Peru The Economy
Figure on an Incan wool and cotton tapestry
THE PERUVIAN ECONOMY achieved a higher rate of economic
growth
than the average for Latin America from 1950 to 1965, but
since
then has turned from one of the more dynamic to one of the
most
deeply troubled economies in the region. Even in the
period of
rapid growth, Peru was characterized by exceptionally high
degrees of poverty and inequality, and since the late
1980s
poverty has become much worse. Major changes in economic
strategy
introduced in 1990 and 1991 offer new hope for future
growth but
have not been oriented toward reduction of poverty and
inequality.
In the first post-World War II decades, Peru achieved
an
above-average rate of growth with low levels of inflation
and
with rising exports of its diversified primary products.
Output
per capita grew 2.9 percent a year in the decade of the
1950s and
then 3.2 percent annually in the first half of the 1960s,
compared with the regional growth rate of 2.0 percent for
these
fifteen years. As of 1960, income per capita was 17
percent above
the median for Latin American countries. However, since
the mid1960s the economy has run into increasing difficulties.
Output
per capita failed to grow at all from 1965 to 1988, then
fell
below its 1965 level in 1989 and 1990. The previously
moderate
rate of inflation accelerated, balance of payments
deficits
became a chronic problem, and the country accumulated a
deep
external debt. As poverty worsened, political violence in
the
countryside and cities grew increasingly intense. The
economy and
the society as a whole seemed to lose coherence and any
sense of
direction.
The reasons for this deterioration from 1965 to 1991
are
complex and very much open to debate. Many aspects of the
debate
center on two opposing conceptions of what national
economic
strategy and goals should be. One conviction is that the
best
course is to keep the economic system open to foreign
trade and
investment, to avoid extensive government intervention in
the
economy, and to rely mainly on private enterprise for
basic
decisions on production and investment. The contrary
conception
favors restricting foreign trade and investment while
promoting
an active government role in the economy to accelerate
industrialization, to reduce inequality, and to control
the
actions of private investors. The conflict between these
economic
models is familiar in the experience of all Latin American
countries. The failure to reconcile them in Peru has been
an
important factor in the deteriorating economic performance
since
the mid-1960s.
At least five interacting problems have been important
in the
explanation of why the economy has deteriorated so badly
since
the mid-1960s. First, natural resource limits began to
handicap
further expansion of primary product exports, requiring
difficult
changes in the structures of production and trade. Second,
partly
in response to these constraints, and partly as a matter
of a
growing conviction that the country needed to
industrialize more
rapidly, successive governments began to promote
industrialization through protection against imports,
reversing
the country's traditional policy of relatively open trade.
Third,
dissatisfaction with widespread inequality and poverty
encouraged
attempts at radical social change, but the two governments
that
tried to lead the way--those of General Juan Velasco
Alvarado
(1968-75) and Alan García Pérez (1985-90)--failed to find
any
effective answers or to maintain viable macroeconomic
policies.
Fourth, the temporary move back toward a more open economy
under
the second government of Fernando Belaúnde Terry (1980-85)
resulted in a surge of imports and an external
crisis--mainly
because of currency overvaluation and an excessively rapid
rise
of government spending--that again discredited this
approach. And
finally, rural violence took on a profoundly destructive
character with the growth of the Shining Path (Sendero
Luminoso--
SL) and the cocaine industry. On top of those two sources
of
violence, weakening governmental capability to maintain
order and
worsening conditions of employment led to growing security
problems in cities.
Deteriorating conditions since the mid-1960s need to be
considered against the background of a deeply divided
society and
a considerable lag, compared with many other Latin
American
countries, in developing either a competitive industrial
sector
or a modern structure of public administration able to
implement
public policies effectively. These handicaps can be
overstated.
After all, the Peruvian economy functioned well up to the
mid1960s , and both private business and government officials
have
gained experience since then. As of the beginning of the
1990s,
however, the country's prolonged decline had seriously
undermined
public confidence in the possibilities for recuperation
and
renewed growth.
The most evident symptoms of the crisis at the
beginning of
the 1990s were falling national output and income, high
levels of
unemployment and underemployment, worsening poverty and
violence,
accelerating inflation, and deep external debt. Under the
Belaúnde administration, the external debt grew too high
for Peru
to meet scheduled service payments, although the
government
maintained the position that payments would be resumed
when
possible. Under the next government, García made a point
of
declaring that payments would be unilaterally limited to
10
percent of export earnings. His more aggressive position
led to a
near-total cutoff of external credit, which remained in
effect
throughout his term.
The government of Alberto K. Fujimori (1990- ) adopted
a
drastic stabilization program to break out of this complex
of
problems by first attacking the forces driving inflation.
The
initial shock of the new measures, which more than doubled
the
consumer price level in a single day, nearly paralyzed
markets
and production. After a steep fall in output, the economy
began
to stabilize with a lower rate of inflation but without
any
strong signs of recovery. Although the Fujimori program
included
many lines of intended action beyond the initial shock, it
remained incomplete in many respects. It raised a host of
questions about what other policies would reactivate the
economy
while preventing any further burst of inflation, and how
long it
would take to restore something like Peru's earlier
capacity for
growth.
Data as of September 1992
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