Economic history of Peru

The economic history of Peru has its traditional roots in natural resources such as mining, farming, fishing, and agriculture. In precolonial times, during the reign of the Inca empire, the economy was mainly agricultural, though it reached some animal husbandry and mining development. The primary goal of the Incan economy was substinence, with a system based on reciprocity and exchange of products.

In recent years, there has been a noticeable increase in slight industries, services, and high technologies. In 2007, the Peruvian economy grew 9%, the largest growth rate in the world.

Pre-colonial

The Tahuantinsuyo was organized in dominions with a stratified society, in which the ruler was the Inca. It was also supported by an economy based on the collective property of the land. In fact, the Inca Empire was conceived like an ambitious and audacious civilizing project, based on a mythical thought, in which the harmony of the relationships between the human being, nature, and gods was truly essential. The economy was mainly agricultural, though it reached some animal husbandry and mining development. The primary goal of the Incan economy was substinence, with a system based on reciprocity and exchange of products

Colonial

The colonial economy was dominated by mineral wealth, and labor was initially provided through enslavement of the indigenous peoples. Peru’s precious mineral resources and large indigenous population placed it at the core of the South American colonies; according to Palmer, Peru could be ranked second on a scale of colonial penetration (Mahoney, 66). Textiles, minerals, and sugars from the colonies were exported back to Europe.

After the war of succession of 1700, Spain began to lose its monopoly over colonial trade. In the mid-18th century, liberal factions began to appear within the colonial elite; these questioned the legitimacy of the crown’s rule in the Americas. These “Creole patriots”, which had originally been marginalized to the periphery of the empire (Venezuela, Argentina, etc.), provided the necessary conditions for successful economic development during the late colonial period (Mahoney, 52, 80). The introduction of free trade led to explosive growth throughout the empire, with Spain receiving ten times more imports by the end of the 18th century. Despite this overall growth of the colonies, the trend observed in Peru over the course of the century and a half following the war of secession was one of stagnation. The regional socioeconomic hierarchy inverted itself, as core territories where liberals were absent experienced much lower levels of economic development. Their marginalization actually allowed them to benefit from expanded trade opportunities. According to Mahoney, “regional specialists have argued that underdevelopment throughout [areas such as Peru] can be traced to colonial patterns of economic dependence, Hispanic culture, and inefficient markets and economic arrangements".

Attempting to protect its colonial possessions and reverse its faltering role in colonial trade, the crown implemented liberalizing reforms, hastening the removal of trade restrictions and weakening colonial monopolies. This continued the decay of the core regions, leaving them more exposed to the uncertainties of the free market. By the mid-19th century, the reversal of the socioeconomic hierarchy was complete; Peru would not recover its Viceroyalty-era supremacy (Mahoney, 86).

Post-colonial

Peru embarked on a railroad building program. Henry Meiggs built a standard gauge line from Callao across the Andes to the Interior, Huancayo; striking for Cuzco he built the line but also bankrupted the country.

In 1879, Peru entered the War of the Pacific which lasted until 1884. Bolivia invoked its alliance with Peru against Chile. The Peruvian Government tried to mediate the dispute by sending a diplomatic team to negotiate with the Chilean government, but the committee concluded that war was inevitable. Chile declared war on April 5, 1879. Almost five years of war ended with the loss of the department of Tarapacá and the provinces of Tacna and Arica, in the Atacama region.

Originally Chile committed to a referendum for the cities of Arica and Tacna to be held years later, in order to self determine their national affiliation. However, Chile refused to apply the Treaty, and both countries could not determine the statutory framework. In an arbitrage that both countries admitted, the USA decided that the plebiscite was impossible to take, therefore, direct negotiations between the parties led to a treaty (Treaty of Lima, 1929), in which Arica was ceded to Chile and Tacna remained in Peru. Tacna returned to Peru on August 29, 1929. The territorial loss and the extensive looting of Peruvian cities by Chilean troops left scars on the country's relations with Chile that have not yet fully healed.

After the War of the Pacific, an extraordinary effort of rebuilding began. The government started to initiate a number of social and economic reforms in order to recover from the damage of the war. Political stability was achieved only in the early 20th century.

20th century

On October 29, 1948, General Manuel A. Odría led a successful military coup and became the new President. Thanks to a thriving economy, Odría was able to implement expensive, populist social reconstruction, including housing projects, hospitals, and schools. His government was dictatorial, however, and civil rights were severely restricted, and corruption was rampant throughout his régime.

Military juntas continued to majoritarily rule Peru over the next three decades. The economic policies of the 1950s, 1960s, and 1970s in particular, were based on the substitution of imports, and had little effect on the size of the economy. General Francisco Morales Bermúdez replaced leftist General Juan Velasco Alvarado in 1975, citing Velasco's economic mismanagement, among other factors. Morales Bermúdez brought about a more conservative period, beginning the task of restoring the country's economy.

In 1980, after 12 years of military rule, Fernando Belaúnde Terry was elected President. After a promising beginning, his popularity eroded under the stress of inflation, economic hardship, and terrorism; his government's lukewarm liberalization attempt failed in the context of the Latin American debt crisis, as per capita income declined, Peru's foreign debt burgeoned, and violence by leftist insurgents (notably Shining Path) rose steadily during the internal conflict in Peru, which was launched the day before Belaúnde's election. He continued many of the projects that were planned during his 1963-1968 term, including the completion of the Carretera Marginal de la Selva, a roadway linking Chiclayo on the Pacific coast with then-isolated northern regions Amazonas and San Martín.

During the next years, the economic problems left behind by the junta government persisted, worsened by an occurrence of the El Niño weather phenomenon in 1982–83, which caused widespread flooding in some parts of the country, severe droughts in others, and decimated the schools of ocean fish that are one of the country's major resources.

Belaúnde's successor, Alan García, was elected to office in 1985. His administration applied heterodox policies through the expansion of public expenditure and limitations on external debt payments.^[1] With a parliamentary majority for the first time in APRA's history, García's administration showed economic promise much as Belaúnde's had. Despite his initial popularity, García's term in office was marked by bouts of hyperinflation, which reached 7,649% in 1990 and had a cumulative total of 2,200,200% over his five-year term, profoundly destabilizing the Peruvian economy. As a result of this chronic inflation, the Peruvian currency, the sol, was replaced by the inti in mid-1985, which itself was replaced by the nuevo sol in July 1991; the new currency had an equivalent value of one billion old soles. During García's administration, the per capita annual income of Peruvians fell to $720 (below 1960 levels) and Peru's GDP dropped by 20%. By the end of his term, national reserves were a negative $900 million.^[2]

García's term was also characterized by heavy increases in poverty. According to studies by the National Institute of Statistics and Informatics and the United Nations Development Programme, at the start of his presidency, 41.6% of Peruvians lived in poverty. By 1991, this figure had increased to 55%. García also attempted to nationalize the banking and insurance industries. He incurred the wrath of the International Monetary Fund and the financial community by unilaterally declaring a limit on debt repayment equal to 10% of the gross national product, thereby isolating Peru from the international financial markets. One of his administration's most glaring failures was a multimillion-dollar electric tram project for Lima that was never completed; the supports for the elevated track still stand in many places around the city.

Critics of García's presidency claim that his many poor decisions while in office created an environment that led to the rise of an authoritarian leader like Alberto Fujimori, who came to power in 1990. Fujimori implemented drastic measures that caused inflation to drop from 7,650% in 1990 to 139% in 1991. Faced with opposition to his reform efforts, Fujimori dissolved Congress in the auto-golpe of April 5, 1992. He then revised the constitution; called for new congressional elections, and undertook a process of economic liberalization which put an end to price controls, discarded protectionism, eliminated restrictions on foreign direct investment and privatized most state companies.^[3] The reforms allowed sustained economic growth, except for a slump after the 1997 Asian financial crisis.^[4]

Positive results have begun to appear after 15 years, reflecting an expanding global economy; according to figures provided by the INEI, in 2007 the gross national product grew by 8.99%, exports grew by over 35% (reaching US$ 27.8 billion), private and public investments accounted for 21% of the GDP (24.4% in 2008), net international reserves (including gold) reached US$ 35.1 billion, state income from taxation increased by 33%, national debt with respect to GNP was reduced from 50% in 2000 to 34% in 2006; finally, the national budget has grown by 50% in the five years before 2007.

Since 1990, the Peruvian economy has undergone considerable free market reforms, from legalizing parts of the informal sector to significant privatization in the mining, electricity and telecommunications industries. Thanks to strong foreign investment and the cooperation between the Fujimori government and the International Monetary Fund and World Bank, growth was strong in 1994-97 and inflation was brought under control. In 1998, El Niño's impact on agriculture, the financial crisis in Asia, and instability in Brazilian markets undercut growth. 1999 was another lean year for Peru, with the aftermath of El Niño and the Asian financial crisis working its way through the economy. Lima did manage to complete negotiations for an Extended Fund Facility with the IMF in June 1999, although it subsequently had to renegotiate the targets.

Peru's per-capita growth rates have diverged from overall growth rates over the last quarter century. Peru’s GDP per capita peaked in 1981 and is only now returning to that level. By the end of 2006 the government had enacted measures that allowed the economy to improve by increasing investments, expanding production and exports. Raw materials and agroindustrial products represent the bulk of potential exports. By the end of the decade of 2010, investment is expected to total US$25 billion for mining activities, US$20 billion in energy and petroleum, US$12 billion for commerce, US$8 billion for agricultural industries, and US$5 billion for tourism. Thanks to the discovery of large petroleum and natural gas reserves, Peru is expected to become an important exporter of hydrocarbons by 2010, after being a net importer for decades.

See also

• Economy of Peru

References

1. Carlos Parodi, Perú 1960-2000. CIUP, 2000, pp. 206-208.
2. Carlos Parodi, Perú 1960-2000. CIUP, 2000, pp. 204-206.
3. John Sheahan, La economía peruana desde 1950. IEP, 2001, p. 207.
4. Banco Central de Reserva, Producto bruto interno por sectores productivos 1951 - 2006. http://www.bcrp.gob.pe/bcr/dmdocuments/Estadistica/Cuadros/Anuales/ACuadro_06.xls.