Download Economic History of

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.
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, 100-800 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
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.
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.
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
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.
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.
Construction of the Central Andean Railway
As a round-up for those years of fiscal
deterioration and governance problems, a
disastrous war (1879-1883) 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 1885-1900.
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.
Early industrial development
(turn of the 20th century)
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
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
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 20th 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
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.
State-run oil refinery (1970s)
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
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;
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 2001-2008; and GDP per
capita grew 43% over the same period.
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.
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.
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
Lima Financial Center