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THE ECONOMIC HISTORY AND
THE ECONOMY OF PERU

Peru

In the early 1980's under conservative President Fernando Belaunde Terry a series of International Monetary Fund (IMF) austerity adjustment policies were adopted. These were not always implemented as they were supposed to have been so the Belaunde Terry administration had the image of adhering to economic orthodoxy without necessarily doing so.

President Fernando Belaunde Terry

When inflation rose while output stagnated and the poor suffered a decline in their living standards economic orthodoxy was blamed.

 

In 1985 Peruvian voters elected Alan García of the American Popular Revolutionary Party (APRA) as president. García promised economic reform under a program of economic heterodoxy. García imposed price controls to cope with inflation and promoted state development programs to expand aggregate demand. García needed more foreign currency to finance the import requirements of the development programs than was available after the foreign debt was serviced. García announced that debt service would be limited to ten percent of the export earnings.

 

President Alan Garcia

Belaunde Terry had also restricted debt service but did so quietly. In contrast García announced this practice as government policy in his inaugural address in July of 1985. This of course alienated international lenders and sources of credit for Peru dried up.

But generally the first two years of García's administration showed economic growth and reduced inflation. It appeared that García might have found an alternative to IMF orthodoxy. However by 1988 the economy had collapsed and high inflation had turned into hyperinflation. Generally wages and salaries did not keep up with the inflation of prices. The real buying power of wages and salaries eventually declined drastically, as is shown in the following table:

YearIndices (1980=100.0)
 Real SalariesReal WagesInformal Incomes
1981105.6105.1125.1
1982109.7105.1125.1
198394.187.2103.5
198486.774.4102.6
198590.064.1105.6
198699.887.2151.9
1987106.094.9195.9
198870.061.575.8
198954.548.772.3

In the next election the front runner, Vargas Llosa, promised a return to orthodoxy. A new-comer to politics, Alberto Fujimori, promised a gradualist program for dealing with the economic crisis. Fujimori forced Llosa into a runoff election and a coalition of political factions backed Fujimori and his gradualist program as an alternative to Llosa's orthodox austerity. Fujimori won but immediately abandoned his gradualist program and adopted an orthodox policy of shock therapy to curb hyperinflation. For example, as a means of increasing government revenue to balance the budget Fujimori increased the price of gasoline sold by the state monopoly by 3000 percent.

President Alberto Fujimori

With Fujimori Peru completed another cycle of government policy. Belaunde had been leader from 1961 until 1968 when he was overthrown by a military coup which put General Velasco in power. Under Belaunde in the 1960's Peru abandoned the policy of nonintervention and adopted the strategy of import substitution for economic development. Under the import substitution strategy the government tries to promote enerprises, either public or private, for producing the products which the country imports.But usually the domestic enterprises cannot produce these products as cheaply or as well as the imported products so the State protects them by imposing high tariffs on their competitors or it bans the imports altogether. In either case the domestic buyers have to pay higher prices than they did before the country tried to produce the products. This may put domestic exporters at a disadvantage in international markets. Sometimes a country creates subsidies to enable domestic producers to compete with foreign producers. These subsidies have to be covered by a tax on viable industries, perhaps making them nonviable.

Peru was quite late in adopting the import substitution strategy. Most countries by 1960 had tried it and found that it does not work.

General Juan Velasco

The military regime headed by General Juan Velasco that replaced Belaunde kept some elements of import substitution but focused more upon promoting State enterprises for exporting. This involved massive borrowing that more than tripled the debt of Peru. By the time the military returned Peru to civilian rule the economy was in difficulty and austerity measures were called for.

Belaunde was not able to reverse many of the policies of Velasco.


 

 

 


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