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Peru Orientation Toward Primary Product Exports
Peru's most famous exports have been gold, silver, and
guano.
Its gold was taken out on a large scale by the Spanish for
many
years following the conquest and is of little significance
now,
but silver remains an important export. Guano served as
Europe's
most important fertilizer in the mid-nineteenth century
and made
Peru for a time the largest Latin American exporter to
Europe.
The guano boom ran out about 1870, after generating a long
period
of exceptional economic growth
(see The Guano Era, 1845-70
, ch.
1). When the guano boom ended, the economy retreated
temporarily
but then recovered with two new directions for expansion.
One was
a new set of primary product exports and the other a turn
toward
more industrial production for the domestic market.
The alternative primary exports that initially replaced
guano
included silver, cotton, rubber, sugar, and lead. As of
1890,
silver provided 33 percent of all export earnings, sugar
28
percent, and cotton, rubber, and wool collectively 37
percent.
Copper became important at the beginning of the twentieth
century, followed on a smaller scale by petroleum after
1915.
Then, in the post-World War II period, fish meal from
anchovies
caught off the Peruvian coast became yet another highly
valuable
primary product export. Industrial products remained
notably
absent from Peru's list of exports until the 1970s. As
late as
1960, manufactured goods were only 1 percent of total
exports.
Manufacturing for the home market has had many ups and
downs.
The first major downturn came with the guano boom of the
mid-
nineteenth century. Foreign-exchange earnings from guano
exports
became so abundant and, therefore, imported goods so cheap
that
much of Peru's small-scale local industry went out of
production.
The end of the guano boom relieved this pressure, and in
the
1890s a new factor, a prolonged depreciation of the
currency,
came into play to stimulate manufacturing. The currency
was at
that time based on silver, and falling world market prices
for
silver in this period acted to raise both import prices
and
export values (of products other than silver), relative to
Peruvian costs of production. Without any overt change in
national policies, Peru began a process of
import-substitution industrialization (see Glossary)
combined with stronger
incentives for exports. Domestic entrepreneurs responded
successfully, and the economy began to show promising
signs of
more diversified and autonomous growth.
This redirection of Peruvian development was in turn
sidetracked in the 1900-1930 period, in part by a decision
to
abandon the silver-based currency and adopt the gold
standard
instead. The change was intended to make the currency more
stable
and, in particular, to remove the inflationary effect of
depreciation. The change succeeded in making the currency
more
stable and to some degree in holding down inflation, but
Peruvian
costs and prices nevertheless rose gradually relative to
external
prices. That trend hurt exports and the trade balance,
especially
in the 1920s, but instead of devaluing the currency to
correct
the country's weakening competitive position, the
government
chose to borrow abroad to keep up its value.
As has been noted, many Latin American countries
reacted to
the Great Depression by imposing extensive import
restrictions
and by adopting more activist government policies to
promote
industrialization. But at that point, Peru departed from
the
common pattern by rejecting the trend toward protection
and
intervention. After a brief experience with populist-style
controls from 1945 to 1948, Peru returned to the open
economy
model and a basically conservative style of internal
economic
management, in sharp contrast to the growing emphasis on
import
substitution and government control in Argentina, Brazil,
Chile,
and Colombia.
Aided by the early recovery of some of its main exports
in
the 1930s, and then by development of new primary exports
in the
early post-World War II period, Peru had in many respects
the
most successful economy in Latin America up to the
mid-1960s. But
increasing pressure on the land from a rapidly growing
population, accompanied by rising costs and limited
supplies of
some of the country's natural resources, began to
intensify
demands for change. One of the worst blows for continued
reliance
on growth of primary exports was a sudden drop in the fish
catch
that provided supplies for Peru's important fish meal
exports;
over-fishing plus adverse changes in the ocean currents
off Peru
cut supplies drastically in the early 1970s
(see Structures of Production
, this ch.). That reversal coincided with supply
problems in copper mining. Costs had begun to rise steeply
in the
older mines, and development of new projects required such
large-
scale investment that the foreign companies dominant in
copper
hesitated to go ahead with them. Further, population
pressure and
increasing difficulties in raising output of food
converted Peru
into an importer for a rising share of its food supply and
began
to work against use of land for agricultural exports.
Although
new investment and better agricultural techniques could
presumably have helped a great deal, it began to seem
likely that
the only way to maintain high rates of growth would be to
shift
the structure of the economy more toward the industrial
sector.
Evolution of Foreign Investment
During its long period of attachment to an open
economic
system, Peru welcomed foreign investment and in some
periods
adopted tax laws specifically designed to encourage it.
That is
to say, until the 1960s the small fraction of Peruvians in
a
position to determine the country's economic policies
welcomed
foreign investment without paying much attention to
growing signs
of popular opposition. In the 1960s, many things changed.
The
major change for foreign investors was that growing
criticism of
their role in the economy led to nationalization of
several of
the largest firms and to much more restrictive
legislation.
Foreign investment played a relatively minor role in
the
nineteenth century, although it included railroads,
British
interests in banking and oil, and United States
participation in
sugar production and exports. Its role grew rapidly in the
twentieth century, concentrated especially in export
fields. In
1901, just as Peruvian copper began to gain importance,
United
States firms entered and began buying up all but the
smallest of
the country's copper mines. The International Petroleum
Company
(IPC), a Canadian subsidiary of Standard Oil of New
Jersey,
established domination of oil production by 1914 through
purchase
of the restricted rights needed to work the main oil
fields. The
trend to foreign entry in manufacturing as well as finance
and
mining was stimulated by promotional legislation under the
eleven-year government of Augusto B. Leguía y Salcedo
(1908-12,
1919-30), an initially elected president turned dictator
who
regarded foreign investment as the key to modernization of
Peru.
That much-publicized partnership between a repressive
government
and foreign investors was to play an important role for
the
future of Peru, by feeding convictions that foreign
investment
was inescapably linked to control of the country by the
few at
the expense of the public.
By the end of the 1920s, foreign firms accounted for
over 60
percent of Peru's exports. The Great Depression of the
1930s
changed that by bringing new foreign investment to a halt
and by
driving down the prices of the products of foreign firms
(chiefly
copper) much further than those exported by Peruvian
firms. That
double effect brought the share of exports by foreign
firms down
to about 30 percent by the end of the 1940s. Foreign
investment
remained low in the first postwar years, both because
investors
in the industrialized countries were preoccupied at home
and
because it was not encouraged by the populist government
in Peru
from 1945 to 1948. After a military coup installed a
conservative
dictator in 1948, the government offered a renewed welcome
to
foreign investors, made particularly effective by the
Mining Code
of 1950. This law offered very favorable tax provisions
and
quickly led to an upsurge of new investment. History
repeated
itself: as in the 1920s, a repressive government turned to
foreign investors for economic growth and for its own
support,
adding fuel to widespread public distrust of foreign
firms.
Public opposition to foreign ownership focused
particularly
on the largest firms owning and exporting natural
resources,
above all in copper and petroleum. The IPC became the
center of
increasing conflict over the terms of its operating rights
and
its financial support of conservative governments. When
Belaúnde
(1963-68, 1980-85) took office as president in 1963, he
promised
to reopen negotiations over the contract with IPC, but he
then
delayed the question for years and finally backed away
from this
promise in 1968. His failure to act provoked the military
coup
led by General Velasco, this time from the left wing. The
Velasco
government promptly nationalized IPC and started a
determined
campaign to restrict foreign investment. Although the
government
subsequently moderated its hostility to foreign firms,
continuing
disputes and then the deterioration of the economy led
some
companies to withdraw and held foreign investment down to
very
low levels through the 1980s.
The redirection of economic strategy under the Fujimori
government in 1990-91 included a return to welcoming
conditions
for foreign investment, providing a much more favorable
legal
context, and disavowing completely the control-oriented
policies
of the governments of Velasco and García. Several foreign
oil
companies responded immediately, although the disorganized
state
of the economy and the context of political violence
discouraged
any general inflow of new foreign investment.
Data as of September 1992
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