Delegation of powers: things to watch for

11 September 2016

The government’s legislative agenda has become a little clearer over recent weeks, not least because of the list of measures for which the executive is asking for special legislative powers. These cover a number of areas that range from the economy and citizen (in)security to the future of Petroperú. The official request for delegated legislative powers was sent to Congress on 8 September. Irrespective of whether it is accepted, either in full or in part, the list of items for which such powers are requested include two things that merit particular attention.

The first is the concessions being offered to sub-national levels of government in order to win over their support. The government has said it plans to decentralise the operations of Proinversión, its investment promotion office. It also says it will reform the workings of the SNIP (Servicio Nacional de Inversión Pública) which has long held the purse strings in the choice and design of infrastructure projects, notably those funded by the various canon schemes (by which half of the income tax paid by extractive companies is channelled to regional, provincial and district layers of government).

These measures respond to longstanding complaints by sub-national government that, despite policies of decentralisation, the central government has retained the whip-hand when it comes to the distribution of fiscal resources. In large part, it forms part of a political strategy to win over support from regional governors, given the new Kuczynski government’s weakness in Congress. Evidently, the hope is that governors, whose electoral base is local, will put pressure on those elected for the opposition Fujimori ticket in their respective localities. Many current congressmen for the Fujimorista Fuerza Popular (FP), with its absolute majority in Congress, are themselves local politicians who jumped on the Fujimori bandwagon in this year’s elections but do not form part of the Fujimorista hard core.

It, of course, remains to be seen whether what will transpire is a real move towards greater decentralisation rather than just a hollow gesture. Within the Ministry of Economy and Finance (MEF) there has always been a profound distrust in the probity and efficacy of local government, and the desire to maintain tight control over spending. Will the present incumbent take a very different line?

The second is the government’s attempt to shrink the informal sector and extend the ambit of the formal. It hopes that its policy of reducing VAT by one percentage point and reducing official red tape will help bring more informal businesses within the tax net. The problem here is that it is not just taxation and red tape that makes Peru’s informal sector among the largest in Latin America. Around 70% of the Peruvian economy is thought to be in the informal sector.

The informal sector is a term that covers a large range of types of economic enterprise, including the peasant economy, people working in small-scale enterprises, the self-employed (including a massive number of traders of one sort or another), those cultivating illicit crops (like cocaleros), those involved in unregistered (sometime illegal) mining operations, those whose income is derived from contraband activity etc. The idea, popularised by people like Hernando de Soto that the informal will become formal simply by reducing red tape and ‘liberalising the labour market’ (further eroding labour protection), is highly dubious.

As Waldo Mendoza of the Consejo Fiscal has suggested, experience elsewhere shows that it is growth in the formal economy, and with it increased demand for labour and higher resultant wages, which induces people to shift across into the formal sector. But in Peru, the sectors of the economy in which productivity and wages are highest, are those (like mining) which are highly capital-intensive and which offer relatively few jobs in proportion to the sums invested.

If Pedro Pablo Kuczynski is able, in his five years in office, to engineer a real decentralisation in power and decision-making whilst making serious inroads on the size of the informal sector, it will be a revolution indeed.

Meanwhile, the Fujimoristas (with backing from APRA) have made clear their intention to debate the government’s legislative proposals point by point; they are in no mood to offer the government a blank cheque.

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