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Peru The Second Belaúnde Government, 1980-85
The return to democracy allowed Peruvians to choose
among
strongly left, strongly conservative, or
middle-of-the-road
parties. They chose Belaúnde and his party as the middle
road,
but it led nowhere. The Belaúnde government tried to
return the
economy to a more open system by reducing barriers to
imports,
implementing financial reforms intended to foster private
markets, and reversing the statist orientation of the
Velasco
system. But the new approach never had a chance to get
very far
because of a series of macroeconomic problems. On one
side, the
government was rightly concerned about continuing
inflation but
made the mistake of focusing the explanation on monetary
growth
arising from the export surplus it inherited at the start.
That
position made it seem undesirable to continue trying to
promote
exports and desirable to raise domestic spending and
imports. On
the other side, President Belaúnde's personal and
political
objectives included using public investment actively to
develop
the interior of the country and to answer evident needs
for
improved infrastructure. Seeing the export surplus as the
key
macroeconomic source of imbalance, the government decided
to
eliminate it by removing import restrictions, slowing
nominal
devaluation to allow the real exchange rate to appreciate,
and
increasing government investment spending.
The real exchange rate appreciated through 1981 and
1982,
public sector investment rose 54 percent in real terms
from 1979
to 1982, and public sector consumption rose 25 percent
during the
same three-year period. The combination effectively turned
the
current-account surplus into a large deficit, as increased
spending plus import liberalization practically doubled
imports
of goods and services between 1979 and 1981. The
appreciation
also turned manufacturing exports back downward, and a
plunge in
external prices of primary exports brought them down too.
And
then the mistake of focusing on the earlier export surplus
as the
main cause of inflation became clear: the increases in
spending
led to a leap of inflation despite the return to an
external
deficit. The rate of inflation went from 59 percent in
1980 to
111 percent by 1983.
Nothing improved when the government then tried to go
into
reverse with contractionary macroeconomic policies and
renewed
depreciation. Output plunged, but inflation once more went
up
instead of down, to 163 percent by 1985. By this time,
pessimism
about the government's capacity to solve anything,
inflationary
expectations turning into understandable convictions, and
the
price-increasing effect of devaluation all combined to
give Peru
a seemingly unstoppable inflation despite the elimination
of
anything that might be considered excess demand. The
government
apparently lost its sense of direction, retreated from its
attempt to reopen the economy by returning to higher
tariff
levels, and otherwise did little except wait for its own
end in
1985.
Data as of September 1992
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