Peru. Economic History of

Transcription

1 Economic History of Peru Throughout history, many nations have stood out for their economic and technical accomplishments; but only a handful of civilizations including what is now Peru did so autonomously. The first cultures created in this part of the world date as early as 3,200 B.C.E. according to recent scholarship. Later the Inca Empire, ruled from the historic city of Cusco, tapped the knowledge built in the previous centuries and sprawled over an immense domain covering six present-day South American countries. During such a protracted period of selfsufficient development, ancient Peruvians attained no little success.

2 In 1500, a few years before the European conquest, the territory now occupied by Peru hosted between five and nine million inhabitants. In order to support such a considerable population in a land with comparatively limited agricultural resources and a challenging geography, ancient Peruvians developed a highly complex and effective economic organization. Quipu (Museum of the Central Reserve Bank of Peru) Their achievements include impressive architectural works, of which the citadel of Machu Picchu, Peru s flagship cultural icon, is but an example. Inca agricultural terraces (andenes) They excelled at using natural resources in harmony with the environment by means of massive agricultural systems and road networks cleverly adapted to the steep slopes of the Andes (a strategy known to modern scholars as vertical archipelago ). Apparently they had no written language as we know it; but they developed ingenious devices, such as a system of recording knots and cords (known as quipus) for accounting, engineering, and scientific purposes. Gold art (Moche culture, AD) In 1532, the Spanish conquerors captured Atahualpa, the last Inca Emperor. This bold action triggered the dismantling of the Inca state and the establishment of Spanish rule, which was to last for three centuries. At its peak in

3 the 18th century, before its division into several jurisdictions under the Bourbon dynasty, the Viceroyalty of Peru extended over most of Spanish South America. Viceroyalty of Peru at the center of the international monetary system of the day. On one hand, under the viceroyal system the country experienced a demographic stagnation (particularly due to the introduction of European diseases) and specialized as a commodity exporter. On the other hand, even though during Colonial Coins (17th Century) The colonial or viceroyal period brought sweeping social and economic changes. The Europeans introduced new crops, animals, and technologies, as well as innovations such as the use of the currency. They also promoted urban development and established the large estate as the main link in the agricultural production chain. Especially, the economic system relied largely on the large-scale mining of precious metals (mainly silver), a new activity that put the Potosí silver mine (Viceroyalty of Peru) The Lima Mint colonial times the agricultural expertise that had served pre-hispanic civilizations well for centuries gradually fell into oblivion, the new technologies and economic institutions brought by the Europeans contributed to enhancing productivity. Another major innovation was the insertion of Peru into the international trade system. Until the first decades of the 18th century, the Peruvian port of Callao was the commercial hub of the region: virtually all goods produced in presentday Peru, Bolivia, and Argentina were shipped from there to Spain via Panama.

4 However, perhaps the most lasting inheritance of the colonial experience was that it turned Peru into the ethnic and cultural melting pot that it is nowadays. content of nutrients essential for plant growth exploitation, and over which Peru held a virtual monopoly, reached record highs in the world s main stock exchanges. Real Felipe Fortress (Port of Callao, 18th Century ) The initial times after the declaration of Independence from Spain in 1821 were difficult. The war of Independence exhausted the country s material resources and the new republican authorities forced the colonial economic elite to leave, depriving the fledgling nation of their expertise and international connections. Civil wars, border conflicts, and a serious deterioration of the state s fiscal powers marked the first years of independent life. However, an unexpected natural resource boom took primary importance towards the mid-nineteenth century: the price of guano (seabird manure), a highly effective fertilizer due to its exceptionally high Guano mining site (mid-19th century) The exploitation of the massive guano deposits on the islands off the coast of Peru brought immense wealth and influence to a new economic elite and boosted fiscal revenues. Several infrastructure works, especially associated with railroad expansion, were launched to modernize the country. Nevertheless, many remained incomplete or did not yield the expected results due to poor planning and corruption leaks. Furthermore, instead of buoyant surpluses, the outcome of the guano era was a disproportionate growth of public debt (five times the public budget as of the mid-1870s). It is widely accepted that the guano era represented a regrettable lost opportunity in Peruvian history.

5 Construction of the Central Andean Railway As a round-up for those years of fiscal deterioration and governance problems, a disastrous war ( ) over yet another coveted commodity, this time saltpeter, left the country devastated and without its resource-rich southern provinces. The reconstruction efforts carried out in the wake of the war included important administrative reforms, especially a profound redesign of fiscal and monetary policy in standard to restore monetary stability in response to the high inflation that ensued during and immediately after the war. The revamped macroeconomic framework and a commodity export boom laid the foundation for solid growth during the first three decades of the 20th century. Those years also witnessed a greater diversification in the domestic economy and, particularly, the appearance of a sound banking system linked both to export activities and to an emerging local manufacturing sector. Saltpeter mining site (Southern Peru, 1870s) The governments of that period reformed the tax system and adopted, by the end of the 19th century, a British-style gold Early industrial development (turn of the 20th century) Nevertheless, a robust industrial development proved elusive due to a deep territorial fragmentation coupled with a still considerable inequality in the distribution of wealth, income, and opportunities, which in turn prevented the full formation of an integrated market economy. On a brighter note, the 1920s in particular were a time of important

6 public works in response to the aspirations of a growing middle class. In addition, after the crisis of the gold standard, fiduciary money was finally accepted by the public, after several unfavorable experiences in the past, due to the guarantee and control provided by the newly founded central bank. cities. Towards the last decades of the 20th century, those proportions had reversed. In the absence of an adequate production infrastructure and with limited legal powers, the migration to the cities encouraged the emergence of a large informal sector, which continues to be a considerable policy and social challenge to this day. Reserve Bank of Peru headquarters (end-1920s) In these circumstances, the ripples from the 1929 Wall Street crash reached Peru and heralded a time marked by important social shifts. Between the 1930s and the end of the 20th century, the country experienced a crucial demographic transition: the population tripled and a massive migration from the inland highlands to the coast and from rural to urban areas radically changed the social landscape. In 1930, two-thirds of the population lived in rural towns and communities and just one-third lived in large and medium Urban development picked up since the first half of the 20 th century (Lima main square, 1920s) Particularly, that period saw an alternation of free-market and interventionist regimes, with a clear predominance of the latter. Timidly towards the end of the 1950s, and more openly in the 1960s and 1970s, the country adopted an import substitution model under the view (upheld by the schools of economic thought predominating in Latin America at the time) that commodity export-oriented strategies promoted growth but not

7 development, as enclave-based extractive activities failed to create linkages with the rest of the economy; and that it was therefore necessary to reinforce the domestic market and buttress industrialization by means of interventionist and protectionist policies. Moreover, the national security doctrine advocated the identification of strategic industries to ensure national sovereignty. regimes were aligned to protect the domestic industry. Import substitution (1970s) The military government of the 1970s, which embodied this mindset, set out to change the composition of the economic elite and the production structure. A radical land reform was put in place to expropriate large and medium estates and hand them over to thousands to peasant families; the energy industry (including large mining projects, oil fields, and refineries) and other productive sectors were nationalized; the public sector was enlarged significantly to take over and supervise a wide range of economic activities; and the tariff and exchange rate State-run oil refinery (1970s) Inadequate implementation and the inefficiencies inherent to the system, together with the implementation of expansionary fiscal and monetary policies, led to an economic crisis and initiated a period of economic stagnation. However, despite its flaws, the essentials of the model lingered into the 1980s. The main policies adopted during the second half of that decade were an extreme expansionary stance in monetary and fiscal policy, widespread controls, and strong economic interventionism (notably an attempt to nationalize the banking system), all of which seriously eroded public confidence. In this context, production fell drastically; the country experienced one of the most severe hyperinflation episodes in history; fiscal expansion and the erosion of tax revenues resulted in massive public sector deficits;

8 The 1980s hyperinflation: 1 New Sol = 1 million Intis (Numismatic Museum of Peru) official reserves where depleted; and around two-thirds of the foreign debt fell into default. The economic crisis was accompanied by growing poverty, gaping income inequalities and an unprecedented escalation of political violence. However, in a dramatic reversal from the economic pattern that had prevailed in previous decades, since 1990 Peru established a prudent macroeconomic framework and introduced key reforms that in a comparatively short period resulted in high growth, a solid external position, and a considerable reduction in poverty. In stark contrast with previous decades, the authorities put in place a strong macroeconomic framework and launched a set of structural reforms to promote efficiency, reduce vulnerabilities, and lay the foundation for sustainable growth. In this context, they set out to reduce the fiscal deficit by rationalizing The New Sol expenditures, overhauling the tax system, normalizing the prices of governmentprovided goods and services, moderating the size of the public payroll, and liquidating the state-run development banks; redesign the monetary framework and, crucially, enact the central bank s constitutionally-mandated independence; liberalize trade and capital flows; privatize several economic activities previously confined to the public sector; introduce a private pension fund system; and strengthen financial supervision. Due to these policies, and helped by an exceptional global boom cycle, the ensuing years saw an impressive economic performance. The period running from the first years of the 21st century until the onset of the international financial crisis was one of longest expansion cycles in Peru s history (32 quarters of consecutive growth). Spurred by domestic consumption and investment, GDP grew around 7% on average in ; and GDP per capita grew 43% over the same period.

9 The record growth achieved in 2008 (9.1%) put Peru among the world s most dynamic economies. The country risk dropped drastically in response to Peru s declining public debt and substantial fiscal and foreign reserve buffers. On the monetary front, the formal adoption of an inflation targeting regime in 2002 (after gradual implementation during the 1990s) kept inflation low, anchored expectations, and promoted a decrease in dollarization. Trade openness plays a key role in Peru s development (Port of Callao) Steps were also taken to further open the economy, notably through the signature of several free-trade agreements. At the same time, considerable challenges remain, especially improving targeting in poverty-reduction programs; bridging the infrastructure deficit through effective public investment, public-private partnerships, and concessions; further reducing financial vulnerabilities, a main concern in the wake of the international financial crisis; and, crucially, better aligning education with the demands of development. The authorities are determined to tackle these weaknesses to definitely pave the way for sustainable and inclusive growth. Peru is now among the world s twentyplus emerging market economies and is regarded as one of the best-performing countries in the region. For its transition from a state of deep economic and social crisis to strong growth and high optimism, Peru can justly be considered a remarkable success story in economic history. In contrast with other periods in its history, Peru learned the lessons from the past, mainly the need to put in place a sound macroeconomic framework, build substantial buffers, and reinforce market confidence. Lima Financial Center