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Peru The Fujimori Government, 1990-91
The Fujimori administration began with yet another
reversal
of practically all the economic policies of the preceding
government, in conditions that clearly required drastic
corrective action. Its main immediate target was to stop
the
runaway course of inflation. Beyond that, the goals
included
repudiating protection and import substitution, returning
to full
participation in the world trading and financial systems,
eliminating domestic price controls and subsidies, raising
public
revenue and holding government spending strictly to the
levels of
current revenue, initiating a social emergency program to
reduce
the shock of adjustment for the poor, and devoting a
higher share
of the country's resources to rural investment and
correction of
the causes of rural poverty. In practice, new measures
came out
in bits and pieces, dominated by immediate concern to stop
inflation; actions taken in the first year did not
complete the
program.
Preoccupation with inflation was natural enough, after
the
steep rise of 1989 and the months immediately preceding
the
change of government. The monthly rate of inflation ranged
between 25 percent and 32 percent in the second half of
1989,
exceeded 40 percent in June 1990, and amounted to 78
percent by
July. The deficit of the central government increased from
4
percent of GDP in January 1990 to 9 percent by May. The
money
supply of the country increased six times over from
January to
the end of July. The new government had to act quickly,
and did.
The most dramatic immediate action was to eliminate
price
controls for private-sector products and to raise prices
of
public-sector products to restore financial balance for
public
firms. The price of gasoline, previously driven down to
the
equivalent of twelve United States cents a gallon, was
multiplied by thirty times. For the consumer price index
(CPI--see Glossary),
the shocks caused an increase of 136 percent in one day.
Eliminating price controls in the private sector and
raising prices charged by state firms had three objectives. First,
the price increases for the public-sector firms and government
services were meant to restore revenue to a level that
would allow the government to stop borrowing from the Central
Bank. Second, the rise in prices was intended to reduce
aggregate demand by cutting the liquidity of business and the
purchasing
power of the public. Third, with everything priced far
higher
relative to public purchasing power, it was expected that
market
forces would begin to operate to drive some prices back
down,
reversing the long trend of increases in order to help
break the
grip of inflationary expectations.
To back up the impact of the price shocks, the
government
declared that it would keep its own expenditure within the
limit
of current revenue and stop the other two large streams of
Central Bank credit creation: Central Bank financing for
agricultural credit and for the system of subsidies
supporting
differential exchange rates. The multiple exchange rates
in
effect under García were to be unified, and the unified
rate was
to be determined by market forces. Further, competition
from
imports to restrain inflation and access to imported
supplies for
production would both be improved by taking away
quantitative
restrictions and reducing tariff rates.
The new policies helped greatly to bring down the rate
of
inflation, although they fell short of accomplishing full
stabilization. Against an inflation rate that had reached
approximately 2,300 percent for the twelve months to June
1990,
the rate of 139 percent for the twelve months to December
1991
can be seen as a dramatic improvement. But the latter was
still
more than double the government's intended ceiling for
1991 and
still extremely high relative to outside world rates of
inflation. The last quarter of 1991 looked more promising,
with
the monthly rate down to 4 percent, but it had risen to 7
percent
by March 1992. Inflationary dangers clearly remained
troublesome,
especially in view of two factors that should have stopped
inflation more decisively: a deeply depressed level of
domestic
demand and an unintended increase in the real exchange
rate,
making dollars cheaper.
Domestic demand has been held down by the combination
of the
price shock at the start of the stabilization program,
steeply
falling real wages, reduced government deficits, and much
tighter
restraint of credit. All these were deliberate measures to
stop
inflation, accepting the likely costs of higher
unemployment and
restraint of production as necessary to that end. In 1990
GNP
fell 3.9 percent, aggravating the plunge of 19 percent
between
1988 and 1990. In 1991 production turned up slightly, with
a gain
of 2.9 percent in GNP. That situation left output per
capita
essentially unchanged from 1990 and at 29 percent below
its level
a decade earlier.
The incomplete success in stopping inflation created an
extremely difficult policy conflict. Recovery could in
principle
be stimulated by more expansionary credit policies and
lower
interest rates, which would favor increased investment,
depreciation of the currency to help producers compete
against
imports, and improved exports. But continuing inflation
and the
fear of accelerating its rate of increase argued instead
for
keeping a very tight rein on credit and thereby blocked
the
actions needed for recovery. This conflict became
particularly
acute over the question of what to do about the exchange
note:
the real exchange rate went in exactly the wrong direction
for
recovery by appreciating when depreciation was both
expected and
needed.
The decision to remove controls on the exchange rate
had been
expected to lead to a much higher foreign-exchange price,
to
encourage exports, and to permit import liberalization
without a
surging external deficit. But when the rate was set free,
the
price of dollars went down instead of going up. That
initial
effect could be explained by the tight restraints imposed
on
liquidity, which drove firms and individuals who held
dollar
balances to convert them to domestic currency in order to
keep
operating. This movement should presumably have gone into
reverse
when holdings of dollars ran out, but fully eighteen
months later
no reversal had occurred. Dollars remained too cheap to
make
exports profitable and too cheap for many producers to
compete
against imports for several reasons, including the
continuing
influx of dollars from the drug trade into street markets
and
then into the banking system. A second reason has involved
the
continuing low level of domestic income and production,
and
corresponding restraint of demand for imports as compared
with
what they would be in an expanding economy. But perhaps
the most
fundamental reasons have been the continuing squeeze on
liquidity
in terms of domestic currency and the resulting high rates
of
interest for borrowing domestic currency, which strongly
favor
borrowing dollars instead or repatriating them from
abroad. All
this means that the economy has had no foreign-exchange
problem,
but also that incentives to produce for export have been
held
down severely, when both near-term recovery and
longer-term
growth badly need the stimulus of rising exports.
The government was more successful in the part of its
program
aimed at trade liberalization. As has been noted, the
average
tariff rate was cut greatly in two steps, in September
1990 and
March 1991. Quantitative restrictions were eliminated, and
the
tariff structure was greatly simplified. Effective
protection was
brought down to a lower level than at any point since the
mid1960s , with a more coherent structure that left much less
room
for distorted incentives.
Although stabilization and structural reform measures
have
thus shown some success, the government's program has not
taken
adequate action to prevent worsening poverty. Its
announced
programs of short-term aid in providing food and
longer-term
redirection of resources to get people out of poverty by
programs
designed to help them raise their productivity have not
yet been
implemented in any meaningful way. Private charitable
agencies,
the United Nations (UN), and the United States Agency for
International Development (AID) have helped considerably
through
food grants to stave off starvation. But the government
itself
has done little, either to alleviate current strains on
the poor
or to open up new directions that promise gains for them
in the
future.
Data as of September 1992
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