The Economy

The Economy

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.

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