History of economic thought

Country: Peru

1
 Table of contents

Introduction page 1

Historical Background page 1-4

Major economic thought influence..page 5

The Velasco Governmentpage 5

Land Reformpage 5

Labor and Capital in the Industrial Sector ..page 6

Protection and Promotion of Industry..page 6

Firmspage 6

Macroeconomic Imbalance: Domestic and External...page 6

The Second Belande Government.page 7

The Garca Government..page 7

The Fujimori Government..page 8

Hernando de Soto Polar..page 8-9

The Peruvian economy in the present....page 9

2
Peru Economy Data...page 9- 10

Student recommendation ...page 11

Biography...page 11

3
Introduction

Peru is classified as an upper middle income country by the World Bank and is the
39th largest country in the world by total GDP. Peru is one of the worlds fastest-
growing economies with a 2012 GDP growth rate of 6.3%. It currently has a high
human development index of 0.741 and GDP per capita above $12.000.

Historical background of economics.

Through the nineteenth century and into the mid-twentieth century, the great majority
of the Peruvian population depended on agriculture and lived in the countryside. By
1876 Lima was the only Peruvian city with over 100,000 people only 4% of the
population. Much of the impetus for economic growth came from primary 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. The guano boom ran out
about 1870, after generating a long period of exceptional economic growth. 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 % of all export earnings, sugar 28 %, and
cotton, rubber, and wool collectively 37 % . 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

Page 1
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 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

Page 2
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. 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. Legua y Salcedo (1908-12, 1919-30), an initially elected president turned
dictator who regarded foreign investment as the key to modernization of Peru. That

Page 3
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.

Economic and social indicators, Peru and Latin America, 1960, 1970,1980, 1992

1960 1970 1980 1992

GDP per capita (constant 1988 dollars)
Peru 1293 1656 1788 1287
Median for Latin America 1032 1296 1497 1486
Ratio, Peru to median 1.25 1.28 1.19 0.87
Infant mortality (per 1,000 live births)
Peru 142 64
Median for Latin America 115 40
Poverty (percentage of households below
poverty line defined by ECLAC)
Peru 50 46
Median for Latin America b 34 35

SOURCES: GDP per capita from 1DB 1990, 4; 1994, 239. Infant mortality from
UNDP 1995. 162-63. Poverty rates from ECLAC 1996, 145-46; 1997, 193-94.
Median for nineteen countries.

Page 4
b .1970 median for the nine countries reported in source; 1980 for ten countries in or
near that year (1979 for Brazil and Peru; 1981 fur Costa Rica and Uruguay; 1984 for
Mexico).

Major economic thought influence

The major influences of thought upon the Peruvian economy were the :The Velasco
Government ,The Second Belande Government ,The Garca Government,The
Fujimori Government.

The Velasco Government

The economic strategy of the Velasco government was shaped by a conception

frequently advocated in Latin America but rarely put into practice. The idea was to
find a "third way" between capitalism and socialism, with a corporatist society much
more inclusionary than that possible under capitalism but without rejecting private
ownership or adopting any of the compulsory methods identified with communism.
Under this strategy, land reform was designed to override existing property interests
in order to establish cooperative ownership, rejecting both individual private farming
and state farms. Promoting worker participation in ownership and management was
intended to reshape labor relations. Foreign influences were reduced through tight
restrictions on foreign investment and nationalization of some of the largest foreign
firms. On a more fundamental plane, the Velasco government saw its mission as one
of eliminating class conflict and reconciling differences among interest groups within
its own vision of a cooperative society.

Land reform

The most striking and thorough reform imposed by the Velasco government was to
eliminate all large private landholdings, converting most of them into cooperatives
owned by prior workers on the estates. The reform was intended to destroy the basis
of power of Peru's traditional elite and to foster a more cooperative society as an
alternative to capitalism. Such socialpolitical purposes apparently dominated
questions of agricultural production or any planned changes in patterns of land use. It
was as if the questions of ownership were what mattered, not the consequences for

Page 5
output or rural incomes. In fact, the government soon created a system of price
controls and monopoly food buying by state firms designed to hold down prices to
urban consumers, no matter what the cost to rural producers.

Labor and Capital in the Industrial Sector

In line with its basic conception of social order, the military government also created
a complex system of "industrial communities." Under this system, firms in the
modern sector were required to distribute part of their profits to workers in the form
of dividends constituting ownership shares. The intent was to convert workers into
property owners and property ownership into a form of sharing for the sake of class
reconciliation. But in practice, the system never functioned well.

Protection and Promotion of Industry

Along with the intention of resolving internal class conflict, the Velasco government
determined to lessen Peru's dependency on the outside world. The two most important
components of the strategy were a drive to promote rapid industrialization and an
attack on the role of foreign firms. In contrast to the industrialization strategies of
most other Latin American countries, the intention of the Velasco regime was to
industrialize without welcoming foreign investment.Nationalizations and State
Firms

The industrialization drive was meant to be primarily a Peruvian process not totally
excluding foreign investors but definitely not welcoming them warmly. In that spirit,
the Velasco regime immediately nationalized IPC in October 1968 and, not long after
that, the largest copper mining company, while taking over other foreign firms more
peacefully through buy-outs. The government put into place new restrictions on
foreign investment in Peru and led the way to a regional agreement, the Andean Pact,
that featured some of the most extensive controls on foreign investment yet attempted
in the developing world.

Macroeconomic Imbalance: Domestic and External

Whatever the promises and the costs of the many kinds of reform attempted by the
Velasco government, the ship sank because of inadequate attention to balances

Page 6
between spending and productive capacity, and between export incentives and import
demand. The Velasco government inherited recessionary conditions in 1968, with a
positive external balance and productive capacity readily available for expansion.

The Second Belande Government

The return to democracy allowed Peruvians to choose among strongly left, strongly
conservative, or middle-of-the-road parties. They chose Belande and his party as the
middle road, but it led nowhere. The Belande government tried to return the
economy to a more open system by reducing barriers to imports, implementing
financial reforms intended to foster private markets, and reversing the statist
orientation of the Velasco system. But the new approach never had a chance to get
very far because of a series of macroeconomic problems.

The Garca Government

With the market-oriented choice of economic strategy discredited by results under

Belande, Peruvians voted for the dynamic populist-reformist promise of Garca and
responded enthusiastically to his sweeping changes. Garca's program worked
wonders for two years, but then everything began to go wrong.

The main elements of the economic strategy proposed by the Garca government were
full of promise. They recognized the prior neglect of the agricultural sector and called
for redirecting public programs toward promotion of agricultural growth and
reduction of rural poverty. Correspondingly, economic activity was to be
decentralized to break down its high concentration in Lima, and within the cities
resources were to be redirected away from the capital-intensive and import-intensive
modern sector to the labor-intensive informal sector. A strategy
of concertacin (national understanding) with private business leaders on economic
issues was to be used systematically to avoid disruptive conflict. Problems of external
balance were to be answered both by restructuring production to lessen dependence
on imports and by reorienting toward higher exports over the long-term.These goals
for structural change could have improved the efficiency of resource allocation while
doing a great deal to lessen poverty. But the goals clearly required both time and the
ability to restore expansion without worsening inflation and external deficits.

Page 7
The Fujimori Government

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.

Hernando de Soto Polar

Hernando de Soto was born on 2 June 1941 in Arequipa, Peru. His father was a
Peruvian diplomat . After the 1948 military coup in Peru, his father chose exile in
Europe, taking his wife and two young sons with him. De Soto was educated in
Switzerland, where he attended the International School of Geneva and then did
post-graduate work at the Graduate Institute of International Studies in Geneva. He
later worked as an economist, corporate executive and consultant. He returned to Peru
at the age of 38.Between 1988 and 1995, he and the Institute for Liberty and
Democracy were mainly responsible for some four hundred initiatives, laws, and
regulations that led to significant changes in Peru's economic system.

In particular, ILD designed the administrative reform of Peru's property system which
has given titles to an estimated 1.2 million families and helped some 380,000 firms,
which previously operated in the black market, to enter the formal economy. This
latter task was accomplished through the elimination of bureaucratic "red-tape" and of

Page 8
restrictive registration, licensing and permit laws, which made the opening of new
businesses very time-consuming and costly. Yale University political scientist Susan
C. Stokes believe that de Soto's influence helped change the policies of Alberto
Fujimori from a Keynesian to a neoliberal approach. De Soto convinced
then-president Fujimori to travel to New York City, where they met with Javier Prez
de Cullar, Barber Conable, Enrique V. Iglesias (the heads of the United Nations, the
International Monetary Fund, and the Inter-American Development Bank), who
convinced him to follow the guidelines for economic policy set by the international
financial institutions. These policies led to a reduction in the rate of inflation. The
main message of de Soto's work and writings is that no nation can have a
strong market economy without adequate participation in an information framework
that records ownership of property and other economic information. Unreported,
unrecorded economic activity results in many small entrepreneurs who lack legal
ownership of their property, making it difficult for them to obtain credit, sell the
business, or expand. They cannot seek legal remedies to business conflicts in court,
since they do not have legal ownership. Lack of information on income prevents
governments from collecting taxes and acting for the public welfare.

The Peruvian economy in the present

Economic activity in Peru appears to have decelerated slightly , but it remains at a

healthy level. In the last three months of the year, business confidence declined from
its record high in September, and economic activity slowed in October, though it
picked up steam again in November. Meanwhile, the external sector continues to
provide momentum and the 12-month sum of the trade balance turned positive for the
first time in almost three years. Peru emerged as the star of South American
economies in 2016. Its robust growth was underscored by soaring metal exports and
the election of business-friendly President Pedro Pablo Kuczynski. In late December,
the government published a change to the Fiscal Transparency and Responsibility
Law . Under the new rule, the fiscal deficit target will be based on the nominal deficit
rather than the structural shortfall. While this gives the government more flexibility
and eases monitoring, it also increases the governments responsibility to stay
fiscally prudent.
Peru Economy Data

Page 9
 .
.2011 2012 2013 2014 2015

Population (million) 2012

30.5
30.9 31.4 31.9
GDP per capita (USD) 5,705
30.0 6,319 6,547 6,467 5,993
GDP (USD bn) 171 193 203 203 191
Economic Growth (GDP. annual variation
6.5 6.0 5.9 2.4 3.3
in %)
Consumption (annual variation in %) 5.8 6.4 5.5 5.1 4.4
Investment (annual variation in %) 5.8 16.3 7.3 -2.1 -4.9
Manufacturing (annual variation in %) 8.3 1.3 5.3 -3.2 -1.7
Retail Sales (annual variation in %) 8.6 8.5 6.0 4.6 3.9
Unemployment Rate 7.7 6.8 6.0 5.9 6.5
Fiscal Balance (/<, of GDP) 2.0 2.3 0.9 -0.3 -2.1
Public Debt (% of GDP) 22.1 20.4 19.6 20.0 23.3
Money (annual variation in %) 13.7 25.3 5.9 6.7 3.2
Inflation Rate (CPI. annual variation in %. eon) 4.7 2.7 2.9 3.2 4.4
Inflation Rate (CPI. annual variation in %) 3.4 3.7 2.8 3.3 3.6
Inflation (PPI, annual variation in %) 6.3 1.8 0.4 1.8 1.8
Policy Interest Rate (%) 4.25 4.25 4.00 3.50 3.75
Stock Market (annual variation in %) -16.7 5.9 -23.6 -6.1 -33.4
Exchange Rate (vs USD) 2.70 2.55 2.80 2.99 3.41
Exchange Rate (vs USD. aop) 2.75 2.64 2.70 2.84 3.18
Current Account (% of GDP) -1.9 -2.8 -4.3 -4.0 -4.4
Current Account Balance (USD bn) -3.2 -5.3 -8.6 -8.1 -8.4
Trade Balance (USD billion) 9.2 6.4 0.5 -1.5 -3.1
Exports (USD billion) 46.4 47.4 42.9 39.5 34.2
Imports (USD billion) 37.2 41.0 42.4 41.0 37.4
Exports (annual variation in %) 29.6 2.3 -9.5 -7.9 -13.4

Page 10
Imports (annual variation in %) 29.0 10.0 3.4 -3.3 -8.8
International Reserves (USD) 48.8 64.0 65.7 62.3 61.5
External Debt (% of GDP) 28.1 30.8 30.0 31.7 35.7

Student recommendation

Although the Peruvian economy had some difficulties during the years like in 1930
when the Grand Depression stroke the economy , at the moment the country is
recovering very well it is having some minor fluctuations in the GDP. The effort of
Hernando de Soto in 1998 and 1995 to reduce inflation certainly worked.
The best year for Peru was 2013 when the GDP in US dollars was 201.151 billion
dollars according to the world bank statistics . I think the Peruvian economy will
continue to rise all the statistics seem to indicate so.

Biography
1. Wikipedia https://en.wikipedia.org/wiki/Economy_of_Peru
2. Rex A. Hudson, ed. Peru: A Country Study. Washington: GPO for the Library of
Congress, 1992.
3. Searching for a Better Society The Peruvian Economy from 1950 John Sheahan
page 5
4. Wikipedia https://en.wikipedia.org/wiki/Hernando_de_Soto_Polar
5. Focus Economics http://www.focus-economics.com/countries/peru
6. World Bank http://data.worldbank.org/country/peru

Page 11
Page 12