is a Fiscal Stabilization Fund worth around $9 billion US dollars that can be used to rebuild their cities after natural disasters. It is managed by the MEF, Central Reserve Bank, and the Presidency of the Council of Ministers.

How the MEF’s Allocation of Funds Can Affect Farmers

As stated above, the farmers who were affected by this natural disaster were all given a standard consolation of 1000 Sol bonds per hectare, no matter what each individual farm produces. It’s likely that multiple farmers are given too much, while others are given too little and this uncertainty could play a role in an investor’s willingness to support the farmers.

If an unlucky farmer produces a good that needs more than the allocated 1000 Sol bond, only risk-loving investors will want to stay and people have shown to be more risk averse after a natural disaster (Cassar et al. 2017). This would decrease the amount of produce that can be bought and traded, eventually removing the contribution that farmers can make to the GDP.

Given that a natural disaster such as this one will affect everyone, not just the farmers, there could be benefit from using some kind of informal insurance institution, as described by Schaffner (2014). If everyone in the community would assist those farmers who did not receive enough to revitalize the entirety of their farms, there would be benefits for all. The farmer would benefit by not losing his farm and source of income, and the community would benefit by not losing that specific product.

Luckily, there are localized groups who value the social and necessary need for these farmers and their crops. Conveagro, a group who shares goals of educating about agriculture. On their website, their listed “Declaration of Principles” shows support to not only make the earth more sustainable, but also decentralization of the economy and a support for social justice.

Disaster Relief and Beyond

The beginnings of a disaster care budget program and an intervention fund will be valuable to stabilizing the economy of a country that is prone to be affected by the natural elements. If the funds are not needed a particular year, then there is an increase in the wealth of the country. If the funds are needed, then there shouldn’t be an increase in the budget deficit goal because those funds have already been accounted for and, if properly funded, shouldn’t exceed the amount needed to rebuild. Additionally, the funds will already be there, so the amount of time it will take to reconstruct will decrease.

As described in the article, the Fiscal Stabilization Fund wasn’t created to assist economy during a natural disaster, but the additional funds would make the increased deficit less hurtful to the population, specifically the farmers and the funds they receive.

Works Cited

“About Us.” Conveagro.org. Accessed May 7, 2017. http://www.conveagro.org.pe/quienes-somos.

Cassar, Alessandra, Andrew Healy, and Carl Von Kessler. “Trust, Risk, and Time Preferences After a Natural Disaster: Experimental Evidence from Thailand.” World Development 94 (June 2017): 90-105. Accessed May 7, 2017. doi:https://doi.org/10.1016/j.worlddev.2016.12.042.

“El impacto de los desastres naturales en las cuentas públicas.” El Comercio, March 17, 2017. Accessed May 7, 2017. http://elcomercio.pe/economia/peru/impacto-desastres-naturales-cuentas-publicas-noticia-1976722?ref=flujo_tags_17964&ft=nota_39&e=titulo.

Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis. Wiley, 2014.

Translation:

“The impact of coastal El Niño on the economy is not yet known . Analysts are still measuring the effect. However, the potential magnitude of this phenomenon is already being compared with that of the 1998 El Niño phenomenon that swept the country.

The Ministry of Economy and Finance (MEF) has announced that it has the necessary resources to handle the emergency and reconstruction, but it is anticipated that these will exceed what is projected in the public sector budget for this year.

Increasing public spending would inevitably increase the fiscal deficit. “But in this context, you have to do it,” says Carlos Casas, a professor at the University of the Pacific.

The target for the fiscal deficit for this year was set at 2.5% of GDP and in February the annualized figure closed at 2.7%. If the goal remained unchanged, extraordinary expenses for emergency care and reconstruction would force the execution of ordinary expenditures to be sacrificed, warns economist Luis Alberto Arias.

“These [extraordinary] expenses should not be accounted for for the purpose of meeting the fiscal target,” says Arias, who believes that emergency care justifies the state’s level of indebtedness. Thus, it recommends extending the deficit fence by 2017 in an exceptional way so that it can be “spent quietly”. For this, Congress is required to approve the change in the fiscal trajectory.

REBUILDING AND REACTIVATING

This week, Central Reserve Bank President Julio Velarde said that public spending that will be made to recover the country from the damages suffered will be a driver of the economy.

However, the recent recent reconstruction experience of Peru after the Pisco earthquake revealed a great inefficiency in spending and severe problems in its execution. For example, it was expected that the rehabilitation of the city would take three years, but almost a decade later the process does not end. For this, Arias recommends that this phase be planned and executed as soon as the disaster ends.

“These things can not happen again [as in Pisco]. They have to establish expeditious procedures to be able to spend the money in a timely manner, not two or three years later, “Arias concludes.

“This phenomenon tests the state’s ability to react to natural disasters, but it also highlights the tremendous institutional shortcomings we have,” said Pacific University economist Flavio Ausejo. He adds that the next item on the agenda is to work on disaster management and prevention mechanisms to make the country more resilient to these phenomena.

In this way the El Niño phenomenon would affect our economy. In January the GDP growth rate was 4.8%, but for February it is estimated to be half of that. (Video: El Comercio)

RESOURCE MANAGEMENT

The MEF announced this week the immediate measures that are being implemented to mitigate the effects of disasters. These include the transfer of an additional S / 100 thousand to local governments that have executed 75% or more of the S / 100 thousand already delivered to them in February.

It was also decided to deliver S / 1,000 bonds to farmers for each affected hectare. However, guilds of the sector have considered it insufficient. “It is still much lower, because on the coast when one hectare is planted there is a strong investment. The average amount should be evaluated according to the crops of each farmer, “said Héctor Carrasco, president of Conveagro, to the newspaper” Gestión “.

On the other hand, there are three sources of resources to face the climate phenomenon and to rebuild the damaged. On the one hand, a budget program for disaster care amounting to S / 1,088.1 million. To this is added an exclusive intervention fund for these anomalous cases amounting to S / 321 million, of which S / 42 million have already been transferred to subnational governments. And, finally, a contingent line of credit that amounts to US $ 3.7 billion.

The resources of the Fiscal Stabilization Fund are also available. These resources are assigned to the MEF and are managed by a board composed of three representatives distributed between the MEF, the Central Reserve Bank and the Presidency of the Council of Ministers. Although their primary use is to provide the country with a “mattress” in the face of adverse economic cycles, they can also be used in the face of natural disasters. Currently, the fund is around US $ 9 billion.”

3 thoughts on “Peru’s Recovery From El Niño”

  1. In the first paragraph, when you say, “an economist argues that it is necessary and won’t reflect poorly on the MEF because caring for a natural disaster can be clearly justifiable”, who is the economist?
    I find the flat consolation rate to be poorly thought out as you do; it seems that Peru’s economy will suffer as a whole because of the varying levels of farmers’ debts. Did the government or an NGO actually start “a disaster care budget program and… intervention fund”, or did the article just suggest that as possible solution? Based on the title of the post, did Peru’s economy ever recover from El Niño, or are they still reeling?

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  2. After reading your blog, it is pretty interesting to analyze the effects of a natural disaster in under-developed areas. The lack of infrastructure and government run disaster relief agencies require the employment of outside help. It is pretty interesting how natural disasters affect GDP because until the situation is resolved, the GDP would continue to decline.

    What is also another problem is the universal payout to individuals affected by the disaster. There is a lot of moral hazards involved in which people who were not affected will take advantage of the program. Also, because payment is the same for everybody, some people may be getting more money than they deserve and some people do not receive enough.

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  3. It’s interesting to me that with all the additional money lying around to set up these disaster funds, “a disaster care budget program that amounts to about 1,088.1 million Sol, an intervention fund equaling about 321 million Sol as well as a line of credit worth about $3.7 billion US dollars. There is a Fiscal Stabilization Fund worth around $9 billion US dollars”, that Peru wouldn’t have used this to either clear its deficit, or use the money to set up preventative measures. Since Peru is so prone to El Nino, earthquakes, volcanism, etc, it would make sense to invest in preventative measures instead of having to borrow extensively and increase the deficit. It’s kind of like giving insulin to the kid who just got diabetes instead of just not letting him eat donuts everyday for a few years.
    As far as the compensation plan for these farmers, if a farmer produces a product that require more than the bond, wouldn’t they just produce on less hectares until they recovered? I guess I see your problem with the flat compensation rate, but I feel evaluating on a case by case basis would not only be an inefficient use of resources, but could also sow divisions in communities. If a certain farmer was really that crucial to the people of their village, those people would help out.

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