Georgetown Americas Institute

An Economy Under Strain

In his opening remarks, Werner noted that despite Peru’s historically sound macroeconomic management, the country now faces serious institutional fragilities, governance deficits, and social fragmentation that threaten its long-term stability.

Castilla described Peru’s current economic environment as one of resilient stagnation, marked by weak investment, low productivity growth, and fragile confidence in state institutions. He noted that while Peru's macroeconomic fundamentals—such as public debt and inflation—remain relatively stable, structural issues such as informality, inequality, and regional asymmetries are undermining growth potential. Similarly, he noted that Peru has not had a fiscal crisis, but rather a crisis of governance and legitimacy. 

He pointed to several indicators of economic stagnation, including declining private investment, persistent underemployment, and deteriorating infrastructure. He argued that although Peru experienced a commodity boom in the early 2000s and maintained fiscal discipline, the country did not take advantage of that period to implement deeper institutional reforms. As a result, the economy remains vulnerable to external shocks and internal political volatility.

Informality and Regional Inequality

A central theme of Castilla’s presentation was the persistence of informality and its implications for Peru’s economic and social development. He described the Peruvian economy as highly fragmented, with over 70% of the workforce in the informal sector. Informality, he explained, limits tax revenue, weakens labor protections, and creates significant barriers to productivity growth. Castilla stressed that addressing informality is not merely a matter of formalizing small businesses but requires a comprehensive rethinking of the state’s capacity to deliver quality public services and enforce regulations across regions.

“There is a reform agenda still pending in the country and you see it in high informality ratios; three out of four Peruvians don’t have access to pension or don’t have access to basic health services, and they rely on daily activities to be able to meet their needs.”-Luis Miguel Castilla. 

He also highlighted the stark geographic disparities that define Peru’s development landscape. While coastal urban centers such as Lima and Arequipa have seen relatively strong economic performance, the Amazon and highland regions remain marginalized, with limited access to infrastructure, health services, and education. Castilla argued that decentralization in Peru has failed to translate into effective governance due to low administrative capacity and weak accountability at the regional and municipal levels.

Global Trends and Strategic Partnerships

The conversation turned to geopolitics, including Peru’s relationship with China and the United States. Castilla remarked that China’s growing role as Peru’s largest trading partner—especially in mining and infrastructure—has deepened economic linkages but also created dependencies. He called for a more strategic foreign policy that leverages ties with both China and the United States, while prioritizing long-term national development goals. Castilla stressed the importance of diversifying trade partnerships in the form of free trade agreements since both Chinese and U.S. influence are still very prevalent. 

 “The U.S. represents around 13% of our market exports, which means that 87% goes to other countries, with China being our main trading partner primarily in commodities like copper, among others.”-Luis Miguel Castilla. 

Castilla also reflected on Peru’s approach to climate risk and green investment, recognizing the need for resilience-oriented planning. He acknowledged that while Peru has abundant natural resources and renewable energy potential, the institutional and technical gaps remain large. Greater coordination among ministries, clearer regulatory frameworks, and international support would be needed to shift toward a more sustainable economic model.

A Conversation on Institutions and Reform

The discussion also covered the political economy of reform in Peru. Castilla expressed concern over the erosion of public trust in democratic institutions, which he identified as a major barrier to structural change. He emphasized the need for technocratic leadership, evidence-based policymaking, and stronger political parties to navigate Peru out of its current institutional paralysis.

When asked about the private sector’s role, Castilla stressed that while business elites in Peru have historically supported macroeconomic stability, they must now take a more active role in promoting long-term inclusive development and rule of law. He also pointed to the importance of education and digital infrastructure in improving human capital and productivity over time.

Q&A: Toward a More Inclusive Economy

In the Q&A session, Castilla addressed audience questions on critical challenges facing Peru’s development. On rural investment, he stressed the urgent need to extend public infrastructure and services to historically neglected areas such as the Andean highlands and Amazon, arguing that inclusive development is essential for national stability. Castilla highlighted that meaningful investment in roads, health, and education is key to building trust between rural communities and the state. Regarding tax reform, he emphasized that Peru’s narrow tax base and overreliance on extractive industries hinder fiscal stability. He called for reforms to broaden the base, increase government compliance, and ensure that wealthier individuals and corporations contribute more equitably.

In response to concerns about institutional trust, Castilla pointed out that legitimacy is restored through concrete results, not rhetoric. He argued that improving local government capacity to deliver services is crucial for rebuilding citizen confidence in the state. On youth participation, he acknowledged widespread frustration with politics but encouraged young people to remain engaged. He suggested that civic innovation and grassroots efforts are essential for revitalizing Peru’s political and economic systems. Castilla closed by reiterating the importance of long-term planning and a new social contract centered on inclusion, transparency, and effective governance to prevent further stagnation and fragmentation.