GROWTH WITHOUT DEVELOPMENT

Rubén Berríos

Clarion University of Pennsylvania

What phase of development has Peru entered at the outset of the 21st century? How
does it fare in relation to the developed world? Why has it failed to keep pace with other
emerging economies? These are some of the questions raised in this work in an attempt
to understand why Peru has lagged behind and why it has even regressed in its conditions
of development in recent years. By examining economic policies and other institutional
factors and focusing on Peru’s external sector, this study addresses Peru’s dilemma: that
neither the state-led development model nor the economic liberalism that has replaced it
has worked for Peru. The challenging question that remains, then, is how a peripheral,
small-sized country like Peru can compete in an increasingly integrated global market.

While the world has been rapidly changing with the use of modern technologies, Peru has
not changed much. In fact, most of Latin America, Africa, and Asia have been unable to
keep up with the affluent northern countries in the process of technological progress and
structural change. Peru has not made any significant contributions in the provision of
international services or inventions, or even in the technological content of its exports.
Under such circumstances the country has gradually seen its international negotiating
power weaken because it continues to export low-priced commodities, is overburdened
by a heavy foreign debt, and is constrained by a demographic explosion.

Peru has traditionally been described as “a beggar sitting on a golden bench,” a phrase
coined by Antonio Raimondi in the 1860s. The reference is to the country’s poor
condition amid an abundance of natural resources. These resources were used to generate
export booms, which increased government revenues that largely benefited Lima’s elite.
These export booms led to growth, but each time ended in collapse because of diminished
external demand over time. As this export-led strategy ran out of steam, the economy

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became more vulnerable and unable to deal with short-term crises. The model also failed
because it did not benefit large sectors of the population, thus worsening income
distribution over time (Gonzalez de Olarte 1998, Sheahan 1999, Thorp 1987, Thorp and
Bertram 1978, Wise 2003). In addition, the emphasis on primary export growth
weakened the industrial base and weakened confidence in the small entrepreneurial class.

Although proud of its Inca past, Peru has little to show for that legacy in modern times.
Most of its Inca descendants now live in extreme poverty. Much of the country’s post-
colonial history has been plagued with social, economic, and political problems. Liberal
democracy in recent years has not been a forward march for Peru. Besieged by its
endemic problems and its political volatility, and despite its diverse geography and racial
composition, Peru has nevertheless been searching for its own identity. During much of
the 20th century, a number of Peruvian intellectuals wrestled with the problem of national
identity, and some even questioned whether Peru could become a unified nation. The
appearance of Sendero Luminoso, or Shining Path, during the 1980s in the poorest
regions of the country was the most recent reminder of Peru’s deep-seated ethnic divide.

Economic policies of the last decades also have failed to create sustained development. In
this paper, I will examine a number of factors that have led to failure, but as the success
of countries of similar circumstances shows, none explains adequately. The failure of
development in Peru can most succinctly be explained by examining policy failure and
the inability in the leadership to formulate the right incentives to achieve long-term goals.

Development Performance: An Overview

Development is an elusive concept, and for many countries it has become an “illusive”
goal. Generally, development refers to a qualitative jump, a sustainable process by which
the welfare of the people is enhanced. The experiences of Peru and other countries make
clear that the goal of development must be not simply to achieve economic growth, but to
attain other qualitative social goals that must be approached in the context of a
democratic setting. Economic growth (rise in national and per capita income or product)

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is a necessary but not a sufficient condition for true development. These social goals of
development include meeting basic needs (sanitation and health care, housing,
education), generating employment opportunities, and reducing abysmal disparities in
income distribution.

Growth has been a key factor in Peru’s economy to this day, but such growth in tandem
with extreme distributive inequality has only led to even greater impoverishment.
Figueroa (1984, 1993) and Sheahan (1999) argue that Peru’s inequality is rooted in a
pattern of neglect for the rural poor. Research on this issue notes that there is an
association between high inequality with lower growth. The failure to reduce extreme
inequality remains one of the thorniest issues yet to be resolved. Although during the
past fifty years Peru has experienced rising incomes across all sectors, income
distribution has worsened, and there has been no substantial drop in birth rates (Sheahan
1999, Webb and Fernandez Baca 2003). During the 1980s, Peru’s economic conditions
regressed to levels not seen since the 1970s. While Latin America’s per capita GDP
declined by almost 10%, Peru’s declined by 30%. Some scholars call it the “lost
decade,” even though in the eyes of others the country has lost a century (de Rivero,
1999).

Although Peru has posted rates of economic growth that have been above the Latin
American average for much of the 20th century, it has failed to gain ground on the
industrialized countries. A crude way of putting it is that there has been growth without
development. As Thorp (1998) has noted, during the course of the 20th century, Peru, and
the Latin American region for that matter, made substantial progress with improvements
in real income, higher levels of literacy, longer life expectancy, and better health.
However, even during periods of economic expansion, the continued exclusion of the
poorest sectors generated more poverty and inequality. Economic growth and poverty
reduction go hand in hand, but there was no strategy in place to reduce levels of absolute
poverty (Iguiñez, 1994). In this sense, Peru was one of those countries that failed to
share in the fruits of periodic bursts of growth and economic prosperity. Peru does not
fare well even compared with its neighbors (e.g., Chile) and is far outdistanced by some

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of the East Asian countries (e.g., South Korea, Taiwan, Singapore, and China). While
Peru and the rest of Latin America were mired in debt during the 1980s, many of the East
Asian countries were achieving remarkable economic success and were aggressively
following an export-led strategy, posting high rates of growth (Naya et al., 1989). These
countries have been labeled "newly industrializing countries" (NICs), and rightly so,
because they have demonstrated impressive economic performance and because they are
actually developing.

If, despite economic growth, development has not blossomed, then perhaps some aspects
of the quality of growth need to be examined. The process of economic growth itself is
not always stable. The economy has suffered a discontinuous process of leaps and falls
as Peru has experienced periods of growth, slowdown, and severe economic contraction.
Reliant on the external sector for foreign exchange earnings, the country sometimes has
had to endure price instability, external economic shocks, counterproductive trade policy
decisions by governments in office, and climatic factors that have made exports
vulnerable. Peru has had spurts of high growth, only to see them undone by periods of
decline and crisis (Sheahan, 1999; Thorp 1987, 1991).

Obstacles to development arise from both internal and external circumstances. Internally,
rapid population growth has negatively affected the development process. The quality of
education has also become a significant impediment. And another issue that is not
treated sufficiently here because it takes us beyond the scope of this chapter is the lack of
good governance.

Peru’s economy and society have undergone considerable change since the 1950s. In
1950, 23% of GDP came from agriculture and 58% of the labor force was engaged in
that sector. By the end of the century, 75% of the population was urban. In 1950, 55%
of total exports came from agriculture, but by 1977, this figure had decreased to 23.6%.
From the 1960s on mining and manufacturing, including fishing, grew in economic
significance displacing agriculture. Along with a rising population growth and the
expansion of manufacturing industries, a notable increment in migration to the cities

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began to take shape. This rising rate of population growth since has weakened the rate of
growth of income. Furthermore, the pattern of industrialization Peru experienced,
exacerbated by rapid migration, made planning difficult and the economy simply was
unable to absorb all those seeking work in the “formal” sector.

Labor is an abundant resource in Peru, but the labor force is poorly educated and
inadequately trained. Its population has practically doubled in the past 25 years, putting a
strain on the limited resources already available. Rapid population growth reduces the
capacity for household savings, and this reduces the economy’s ability to accumulate
capital. When investment fails to keep pace, declining productivity is the result.
Population growth, along with failed regional and industrial policies, encouraged the
influx of migrants to the city, which in turn aggravated the level of unemployment and
underemployment (Matos Mar, 1984; Klaren, 2000). This situation also generated a
chain-reaction of substandard housing, poor public services, congestion, crime, and
pollution. Approximately one-third of Peru’s population now lives in Lima.

The development crisis can also be traced to a perverse combination of political and
economic instability. Since its formation the country has had a fragile democracy. One
unfortunate characteristic of Peruvian politics has been the continued influence of the
military on the presidency. Ever since independence from Spain was achieved in the
1820s, Peru has fallen under the sway of military dictators (Villanueva, 1972, 1973).
More half of the country's presidents have been military strongmen― of 82 presidents,
52 have been military men who have ruled the country for a combined total of 96 years―
and even some who were elected civilians have displayed disturbingly autocratic
tendencies. Authoritarianism has been a common feature of an often personalistic
presidency. Furthermore, military expenditures have usually taken a large chunk of the
public budget and absorbed scarce resources that could otherwise have been used to
improve basic needs.

Highly unequal societies are also likely to be more politically unstable. Until the late
1960s the Peruvian social structure was oligarchical (Pease 1979). Political power has

5
remained centralized in Lima. The constant meddling of the military in the political life
of the country generated instability. Villanueva (1972, 1973) has noted that it is not
possible to study Peruvian politics without emphasizing the role of the military.
Militarism has been an important theme in Peru’s political history (Masterson 1981).
Although the armed forces relinquished power in 1980 to pave the way for presidential
elections, the officer core, as an elitist institution, retained significant influence
throughout the 1990s until Fujimori resigned in 2001 (Rospigliosi 2000, Obando 1994 ).

The political system and its central institutions are profoundly weak. This is the case
with the parliamentary system, the judiciary, and the executive branch. Although the
constitution provides for an independent judiciary, in practice, the judicial system is
inefficient, corrupt, and is often controlled by the executive branch. The political system
is exclusionary and often been polarized as the vested interest of the elites in power are
very different from those of the majority of the population. Widespread political
weakness and economic vulnerability have raised concerns about the lack of "good
governance," which is a fundamental prerequisite for sustained development. Quality
leadership in formulating and implementing policy is lacking, as is transparency in
government transactions (Sagasti 1999). Budgetary operations, for example, are closed
to public scrutiny, and political patronage has often been the norm. In general,
governments of different political persuasions have lacked the administrative capacity to
implement policies effectively.

Repeated policy failures by successive governments have thrown Peru into recurrent
crises. Governments, for the most part, have been unable to deliver on their promises of
social prosperity. Each government has faced difficult challenges, yet at the same time
has had little capacity to meet its obligations. The country now feels stuck in a trap from
which there is no escape. Poverty persists, there is little investment, and expectations are
low. The government bureaucracy has been notoriously slow, inefficient, and corrupt.
By the end of the 1980s, the general public had lost much faith in the system, and the
traditional parties had lost their credibility. The rejection of politics as usual was best

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reflected in the election of Alberto Fujimori in 1990, a relatively unknown candidate and
an “outsider” who came from behind to win the presidential election (Bowen 2000).

Throughout much of the 1970s and ‘80s, the economy relied heavily on foreign loans and
foreign investment to support state endeavors. Production was mainly in the hands of
state-owned enterprises. The overall quality of management in public administration was
inefficient. There was a weak regulatory framework and a lack of oversight and
accountability. Wise (2004) argues that the country suffered from a “weak administrative
and institutional apparatus.” Moreover, because of the lack of a cohesive social policy, to
this day there has been little effort to reduce the highly skewed patterns of income
distribution.

A mixture of orthodox, heterodox, and neoliberal policies introduced over the past two
decades generated expectations of a new era of viable development each time. The statist
model, perhaps best exemplified under the first phase of the military regime (1968-74)
and under the Garcia administration (1985-90), has been criticized for its poor
management of macroeconomic policy (Schydlowsky and Schultz 1996, Thorp 1991,
Wise 2004). In 1990, the state assumed a more market-supporting role in the economy,
but despite inroads in implementing market reforms, it falls short of its stated aims. The
sweeping liberalization and the benefits that were to have resulted from free markets and
privatization have eluded the poor (Sheahan 1999). The bulk of employment in the urban
sector is in the informal economy, and most of those in rural areas are eking out a living
from subsistence agriculture (de Soto 1988, Figueroa 1984).

The Washington consensus, the current orthodoxy of economic policy, urges LDCs to
emulate American-led views on development. The main points are: economic activity
should be determined by the free market; the economy should be liberalized; the state
should limit its intervention by deregulating industry, privatizing its assets, and enforcing
fiscal discipline by downsizing and eliminating subsidies. The results have been
disappointing, and Latin American analysts are becoming increasingly skeptical as they
see many countries running out of options. In the case of Peru, the wave of market

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reforms came in the 1990s that streamlined the state. However, there are remaining
challenges that confront Peru.

Policy-makers have expected growth to come from loans and aid-financed investment.
But over time this has proven to be insufficient (Easterly 2001). Reliance on aid to fill the
financing gap has not been an incentive for growth to marshal the country’s own
resources for development. Moreover, investment in manufacturing or in education alone
has not propelled growth. Each time a new formula was tried it did not properly work
because the right incentives have not been created. Easterly reminds us that prosperity
can occur when government incentives induce technological adaptation, when
investments aim at a qualitatively different outcome, when politics do not polarize
entrepreneurs willing to take risks, when the government is accountable for its actions. If
government policy does not provide the right incentives to generate growth, then the final
outcome will be predictably disappointing.

Economic policy in Peru has been missing another aspect: stability and predictability.
Stability is a precondition for growth and development. Unstable rules and unpredictable
regulations have led to uncertainty. Various governments have lacked political credibility
and transparency. Economists stress creating incentives for growth by fostering
institutional reforms to make the government more accountable to its citizens.

The failure of economic policy is not due to any single policy implementation, but is also
a consequence of entrenched institutional barriers that support particular interests. In Peru
there are vested interests that have often resisted reform and discouraged growth. This is
perhaps why there has been an ambiguous relationship between the private sector and the
state.

Peru also faces institutional obstacles to development: administrative ineptitude resulting

from political patronage, rent-seeking behavior, inconsistent enforcement of contracts,
and outright corruption. Almost any rule can be changed at any time, for any reason, at
government discretion. As a result, uncertainty and risk are deeply entrenched in the

8
political and legal system. Although there are means to cope with macroeconomic
instabilities, it is much more difficult to cure a volatile institutional environment rife with
discontinuities in the legal system, unpredictable government intervention, and even
outright corruption. Such institutional risks and uncertainties reduce investment levels,
and, therefore, slow growth.

Peruvian governments lack credibility, and thus citizens often resort to informal networks
of personal relationships so as to minimize potential risks (Borner et al. 1992). Political
decisions are made for personal reasons rather than to foster development. At the dawn
of the 21st century, Peru still lacks an effective government. Many of its decisions are
improvised and without technical merit. The lesson here is that a country is not enriched
by its natural resources alone, but must seek the trust of its people through creative
imagination and hard work, and by generating entrepreneurship. Firms remain inefficient
because they seek protection and political favors. The tax system is arbitrary, unjust,
cumbersome, and detrimental to incentives to work and invest. Within the public
administration rent-seeking behavior is common, and corrupt practices cause apathy and
distrust among the general public.

Faced with serious economic challenges over the years, policies adopted often only had
limited reach. Short-term measures for domestic recovery left little leverage to apply
development strategies. Macroeconomic policies were mainly used to correct short-term
distortions. Often policy-makers were so concerned about the short-term macro
adjustments and the foreign debt, that they lost sight of overall long-term development
goals.

But economic considerations alone do not explain why an economy does or does not
grow. Substantial socio-cultural and institutional readjustments are usually an integral
part of the development process. Development brings about changes in the way people
think, behave, and associate with one another. Socio-cultural impediments to
development are numerous, and often a country will fail to achieve the preconditions for

9
its emergence as a national economic entity. Peru, for instance, suffers from racial and
ethnic antagonisms that impede development and lead to misallocation of resources.

Cultural factors can often be narrowed down to values, attitudes, and beliefs, all of which
can impede development. Harrison (1988) argues that much of the region’s poverty is the
result of its tradition-bound Hispanic culture. The argument is that development would
occur if Peruvians changed their attitudes and social values. The claim is that there is a
lack of work ethic, self-discipline, and national identity. For instance, the criollo costeño
prides himself on doing less, and his lack of punctuality shows that he does not value
time. In the industrialized countries like Japan, those in Europe and North America,
work is a virtue that is properly compensated. For the criollo, work is punishment. This
does not mean that people do not work hard, but sadly enough, there are often no rewards
for hard work. Peruvians also lack instilled discipline and often base advancement
decisions on friendship rather than merit, according to Harrison. Although these attitudes
and values hinder development, they have often been overemphasized, making the
arguments culturally reductionist resulting in a tendentious interpretation.

Peru’s development woes can also be understood by examining its geography, racial
composition, and political trends. Located along the Pacific coast, Peru is endowed with
many natural resources, but it has also been cursed by nature. A very small portion of its
territory is arable land (less than 3%). Peruvian topography comprises an arid coastal
region, a highland region that is part of the Andean mountain range, and a jungle region
that is covered by almost impenetrable tropical forest. Low agricultural productivity due
to unfavorable geography is another explanation for Peru's persistent impoverishment.
These geographical features have placed serious constraints on economic development.

Peru is an ethnically diverse country. Its large indigenous population makes up

approximately half of its entire population, much of which lives in a pre-modern
economy. Peru’s commitment to its indigenous peoples has always been more rhetorical
than real; even to this day they are for the most part excluded from the development
process. Although the mestizos are an important segment of the population, they occupy

10
an ambiguous position in Peruvian society. They have been criticized for retaining all the
defects inherited from the tradition-bound Hispanic culture. Peru also has a small layer of
white Europeans, as well as blacks and Asians of Japanese and Chinese descent. It is this
mixed ethnic background that “has led to widely divergent interpretations of Peruvian
history” (Skidmore and Smith, 2001). The Spaniards and their descendants have often
criticized the indigenous peoples, calling them lazy and addicted to the chewing of coca
leaves. But Peru’s white elite has also looked more to European and American influences
than to developing its own alternatives.

With a small middle class and a miniscule privileged upper class, Peru has produced
leaders who have often missed opportunities and lost their vision of the future. Many of
them were populist demagogues who governed amid fraud and dishonesty. Although
there has been a general awareness on the part of Peruvian leaders of the extent of
poverty and inequality, the political structure has existed first and foremost to protect
their interest and privilege. Pressures for change have come only when rising
antagonisms have reached a boiling point. Whenever growth opportunities have arisen
they have been squandered. As a result, the country has been falling further and further
behind the modern world. Unable to chart an appropriate path for development, Peru's
leaders have resisted change, blocked opportunities for sustainable development, and left
the country with little capacity for innovation.

The public system of education illustrates another failure. Economists see investment in
education as a means to foster development. Although there has been a dramatic
expansion in education during the last four decades, the results have been disappointing.
According to UNESCO data, Peru achieved 100% primary school enrollment but there is
little positive association between growth in education and growth in output per worker.
Educational expansion to meet a target is not always the right incentive to propel growth.
The educational system suffers from a lack of resources and incentives, poor
management, poor teacher training, low salaries, and political patronage. The system
remains highly centralized, and huge regional disparities in resources make the
distribution of education increasingly skewed (IDB, 1994). Easterly (2002) notes that the

11
incentive to invest in the future is not there. According to Gonzalez (1989, 1994), when
measured as part of public spending per capita, as a determinant of long-term growth, the
correlation between education and development is very low. Another distortion is the
significantly greater amount of education spending allocated to higher education rather
than to primary and secondary. Faced with a lack of opportunity at home, many qualified
professionals and skilled laborers emigrate, mainly to the northern countries
(Altamirano, 1992). Moreover, as greater numbers of people have become literate in
recent decades, the result has been a larger mass of poorly educated people, since the
educational system itself is deficient. So far governments have lacked a clear vision to
transform the educational system.

Faced with daunting challenges, recent governments have focused on short-term

management of recurrent crises. A long-term or sustained development strategy has not
been seriously considered, although it is part of the political discourse. The term as a
new paradigm in the discourse of development is now pervasive in the language used to
request aid from international financial institutions and major donor countries that expect
such language in the proposals submitted. Concern for a more equitable pattern of
growth has not been the focus of policy either. Successive governments have failed to
generate productive employment or to provide adequate investment in human capital.

As successive governments proved unable to cope with the social consequences of a

deteriorating situation, NGOs emerged as important social actors in the development
scene. Over the past two decades, Peru has experienced the rapid growth of NGOs.
These have become a valuable resource and have to some extent fulfilled the role that had
been virtually abdicated by the state. But, lacking sufficient resources, NGOs have often
had to seek foreign funding or have had no choice but to enter into collaborative efforts
with the state. While many have remained non-profit enterprises, many others have
resorted to income-generating or for-profit ventures in order to carry out their missions.
These arrangements, in some sense, have undermined the original purpose of many
NGOs by compromising their independence.

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Peru’s External Sector
Up to this point I have discussed mainly the internal impediments to development, which
include political, cultural, and domestic economic constraints. These conditions can
inhibit growth and perpetuate poverty. But a key element of Peru’s economy is its
external sector. Export-led growth has been a blessing and a curse. Vulnerability to
external factors has arisen from changes in demand or from alternative substitutes,
negative exogenous shocks that aggravated foreign debt, periodic climatic changes such
as the El Niño phenomenon, or financial shakeups such as the Asian crisis of 1997.
Other effects result from international pressures and power relations that tilt in favor of
rich nations because of their greater bargaining power and influence. Peru’s external
weakness is reflected in the size of its GDP, the dollar value of its exports, and the lack of
competitive strength of its industrial sector in non-traditional exports. Partly to blame are
its technological weakness, low levels of human capital, and institutional uncertainty that
deters investment.

Economists refer to the export sector of an LDC as its engine of growth. In Peru’s case,
economic growth has relied on the export of primary commodities and on foreign
investment. Unlike other countries, Peru has increasingly diversified its exports,
achieving what is known as low commodity concentration, where no single product
dominates. Exports have relied mainly on traditional agriculture, mining, and fishing.
By the mid-90s, the share of primary goods in merchandise exports was about 80%.
Over the years, primary exports have consisted of copper, silver, gold, cotton, sugar, oil,
wool, and in recent years, fish and fishmeal. Throughout its history there have been
booms in guano, mining, rubber, and fishing, but Peru has been unable to achieve success
using this export-led growth model. During the boom years the development potential
looked promising, but not long afterward either markets collapsed, or elite groups were
unable to sustain this trend for substantial periods of time (Thorp and Bertram 1978,
Thorp 1987, Hunt 1985, Gootenberg 1989). In earlier years, guano had seen its bonanza,
just as the Amazon region had experienced a rubber boom, or as fishing had reached its
boom in the 50s and 60s. But they were all eventually affected by external vulnerability,
inappropriate policy, climatic changes, or other intangibles (Thorp 1998). In some

13
instances, a cheaper substitute cut into the market, as was the case with fishmeal, which
was used as animal feed but was largely replaced by soy.

Export expansion has been a stimulus for growth, but the Peruvian government has
frequently faced serious balance of payments problems. Its export sector’s changing
composition has also impeded the country's ability to manage it properly. Although the
export sector provides much of the country's foreign exchange earnings, some industries
do not generate much employment. For instance, the mining sector is an important
recipient of foreign exchange earnings but does not generate much employment. In fact,
many of the privatized mines have reduced their personnel. The same is true for other
agricultural exports. The manufacturing sector has experienced rapid growth in recent
years but has not yet built any significant capacity to compete adequately in international
markets (Schydlowsky and Schultz 1996, Wise 2003).

While exports’ share of Peru's GDP has grown, Peru's share of world trade has not. Nor
has the content of Peru's exports changed significantly, as the country has remained a
primary commodity exporter. Today Peru relies on a variety of primary commodities for
its export earnings but also depends on foreign aid handouts as well as the remittances of
Peruvians working abroad. One notable change has been the windfall of revenues from
the export of illicit drugs like cocaine, which has witnessed a substantial increase in
recent years. Until the mid-1990s Peru was the world's largest coca producer. Albeit
with much American help and money, Peru has tried to eradicate the production of coca,
yet the industry was thriving again in 2002 as coca leaf prices rose substantially relative
to prices in other, legitimate agricultural activities.

One aspect that has often been overlooked is Peru’s trade policy and the institution that
implements such policy. During the past 50 years, foreign trade has been managed by
different ministries. Until the 1960s, it was handled by the Ministry of Economics. In
1969, it passed to the Ministry of Industry. In 1974 it functioned independently for a year
but was later incorporated into the Ministry of Industry that managed tourism and
subregional integration. In 1980, it went back to the Ministry of Economics. In 1981 the

14
Instituto de Comercio Exterior (ICE) was created as an autonomous entity, but in 1989
ICE was disbanded and later incorporated to the Ministry of Economics. Given the
enormous institutional difficulties and faced with such modifications, foreign trade has
not had clear objectives nor has it functioned effectively. Commercial policy has often
changed course depending on the government in office.

As an economy that relies on the external sector, Peru has never quite articulated a
coherent export policy. The country still does not have a ministry of commerce to
coordinate policies related to export promotion, international trade negotiations,
economic integration, and the promotion of foreign investment. These efforts have close
interdependence but would be better served under one institution. So far these functions
have been worked out disjointly and decision-making is slow in its implementation.
Faced with a new international order, trade and capital investment have become
increasingly more competitive. The lack of trained personnel, particularly economists to
negotiate trade deals and investment, has led to indecisiveness in commercial
negotiations. Under such circumstances Peru has to rely on the temporary renewal of
preferential status granted by the U.S. to Andean nations but it has been incapable of
dealing with protectionist pressures from the northern powers, particularly in the form of
quotas, tariffs, and other import restrictions.

A critical element in international economic relations has been the lack of negotiating
capacity. The Peruvian diplomat Garcia Bedoya (1981) stressed the importance of
strengthening the country’s negotiating capacity at the bilateral, multilateral, and regional
levels. A country like Peru might not have much of an international presence but there
have been times when it has been at a disadvantage for lack of negotiating skills with
institutions such as the IMF over debt restructuring or countries such as the United States
in negotiating textile exports, which in the 1980s became a point of friction (Alvarez
1990).

Challenges faced in international negotiations are the result of deficiencies in institutional

coordination, particularly among the different entities within the public sector. At times

15
improvisation emerges when there is a lack of a well-thought out plan based on long-term
perspective. Lack of coherence arises when politically appointed officials do not always
strive for what might be best for the country when they have their own agenda to pursue.
Moreover, there is inadequate knowledge of how the international system works. Young
diplomats on assignment often have insufficient skills of negotiation, management, and in
arranging investment deals. For instance, over the past decade Peru had established
strong links with Japan but Peruvian “experts” on Japan where almost non-existent.

Mainstream economic arguments attribute economic failure to internal causes but

downplay international forces. The reference is usually to internal mismanagement and
inappropriate economic policies. But critics emphasize the subordination of the economy
to foreign centers of decision-making. For instance, the debt crisis was caused by
external forces over which poor countries had no control. External shocks were often so
disruptive that macroeconomic instability resulted. Opposing interpretations of economic
events over the last three decades have led to very different policy direction. The
dominant trend now favors the expansion of free markets and a reduction of the role of
the state, as well as a closer integration with the world economy, as a way to improve
resource allocation (Rosini and Paredes 1991). However, others have argued that state
intervention (as was the case in some Asian countries) is as necessary for the success of
purposeful industrial policies as is the aim of "strategic" integration with the world
economy (Amsden 1989, Singh 1993).

Peru has traveled the road of different development strategies and has faced serious
economic challenges when each crisis erupted. The dominant export model in the 1950s
was the liberal primary export model that predominated. The role of non-traditional
exports was miniscule (Thorp 1978). Economic growth seemed fragmented, as the
traditional and modern sectors co-existed. The outcome was uneven growth, and the
economy’s vulnerability was reflected in a weak industrial base and a passive
entrepreneurial class (Parodi 2000).

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Industrialization then modernized and generated more jobs, but this was to be realized
with protectionist barriers. The process is known as import-substitution industrialization
(ISI) strategy. ISI enlarged the size of the state in the economy while encouraging
industrial development. But as it turned out, import-substituting industries never left the
stage of infancy, and protectionist measures generated an anti-export bias and
dependence on imported inputs. Moreover, it failed to provide much stimulus to growth
or to create much employment. Furthermore, this policy led to fiscal imbalances and
exchange rate misalignment that resulted in balance of payments crises (Abusada 2001,
Schydlowski 1986).

Influenced by ECLA, the military regime that seized power in 1968 emphasized that
development could only be achieved through structural change. Breaking with the past,
the military regime implemented long overdue structural reforms. The legal framework
of the government’s industrial policy was outlined in the General Law of Industries of
1970 as a way of promoting local production of intermediate and capital goods. Along
these lines the government also sought to promote non-traditional exports.

The military regime also embarked on a series of measures to try to exercise greater
control over the role of foreign capital (Huerta 1977). Until then, multinational firms had
operated under extremely liberal and favorable conditions. First, the regime nationalized
key enterprises that had been in the hands of foreign owners and set new rules on joint
ownership. The bulk of investment came from the public sector, as the number of state-
owned enterprises tripled by 1980 (Fitzgerald 1983). The development program was
largely state-led and faced limitations because it relied on external financing. Ultimately,
it was increased foreign borrowing by the public sector that undermined the efforts at
reform, as it became increasingly difficult to refinance the foreign debt. In spite of the
nationalist rhetoric, the country remained heavily dependent on imported foodstuffs and
industrial inputs as well as foreign financing.

As a result of the nationalization of key enterprises and new regulations on investment,

the private sector found itself excluded from some key sectors. Under the new rules, the

17
public sector maintained its pre-eminence. The private sector was viewed with
skepticism and even discouraged from participating. But the model of “state capitalism”
that was being formed failed because foreign capital was being replaced by foreign
borrowing. The notion that eliminating the role of the traditional oligarchy and
exercising greater control over foreign investment would solve the root obstacles to
development turned out to be naïve (Wise 2003).

This situation changed in 1980 when the incoming Belaúnde administration (1980-85)
emphasized the free play of market forces and promoted trade liberalization. One of its
main achievements was the dismantling of the Registro Nacional de Manufacturas,
substantially lowering tariffs on imports, and lifting other trade restrictions. The critics of
import-substitution, or promoters of the new economic model, argued that ISI generated
inefficiencies, balance of payment deficits, foreign debt, and lack of competitiveness
(Kuzynski 1988; Abusada 2001). However, “the impact on domestic industry was
severe: manufacturing output fell 20 percent between 1980 and 1983, and idle capacity in
manufacturing rose to more than 54 percent” (Alam and Morrison 2000). But the
Belaúnde administration, under pressure, showed indecisiveness by reversing some of its
earlier decisions. Moreover, the trade reforms implemented were not part of a broader set
of policies, and large deficits resulted from increased public spending and substantial
growth in imports.

Alan Garcia assumed the presidency in 1985 but continued to shelter domestic industries
with ISI. With no substantial investment coming from abroad, Garcia sought to court
Peru’s main economic groups. But there was flagging confidence in the government’s
ability to manage the economy. The government also had doubts about the private
sector's intention to invest. The relationship became strained when President Garcia
nationalized the banking system. His heterodox economic policies aggravated Peru’s
external commercial and financial problems. In the latter part of his tenure, Peru was
facing hyperinflation and political turmoil.

18
The election of Alberto Fujimori in 1990 marked a new phase. As president, Fujimori
had to face an economy that was in shambles. Peru soon became one of the most
liberalized regimes in Latin America in the early 1990s. While extremely liberal in its
economic program, the Fujimori administration was authoritarian in its political behavior.
Soon after taking office, a structural adjustment program was applied, the state was
downsized and its role in the economy was substantially reduced. Even so, Peru retained
a very centralized government. By the time Fujimori resigned in disgrace in 2000, Peru
had already experimented with different and not always consistent policy measures and
experienced pendular swings in the economy over a period of four decades.

In essence, Peru’s economy has had an erratic performance with strong and frequent
variations in the rate of growth. From 1960 to 1975 it performed above average, but from
1975 to 1990 it was disastrous. However, other countries like those in east Asia (e.g.
Korea) had exceptional consistent high growth over the 30-year period. Bad government
policies are partly to blame. Other factors are also pure luck: commodity prices were
very volatile, natural disasters happened unexpectedly, and since 1980 the country faced
random violence from sectarian groups that tried to destabilize the government.
Evidence from Peru’s experience (but also that of many other LDCs), indicates that bad
policies can negatively affect growth. These policies can ultimately result in high
inflation, high black market premiums, negative real interest rates, and high budget
deficits. This situation can generate speculation and distrust that ultimately have a
negative effect on growth.

Growth with Development: Some Success Stories

A question that emerges in the literature is: Why have some countries, such as South
Korea and Chile, been traveling the path to successful development, while others like
Peru have lagged far behind? The difference might lie in their different physical, human,
and socioeconomic environments, but there is no simple generalization that can be made.
Some countries are better endowed with natural resources, their people are more
motivated, or their economy is better managed. Peru has little arable land, has few
sources of energy, and faces many of the same constraints other poor countries normally

19
face. The same might be true for Korea, which is a peninsula, and Chile, which has a
similar resource base as Peru. In fact, Peru is more natural-resource rich than Korea.
However, there are several notable differences. South Korea has a relatively
homogeneous population, has changed political leadership but has left economic policy
basically unchanged, has implemented broad-based development policies, has prioritized
education, has successfully promoted exports, has encouraged high rates of saving and
investment over consumption, and has a labor force with a strong work ethic.

Over three decades, Korea’s economy grew by an average of almost 9% a year, from $2.3
billion to $442 billion in 1997. Per capita income during this period rose from $87 to
$9,511 (Breen 1999). By the 1990s, it had become the world’s 11th largest economy and
the 13th trading nation.

During the 1970s, Korea launched a major drive to develop heavy and chemical
industries. Under the dictator Chung-hee Park, Korea built its own industrial base.
Agriculture was modernized and domestic savings rose to 35 percent. As firms fulfilled
their targets they gained preferential credits and tax benefits. As the economy grew,
export targets were prioritized (Song 1997). Much of Korea’s success is attributed to
outward-looking and market-oriented policies it adopted. Aggressive trade-oriented
policies led to higher rates of growth and helped achieve faster structural transformation
from agriculture to industry and services. The quality of growth was reflected in levels of
near full employment and improved opportunities for a larger share of the population
(James et al.1989). As a result, poverty incidence declined steadily and the distribution of
income also became more even.

Why has Peru not progressed significantly beyond the import substitution
industrialization (ISI) strategy? Why did Peru’s stylized development path diverge from
the Asian (e.g. Korea’s) success cases? In Asia, ISI was indispensable in creating
manufacturing capacity (Amsden 1989). But trade and industrial policy also became a
central element in Korea’s growth and structural change (Song 1997). Its growth pattern
was ignited by prioritizing the expansion of exports and manufacturing industries. The

20
export-oriented strategy was supported by the government (Amsden 1989). In this sense,
the Korean case provides a feasible guide to growth and development.

According to Graph 1, in 1960 Peru’s GDP per capita was greater than Korea’s, but in
2000, Peru’s GDP per capita was only 18% that of Korea’s. During the last three decades
Korea’s economy was growing at an average of 9%. Note that Korea’s growth is an
ascending curve and Peru’s remains almost flat. According to one study (IPE 2001), over
the past 50 years (1951-2000), GDP per capita growth in Peru has been 1.1% (see Table
1). The study emphasizes that this disappointing level of growth is mainly due to the
negative level of productivity growth (-0.1%), in spite of the technological break-
throughs we have witnessed these past 50 years. The study concludes that “such
behavior can only be explained by the policies and economic management that have
deteriorated the economy’s efficiency in a significant way” (p. 27).

[Place Figure 1 here]

[Place Table 1 here]

Table 2 shows the changing patterns in exports of Peru and Korea. The latter is a more
dynamic exporter because it has made better use of the technological content in its
exports. By the mid-1980s, half of Peru’s exports were primary goods. Korea, a natural
resource-poor country, could only muster 3.8% of its exports as primary goods. In the
category of goods manufactured with natural resources, Peru increased, albeit slightly, by
1999-01. But while Peru made some progress in the production of goods manufactured
with low-technology, its use of high-technology changed only minimally. Korea, on the
other hand, shows a leap by more than doubling the production of exports with high-
technology content, from 15% to 34%. It is in this area where productivity growth had
paid off for Korea because the production process requires more capital-intensive
techniques and the use of a higher level of know-how.

[Place Table 2 here]

21
There are three hypotheses that explain this uneven development between Peru and
Korea:
1. Divergence in the rate of growth can be partly explained by the use of “wrong
prices” by Peru and the use of a linear path policy of liberalization by Korea.
2. The different export orientation of the two countries. Peru was inward-looking
and Korea was outward-oriented.
3. The active participation of the state in the private sector through public policies
that generate greater productivity.

The first factor can be explained by policy instruments used by the Korean government to
manipulate the interest rate, the exchange rate, the rate of protection, the rate of taxation,
and the rate of money supply growth. These are basic principles that underly growth
promotion.

In terms of the second factor, the rate of growth of Korean exports, based on its outward-
oriented strategy, has been spectacular. From 1965-99, the rate of growth of exports was
15.6%, while for Peru, during the same period, was only 2.6%.

The third hypothesis stresses that there is more transfer of resources from the public
sector to the private sector in the Korean economy. The success of this economy has
much to do with the active role of the state in promoting investment. There is a close
relationship between the public and the private sectors. This is particularly true in
supporting R&D and formulating strategic planning.

The Korean experience shows the feasibility of achieving successful economic results if
the right policies are implemented. Korea has had a clear perspective on international
trade, the exchange rate, financial policies, and in providing decisive support to the
external sector.

Korea’s growth was of its own making, although the U.S. provided a market for its
products. Korea’s development owes much of its efforts to replicating foreign

22
technology. Unlike Peru, Korea directed more attention to the domestic generation of
technological capacity. By slowly building such a foundation, Korea has become a major
producer of ships, steel, electronics, and cars. Moreover, because of their strong sense of
nationalism, Koreans have placed importance on the organization—both the nation and
the corporation. By the mid-1980s, Korean companies started investing overseas and
have faired well in international markets.

Not to be overlooked is that the Korean example as a remarkable case of growth and
development was made possible under strong authoritarian government. The dark side of
this story is that the foundation of this success was achieved under the suppression of
democratic reforms. Under such an authoritarian political climate, Korea’s development
relied on a disciplined labor force and a strong state.

Another outward-looking development strategy that has achieved a degree of success is

Chile. The export-oriented strategy has succeeded under a well-managed macroeconomic
policy. The government did strive to provide a stable economic environment in which the
private sector could flourish. Price distortions were minimized and openness required
cautious financial management by providing the right incentives. Initially, Chile gave
priority to economic growth over social welfare spending, but this was also the
experience of some of the Asian countries.

Chile’s impressive turnaround bore fruit by the mid-1980s, based on a combination of

internal state reform and the modernization of government-business relations. Since the
mid-1970s Chile had also made an explicit commitment to trade-led development
strategy by promoting non-traditional products with higher value-added (Meller 1997).
By the time of the transition to civilian rule in 1990, Chile’s competitive trade strategy
was very much in place. The Chilean approach was based in well-designed incentives to
promote exports which included subsidies, tax exemptions, cheap credit, strong
marketing efforts, and a devalued currency. This was also made possible by the active
participation of the state development corporation (CORFO). And finally, there was an
effort to keep wages low under a strong military rule.

23
One way to calculate the development performance between countries is the human
development index, which uses a set of socio-economic indicators to measure
performance outcome. For instance, the Human Development Report 2003, with data for
2001, shows that out of 175 countries, Chile ranks 43 and Peru 82 (see Table 3). Chile
performs better than Peru in almost every indicator. Peru today is at the HDI achieved by
Chile in 1985 (UNDP 2003). Chile’s per capita GDP is twice that of Peru’s. Chile’s
overall progress in human development has lifted that country to higher levels of
development.

[Place Table 3 here]

How does Peru fit in comparison to Chile’s success? While Peru has been able to
overhaul the state and government-business relations have improved since 1990, policy
makers have not yet formulated and articulated a competitive development model for
sustained economic growth. Peru’s economic reforms have fallen short of the kind of
takeoff that Chile has accomplished these past fifteen years (Wise 2004). A competitive
strategy for Peru would entail a more dynamic completion of market reforms by
providing proper macroeconomic incentives, the adoption of an explicit export-led
strategy, and the implementation of a cohesive social policy to upgrade human capital.
For this to occur, there needs to be a stronger coordination of policy among entities,
something that is still lacking.

Finally, for illustrative purposes, another interesting case is that of China. This Asian
country has had an impressive record of economic growth and poverty reduction
throughout the past two decades since economic reform was launched. Its economy has
grown five-fold, its average income per capita has quadrupled, and 270 million people
have been lifted out of absolute poverty (Chen and Wang 2001).

At the risk of making sweeping generalizations, I have identified some factors that help
to explain the rapid success of some of the Asian countries. Although Asia’s growth has

24
not been uniform during the past three decades, its economic performance has been
superior to that of Latin America. The cultural explanation touches on Confucian values,
which stress loyalty and a strong work ethic. It has also been pointed out that there is a
degree of trust between the private sector and the government, something that has not
always been present in the case of Latin America.

Another issue is that successful Asian countries have exhibited more market-oriented and
less heavily regulated policies than Latin America. This is not to say that Asian
governments have not intervened, but their policies have been more “market friendly.”
For instance, protected industries have been required to compete by exporting, improving
their efficiency and making them more competitive in world markets. In this sense,
Asian countries have had a more outward-oriented strategy. Another way of putting it is
that Latin America has placed less emphasis on export promotion than on import-
substitution. Furthermore, Asia has had a more cautious approach with respect to debt
management and inflation, in contrast to the more liberal expenditure policies of Latin
America. This might also be one of the reasons why Asia has had higher rates of savings.
Finally, the political situation in Asia has been such that while there have been changes of
heads of government, economic policies have remained basically the same (Naya et al.
1989, Singh 1993).

Concluding Remarks

Throughout its history Peru has experienced cyclical short-term crises, which have
become more pronounced during the past four decades. Its troubled history of economic
development has often been blamed on political leaders practicing elitism or populism. In
recent years governments created high expectations but failed to deliver on their
promises. Along the way, the country witnessed socio-political turbulence and suffered
from periods of economic instability and recession. Compounding the problems were
macroeconomic mismanagement, indecisiveness, and political squabbles among
opposition parties.

25
In spite of considerable modernization, Peru still faces serious obstacles and much of its
population remains marginalized. As Hunt (1996) has noted, Peru has met some of the
preconditions for development as interpreted by Arthur Lewis but lacks a consistent
development model and policy continuity. This, along with a weak state, inhibits long-
term growth and development possibilities. As the economy is becoming more integrated
into the new international order, it has not found a viable development alternative nor has
it fully explored ways to make its exports more competitive. Since growth has
traditionally depended on the performance of its export sector, the state has not chartered
a clearly defined trade policy and has sent wrong signals to exporters who, instead of
incentives, face virtually insurmountable hurdles. Lessons can certainly be learned from
its neighbor to its south and other success stories such as South Korea and China. While
Peru has been looking for ways to build bridges with the Asia Pacific region, the success
has been mainly on the diplomatic front. More concrete commercial and business deals
have yet to materialize.

As long as governments in office remain primarily concerned with short-term solutions to

long-term problems, Peru will continue to face stumbling blocks. The country still lacks
a viable development model and a coherent trade strategy to compete globally. If Peru is
to seriously contemplate sustainable development leading to social progress, it will have
to focus on new opportunities by facing the challenges ahead by articulating policy
alternatives that lead to significant changes for sustained growth.

26
 GDP per capita of Peru and Korea
(constant 1995 US$)

KOR PER
16000

14000

12000
constant US$

10000

8000

6000

4000

2000

0
1950 1960 1970 1980 1990 2000 2010
Years

Source: World Bank

27
 TABLE 1

GDP PER CAPITA GROWTH

(1950 – 2000) (%)

YEAR PERU LATIN LDC’s DEVELOPED

PERIOD AMERICA COUNTRIES

1951- 2.9 - - -
1960
1961- 2.3 2.4 2.9 4.2
1980
1971- 1.0 3.4 3.2 2.5
1980
1981- -3.2 -1.0 0.7 2.4
1990
1999- 2.3 1.6 1.6 1.8
2000
1951- 1.0 - - -
2000
1994- 3.2 1.4 2.3 2.3
2000

Source: Banco Central de Reserva, International Monetary Fund.

CUADRO 2

ESTRUCTURA EXPORTADORA POR CATEGORIAS de INTENSIDAD

TECNOLOGICA (%)
Categorías& Productos Manufacturas Manufacturas de Manufacturas de Manufacturas de
períodos primarios basadas en baja technología technología alta technología
recursos intermedia
naturales
Paises
1985 – 87 99-2001 1985 – 87 99-2001 1985 – 87 99-2001 1985 – 87 99-2001 1985 – 87 99-2001

Chile 38.7 36.0 57.1 53.6 1.2 3.3 2.5 6.3 0.4 0.7
Peru 49.8 43.3 35.4 38.4 11.2 14.5 3.4 3.0 0.2 0.8
Korea 3.8 1.3 8.1 12.3 42.0 17.4 31.1 34.9 15.0 34.0
China 41.7 6.2 13.4 9.9 31.2 41.8 10.8 19.4 3.0 22.7
Fuente: CEPAL, Panorama de la inserción internacional de América Latina y el Caribe
2001-2002, cuadro III.1, 2003

TABLE 3

28
Human Development Index, 2001

HDI Life Adult Combined GDP per Life Education GDP HD

RANK Expectancy Literacy Capita expectancy Index Index Index
at Birth Rate School index Value

Enrollment

43. 75.8 95.9 76 9,190 0.85 0.89 0.75 0.831

Chile
82. 69.4 90.2 83 4,570 0.74 0.88 0.64 0.752
Peru
30. 75.2 97.9 91 15,090 0.84 0.96 0.84 0.879
Korea

Source: Human Development Report 2003, United Nations Development Program

29
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