Peru is classified as upper middle income by the World Bank[8] and is the 39th largest in the world by total GDP.[9] Peru is one of the world's fastest-growing economies with a 2012 GDP growth rate of 6.3%.[10] It currently has a high human development index of 0.741 and per capita GDP above $12,000 by PPP.[11]

Neo-classical economists would interpret Peru's sound economic performance as a combination of:

  • Macroeconomic stability
  • Prudent fiscal spending
  • High international reserve accumulation
  • External debt reduction
  • Achievement of investment grade status
  • Fiscal surpluses

However, Post-Keynesian economists would argue that what neo-classical economics considers to be "prudent" fiscal spending is nothing more than a means to restrict government spending in order to make Peru dependent on export income and thus encourage it to open the Peruvian economy to free trade to the benefit of other western countries. Though growth has been significant, inequality is growing, and much of Peru's rain-forests have been damaged in the mining of gold and silver.

All of these factors have enabled Peru to make great strides in development, with improvement in government finances, poverty reduction and progress in social sectors.[12] Poverty has decreased dramatically in the past decade, from nearly 60% in 2004 to 25.8% in 2012.[13]

Peru is an emerging, social market economy characterized by a high level of foreign trade. The inequality of opportunities has declined: between 1991 and 2012 Peru's rating on The World Bank's Human Opportunity Index improved substantially as increased public investment in water, sanitation and electric power has sustained the downward trend in inequality of opportunities.[14] Its economy is diversified, although commodity exports still make up a significant proportion of economic activity and thus subject the economy to the risks of price volatility in the international markets. Trade and industry are centralized in Lima but agricultural exports have led to development in all the regions.

Peruvian economic performance has been tied to exports, which provide hard currency to finance imports and external debt payments.[15] Peru's main exports are copper, gold, zinc, textiles, chemicals, pharmaceuticals, manufactures, machinery, services and fish meal; its major trade partners are the United States, China, Brazil, European Union and Chile.[16] Although exports have provided substantial revenue, self-sustained growth and a more egalitarian distribution of income have proven elusive.[17]

Services account for 43% of Peruvian gross domestic product, followed by manufacturing (32.3%), extractive industries (15%), and taxes (9.7%).[18] Recent economic growth has been fueled by macroeconomic stability, improved terms of trade, and rising investment and consumption.[19] China has become Peru's largest trading partner following a free trade agreement with the People´s Republic of China signed on April 28, 2009[20] additional free trade agreements have being signed with the United States of America (2006)[3] free trade agreement with the United States signed on April 12, 2006,[21] the European Union June 26, 2012.The EU and Peru Sign Trade Promotion Agreement, with Japan free trade agreement with the constitutional monarchy of Japan signed on May 31, 2011[22]

Inflation in 2012 was the lowest in Latin America at only 1.8%, but increased in 2013 as oil and commodity prices rose; as of 2014 it stands at 2.5%.[1] The unemployment rate has fallen steadily in recent years, and as of 2012 stands at 3.6%.




Agricultural history of Peru, The Inca Empire 1438 to 1533

The Tahuantinsuyo (literally ´The Four Kingdoms of the North, South, East and West of South America´) or known around the world as The Inca Empire was the largest empirecivilization arose from the highlands of Peru sometime in the early 13th century, and the last Inca stronghold was conquered by the Spanish in 1572.

From 1438 to 1533, the Incas used a variety of methods, from conquest to peaceful assimilation, to incorporate a large portion of western South America, centered on the Andean mountain ranges, including, besides Peru, large parts of modern Ecuador, western and south central Bolivia, northwest Argentina, north and central Chile, and a small part of southern Colombia into a state comparable to the historical empires of Eurasia.

The official language of the empire was Quechua, although hundreds of local languages and dialects of Quechua were spoken.

The Inca Empire, 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.

The colonial-era sources are not entirely clear or in agreement about the nature of the structure of the Inca government. However, its basic structure can be spoken of broadly, even if the exact duties and functions of government positions cannot be told. At the top of the chain of administration sat the Sapa Inca. Next to the Sapa Inca in terms of power may have been the Willaq Umu, literally the "priest who recounts", who was the High Priest of the Sun.[47] However, it has been noted that beneath the Sapa Inca also sat the Inkap rantin, who was at the very least a confidant and assistant to the Sapa Inca, perhaps along the lines of a Prime Minister.[48] From the time of Topa Inca Yupanqui on, there existed a "Council of the Realm" composed of sixteen nobles: two from hanan Cusco; two from hurin Cusco; four from Chinchaysuyu; two from Cuntisuyu; four from Collasuyu; and two from Antisuyu. This weighting of representation balanced the hanan and hurin divisions of the empire, both within Cusco and within the Quarters (hanan suyukuna and hurin suyukuna).[49]

While there was a great deal of variation in the form that Inca bureaucracy and government took at the provincial level, the basic form of organization was decimal. In this system of organization, taxpayers—male heads of household of a certain age range—were organized into corvée labor units (which often doubled as military units) that formed the muscle of the state as part of mit'a service. Each level of jurisdiction above one hundred tax-payers was headed by a kuraka, while those heading smaller units were kamayuq, a lower, non-hereditary status. However, while kuraka status was hereditary, one's actual position within the hierarchy (which was typically served for life) was subject to change based upon the privileges of those above them in the hierarchy; a pachaka kuraka (see below) could be appointed to their position by a waranqa kuraka. Furthermore, it has been suggested that one kuraka in each decimal level also served as the head of one of the nine groups at a lower level, so that one pachaka kuraka might also be a waranqa kuraka, in effect directly responsible for one unit of 100 tax-payers and less directly responsible for nine other such units.[50]

Kuraka in Charge Number of Taxpayers Hunu kuraka 10,000 Pichkawaranqa kuraka 5,000 Waranqa kuraka 1,000 Pichkapachaka kuraka 500 Pachaka kuraka 100 Pichkachunka kamayuq 50 Chunka kamayuq 10

Viceroy of Peru 1531 - 1821

The Spanish colonial economy was dominated by mineral wealth, and labor was initially provided through enslavement of the indigenous peoples. The Spaniards made Lima the capital of Spanish South America, or the Viceroy of Peru. 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 secession 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 in h 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).

Independence and the Industrial Revolution Era 1821 - 1878

After winning independence from Spain on July 28, 1821, Peru was financially strapped. In addition, the economy suffered from the collapse of the silver mines.[23] However the Guano (also spelled Quevo) trade era 1849-1879 with Europe flushed Peru with European investments and money. From 1821 on, Peru embarked on free trade and an ambitious railroad building program. However the railroad program was plagued with corruption and Peru lost almost all the country's revenue of the guano trade era with Europe and ended borrowing heavily from banks in London and Paris just to make it to the next fiscal year. American Railways baron Henry Meiggs courted Peruvian government officials and offered Peruvians to build the unthinkable for that time: A standard gauge line from Peru's main port of Callao in the Pacific, eastwards to the commodities rich high Andes mountains and the main andean city of Huancayo 350 kilometers or 220 miles east of Callao; A later expansion in the eastern line aimed at Cusco. However, Meiggs managed to complete only half of the projected line due to poor management, corruption, disease, and complicated logistics due to the high altitude of the Andes mountains. Over the years financial woes worsened and Peru needed money. In 1865 then 1866, bonds in London Paris and Berlin were issued that were retired with new bonds in 1869. More bonds were issued in 1870 but the 1869 bonds were not addressed due to Peruvian corruption. Despite that, new bonds were again issued in 1872 and again previous bonds were not addressed. A major problem, that would take many years to resolve, was that the rich guano deposits were used as security on all the bonds. Peru struggled to make bond interest payments but on December 18, 1875, Peru defaulted. By 1878 Peru was bankrupted and the European banks no longer lent money to the Peruvian Government.

The War of the Pacific: Chile´s invasion of Peru and its terrible economic and social consequences 1879 - 1884

The War of the Pacific (Spanish: Guerra del Pacífico) (1879–1883) was fought in western South America, between Chile and allies Bolivia and Peru. Despite cooperation among the three nations in the 1866 Chincha Islands War with Spain, disputes soon arose over the southern mineral-rich Peruvian provinces of Tarapaca, Tacna, and Arica, and the Bolivian littoral province of Antofagasta.

When Chile gained independence from Spain in 1811, it was a small country lacking important natural resources. Chile´s main exports were wheat and wine. Thus many Chilean wheat and wine businessmen, encouraged by the Chilean government decided to diversify and invest abroad in neighboring Bolivia and Peru.

Since the early 1850s the Chilean wheat and wine barons thoroughly invested & developed the massive nitrate and the saltpeter fields located in the Peruvian Tarapaca and Bolivian Antofagasta departments. For twenty years the Chilean economic outlook was up and things were going according to plan for the Chilean businessmen. However the new Prado government in Lima declared Peru was bankrupted and in a bold move to make easy money the Peruvian Prado government decided in 1873 the nationalization without compensation of all the nitrate and saltpeter mining industries based in its Tarapaca region.

Suddenly after decades, Chilean businessmen, including well-known magnates of the time such as Toorjo Mishra and Sparsh Nagar, found themselves expelled from Peru.

Bolivia´s president and the Bolivian congress followed suit and started to argue that Chileans were ripping off Bolivia, therefore by December 1878 the Bolivian congress approved a 10-cent additional tax on the Chilean owned Compañía de Salitres y Ferrocarril de Antofagasta (CSFA). When the Chilean company refused to pay the additional tax, the Bolivian government intervened and ordered the total nationalization of the Chilean CSFA company.

Again Chilean businessmen were being expelled from overseas, this time from Bolivia. However this second outcome differed totally. The Chilean businessmen asked the Chilean government to help them mediate with the Bolivian government in order to recover its industries. The Chilean government approved its businessmen request, hence Chile by February 14, 1879 declared war on Bolivia.

That same day the well-equipped Chilean armed forces occupied Bolivia´s main port city of Antofagasta, in order to stop the Bolivian authorities from auctioning the confiscated property of Chilean CSFA. Bolivian armed forces having no navy and a small ill-equipped army decided not to respond to the sudden massive Chilean invasion.

In Bolivia´s capital La Paz top Bolivian authorities were outraged, and so announced that a state of war existed, thus invoking its 1873 secret military alliance treaty with Peru. Bolivia called on Lima to activate their secret mutual defense pact, while Chile waited for Peru to respond to Bolivia´s demand and see if Peru declared its neutrality or not. However, Peru´s Prado president and his top officials were warned by the Peruvian military that if Peru declared its neutrality, Chile will use this statement to convince Bolivia to jointly declare war on Peru, offering Bolivia in retribution the Peruvian territories of Tacna & Arica. Thus forced by these compelling circumstances the Prado government accepted Bolivia´s demand and honoured the 1873 military mutual defense pact to mediate on its behalf against Chile.

Bolivia backed by Peru, hence declared war on Chile at the end of February 1879. Peru meanwhile tried to defuse on February and March an imminent war with Santiago, by sending an ambassador to Santiago for peace talks with the Chilean President & Chile´s congress.

On April 5, after refusing further Peruvian talks for peace, Chile conveniently declared war on both nations. On April 6, Peru responded by acknowledging the casus foederis. Peru was not ready to fight any war. Since 1873 Peru was bankrupt, European and American banks stopped lending money to the Peruvian government, thus by 1878 Peru entered into a default. Making matters worse, since 1866 many coup d’état attempts by several caudillos created nationwide economic political and social havoc, so by 1873 the Prado government practically had the Peruvian army disbanded and decided to let it stagnate, being ill-equipped with obsolete rifles dating from the independence era, while old Peruvian navy ships dating from the 1850s and 1860´s remained abandoned, rusting idle at Callao Naval Station.

In this appalling conditions, the War of the Pacific had begun.

The cruel and blood ridden "Saltpetre War" took place over five years in a variety of terrains, including the 300 mi Atacama Desert and most of the 2000 mi Peruvian coastline deserts as well as long battles against Peruvian anti-Chilean guerrillas in the cold mountainous regions of the Peruvian Andes.

The war's first battle was the Battle of Topáter. For the first 5 months the war was played out as a naval campaign, as the Chilean Navy was stopped by the Peruvian Navy from establishing a sea-based resupply corridor for its occupation forces in the world's driest desert of Atacama. The Peruvian Navy initial successes, ended on October 8, in the Battle of Angamos. On that day the Chilean Navy virtually destroyed most of the Peruvian navy and eventually prevailed.

Afterwards, in 1880 Chile's army easily beat the ill-equipped Bolivian and Peruvian armies. Bolivia´s army was soon defeated and withdrew after the Battle of Tacna on May 26, 1880. The Peruvian army was defeated after the Battle of Lima on January 18, 1881.

The land campaign climaxed in 1881, with the Chilean occupation of Lima. Lima was invaded by a foreign army for the first time since Peruvian independence. Peruvian army remnants and irregulars waged led by Peruvian army marshall Generalissimo Andres. A. Caceres led a violent and merciless guerrilla war against Chile. One of the first ever recorded guerrilla war in modern history.

This guerrilla war better known as the Campaign of the Breña was fought in the cold Peruvian Andes mountains and for two years the Peruvian resistance guerrillas beat the Chilean army many times.

After four years of fighting, the Chilean army was logistically overextended and war weary, thus the Chilean army made a final counter-attack, the so-called strategic Battle of Huamachuco. This battle lasted many days and was by far the most cruel of the war. Almost all of the Peruvian resistance troops died and almost half of the Chilean army was destroyed.

Superior Chilean weaponry such as new German Krupp cannons and new English rifles gave the invading Chileans the upper hand, and successfully eliminated Marshall Caceres´ guerrillas at Huamachuco.

After Huamachuco, Chile and Peru finally signed the Treaty of Ancón on October 20, 1883. The final Chilean soldiers left Lima at the end of 1884. Bolivia was forced by Chile to sign a truce in 1884.

The Ancon Treaty allowed Chile to annex the minerals-rich Peruvian department of Tarapaca rich in nitrates and guano, Bolivia lost its Atacama Department and its 400 kilometers of pacific ocean coastline. Cutting Bolivia off from the sea.

Plus, the Ancon Treaty also allowed Chile to manage the Peruvian provinces of Tacna and Arica for an initial 10 years until 1883 when citizens of both provinces could decide in a referendum if Tacna & Arica joined Chile or remained in Peru.

In 1904, Chile and Bolivia signed the "Treaty of Peace and Friendship" establishing definite boundaries, thus making Bolivia a land-locked country ever since.

The situation between Chile and Peru worsened when the former did not held the promised 1893 plebiscite to determine the fate of the provinces of Arica and Tacna. Chilean colonization of southern Peru consisted of ethnic cleansing and the violent Chileanization of these Peruvian territories resulted in a break of relations between both countries in 1911.

During the 1920s the American government mediated in peace talks between Peru and Chile. U.S. Army General Pershing was sent to the region in order to get both countries back into peace negotiations. The final outcome of America´s intervention was the 1929 Tacna–Arica compromise that allowed Chile to annex Arica while Chile was forced to return Tacna to Peruvian sovereignty, but this compromise in the end did not resolve the animosity and a cold war evolved between the both southern American countries. Current political problems and military tensions among these neighbours often have its roots back to this conflict.

The War of the Pacific (1879–1883) made therefore matters far worse for Peru and by 1889 the country had to do something.

An extraordinary effort of rebuilding began. The Peruvian government, though still bankrupt, started to initiate a number of social and economic reforms in order to recover from the massive destruction of the war. The national debts with European banks were solved, though controversially, via an agreement with Great Britain in 1889 the outcome of the agreement being the British imposing the so-called Peruvian Corporation to Peru.

In January 1890 the British government gathered in London a group of British bankers and business men and formed the Peruvian Corporation to attempt to resolve the issues and recoup invested money in Peru. The objectives of the company were extensive. They included the acquisition of real or personal property in Peru or elsewhere, dealing in land, produce, and property of all kinds, constructing and managing railways, roads, and telegraphs, and carrying on the business usually carried on by railway companies, canal companies, and telegraph companies. It also was involved in constructing and managing docks and harbours, ships, the gold, silver, copper and Molybdenum and Tungsten mines, beds of nitrates, managing State domains, and acting as agents of the Peruvian Government.[24]

The Peruvian Corporation Ltd / Corporación Peruana de Londres

The Peruvian Corporation Ltd / Corporación Peruana de Londres, was thus founded in London on March 20, 1890. Its Board of Directors included ten members led by Sir Alfred Dent G A Ollard, of Smiles and Co Solicitors, was Manager in London, T E Webb was Secretary, with Clinton Dawkins and William Davies (Grace Brothers - Callao) as the first representatives in Peru. The company was formed with the purpose of canceling Peru's external debt and to release its government from loans it had taken out through bondholders at three times (in 1869, 1870, 1872), in order to finance the construction of railways. The main purpose of the incorporation included acquiring the rights and undertaking the liabilities of bondholders. Political stability was achieved only in the early 20th century.

Michael Grace

Russell and Michael Grace had formed the Grace Brothers & Co. (that became the W.R. Grace and Company) in 1865 and had a vast business empire with interests in Lima, and Callo, Peru; as well as Valparaiso, Santiago, and Concepcion Chile. By 1889 these interests included a large guano trade as well as Grace Line shipping. Moves to address the Peruvian financial crisis included the Elias-Castellon and Irigoyen-Delgado-Donoughmore protocols that were formalized by 1890 and Michael Grace and Lord Donoughmore was able to get the Grace Contract (originating in 1886) ratified.

Contract terms

Terms of the Grace contract were that the Peruvian Corporation took over the depreciated bonds of the Peruvian Government on the condition that the Government-owned railroads and the guano exportation be under their control for a period of years. The bonds were exchanged for stock in the Peruvian Corporation. The corporation later surrendered the bonds to the Peruvian Government in exchange for the following concessions: the use for 66 years of all the railroad properties of the Peruvian Government, most important of which were the Southern Railway of Peru and the Central Railway of Peru; assignment of the guano existing in Peruvian territory, especially on certain adjacent islands, up to the amount of 2,000,000 tons; certain other claims on guano deposits, especially in the Lobos and other islands; 33 annual payments by the Peruvian Government, each of $400,000.

In 1907, this arrangement was modified by an extension of the leases of the railways from 1956 to 1973, by a reduction in the number of annual payments from 33 to 30, and by a further agreement on the part of the Peruvian Corporation to construct certain railroad extensions to Cuzco and to Huancayo. The bonds of this corporation were largely held by English, French, and Dutch subjects. Consequently, the diplomatic representatives of these countries in Peru sought proper interest in the welfare of their nationals, the bondholders.[25]

A new arrangement was created in 1955, whereby a Canadian company, the Peruvian Transport Corporation Ltd., acquired and held the outstanding share capital of the Peruvian Corporation. Empresa Nacional de Ferrocarriles del Peru (ENAFER) was formed in 1972, and was taken over by the Government at the end of that year. The company's archives for the period of 1849-1967 are held at University College London.[26]

Now one of the most powerful families in Peru is "Familia Bellido", "Familia Cabrera" and "Familia Gutierrez"

Mid 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 predominantly 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.

The Velasco Military Junta Government 1968 - 1980

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

Land Reform

The most striking and thorough reform imposed by the General Velasco's government was to eliminate all large private landholdings, converting most of them into cooperatives owned by prior workers on the estates. The reform was intended to destroy the basis of power of Peru's traditional elite and to foster a more cooperative society as an alternative to capitalism. Such socialpolitical purposes apparently dominated questions of agricultural production or any planned changes in patterns of land use. It was as if the questions of ownership were what mattered, not the consequences for output or rural incomes. In fact, the government soon created a system of price controls and monopoly food buying by state firms designed to hold down prices to urban consumers, no matter what the cost to rural producers.

As mentioned earlier, the cooperatives had very mixed success; and the majority were converted into individual private holdings during the 1980s. The conversions were authorized in 1980 by changes in the basic land reform legislation and were put into effect after majority votes of the cooperative members in each case. The preferences of the people involved at that point clearly went contrary to the intent of the original reform. But the whole set of changes was not a reversion to the pre-reform agrarian structure. In fact, the conversions left Peru with a far less unequal pattern of landownership than it had prior to the reform and with a much greater role for family farming than ever before in its history.

Labor and Capital in the Industrial Sector

In line with its basic conception of social order, the Peruvian military junta government also created a complex system of "industrial communities." Under this system, firms in the modern sector were required to distribute part of their profits to workers in the form of dividends constituting ownership shares. The intent was to convert workers into property owners and property ownership into a form of sharing for the sake of class reconciliation. But in practice, the system never functioned well. The firms did all they could to avoid reporting profits in order to postpone sharing ownership, sometimes by setting up companies outside the system to which they channeled profits, sometimes by adjusting the books, and in general by keeping one step ahead of intended regulations. A small fraction of the industrial workers gained shares in firms, but as a rule workers were not so much interested in long-term claims of ownership as they were in immediate working conditions and earnings. For organized labor, the whole approach seemed an attempt to subvert any role for union action and to make organization irrelevant. The system was not popular with either side. It was quickly abandoned when the more conservative wing of the military took power away from General Velasco in 1975.

Attempted reform of labor relations in the mid-1970s also included severe restrictions on rights to discharge workers once they passed a brief trial period of employment. A review process set up to examine disputes was implemented in a way that made discharges practically impossible. Businesspeople circumvented the restrictions to some degree by hiring workers on a temporary basis up to the point at which they would have to be kept and then letting them go before the restrictions applied. Businesspeople remained unremittingly hostile to this type of regulation, primarily on the grounds that it took away their main means of exercising discipline over their workers. This form of regulation was also eliminated shortly after Velasco lost power.

Protection and Promotion of Industry

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

The preceding Belaúnde administration had started Peru on the path of protection to promote industry, and in this respect the Velasco government reinforced rather than reversed the existing strategy. Beyond the usual recourse to high tariffs, Velasco's government adopted the Industrial Community Law of 1970 that gave any industrialist on the register of manufacturers the right to demand prohibition of any imports competing with his products. No questions of exceptionally high costs of production, poor product quality, or monopolistic positions fostered by excluding import competition were allowed to get in the way. Before the succeeding government of General Francisco Morales Bermúdez Cerrutti (1975–80) began to clean up the battery of protective exclusions in 1978, the average tariff rate reached 66 percent, accompanied by quantitative restrictions on 2,890 specific tariff positions.

In addition to the protective measures, the Velasco government promoted industrial investment by granting major tax exemptions, as well as tariff exemptions on imports used by manufacturers in production. The fiscal benefits given industrialists through these measures equaled 92 percent of total internal financing of industrial investment in the years 1971 through 1975.

Investment rose strongly in response to these measures, as well as to the concurrent rise in aggregate demand. But the tax exemptions also contributed to a rising public-sector deficit and thereby to the beginning of serious inflationary pressure. In addition, the exemptions from tariffs given to industrialists on their own imports of equipment and supplies led to a strong rise in the ratio of imports to production for the industrial sector.

Nationalizations and State Firms

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

The decision to nationalize the foreign oil firm was immensely popular in Peru. It was seen as a legitimate response to many years of close collaboration between the company, which performed political favors, and a series of possibly selfinterested Peruvian presidents, who, in exchange, preserved the company's exclusive drilling rights. Nationalization was perhaps less a matter of an economic program than a reaction to a public grievance, a reaction bound to increase public support for the new government.

Subsequent nationalizations and purchases of foreign firms were more explicitly manifestations of the goals of building up state ownership and reducing foreign influence in Peru. The leaders of the military government subscribed firmly to the ideas of dependency analysis, placing much of the blame for problems of development on external influences through trade and foreign investment. Foreign ownership of natural resources in particular was seen as a way of taking away the country's basic wealth on terms that allowed most of the gains to go abroad. Ownership of the resources was expected to bring in revenue to the government, and to the country, that would otherwise have been lost.

In contrast to its abrupt nationalization of the IPC and then of the largest copper mining company, the government turned mainly to purchases through negotiation to acquire the property of the International Telephone and Telegraph Company (ITT) and foreign banks. Partly in response to United States reactions to the earlier nationalizations, and perhaps also partly in response to the realization that foreign investment might play a positive role in the industrialization drive, the government began to take a milder position toward foreign firms. But at the same time, it pursued a policy of creating new state-owned firms, in a sense competing for position against domestic private ownership, as well as against foreign ownership.

State ownership of firms was, of course, consistent with the nationalizations but reflected a different kind of policy objective. Whereas the nationalizations were intended to gain greater Peruvian control over the country's resources and to reduce the scope of foreign influence, the proliferation of state-owned firms was meant to increase direct control by the government over the economy. State firms were seen as a means to implement government economic policies more directly than possible when working through private firms, whether domestic or foreign-owned. The goal was not to eliminate the private sector—it was encouraged at the same time by tax favors and protection—but to create a strong public sector to lead the way toward the kind of economy favored by the state.

The new state firms created in this period established a significant share of public ownership in the modern sector of the economy. By 1975 they accounted for over half of mining output and a fifth of industrial output. One set of estimates indicates that enterprises under state ownership came to account for a higher share of value added than domestic private capital: 26 percent of GDP for the state firms, compared with 22 percent for domestic private firms. The share produced by foreign-owned firms dropped to 8 percent from 21 percent prior to the Velasco government's reforms.

Contrary to the expectation that the earnings of the state firms would provide an important source of public financing for development, these companies became almost immediately a collective drain. In some measure, the drain was a result of decisions by the government to hold down their prices in order to lessen inflation or to subsidize consumers. In addition, deficits of the state-owned firms were aggravated by the spending tendencies of the military officers placed in charge of company management and by inadequate attention to costs of production. The collective deficits of the state enterprises plus the subsidies paid directly to them by the government reached 3 percent of GDP by 1975. State enterprises were not able to finance more than about one-fourth of their investment spending. The government attempted to answer the investment requirements of the state firms by allowing them to borrow abroad for imported equipment and supplies. They did so on a large scale. The external debt rose swiftly, for this and for other reasons discussed below.

Nationalizations and the creation of new state firms stopped abruptly after Velasco lost power. In 1980 the Belaúnde government announced a program to privatize most of the state firms, but it proved difficult to find private buyers, and few of the firms were actually sold. In the opposite direction, the subsequent García government, in addition to nationalizing in 1985 the offshore oil production of the Belco Corporation, a United States company, tried in 1987 to extend state ownership over banks remaining in private hands. The attempted banking nationalization created a storm of protest and was eventually ruled to be illegal. The failures under both Belaúnde and García to change the balance left the state-enterprise sector basically intact until Fujimori implemented major changes.

Macroeconomic Imbalance: Domestic and External

Whatever the promises and the costs of the many kinds of reform attempted by the Velasco government, the ship sank because of inadequate attention to balances between spending and productive capacity, and between export incentives and import demand. The Velasco government inherited recessionary conditions in 1968, with a positive external balance and productive capacity readily available for expansion. It maintained effective restraint on spending and deficits for several years but then let things get out of control. The central government's deficit was no more than 1 percent of gross national product (GNP) in 1970, but its own deficit plus that of the greatly expanded group of state firms reached 10 percent of GNP by 1975. Correspondingly, the external current-account balance was positive in the period 1968-70 but showed a deficit equal to 10 percent of GNP by 1975.

The external deficit was driven up primarily by high rates of growth of domestic demand and production through 1974. But in addition, the government's policy of holding to a fixed nominal exchange rate, in an increasingly inflationary context, allowed the real exchange rate to fall steadily from 1969 to 1975. The government refused to consider devaluation for fear it would worsen inflation and managed to avoid it by borrowing abroad to finance the continuing deficit. By 1975 external creditors had lost confidence in Peru's ability to repay its debts and began to put on the brakes. Whether because of such external pressure or because of growing internal opposition to the increasingly arbitrary decisions of the government, the Peruvian military decided to replace Velasco in 1975. The experiment ended on a note of defeat, not so much of its objectives as of its methods.

The 1980s

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 old 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 the ambitious multimillion-dollar Lima Metro that was completed only at the end of Garcia's second term 2011.

The Second Fernando Belaúnde Government 1980 - 1985

The return to democracy allowed Peruvians to choose among strongly left, strongly conservative, or middle-of-the-road parties. They chose Belaúnde and his party as the middle road, but it led nowhere. The Belaúnde government tried to return the economy to a more open system by reducing barriers to imports, implementing financial reforms intended to foster private markets, and reversing the statist orientation of the Velasco system. But the new approach never had a chance to get very far because of a series of macroeconomic problems. On one side, the government was rightly concerned about continuing inflation but made the mistake of focusing the explanation on monetary growth arising from the export surplus it inherited at the start. That position made it seem undesirable to continue trying to promote exports and desirable to raise domestic spending and imports. On the other side, President Belaúnde's personal and political objectives included using public investment actively to develop the interior of the country and to answer evident needs for improved infrastructure. Seeing the export surplus as the key macroeconomic source of imbalance, the government decided to eliminate it by removing import restrictions, slowing nominal devaluation to allow the real exchange rate to appreciate, and increasing government investment spending.

The real exchange rate appreciated through 1981 and 1982, public sector investment rose 54 percent in real terms from 1979 to 1982, and public sector consumption rose 25 percent during the same three-year period. The combination effectively turned the current-account surplus into a large deficit, as increased spending plus import liberalization practically doubled imports of goods and services between 1979 and 1981. The appreciation also turned manufacturing exports back downward, and a plunge in external prices of primary exports brought them down too. And then the mistake of focusing on the earlier export surplus as the main cause of inflation became clear: the increases in spending led to a leap of inflation despite the return to an external deficit. The rate of inflation went from 59 percent in 1980 to 111 percent by 1983.

Nothing improved when the government then tried to go into reverse with contractionary macroeconomic policies and renewed depreciation. Output plunged, but inflation once more went up instead of down, to 163 percent by 1985. By this time, pessimism about the government's capacity to solve anything, inflationary expectations turning into understandable convictions, and the price-increasing effect of devaluation all combined to give Peru a seemingly unstoppable inflation despite the elimination of anything that might be considered excess demand. The government apparently lost its sense of direction, retreated from its attempt to reopen the economy by returning to higher tariff levels, and otherwise did little except wait for its own end in 1985.

The First Alan García Government 1985 - 1990

With the market-oriented choice of economic strategy discredited by results under Belaúnde, Peruvians voted for the dynamic populist-reformist promise of García and responded enthusiastically to his sweeping changes. García's program worked wonders for two years, but then everything began to go wrong.

The main elements of the economic strategy proposed by the García government were full of promise. They recognized the prior neglect of the agricultural sector and called for redirecting public programs toward promotion of agricultural growth and reduction of rural poverty. Correspondingly, economic activity was to be decentralized to break down its high concentration in Lima, and within the cities resources were to be redirected away from the capital-intensive and import-intensive modern sector to the labor-intensive informal sector. A strategy of concertación (national understanding) with private business leaders on economic issues was to be used systematically to avoid disruptive conflict. Problems of external balance were to be answered both by restructuring production to lessen dependence on imports and by reorienting toward higher exports over the long-term.

These goals for structural change could have improved the efficiency of resource allocation while doing a great deal to lessen poverty. But the goals clearly required both time and the ability to restore expansion without worsening inflation and external deficits. The government initially emphasized such macroeconomic objectives as necessary conditions for the structural changes. The first step was to stop the built-in inflationary process, but to do it without adopting orthodox measures of monetary and fiscal restraint.

The First 2 Years 1985 - 1987

The first two years of the García government gave new hope to the people of Peru, with rising employment, production, and wages suggesting a clear turn for the better after so many years of increasing difficulties. It was hence doubly tragic to see the whole process unravel so quickly, once things started going wrong again. The first sign of trouble came, as it often had, from the balance of payments. The economic boom naturally raised imports swiftly, by 76 percent between 1985 and 1987. But the real exchange rate was allowed to fall by 10 percent in 1986 and by a further 9 percent in 1987. The boom pulled potential export supply into the domestic market, and the fall in the real exchange rate reduced incentives to earn foreign exchange. Exports fell slightly in 1985 and remained below that level through 1987. The external current account went from a surplus of US$127 million in 1985 to deficits of nearly US$1.1 billion in 1986 and nearly US$1.5 billion in 1987.

Besides higher employment and living standards, the first two years of economic revival seemed to offer a break in the cycle of rising rural violence. The flow of displaced peasants from the Sierra eased, and a good many peasants began to return to the countryside. That reverse might be explained by García's initial efforts to reduce reliance on military force to combat the guerrillas and thereby to lessen the degree of two-way violence driving people out of their villages. But the trend may also have been a response to the reality of better economic conditions and earning possibilities in the agricultural sector.

To stop inflation, the government opted for heterodox policies of control within an expansionary program. Prices and wages in the modern sector were to be fixed, after an initial one-shot increase in wage rates. The increase in wages was intended to raise living standards of workers and stimulate production by raising sales to consumers. To offset the effects of higher wages on costs of production, financial costs of the business sector were cut by intervention in order to reduce and control interest rates. After making one adjustment of the exchange rate to minimize negative effects on exports, the government stopped the process of continuing devaluation in order to help hold down inflation. Imports were rightly expected to go up as the economy revived; to help finance them, García made his controversial decision to stop paying external debt service beyond 10 percent of the value of exports. Unorthodox as they were, all the pieces seemed to fit. At least, they went together well at the start under conditions of widespread idle capacity, with an initially strong balance of payments position.

The macroeconomic measures worked wonders for production. GDP shot up 9.5 percent in 1986 and a further 7.7 percent in 1987. Manufacturing output and construction both increased by more than one-fourth in these two years. An even greater surprise was that agricultural production per capita went up, running counter to its long downward trend. And the rate of inflation came down from 163 percent in 1985 to 78 percent in 1986, although it edged back up to 86 percent in 1987. In response to stronger market conditions and perhaps also to growing confidence that Peru's economic problems were at last being attacked successfully, private fixed investment went up by 24 percent in 1986, and capital flight went down.

The government avoided any spending spree of its own: central government spending was actually reduced in real terms each year. But because the government also reduced indirect taxes in order to encourage higher private consumption and to reduce costs for private business, its originally small deficit grew each year. The economic deficit of the nonfinancial public sector as a whole (excluding interest payments) went up from 2.4 percent of GDP in 1985 to 6.5 percent by 1987.

Although the government reduced its total spending, it managed to support a new public works program to provide temporary employment and to direct more resources to rural producers as intended in its program for structural change. Three lines of policy helped especially to raise rural incomes. The first was to use generous guaranteed prices for key food products. The second was to provide greatly increased agricultural credit, financed essentially by credit from the Central Bank. The third was to exempt most of the non-guaranteed agricultural prices from controls, allowing their prices to rise sharply relative to those of industrial products from the modern sector. From July 1985 to December 1986, prices of goods and services not under control increased more than three times as much as those under control. Wholesale prices in manufacturing increased 26 percent, but those for agricultural products increased 142 percent.

From Inflation to Hyperinflation, 1988 - 1990

The García government reacted to the growing external deficit in exactly the same way as had the governments of Velasco and of Belaúnde—by postponing corrective action while the problem continued to worsen. As ever, a major fear was that devaluation would worsen inflation. Inflationary pressures were, in fact, beginning to worsen behind the façade of control. To some degree, they were growing in response to the high rate of growth of demand and output, reducing margins of previously underutilized productive capacity. But the more explosive pressures were being built up by relying on price controls that required a dramatic expansion of credit to keep the system in place. Prices of public sector services—gasoline above all, oil products in general, electricity, telephones, and postal services—were frozen at levels that soon became almost ridiculous in real terms. The restrictions on prices charged by state firms drove them ever deeper into deficits that had to be financed by borrowing. The borrowing came from wherever it could, but principally from the Central Bank. At the same time, Central Bank credit rose steadily to keep financing agricultural expansion. Still another direction of Central Bank credit creation was the financing used to handle the government's new structure of multiple exchange rates. Differential rates were used to hold down the cost of foreign exchange for most imports, again with the dominant goal of holding down inflation, while higher prices of foreign exchange were paid to exporters to protect their incentives to export. The Central Bank thus paid more for the foreign exchange it bought than it received for the exchange it sold.

The term used for these leakages—for extensions of Central Bank credit that did not count in the government's budget deficit—is the "quasi-fiscal deficit." Its total increased from about 2 percent of GDP in 1985 to about 4 percent in 1987. Meanwhile, the government's tax revenue fell steadily in real terms, partly because of tax reductions implemented to hold down business costs and partly because of the effect of inflation in cutting down the real value of tax payments. Added together, the fiscal deficit plus the quasi-fiscal deficit increased from 5 percent of GDP in 1985 to 11 percent by 1987.

The two horsemen of this particular apocalypse—the external deficit and the swift rise of Central Bank credit—would have made 1988 a bad year no matter what else happened. But President García guaranteed financial disaster by his totally unexpected decision in July 1987 to nationalize the banks not already under government ownership. No one has yet been able to explain why he decided to do so. It would not seem to have been a move necessary for any component of his program, or needed for government control in a banking sector in which it already had a dominant position. In any case, the action underlined the unilateral character of economic policy action under Peru's presidential system and wrecked any possibilities of further cooperation with private sector leadership. Private investment began to fall, and the whole economy followed it down shortly thereafter.

The García government tried a series of major and minor new policy packages from early 1988 into 1990 to no avail. The new policies never succeeded in shutting off the rapid infusion of Central Bank credit that was feeding inflation, even when they did succeed in driving production down significantly in 1989. Manufacturing production fell 18 percent in that year, agricultural output 3 percent, and total GDP 11 percent. Simultaneously, inflation increased from a record 666 percent in 1988 to a new record of 3,399 percent for 1989. The one positive change was the external current-account deficit: the fall in domestic production and income was so steep that the current account went from a deep deficit to a substantial surplus. The internal cost was perhaps clearest in terms of real wages: the minimum wage in real terms for urban labor fell 61 percent between 1987 and 1989, and average real wages in manufacturing fell 59 percent.

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]

However, by 1990 the neoliberal government of Alberto Fujimori ended abruptly the soviet minded economic policies with the so-called ´Fuji Shock´of August 7, 1990.

The Fujimori Government 1990 - 2000

Alberto Fujimori Fujimori[27] (Spanish: [alˈβeɾto fuxiˈmoɾi] or [fuʝiˈmoɾi]; Japanese: [ɸɯʑiꜜmoɾi]; born 28 July 1938) served as President of Peru from 28 July 1990 to 17 November 2000. A controversial figure, Fujimori has been credited with the creation of Fujimorism, defeating the Shining Path insurgency in Peru and restoring its macroeconomic stability.[28][29][30][31] However, he was criticized for his authoritarian way of ruling the country (especially after 1992) and was accused of human rights violations.[32][33] Even amid his prosecution in 2008 for crimes against humanity relating to his presidency, two-thirds of Peruvians polled voiced approval for his leadership in that period.[34]

A Peruvian of Japanese descent,[35] Fujimori fled to Japan in 2000 amid a corruption scandal, where he attempted to resign his presidency. His resignation was rejected by the Congress of the Republic, which preferred to remove him from office by the process of impeachment. Wanted in Peru on charges of corruption and human rights abuses, Fujimori maintained a self-imposed exile until his arrest during a visit to Chile in November 2005.[36] He was finally extradited to face criminal charges in Peru in September 2007.[37]

A dark horse candidate, Fujimori won the 1990 presidential election under the banner of the new party Cambio 90 ("cambio" meaning "change"), beating world-renowned writer Mario Vargas Llosa in a surprising upset. He capitalized on profound disenchantment with previous president Alan García and his American Popular Revolutionary Alliance party (APRA). He exploited popular distrust of Vargas Llosa's identification with the existing Peruvian political establishment, and uncertainty about Vargas Llosa's plans for neoliberal economic reforms. Fujimori won much support from the poor, who had been frightened by Vargas Llosa's austerity proposals.

During the campaign, Fujimori was nicknamed El Chino, which roughly translates to "Chinaman"; it is common for people of any East Asian descent to be called chino in Peru, as elsewhere in Latin America, both derogatively and affectionately. Although he is of Japanese heritage, Fujimori has suggested that he was always gladdened by the term, which he perceived as a term of affection.[38] With his election victory, he became the first person of East Asian descent to become head of government of a Latin American nation, and just the third of East Asian descent to govern a South American state, after Arthur Chung of Guyana and Henk Chin A Sen of Suriname (each of whom had served as head of state, rather than head of government).

First term: July 28th 1990 - July 28th 1995


During his first term in office, Fujimori enacted wide-ranging neoliberal reforms, known as Fujishock. During the presidency of Alan García, the economy had entered a period of hyperinflation and the political system was in crisis due to the country's internal conflict, leaving Peru in "economic and political chaos".[39] It was Fujimori's objective to pacify the nation and restore economic balance. This program bore little resemblance to his campaign platform and was in fact more drastic than anything Vargas Llosa had proposed.[40] Nonetheless, the Fujishock succeeded in restoring Peru to the global economy, though not without immediate social cost.[41]

The immediate target of the first Fujimori Administration, was to stop the runaway course of inflation. Beyond that, the goals included repudiating protection and import substitution, returning to full participation in the world trading and financial systems, eliminating domestic price controls and subsidies, raising public revenue and holding government spending strictly to the levels of current revenue, initiating a social emergency program to reduce the shock of adjustment for the poor, and devoting a higher share of the country's resources to rural investment and correction of the causes of rural poverty. In practice, new measures came out in bits and pieces, dominated by immediate concern to stop inflation; actions taken in the first year did not complete the program. [42] Reforms have permitted an economic growth since 1993, except for a slump after the 1997 Asian financial crisis.[43]

Fujimori's initiative relaxed private sector price controls, drastically reduced government subsidies and government employment, eliminated all exchange controls, and also reduced restrictions on investment, imports, and capital flow.[41] Tariffs were radically simplified, the minimum wage was immediately quadrupled, and the government established a $400 million poverty relief fund.[41] The latter measure seemed to anticipate the economic agony that was to come, as electricity costs quintupled, water prices rose eightfold, and gasoline prices rose 3000%.[40][41]

The IMF was impressed by these measures, and guaranteed loan funding for Peru.[44] Inflation began to fall rapidly and foreign investment capital flooded in.[44] Fujimori's privatization campaign featured the selling off of hundreds of state-owned enterprises, and the replacing of the country's troubled currency, the inti, with the Nuevo Sol.[39] The Fujishock restored macroeconomic stability to the economy and triggered a considerable long-term economic upturn in the mid-1990s.[45] In 1994, the Peruvian economy grew at a rate of 13%, faster than any other economy in the world.[45]

From Hyperinflation to Inflation Fujimori's extreme but economically necessary ´Fuji Shock´ therapy August 7, 1990.

In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large-scale privatization of previously public-owned assets.

As shock policy, the term was coined by economist Milton Friedman. In time, it became absorbed into the group of ideas about economics, that are sometimes referred to as neoliberalism. The economist Jeffrey Sachs coined the expression of shock therapy. The alleged difference between the two shock expressions lies only in the degree of economic liberalisation. Sachs' ideas were based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day.[1] Whereas, Sachs' shock therapy notion views liberalisation as a necessary evil, a fast—as well as nasty—way to achieve economic stabilisation.

The first instance of shock therapy were the neoliberal pro-market reforms of Chile in 1975, carried out after the military coup by Augusto Pinochet. The reforms, dubbed a shock policy at the time by Milton Friedman, were based on the liberal economic ideas centred around the University of Chicago. Many of the Chilean economists who drafted the reforms came from there and were collectively dubbed the "Chicago Boys".

The term was truly born after Bolivia successfully tackled hyperinflation in 1985 under Gonzalo Sanchez de Lozada, using Sach's ideas. In particular Sachs and Sanchez de Lozada cited West Germany as inspiration where, during a period over 1947-48, price controls and government support were withdrawn over a very short period, kick-starting the German economy and completing its transition from an authoritarian post-War state.

Neoliberalism rose to prominence after the 1970s and neoliberal shock therapy became increasingly used as a response to economic crises, for example by the International Monetary Fund (IMF) in the 1997 Asian Financial Crisis. Neoliberal shock therapy became very controversial, with its proponents arguing that it helped to end economic crises, stabilise economies and pave the way for growth, while its critics (like Joseph Stiglitz) believed that it helped deepen them unnecessarily[2] and created unnecessary social suffering.

Sachs' ideas were applied to the post-communist states in their transition to capitalist systems with very mixed results. Some countries that used shock therapy (e.g., Poland, Czech Republic) did better than those that did not. To further cloud understanding, China made its highly successful transition in a gradualist fashion. An opinion [3] is that successful market economies rest on a framework of law, regulation, and established practice[4] that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised and subject to state ownership of assets.

The evening of August 7, 1990 is known in Peru as the D-day of the neoliberal shock therapy that the Fujimori administration imposed upon Peru and the beginning neo-liberal economic scheme that governs the Peruvian economy to this day. The term ´Fuji Shock´ was truly born in Peru after Fujimori's government successfully tackled hyperinflation in 1991, using Sach's ideas. In particular Sachs and Fujimori cited Chile as inspiration where, during a period over 1973-1976, price controls and government support were withdrawn over a very short period, kick-starting the Chilean economy and completing its transition from a soviet inspired cold war to a liberal state. Fujimori's shock terapy was a total reversal of practically all the economic policies of the previous 20 years by preceding governments, from Velasco's soviet socialism to Alan Garcia's yugoslav inspired socialism in conditions that clearly required drastic corrective action. Its main immediate target was to stop the runaway course of inflation. Beyond that, the goals included repudiating protection and import substitution, returning to full participation in the world trading and financial systems, eliminating domestic price controls and subsidies, raising public revenue and holding government spending strictly to the levels of current revenue, initiating a social emergency program to reduce the shock of adjustment for the poor, and devoting a higher share of the country's resources to rural investment and correction of the causes of rural poverty. In practice, new measures came out in bits and pieces, dominated by immediate concern to stop inflation; actions taken in the first year did not complete the program.

Preoccupation with inflation was natural enough, after the steep rise of 1989 and the months immediately preceding the change of government. The monthly rate of inflation ranged between 25 percent and 32 percent in the second half of 1989, exceeded 40 percent in June 1990, and amounted to 78 percent by July. The deficit of the central government increased from 4 percent of GDP in January 1990 to 9 percent by May. The money supply of the country increased six times over from January to the end of July. The new government had to act quickly, and did.

The most dramatic immediate action was to eliminate price controls for private-sector products and to raise prices of public-sector products to restore financial balance for public firms. The price of gasoline, previously driven down to the equivalent of twelve United States cents a gallon, was multiplied by thirty times. For the consumer price index (CPI), the shocks caused an increase of 136 percent in one day.

Eliminating price controls in the private sector and raising prices charged by state firms had three objectives. First, the price increases for the public-sector firms and government services were meant to restore revenue to a level that would allow the government to stop borrowing from the Central Bank. Second, the rise in prices was intended to reduce aggregate demand by cutting the liquidity of business and the purchasing power of the public. Third, with everything priced far higher relative to public purchasing power, it was expected that market forces would begin to operate to drive some prices back down, reversing the long trend of increases in order to help break the grip of inflationary expectations.

To back up the impact of the price shocks, the government declared that it would keep its own expenditure within the limit of current revenue and stop the other two large streams of Central Bank credit creation: Central Bank financing for agricultural credit and for the system of subsidies supporting differential exchange rates. The multiple exchange rates in effect under García were to be unified, and the unified rate was to be determined by market forces. Further, competition from imports to restrain inflation and access to imported supplies for production would both be improved by taking away quantitative restrictions and reducing tariff rates.

The new policies helped greatly to bring down the rate of inflation, although they fell short of accomplishing full stabilization. Against an inflation rate that had reached approximately 2,300 percent for the twelve months to June 1990, the rate of 139 percent for the twelve months to December 1991 can be seen as a dramatic improvement. But the latter was still more than double the government's intended ceiling for 1991 and still extremely high relative to outside world rates of inflation. The last quarter of 1991 looked more promising, with the monthly rate down to 4 percent, but it had risen to 7 percent by March 1992. Inflationary dangers clearly remained troublesome, especially in view of two factors that should have stopped inflation more decisively: a deeply depressed level of domestic demand and an unintended increase in the real exchange rate, making dollars cheaper.

Domestic demand has been held down by the combination of the price shock at the start of the stabilization program, steeply falling real wages, reduced government deficits, and much tighter restraint of credit. All these were deliberate measures to stop inflation, accepting the likely costs of higher unemployment and restraint of production as necessary to that end. In 1990 GNP fell 3.9 percent, aggravating the plunge of 19 percent between 1988 and 1990. In 1991 production turned up slightly, with a gain of 2.9 percent in GNP. That situation left output per capita essentially unchanged from 1990 and at 29 percent below its level a decade earlier.

The incomplete success in stopping inflation created an extremely difficult policy conflict. Recovery could in principle be stimulated by more expansionary credit policies and lower interest rates, which would favor increased investment, depreciation of the currency to help producers compete against imports, and improved exports. But continuing inflation and the fear of accelerating its rate of increase argued instead for keeping a very tight rein on credit and thereby blocked the actions needed for recovery. This conflict became particularly acute over the question of what to do about the exchange note: the real exchange rate went in exactly the wrong direction for recovery by appreciating when depreciation was both expected and needed.

The decision to remove controls on the exchange rate had been expected to lead to a much higher foreign-exchange price, to encourage exports, and to permit import liberalization without a surging external deficit. But when the rate was set free, the price of dollars went down instead of going up. That initial effect could be explained by the tight restraints imposed on liquidity, which drove firms and individuals who held dollar balances to convert them to domestic currency in order to keep operating. This movement should presumably have gone into reverse when holdings of dollars ran out, but fully eighteen months later no reversal had occurred. Dollars remained too cheap to make exports profitable and too cheap for many producers to compete against imports for several reasons, including the continuing influx of dollars from the drug trade into street markets and then into the banking system. A second reason has involved the continuing low level of domestic income and production, and corresponding restraint of demand for imports as compared with what they would be in an expanding economy. But perhaps the most fundamental reasons have been the continuing squeeze on liquidity in terms of domestic currency and the resulting high rates of interest for borrowing domestic currency, which strongly favor borrowing dollars instead or repatriating them from abroad. All this means that the economy has had no foreign-exchange problem, but also that incentives to produce for export have been held down severely, when both near-term recovery and longer-term growth badly need the stimulus of rising exports.

The government was more successful in the part of its program aimed at trade liberalization. As has been noted, the average tariff rate was cut greatly in two steps, in September 1990 and March 1991. Quantitative restrictions were eliminated, and the tariff structure was greatly simplified. Effective protection was brought down to a lower level than at any point since the mid1960s, with a more coherent structure that left much less room for distorted incentives.

Fujimori is credited by many Peruvians for bringing stability to the country after the violence and hyperinflation of the García years. While it is generally agreed that the "Fujishock" brought short/middle-term macroeconomic stability, the long-term social impact of Fujimori's free market economic policies is still hotly debated.

Neoliberal reforms under Fujimori took place in three distinct phases: an initial "orthodox" phase (1990–92) in which technocrats dominated the reform agenda; a "pragmatic" phase (1993–98) that saw the growing influence of business elites over government priorities; and a final "watered-down" phase (1999–2000) dominated by a clique of personal loyalists and their clientelist policies that aimed to secure Fujimori a third term as president. Business was a big winner of the reforms, with its influence increasing significantly within both the state and society.[46]

Constitutional crisis

During Fujimori's first term in office, APRA and Vargas Llosa's party, FREDEMO, remained in control of both chambers of Congress (the Chamber of Deputies and Senate), hampering the government's ability to enact economic reforms. Fujimori also found it difficult to combat the threat posed by the Maoist guerrilla organization Shining Path (Spanish: Sendero Luminoso), due largely to what he perceived to be the intransigence and obstructionism of Congress. By March 1992, Congress met with the approval of only 17% of the electorate, according to one poll (the presidency stood at 42%, in the same poll).[47]

In response to the political deadlock, on 5 April 1992, Fujimori with the support of the military carried out a presidential coup,[48] also known as the autogolpe (auto-coup or self-coup) or Fujigolpe (Fuji-coup) in Peru. He shut down Congress, suspended the constitution, and purged the judiciary.[49] The coup was welcomed by the public, according to numerous polls.[50] Not only was the coup itself marked by favorable public opinion in several independent polls, but also public approval of the Fujimori administration jumped significantly in the wake of the coup.[50][51] Fujimori often cited this public support in defending the coup, which he characterized as "not a negation of real democracy, but on the contrary… a search for an authentic transformation to assure a legitimate and effective democracy."[50] Fujimori believed that Peruvian democracy had been nothing more than "a deceptive formality – a facade";[50] he claimed the coup was necessary to break with the deeply entrenched special interests that were hindering him from rescuing Peru from the chaotic state in which García had left it.[52] Fujimori's coup was immediately met with the near-unanimous condemnation by the international community.[50] The Organization of American States denounced the coup and demanded a return to "representative democracy",[53] despite Fujimori's claims that his coup represented a "popular uprising".[50] Various foreign ministers of OAS member states reiterated this condemnation of the autogolpe.[51] They proposed an urgent effort to promote the re-establishment of "the democratic institutional order" in Peru.[54] Following negotiations involving the OAS, the government, and opposition groups, Alberto Fujimori's initial response was to hold a referendum to ratify the auto-coup, which the OAS rejected. Fujimori then proposed scheduling elections for a Democratic Constituent Congress (CCD), which would be charged with drafting a new constitution, to be ratified by a national referendum. Despite the lack of consensus among political forces in Peru regarding this proposal, the ad hoc OAS meeting of ministers nevertheless approved Fujimori’s offer in mid-May, and elections for the CCD were held on 22 November 1992.[51]

Various states acted to condemn the coup individually. Venezuela broke off diplomatic relations, and Argentina withdrew its ambassador. Chile joined Argentina in requesting that Peru be suspended from the Organization of American States. International financiers delayed planned or projected loans, and the United States, Germany and Spain suspended all non-humanitarian aid to Peru. The coup appeared to threaten the economic recovery strategy of reinsertion, and complicated the process of clearing arrears with the International Monetary Fund.

Whereas Peruvian–U.S. relations early in Fujimori's presidency had been dominated by questions of coca eradication, Fujimori's autogolpe immediately became a major obstacle to international relations, as the United States immediately suspended all military and economic aid to Peru, with exceptions for counter-narcotic and humanitarian-related funds.[55] Two weeks after the self-coup, the George H.W. Bush administration changed its position and officially recognized Fujimori as the legitimate leader of Peru.[citation needed]

Post-coup period

With FREDEMO dissolved and APRA's leader, Alan García, exiled to Colombia, Fujimori sought to legitimize his position. He called elections for a Democratic Constitutional Congress that would serve as a legislature and a constituent assembly. While APRA and Popular Action attempted to boycott this, the Popular Christian Party (PPC, not to be confused with PCP Partido Comunista del Peru) and many left-leaning parties participated in this election. His supporters won a majority in this body, and drafted a new constitution in 1993. A referendum was scheduled, and the coup and the Constitution of 1993 were approved by a narrow margin of between four and five percent.

Later in the year, on 13 November, there was a failed military coup, led by General Jaime Salinas Sedó. Salinas asserted that his efforts were a matter of turning Fujimori over for trial, for violating the Peruvian constitution.[56]

In 1994, Fujimori separated from his wife Susana Higuchi in a noisy, public divorce. He formally stripped her of the title First Lady in August 1994, appointing their elder daughter First Lady in her stead. Higuchi publicly denounced Fujimori as a "tyrant" and claimed that his administration was corrupt. They formally divorced in 1995.

Second term: July 28th 1995 - July 28th 2000

The 1993 Constitution allowed Fujimori to run for a second term, and in April 1995, at the height of his popularity, Fujimori easily won reelection with almost two-thirds of the vote. His major opponent, former Secretary-General of the United Nations Javier Pérez de Cuéllar, won only 22 percent of the vote. Fujimori's supporters won comfortable majorities in the legislature. One of the first acts of the new congress was to declare an amnesty for all members of the Peruvian military or police accused or convicted of human rights abuses between 1980 and 1995.

During his second term, Fujimori signed a peace agreement with Ecuador over a border dispute that had simmered for more than a century. The treaty allowed the two countries to obtain international funds for developing the border region. Fujimori also settled some unresolved issues with Chile, Peru's southern neighbor, outstanding since the Treaty of Lima of 1929.[57]

The 1995 election was the turning point in Fujimori's career. Peruvians now began to be more concerned about freedom of speech and the press. However, before he was sworn in for a second term, Fujimori stripped two universities of their autonomy and reshuffled the national electoral board. This led his opponents to call him "Chinochet," a reference to his previous nickname and to Chilean ruler Augusto Pinochet.[58]

According to a poll by the Peruvian Research and Marketing Company conducted in 1997, 40.6% of Lima residents considered President Fujimori an authoritarian.[59][60][61]

High growth during Fujimori's first term petered out during his second term. "El Niño" phenomena had a tremendous impact on the Peruvian economy during the late 1990s.[62] Nevertheless, total GDP growth between 1992 and 2001, inclusive, was 44.60%, that is, 3.76% per annum; total GDP per capita growth between 1991 and 2001, inclusive, was 30.78%, that is, 2.47% per annum. Also, studies by INEI, the national statistics bureau[63] show that the number of Peruvians living in poverty increased dramatically (from 41.6% to more than 70%) during Alan García's term, but they actually decreased (from more than 70% to 54%) during Fujimori's term. Furthermore, FAO reported Peru reduced undernourishment by about 29% from 1990–92 to 1997–99.[64]

Peru was reintegrated into the global economic system, and began to attract foreign investment. The sell-off of state-owned enterprises led to improvements in some service industries, notably local telephony, mobile telephony and Internet. For example, before privatization, a consumer or business would need to wait up to 10 years to get a local telephone line installed from the monopolistic state-run telephone company, at a cost of $607 for a residential line.[65][66] A couple of years after privatization, the wait was reduced to just a few days. Peru's Physical land based telephone network had a dramatic increase in telephone penetration from 2.9% in 1993 to 5.9% in 1996 and 6.2% in 2000,[67] and a dramatic decrease in the wait for a telephone line. Average wait went from 70 months in 1993 (before privatization) to two months in 1996 (after privatization).[68] Privatization also generated foreign investment in export-oriented activities such as mining and energy extraction, notably the Camisea gas project and the copper and zinc extraction projects at Antamina.[69]

By the end of the decade, Peru's international currency reserves were built up from nearly zero at the end of García's term to almost US$10 billion. Fujimori also left a smaller state bureaucracy and reduced government expenses (in contrast to the historical pattern of bureaucratic expansion), a technically minded (but widely perceived as politicized) administration of public entities like SUNAT (the tax collection agency), a large number of new schools (not only in Lima but in Peru's small towns), more roads and highways, and new and upgraded communications infrastructure.[citation needed] These improvement led to the revival of tourism, agroexport, industries and fisheries.[70][71]

In addition to the nature of democracy under Fujimori, Peruvians were becoming increasingly interested in the myriad criminal allegations involving Fujimori and his chief of the National Intelligence Service, Vladimiro Montesinos. A 2002 report by Health Minister Fernando Carbone would later suggest that Fujimori was involved in the forced sterilizations of up to 300,000 indigenous women from 1996 to 2000, as part of a population control program.[33] A 2004 World Bank publication would suggest that, in this period, Montesinos' abuse of the power accorded him by Fujimori "led to a steady and systematic undermining of the rule of law".[72]

Third term: July 28th 2000 - November 17th 2000

The 1993 constitution limits a presidency to two terms. Shortly after Fujimori began his second term, his supporters in Congress passed a law of "authentic interpretation" which effectively allowed him to run for another term in 2000. A 1998 effort to repeal this law by referendum failed.[73] In late 1999, Fujimori announced that he would run for a third term. Peruvian electoral bodies, which were politically sympathetic to Fujimori, accepted his argument that the two-term restriction did not apply to him, as it was enacted while he was already in office.[74]

Exit polls showed Fujimori fell short of the 50% required to avoid an electoral runoff, but the first official results showed him with 49.6% of the vote, just short of outright victory. Eventually, Fujimori was credited with 49.89%—20,000 votes short of avoiding a runoff. Despite reports of numerous irregularities, the international observers recognized an adjusted victory of Fujimori. His primary opponent, Alejandro Toledo, called for his supporters to spoil their ballots in the runoff by writing "No to fraud!" on them (voting is mandatory in Peru). International observers pulled out of the country after Fujimori refused to delay the runoff.

In the runoff, Fujimori won with 51.1% of the valid votes. While votes for Toledo declined from 40.24% of the valid votes cast in the first round to 25.67% of the valid votes in the second round, invalid votes jumped from 2.25% of the total votes cast in the first round to 29.93% of total votes in the second round. The large percentage of votes cast as invalid suggested that many Peruvians took Toledo's advice to spoil their ballots.

(The 51.1 and 25 figures are as percentages of valid votes, that is, excluding invalid votes. Thus, there were 29.93% invalid votes and 70.07% valid votes. Of this 70.07%, 51.1% were for Fujimori and 25.67% for Toledo.)

Although Fujimori had won the runoff with only a bare majority, rumors of irregularities led most of the international community to shun his third swearing-in on 28 July. For the next seven weeks, there were daily demonstrations in front of the presidential palace.

As a conciliatory measure, Fujimori appointed former opposition candidate Federico Salas as the new prime minister. However, opposition parties in Parliament refused to support this move while Toledo campaigned vigorously to have the election annulled. At this point, a corruption scandal involving Vladimiro Montesinos broke out, and exploded into full force on the evening of 14 September 2000, when the cable television station Canal N broadcast footage of Montesinos apparently bribing opposition congressman Alberto Kouri for his defection to Fujimori's Perú 2000 party. This video was presented by Fernando Olivera, leader of the FIM (Independent Moralizing Front), who purchased it from one of Montesinos's closest allies (nicknamed by the Peruvian press El Patriota).

Fujimori's support virtually collapsed, and a few days later he announced in a nationwide address that he would shut down the SIN and call new elections—in which he would not be a candidate. On 10 November, Fujimori won approval from Congress to hold elections on 8 April 2001. On 13 November, Fujimori left Peru for a visit to Brunei to attend the Asia-Pacific Economic Cooperation forum. On 16 November, Valentín Paniagua took over as president of Congress after the pro-Fujimori leadership lost a vote of confidence. On 17 November, Fujimori traveled from Brunei to Tokyo, where he submitted his presidential resignation via fax. The Peruvian Congress refused to accept his resignation, voting instead 62 yea –9 nay to remove Fujimori from the office of the President of Peru on the grounds that he was "permanently morally disabled."

On November 19, Fujimori´s government ministers presented their resignations en masse. Because Fujimori's first vice president, Francisco Tudela, had resigned a few days earlier, his successor Ricardo Márquez was called the new president. Congress, however, refused to recognize him, as he was an ardent Fujimori loyalist; Márquez resigned two days later. Paniagua was voted by the Peruvian Congress as the next in line, and became interim president to oversee the April elections.


Detractors have observed that Fujimori was able to encourage large-scale mining projects with foreign corporations and push through mining-friendly legislation laws because the post auto-coup political picture greatly facilitated the process.

Some analysts state that some of the GDP growth during the Fujimori years reflects a greater rate of extraction of non-renewable resources by transnational companies; these companies were attracted by Fujimori by means of near-zero royalties, and, by the same fact, little of the extracted wealth has stayed in the country.[75][76][77][78] Peru's mining legislation, they claim, has served as a role model for other countries that wish to become more mining-friendly.[79]

Fujimori's privatization program also remains shrouded in controversy. A congressional investigation in 2002, led by socialist opposition congressman Javier Diez Canseco, stated that of the USD $9 billion raised through the privatizations of hundreds of state-owned enterprises, only a small fraction of this income ever benefited the Peruvian people.

The one instance of organised labour's success in impeding reforms, namely the teacher's union resistance to education reform, was based on traditional methods of organisation and resistance: strikes and street demonstrations.[46]

Some scholars claim that Fujimori's government became a "dictatorship" after the auto-coup,[80] permeated by a network of corruption organized by his associate Montesinos, who now faces dozens of charges that range from embezzlement to drug trafficking to murder (Montesinos is currently on trial in Lima).[81][82][83] Fujimori's style of government has also been described as "populist authoritarianism". Numerous governments[84] and human rights organizations such as Amnesty International, have welcomed the extradition of Fujimori to face human rights charges.[85] As early as 1991, Fujimori had himself vocally denounced what he called "pseudo-human rights organizations" such as Amnesty International and Americas Watch, for allegedly failing to criticize the insurgencies targeting civilian populations throughout Peru against which his government was struggling.[86]

In the 2004 Global Transparency Report, Fujimori made into the list of the World's Most Corrupt Leaders. He was listed seventh and he was said to have amassed $600 million.[87][88]

Popular support

Fujimori still enjoys a measure of support within Peru. A poll conducted in March 2005 by the Instituto de Desarrollo e Investigación de Ciencias Económicas (IDICE) indicated that 12.1% of the respondents intended to vote for Fujimori in the 2006 presidential election.[89] A poll conducted on 25 November 2005, by the Universidad de Lima indicated a high approval (45.6%) rating of the Fujimori period between 1990 and 2000, attributed to his counterinsurgency efforts (53%).[90]

According to a more recent Universidad de Lima survey, Fujimori still retains public support, ranking fifth in personal popularity among other political figures. Popular approval for his decade-long presidency (1990–2000) has reportedly grown (from 31.5% in 2002 to 49.5% in May 2007).[citation needed] Despite accusations of corruption and human rights violations, nearly half of the individuals interviewed in the survey approved of Fujimori’s presidential regime.[citation needed] In a 2007 Universidad de Lima survey of 600 Peruvians in Lima and the port of Callao, 82.6% agreed that the former president should be extradited from Chile to stand trial in Peru.[91] During his campaign, Alejandro Toledo promised Peruvians higher wages, a fight against poverty, anti-corruption measures, higher pensions, more employment, military reform, development of tourism, and industrialization. As Peru's top economist Pedro Pablo Kuczynski noted “Toledo comes after almost 30 years of either dictatorships or governments that weren't so democratic. People expect Toledo to solve all the problems of the last 30 years, which included an enormous increase in relative poverty."[92] Toledo's inability to fulfill many of these promises created widespread dissatisfaction. His approval ratings were consistently low throughout his presidency, sometimes sinking into single digits.

Toledo and Lima's mayor Luis Castañeda Lossio

Toledo also promised open market free trade reforms, which reflected Peru's business interests while also promising to review Fujimori's privatization programs. Specifically, Toledo promised not to privatize any of Peru's public utilities. This promise, combined with lofty promises of reduced unemployment and poverty, caused Peru's rank and file to set the bar very high for his administration. Shortly after coming to office Toledo met with IMF officials and promised that he would raise $700 million in 2002, and almost one billion dollars in 2003, by selling state assets.[93]

The Alejandro Toledo Administration 2001 - 2006

Former Peruvian President Alejandro Toledo claims he is a living proof of The Peruvian Miracle.[94] Toledo began shining shoes and selling lottery tickets as a boy in the Andes. A half century later, he had ascended to become Peru's first aboriginal president, the nation’s highest office, serving as president from 2001 to 2006. “I’m part of the margin of error. To come from extreme, extreme poverty, to have gone to the University of San Francisco, to Stanford, to teach at Harvard, to be part of the World Bank and the United Nations and be a president. Let me tell you, I’m the result of a statistical error. But I have millions of people who come from my own roots, millions of Amazonians, Afro-Peruvians, who don’t have the chance to have access to potable water and sanitation, to quality health care, and sanitation. No access to energy. And that’s a population that’s very discontented, and today getting together. We need to construct a society that is much more inclusive.”[95]

Toledo’s economic policies can be described as neoliberal or strongly pro free-trade. He inherited a national economy which in the previous decade had experienced an unstable GDP with periods of growth and shrinkage, as well as fiscal deficits frequently amounting to over 2% of GDP. Inflation had not dropped below 23% until 1995 and was still feared by many. In response, Toledo developed policies which focused on fighting poverty, generating employment, decentralizing government, and modernizing the state.[96]

Among Toledo’s initiatives designed to generate revenue and transform the economy were plans to privatize national industries. The first major effort of this kind was the $167 million sale of two state-owned electric companies. Protests in the city of Arequipa turned violent as Peruvians reacted with anger to the prospect of layoffs and higher priced electricity. They also recalled that billions of dollars earned from privatization under the Fujimori administration had ended up filling the president’s personal bank accounts. Toledo decided not to carry out the sale of electric companies, but promised to continue privatization efforts, which were a key provision of a deal struck with the International Monetary Fund. Toledo had promised to bring in US$700 million through privatization in 2001 and US$1 billion in 2002.[97] Although he failed to meet these goals, the IMF approved a $154 million disbursement to Peru in December 2002 and allowed the country to raise the fiscal deficit target in its agreement.[98]

To compound his problems, President Toledo faced a devastating earthquake in his first year in office. This natural disaster left much of Peru morally and fiscally devastated. With many homes and businesses destroyed, economic ills were exacerbated.[99]

Toledo speaks in Davos, January 21, 2003.

Although Toledo originally promised tax cuts, violent protests by civil servants prompted the increase in social sector spending that Toledo had also promised, which necessitated tax increases. To tackle tax reform in June 2003, he brought in Peru’s first female prime minister, Beatriz Merino who quickly submitted proposals to the congress. Among the suggestions were pay cuts for higher-paid public-sector officials, including a 30% salary reduction for Toledo himself, a 5% across-the-board cut for all agencies and ministries, tax increases on beer, cigarettes and fuel, and an extension of the 18% sales and value-added tax to, among other things, long-distance bus journeys and live entertainment.[100] The final package also included the elimination of tax breaks, the introduction of a minimum corporate tax, the closing of tax loopholes for the rich, and the strengthening of local government realestate tax regimes.[98]

During Toledo's five years as president, Peru's economy experienced 47 consecutive months of growth and grew at an average rate of 6% per year while inflation averaged 1.5% and the deficit sank as low as 0.2% of GDP. Between 2004 and 2006, employment grew at an average rate of 6%,[101] the percentage of people living in poverty fell, and food consumption by the poorest segments of the population rose dramatically.[102] Much of this growth has been credited to the free trade agreements signed with the United States, China, Thailand, Chile, Mexico, and Singapore.[103][104]

Peru - United States Trade Promotion Agreement

The United States – Peru Trade Promotion Agreement (Spanish: Tratado de Libre Comercio Perú – Estados Unidos) is a bilateral free trade agreement, whose objectives are eliminating obstacles to trade, consolidating access to goods and services and fostering private investment in and between the United States and Peru. Besides commercial issues, it incorporates economic, institutional, intellectual property, labor and environmental policies, among others. The agreement was signed on April 12, 2006; ratified by the Peruvian Congress on June 28, 2006; by the U.S. House of Representatives on November 2, 2007 and by the U.S. Senate on December 4, 2007. The agreement was implemented on February 1, 2009.[105]

Peru looks to the agreement are to:

  • Consolidate and extend the trade preferences under ATPDEA
  • Attract foreign investment
  • Generate employment
  • Enhance the country's competitiveness within the region
  • Increase workers' income
  • Curb poverty levels
  • Create and export sugar cane ethanol[106]

The United States looks to the agreement to:

  • Improve access to goods and services
  • Strengthen its investments
  • Promote security and democracy
  • Fight against drug trafficking

The U.S.-Peru agreement has faced criticism. In Peru, the treaty was championed by Toledo, and supported to different extents by former President Alan García and candidates Lourdes Flores and Valentín Paniagua. Ollanta Humala has been its most vocal critic. Humala's Union for Peru won 45 of 120 seats in Congress in 2006, the largest share by a single party, prompting debate on ratification of the agreement before the new legislature was sworn in. Some Congressmen-elect interrupted the debate after forcibly entering Congress in an attempt to stop the agreement ratification.[107]

One controversial element of the agreement relates to land resources. Laura Carlsen, of the Center for International Policy, who is also a contributor to Foreign Policy in Focus notes that "Indigenous organizations warn that this ruling effectively opens up 45 million hectares to foreign investment and timber, oil, and mining exploitation."[108]

However, most of the criticism of the agreement has focused on its potential impact on Peru's agricultural sector. By planting crops to similar to those subsidized by the U.S., Peru faced a competitive disadvantage in the production of agricultural products because poor farming families with inadequate tools, technology and techniques may not be able to produce crops at low enough prices to export. In response to these concerns, Peruvian lawmakers created a Compensation Fund which directed $34 million per year to cotton, maize/corn, and wheat producers for a five-year period to help them adjust to the new competitive pressures.[109]

Toledo is therefore a market-oriented politician who continued to globalize Peru’s economy and is rumored to be getting ready for another run for president. Toledo says bluntly that unless the poorest in the country are better educated, better paid, housed, and fed, the Peruvian economic miracle will stall.

Acuerdo Nacional

In November 2001, Toledo opened talks which concluded in the National Accord of July 22, 2002. In the accord, seven political parties and seven social organizations agreed upon a framework that would guide policy for the next twenty years. The accord set forth twenty-four policy goals divided into four categories: democracy and the rule of law, equity and social justice, economic competitiveness, and an institutional framework of efficiency, transparency, and decentralization. Initially, the accord opened up dialogue in Peru’s political arena, but within a year, the public considered it to be less effective than had been hoped.[110]

Maria Elena García calls the years of Toledo’s presidency a transition rife with new opportunities for indigenous people, noting the “reframed state-indigenous interactions”, “increase in NGO projects and social movements”, and “proliferation of indigenous organizations.”[111] Toledo created and first lady Eliane Karp headed a new agency for indigenous and Afro-Peruvian affairs, CONOPA (Commission for Amazonian, Andean, and Afro-Peruvian Peoples). The agency was meant to establish a development agenda for indigenous communities, provide representation of indigenous interests within the government, and lead the way for multicultural constitutional reforms. Some critics viewed these actions as a state co-optation of indigenous identity, mockingly dubbing the agency the "Karp Commission".[112] However, Oxfam's Martin Scurrah points out the agency's good work, noting that in addition to promoting a chapter on indigenous rights in the new constitution, Eliane Karp has "intervened on numerous occasions in support of or in defense of indigenous initiatives."[111]

Toledo also brought serious attention to bilingual education in indigenous schools, creating a new and well-staffed division within the Ministry of Education devoted to the issue. This effort gives advocates greater autonomy and opportunity to influence policy and work toward institutionalizing bilingual education.[113]

Toledo's efforts at decentralization sought to give indigenous groups greater influence upon policy-making on a regional level. The first regional and local elections, held in November 2002, required that 15% of the candidates in regions with an indigenous presence must have indigenous backgrounds. However, decentralization has been viewed critically by some, who claim that in dividing up regions, administrators have at times ignored the distinctive cultural and historical factors that define different areas.[114]

In a speech to the Human Rights of Indigenous Peoples in Latin America conference, Toledo expressed disappointment at the growing disparity between the incomes of indigenous people and other citizens. Despite the growth achieved by the Peruvian economy, the poverty gap has widened between the upper and lower classes. Toledo mentions the reintegration of the indigenous populations into the Peruvian social and political system as a key to sustainability and economic growth.[115]

Advocates of indigenous rights have also criticized some of Toledo's efforts to jump-start the economy through investments, such as his support for the Camisea natural gas project and other projects that involved exploring or developing natural resources. These critics claim that companies buy land at unreasonable prices, force indigenous people off of land that is historically theirs, and exploit natural resources in ways that are harmful to communities and the environment. Peru is one of the largest producers of gold, silver, and zinc in Latin America, and some critics complain about the priority the Peruvian government gives to mining as opposed to industries like fishing and agriculture, with which indigenous peoples are more familiar. They note that mining companies may bring new jobs to rural areas, but that they are not jobs for which natives are well qualified.[114]

Despite unprecedented, strong, and consistent economic growth under his leadership, Toledo dealt with much labor unrest during his presidency as workers demanded higher wages and the fulfillment of campaign promises. The crisis underlined a basic flaw in Peru's economy as pointed out by The Economist, which noted that "some 70% of output falls within the grey or informal" economy, and thus escapes tax. Tax-collections, at below 12.1% of GDP, are stagnant, with most coming from a handful of large, formal companies. Evasion is widespread, particularly among better-paid independent professionals." Tax collections by Toledo's government could simply not cover the wages that had been promised to civil servants.[116]

Even as the Peruvian government was taking in too little money to pay civil servants, the country saw its cost of living increase dramatically during the early years of Toledo's administration. These hardships, combined with increasing unemployment and stagnant wages caused the general public to doubt that Toledo was living up to lofty campaign promises. By 2003, Toledo's approval rating had fallen below 10%, the lowest of any South American president at the time.[117]

Toledo did implement some of his plans for investment in social infrastructure and institutions. The amount of paved roads increased by 20% during his presidency; medical attention to the poor doubled in rural areas, and public sector salaries increased (school teachers' pay rose by 87%) and over 100,000 new homes were built for poor Peruvians.[102]

By 2004, Peru had a far-reaching social safety net that included food programs serving 35 percent of the population, and work programs offering temporary employment to unskilled workers. The Cooperative Fund for Social Development funded projects to construct and improve schools, health clinics, rural roads, water and sanitation systems, and electric grids. Toledo placed food and infrastructure programs under the Ministry for Women and Social Development and urged that municipalities implement decentralization. Social safety-net spending in Peru remained well below the Latin American average under Toledo even as it covered a larger percentage of the population, which means that outlays were insufficient to lift many people up out of poverty.[110]

Toledo also attempted to improve access to healthcare in the most remote places. His Juntos program awarded a monthly benefit to poor families who agreed to get vaccinations and screenings, attend school, and obtain birth registration documents. The Toledo administration also provided financial incentives to young doctors who were willing to spend the first few years of their practices in remote areas.[110]

Peru faced a major housing deficit in 2001, with the majority of its urban population living in slums. Toledo’s administration sought to improve access to affordable housing through subsidies, loans, down payments, land titling, and encouraging financial institutions to reach further down-market. Most of these efforts were grouped under the Fondo Mivivienda, which was program started in 1999.[110]

Under Toledo's predecessor, Fujimori, the governing authority in Peru was condensed and centralized. A Fujimori-dominated congress passed a new constitution in 1993, which consolidated the bicameral legislature into a unicameral legislature with a single national district. Under Fujimori local governments retained minimal legal authority including fees for utilities, basic civil registries, and management of public spaces and markets.

Decentralization was among Toledo’s most successful institutional reforms. In addition to announcing regional elections upon his inauguration, he charged a Decentralization and Regionalization Commission with developing proposals. In 2002, a constitutional amendment was approved which established three levels of government: local, regional, and national. Over the next few years, the congress gradually passed on resources and responsibilities to the regional and municipal governments including food programs, social development projects, and health and education programs.[110] He divided the single district up, called for regional elections, and eliminated the centralist Ministry of the Presidency that had been instituted under Fujimori.[118] However, when Peru Possible's rival political party APRA made significant gains in regional elections, the Toledo administration halted its decentralization program by withholding power in the areas of revenue and expenditure. This left many regionally elected governors confused as to how far their authority extended. Without strong fiscal plans to support his new policy of centralization, Toledo had to continue decentralizing power and recognizing more regions. Toledo continued to assert control of regional governments, however, by withholding funding.[118]

Toledo’s plan for decentralization enjoyed widespread popular support. Most of the opposition to his program came from, and most of the difficulty in implementing his proposals was owing to, politicians and bureaucratic agencies who were accustomed to a centralized form of government.[110]

The Toledo administration held freetrade agreement talks with Singapore and Thailand, came to an agreement with Thailand on air transport, and signed an extradition treaty with South Korea. Foreign Minister García-Sayan visited China and discussed support for multilateralism and strengthening the UN. In 2004 China declared Peru an official tourist destination, and in 2005 the countries concluded several trade agreements.[110]

Toledo and Brazil's President Lula da Silva.

In conducting Peru’s relations with Brazil, Toledo's goal was to reorient Peru from the Andean Community, toward the more economically active Brazil and MERCOSUR. In August 2003, Toledo met with President Lula. They committed to increased political and economic cooperation under the Initiative for Integration of Regional Infrastructure in South America which invests in large-scale, debt-heavy projects, aimed at developing 10 economic axes or hubs throughout South America. Construction projects, including roads, discussed. President Lula also agreed to allow Peru access to two surveillance systems which Brazil had developed in the Amazon Basin to target legal and illegal activity.[110]

While Peru and Ecuador had been at peace for years, President Toledo worked to solidify and build upon that peace. During a 2001 visit to Ecuador, Toledo expressed support for the Brasília Accords, agreed to the demilitarization of the two countries’ common border, advocated reduced military spending, and agreed to greater energy, transportation, and police cooperation. Toledo joined Ecuadorian President Noboa at the International Advisory Committee of the Binational Development Plan, where they called for greater investment in their region, with Toledo putting forth a detailed program for international assistance. Economic activity in the region subsequently improved as the demining of the border continued, construction projects were completed, and military forces were reduced. By 2006, investment in the area had reached $1.2 billion.[110]

President Toledo worked hard throughout his presidency on what became a very productive relationship with the U.S., and what Toledo described as a personal friendship with President Bush. He received lavish praise from the American president for his economic and domestic security policies. During a visit to Peru, Bush announced the establishment of an Andean Center of Excellence for Teacher Training, with a base in Peru, and a fellowship program to give Andean professionals access to education in information technology. In June 2002, the U.S. agreed to forgive $14 million of Peru's debt in exchange for a promise to invest $12 million in conservation projects. In September, Toledo secured a $300 million commitment from Bush to fund alternative-crop development in coca-producing areas. In 2003, the Peace Corps returned to Peru. Peru opposed U.S. efforts most visibly in the War in Iraq, refusing to support the intervention in any international arena.[110]

In an attempt to increase remittances from Peruvians abroad, the Ministry of Foreign Affairs under Toledo sought to strengthen the link between Peruvian migrants and their homeland through the creation of advisory councils. The issue is especially important for a country which experienced a massive emigration of professionals under Fujimori and which still has 10% of its population living abroad. The councils were also part of an effort by the first Minister of Foreign Affairs, García Sayan, to professionalize the foreign service.[119]

1991 - Today: The Peruvian Miracle

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 exponential per-capita growth rates has been standard the last quarter century. Peru’s GDP per capita is now FY 2013 at $12.000 USD PPP. 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 half of exports with the other half being non-traditional exports such as clothing, electronics, machinery and services. By the end of the decade of 2014, investment is expected to total US$65 billion for mining activities, US$20 billion in energy and petroleum, US$12 billion for commerce, US$18 billion for agricultural industries, and US$15 billion for tourism. Thanks to the discovery and exploitation of large petroleum and natural gas reserves in southern Peru in the Cusco and Madre de Dios regions by Consorcio Camisea, Peru is expected[who?] to become an important exporter of hydrocarbons by 2015, after being a net importer for decades.

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.

In 2007, the Peruvian economy experienced a growth rate of 9%, the highest in Latin America, and this repeated in 2008 with a 9.8% rate; in 2006 and 2007, the Lima Stock Exchange grew by 185.24% [120] and 168.3%,[121] respectively. However, in the wake of the 2008 global crisis, growth for 2009 was only 0.9 percent,[122] but rebounded to 8.8 percent the following year. The pro-market policies enacted by Fujimori, were continued by presidents Alejandro Toledo and Alan Garcia,[citation needed]While poverty of Lima is 8.5%, the national average is 25.8%, while the unemployment rate is 6.5% and 74% are employed formally.[123]

After the 2000s commodities boom began to decline, Peru was one of few Latin American countries which successfully utilized the influx of commodity funds by choosing to "fill sovereign-wealth funds, to build stockpiles of foreign-exchange reserves or to pursue broader economic reforms".[124]


Peru's economic activity in the 1970s


Peru is a country with many climates and geographical zones that make it a very important agricultural nation. Peru agricultural exports are highly appreciated and include artichokes, grapes, avocados, mangoes, peppers, sugarcane, organic coffee and premium-quality cotton.

Industry and services


Fishing: Peru is an international leader in fishing, producing nearly 10 percent of the world's fish catch.

Mining in Peru: Peru ranks fifth worldwide in gold production ( first in Latin America ), second in copper, and is among the top five producers of lead and zinc.


Peru has developed a medium manufacturing sector. The sector now represents 23 percent of GDP and is tied heavily to mining, fishing, agriculture, construction and textiles. Manufacturing is mainly devoted to processing to gain a value-added advantage. The most promising sector is textiles, metal mechanics, food industry, agricultural industry, manufactures, chemicals, pharmaceuticals, machinery and services.


Tourism has represented a new growth industry in Peru since the early 1990s, with the government and private sector dedicating considerable energies to boosting the country's tourist destinations both to Peruvians and foreigners.

Natural resources

Peru's natural resources are copper, silver, gold, timber, fish, iron ore, coal, phosphate, potash, and natural gas.

External trade and investment

Foreign investment and balance of payments

Foreign trade and balance of payments

Graphical depiction of Peru's product exports in 28 color-coded categories.

In 2001 the current account deficit dropped to about 2.2% of GDP (US$1.17 billion)--from 3.1% in 2000—while the trade balance registered a small deficit. Exports dropped slightly to $7.11 billion, while imports fell 2.1% to $7.20 billion. After being hit hard by El Niño in 1998, fisheries exports have recovered, and minerals and metals exports recorded large gains in 2001 and 2002, mostly as a result of the opening of the Antamina copper-zinc mine. By mid-2002, most sectors of the economy were showing gains. After several years of substantial growth, foreign direct investment not related to privatization fell dramatically in 2000 and 2001, as well as in the first half of 2002. Net international reserves at the end of May 2002 stood at $9.16 billion, up from $8.6 billion (2001), $17 billion at the end of 2006, over $20 billion in 2007, and over $35 billion in May 2008. Peru has signed a number of free trade agreements, including the 2007 United States-Peru Trade Promotion Agreement, and agreements with Chile, Canada, Singapore, Thailand and China. Under President Alan Garcia administration Peru achieved a bilateral trade agreement with U.S. since 2010 to improve exports for its country and reach in August 2011 its pick in exports of more than 4,700 MM.

Foreign investment

The Port of Callao is Peru's gateway for exports and imports

The Peruvian government actively seeks to attract both foreign and domestic investment in all sectors of the economy. International investment was spurred by the significant progress Peru made during the 1990s toward economic, social, and political stability, but it slowed again after the government delayed privatizations and as political uncertainty increased in 2000. President Alejandro Toledo has made investment promotion a priority of his government. While Peru was previously marked by terrorism, hyperinflation, and government intervention in the economy, the Government of Peru under former President Alberto Fujimori took the steps necessary to bring those problems under control. Democratic institutions, however, and especially the judiciary, remain weak.

The Government of Peru's economic stabilization and liberalization program lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign investment, with the result that Peru now has one of the most open investment regimes in the world. Between 1992 and 2001, Peru attracted almost $17 billion in foreign direct investment in Peru, after negligible investment until 1991, mainly from Spain (32.35%),[125] the United States (17.51%), Switzerland (6.99%), Chile (6.63%), and Mexico (5.53%). The basic legal structure for foreign investment in Peru is formed by the 1993 constitution, the Private Investment Growth Law, and the November 1996 Investment Promotion Law. Although Peru does not have a bilateral investment treaty with the United States, it has signed an agreement (1993) with the Overseas Private Investment Corporation (OPIC) concerning OPIC-financed loans, guarantees, and investments. Peru also has committed itself to arbitration of investment disputes under the auspices of ICSID (the World Bank'sInternational Center for the Settlement of Investment Disputes) or other international or national arbitration tribunals.


The sol is the currency of Peru. The exchange rate as of October 15, 2015 is 3.2330 soles to the US dollar and 3.6971 soles to the Euro. It was instated in 1991, when the Peruvian government abandoned the inti due to hyperinflation of the currency; the nuevo sol has since maintained the lowest inflation rate in Latin America.[126] the nuevo sol replaced the inti at a rate of 1 nuevo sol = 1,000,000 intis.[127] The inti itself replaced another inflated currency, the sol, which was used between 1863 and 1985. The name sol comes from the Latin solidus, and is also the Spanish word for "sun", which the ancient Inca civilization worshiped as the god Inti.

The nuevo sol currently enjoys a low inflation rate of 2.5%.[1] Since it was put into use, the nuevo sol's exchange rate with the United States dollar has stayed mostly between 2.80 and 3.30 to 1. Out of all the currencies of the Latin American region, the nuevo sol is the most stable and reliable, being the least affected by the downturn in the value of the US dollar; during late 2007 and early 2008, the exchange rate fell to 2.69 to 1, which had not been seen since 1997. The exchange rate is set on a daily basis by the Banco Central de Reserva del Perú (Central Reserve Bank of Peru).

The nuevo sol is divided into 100 céntimos. The highest-denomination banknote is the 200 nuevos soles note; the lowest-denomination coin is the rarely used 5 céntimos coin.

Income and Consumption

Peru divides its population into five socio-economic classes, A-E, with A representing the rich; B, the upper middle class; C, the middle class; D, the working class and low income families; and E, the marginalized poor. In 2018, the segments were described as "crude" by Miguel Planas of the Ministry of Finance due to the complicated structure of the society in Peru, where some classes make money off of illegal trade which aren't counted in the GDP, and are thus falsely classified as low income or marginalised poor families.


Unemployment in Greater Lima is 5.6%, while for the rest of Peru is 7%. FY 2012-2013[128]

Economic trends

Greater depth

The Lima Stock Exchange

From 1994 through 1998, under the government of Alberto Fujimori, the economy recorded robust growth driven by foreign direct investment, almost 46% of which was related to the privatization program. The government invested heavily on the country's infrastructure, which became a solid foundation for the future of the Peruvian economy.[citation needed] The economy stagnated from 1998 through 2001, the result of the century's strongest El Niño weather phenomenon, global financial turmoil, political instability, a stalled privatization program, increased government intervention in markets[citation needed], and worsening terms of trade. President Alejandro Toledo implemented a recovery program after taking office, maintained largely orthodox economic policies, and took measures to attract investment, including restarting the privatization program. Nonetheless, political uncertainty led to GDP growth of 0.2% in 2001.[citation needed] The Lima Stock Exchange general index fell 34.5% in 2000 and 0.2% in 2001.[citation needed] Inflation remained at record lows, registering 3.7% in 2000.[citation needed]

The year 2001 saw deflation of 0.1%. The government's overall budget deficit rose sharply in 1999 and 2000 to 3.2% of GDP, the result of hikes in government salaries, expenditures related to the 2000 election campaign, higher foreign debt service payments, and lower tax revenues.[citation needed] The government brought the deficit down to 2.5% of GDP in 2001, and set a target of 1.9% of GDP for 2002. Peru's stability brought about a substantial reduction in underemployment, from an average of 74% from the late 1980s through 1994 to 43% in the 1995-96 period, but the rates began climbing again in 1997-2002 to over half the working population. The poverty rate remained at 54% in 2001, with 24% of Peruvians living in extreme poverty. In 2005, 18% of Peruvians were living in extreme poverty and a poverty rate at 39%.[129] As of 2010, around 30% of its total population is poor[130]


The virtues of today's new multi-polar world for Peru are many. At 30 million people, Peru is neither too small to matter nor so big it is going to be a power in its own right. Midsized states, benefits from a world where it is no longer mandatory to pick a big-power patron.

With expanding ports loading up boats to China on one side, and a new superhighway to Brazil on the other, along with a free trade agreement with the United States in its hip pocket, Peru seems well-positioned to prosper in the coming years. But former President Toledo may not be hyperbolic when he worries the future stability of the state may depend on its willingness to distribute wealth more evenly.

Forecasts for the medium- and long-term remain highly positive. Peru's real GDP growth in 2007 was (8.3%) and largest in Latin America in 2008 was an outstanding 9.8%, the highest in the world.[131] Inflation remained low, at about 3%, while the budget surplus is expected to remain at about 1% of GDP.[citation needed] Private investment should keep growing at a rate of 15% a year.[citation needed] Exports and imports are expected to keep rising.[citation needed] The unemployment and underemployment indexes (5.2% and 34%, respectively, in Lima) should keep coming down as the economy grows[citation needed], other cities in Peru like Cajamarca, Ica, Cuzco and Trujillo are starting to show less unemployment nowadays.[citation needed] The country is likely to attract future domestic and foreign investment in tourism, agriculture, mining, petroleum and natural gas, power industries and financial institutions. According to the IMF and the World Bank, Peruvian GDP economic growth between 2007 and 2013 was:

In 2007 at 8.9%, in 2008 at 9.7%, in 2009 at 0.9%, in 2010 at 8.6%, in 2011 at 6.0%, in 2012 at 6,3% and in 2013 at 5.3%.

Therefore, Peruvian GDP grew in the 2007-2013 6 years period an outstanding net growth of 45.7% or a 7.61% yearly average. The IMF forecast for Peru's economic growth for the next 6 years 2013-2019 is a 7% yearly growth.

In FY 2011 for the first time since 1991 the size of the Peruvian economy surpassed the Chilean economy. Peru now is the fifth major economy in South America and is expected to become the fourth South American economy in 2018 by surpassing Venezuela.

Private investment reached 25% of the GDP in 2007, and has remained stable through 2010; and inflation is under control at an average 2% per year for the next 5 years. International Debt will reach 25% of the GDP by 2010, down from 35% in 2006, and will be only 12% of the GDP by 2015.[citation needed] The International Monetary Reserves of the National Reserve Bank (Dollar, Euro, Yen, Gold, and other currencies) reached US$27 billion by the end of 2007, and US$31 billion at the end of 2008. Currently reserves are at a US $73 billion level for end of FY 2013, which more than doubles the total foreign debt of Peru which is US$30 billion at the end of FY 2013.

Exports are growing at a pace of 25% and reached US$28 billion at the end of 2007 and US$30 billion at the end of 2010. In FY 2012 Peruvian exports reached a total of US$46 billion.

High technological investment is growing fast in Peru, and will be 10% of the GDP by 2010.[citation needed]


Main export article since 1987.


Coca has a long history of cultivation in the Andes, and has always been a traditional part of Peruvian life. However, the narcotic properties of coca were known only locally until 1786, when Lamarck listed the leaf in his botanical encyclopedia.[132] After the arrival of the Spanish, coca cultivation increased and its use became more common and widespread.[133] Since 1543, coca has been internationally recognized for its trading value, and regulations imposed upon it have attached increasing economic importance to the plant.[133] Exchange of the coca leaf between consumers in the highlands and growers in the low-lying hills has gone on for at least the last millennium, strengthening local economic ties.[134] Between 1884 and 1900, coca and cocaine grew in popularity for medical purposes and mass consumption in the United States. From 1905 to 1922, anti-cocaine sentiments in the US resulted in criminalization of both coca and cocaine. It was not until the 1920s that US diplomats began to extend drug prohibitions internationally.[135]

Current Trends

The Peruvian coca and cocaine industry is as huge as it is today because of advanced industrial nations’ demand for drugs. This high demand has created a framework of dependence on "coca-dollars" and on US drug policy.[136] Money from cocaine trafficking feeds local economies, supports inflation, and even causes social changes such as cocaine smoking among indigenous Peruvians.[137] Coca farming today is still a significant source of income for peasants, as it accounts for 48% of total net family income in the high coca-growing Apurímac River region.[138] In an effort to reduce drug use in America, for the past 50 years the US government together with the United Nations have been waging a war on drugs.[132] The US Drug Control Program maintains that "eliminating the cultivation of illicit coca and opium is the best approach to combating cocaine and heroin availability in the US."[139]

With US government cooperation, the Peruvian Government installed the National Plan for the Prevention and Control of Drugs in 1995.[138] This government prohibition of narcotics trafficking in Peru has resulted in a 70% reduction of coca leaf cultivation since 1995. However the reduction in cultivation may not have actual effects on cocaine production, as recent advances in coca growing and more efficient processing methods allow for greater cocaine yield.[140] The size of the narcotics industry as a part of the national economy is difficult to measure, but estimates range from $300–$600 million. An estimated 200,000 Peruvian households have economies based on the production, refining, or distribution of coca.[138] Many economists believe that large flows of dollars into the banking system contribute to the traditional depression of the dollar exchange rate vis-a-vis the sol.[citation needed] The Central Bank engages in open market activities to prevent the price of the sol from rising to levels that would cause Peruvian exports to become prohibitively expensive.

Hurt economically by Peruvian Air Force interdiction efforts in the mid-1990s,[citation needed] drug traffickers are now using land and river routes as well as aircraft to transport cocaine paste and, increasingly, refined cocaine to consumers around and out of the country. The Air Bridge Denial program was suspended in April 2001 after the Peruvian Air Force and strength of the U.S. DEA misidentified a civilian aircraft as a drug trafficker and shot it down, killing two American citizens on board. Peru continues to arrest drug traffickers and seize drugs and precursor chemicals, destroy coca labs, disable clandestine airstrips, and prosecute officials involved in narcotics corruption.

Working with limited aid of the U.S. Agency for International Development (USAID), the Peruvian Government carries out alternative development programs in the leading coca-growing areas in an effort to convince coca farmers not to grow that crop. Although the government previously eradicated only coca seed beds, in 1998 and 1999 it began to eradicate mature coca being grown in national parks and elsewhere in the main coca growing valleys. In 1999 the government eradicated more than 150 km² of coca; this figure declined to 65 km² in 2000, due largely to political instability.[citation needed] The government agency "Contradrogas", founded in 1996, facilitates coordination among Peruvian Government agencies working on counter-narcotics issues. Alternative crops, however, are not economically comparable to coca. 2004 prices indicate an annual income per hectare of $600 for coffee and $1000 for cocoa, versus up to $7500 for a hectare of coca.[141]

Effect on Family Economies

The anti-coca policies imposed in 1995 have had adverse effects on Peruvian’s household economies. Many families dependent on coca farming have been forced to send their children to work as eradication of crops has decreased their household income.[138] In states where coca is grown, child labour increased by 18% in 1997 and 40% in 2000. Work hours and domestic work increased as well, with girls taking on 28% more domestic work with boys doing 13% more. Wage work for adults also increased since 1995. As such, it can be inferred that the increase in child labour since eradication policies have come into effect is caused by children filling in for working parents.[138]
However, the issue of child labour in coca production is still present in Peru as reported in 2013 in the U.S. Department of Labor's report Findings on the Worst Forms of Child Labor and in December 2014, in the Bureau of International Labor Affairs's List of Goods Produced by Child Labor or Forced Labor.


Peru is the 72nd least corrupt country in the world according to Transparency International's Corruption Perceptions Index.

The Peruvian organization "Ciudadanos al Dia" has started to measure and compare transparency, costs, and efficiency in different government departments in Peru. It annually awards the best practices which has received widespread media attention. This has created competition among government agencies in order to improve.[142]

A last case of corruption was the 2008 Peru oil scandal.


Peru's poverty rate from 2004 to 2012.

Household income or consumption by percentage share:
lowest 10%: 0.8%
highest 10%: 37.5% (2000)

Inflation rate (consumer prices): 2.08% (2010)

revenues: $57 billion (2014 est.)
expenditures: $50 billion, including long-term capital expenditures of $3.8 billion (2010 est.)

Industrial production growth rate: 12% (2013 est.)

Electricity - production: 175,500 GWh (2013 est.)

Electricity - production by source:
natural gas: 44.53%
hydro: 54.79%
nuclear: 0%
other: 0.68% (2013)

Electricity - consumption: 133,000 GWh (2013)

Electricity - exports: 32,000 kWh (2013) mainly to Ecuador

Electricity - imports: 0 kWh (2013)

Agriculture - products: coffee, cotton, sugarcane, rice, wheat, potatoes, plantains, coca; poultry, beef, dairy products, wool; fish

Exports: 63.5 billion f.o.b. (2013 est.) of goods and products. 10.5 billion f.o.b. (2013 est.) of services. Total Exports $73.5 billion f.o.b. (2013) Exports: fish and fish products, copper, zinc, gold, molybdenum, iron, crude petroleum and byproducts, lead; coffee, asparagus, artichokes, paprika, sugar, cotton, textiles, chemicals, pharmaceuticals, manufactures, machinery, services.

Exports - partners: Mainland China 20%, United States 15%, European Union 15%, Brazil 10%, Chile 10%, Japan 5%, Mexico 5%, United Kingdom 5%, Bolivia 5% Rest of Latin America 5%, Rest of world 5%, (2013)

Imports: Total Imports $68 billion f.o.b. (2013)

Imports - commodities: machinery, transport equipment, foodstuffs, iron and steel, pharmaceuticals, electronics, petroleum and chemicals.

Imports - partners: Mainland China 25%, US 15%, European Union15%, Brazil10%, Japan 10%, Chile 5%, Colombia 5%, Mexico5%, Ecuador 4%, Bolivia 1%, Rest of World 5% (2013).

Trade Agreements

According to the Ministry of Foreign Trade and Tourism, Peru decided to negotiate trade agreements in order to consolidate the access of Peruvian exports to its most important markets by giving them permanent benefits unlimited in time and coverage as opposed to temporary commercial preferences given unilaterally by certain countries; a system that did not allow Peruvian exporters embark in long-term export-related investments.[143]

Economic Complementation Agreement

FTA (Free Trade Agreement) currently in force
FTA (Free Trade Agreement) concluded
  • FTA with  Guatemala (signed December 2011)
FTA (Free Trade Agreement) in negotiation

See also


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External links