Peru - Manufacturing

Manufacturing

The industrial sector has had its problems too, especially in the 1980s. Manufacturing production grew more rapidly than the economy as a whole up to that decade. It increased at a compound annual rate of 3.8 percent between 1965 and 1980. But it grew only 1.6 percent a year from 1980 to 1988, and then plunged 23 percent in the ghastly economic conditions of 1989.

Of dominant importance in the 1980s were food processing, textiles, chemicals, and basic metals; food processing alone accounted for nearly one-third of total manufacturing output. For the period 1980-88, when total manufacturing production increased by only about 5 percent, food processing rose by nearly 23 percent. Production of basic metals went the other way, falling by almost 22 percent. Output of metal products and machinery, closely associated with capital goods and investment, fell by 7 percent from 1980 to 1988, and then fell by one-fourth between 1988 and December 1989.

The weak picture for manufacturing in the 1980s did not result from any intrinsic obstacle on the side of productive capacity but from the overall weakness of the economy and of domestic markets. The sector's ability to increase production under better economic conditions was demonstrated by what happened between 1985 and 1987, in the successful first half of the García administration when aggregate demand was stimulated but inflation had not yet gotten out of control; manufacturing output shot up 34 percent between these two years.

The modern manufacturing sector has relied on relatively capital-intensive and import-intensive methods of production, failing to provide much help for employment. Manufacturing value increased from 20 to 22 percent of GDP between 1950 and 1990, but its share of total employment fell from 13 to 10 percent. Its dependence on imports of current inputs and capital equipment has probably resulted in large measure from the combination of an overvalued currency with high protection against competing imports. Overvaluation holds down the prices of imported equipment and supplies, making them artificially cheap relative to labor and other domestic inputs. Protection adds to the problem by allowing those firms that prefer the most modern possible equipment, even when it is more expensive than domestic alternatives, to pass on any extra costs to captive domestic consumers. In addition, protection saddled industrial firms themselves with high-cost inputs from other domestic firms, raising their costs to levels that have made it extremely difficult for even the most efficient to compete in export markets.

Growth of manufacturing, as of the whole economy, has been held back seriously by the failure so far to achieve any sustained growth of industrial exports. The sector acts as a drag on the possibilities of overall growth by using a great deal more of the country's scarce foreign exchange to import its supplies and equipment than it earns by its exports. This issue is key to future growth. Directing manufacturing production more toward exports would provide a new avenue for growth through sales to world markets and would also help relax the foreign-exchange constraints that so frequently hold back the whole economy.

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