economic history of peru_brochure

8/17/2019 Economic History of Peru_Brochure

1/9

Throughout history, many nations have stood out for their economic and

technical accomplishments; but only a handful of civilizations — including what is

now Peru — did so autonomously. The first cultures created in this part of the

world date as early as 3,200 B.C.E. according to recent scholarship. Later the

Inca Empire, ruled from the historic city of Cusco, tapped the knowledge built in

the previous centuries and sprawled over an immense domain covering sixpresent-day South American countries. During such a protracted period of self-

sufficient development, ancient Peruvians attained no little success.

Economic

History of

Peru


2/9

In 1500, a few years before the European

conquest, the territory now occupied by

Peru hosted between five and nine million

inhabitants. In order to support such a

considerable population in a land with

comparatively limited agricultural

resources and a challenging geography,

ancient Peruvians developed a highly

complex and effective economic

organization.

They excelled at using natural resources

in harmony with the environment bymeans of massive agricultural systems

and road networks cleverly adapted to the

steep slopes of the Andes (a strategy

known to modern scholars as “vertical

archipelago”). Apparently they had no

written language as we know it; but they

developed ingenious devices, such as asystem of recording knots and cords

(known as quipus ) for accounting,

engineering, and scientific purposes.

Their achievements include impressive

architectural works, of which the citadel

of Machu Picchu, Peru’s flagship culturalicon, is but an example.

In 1532, the Spanish conquerors

captured Atahualpa, the last Inca

Emperor. This bold action triggered thedismantling of the Inca state and the

establishment of Spanish rule, which was

to last for three centuries. At its peak in

Quipu (Museum of the Central

Reserve Bank of Peru)

Inca agricultural terraces (andenes)

Gold art (Moche culture, 100-800 AD)


3/9

the 18th century, before its division into

several jurisdictions under the Bourbon

dynasty, the Viceroyalty of Peru extended

over most of Spanish South America.

The colonial or viceroyal period brought

sweeping social and economic changes.

The Europeans introduced new crops,

animals, and technologies, as well as

innovations such as the use of the

currency. They also promoted urban

development and established the large

estate as the main link in the agricultural

production chain. Especially, the

economic system relied largely on the

large-scale mining of precious metals

(mainly silver), a new activity that put the

Viceroyalty of Peru at the center of the

international monetary system of the day.

On one hand, under the viceroyal system

the country experienced a demographic

stagnation (particularly due to the

introduction of European diseases) and

specialized as a commodity exporter. On

the other hand, even though during

colonial times the agricultural expertise

that had served pre-Hispanic civilizations

well for centuries gradually fell into

oblivion, the new technologies and

economic institutions brought by theEuropeans contributed to enhancing

productivity.

Another major innovation was the

insertion of Peru into the international

trade system. Until the first decades of the

18th century, the Peruvian port of Callao

was the commercial hub of the region:virtually all goods produced in present-

day Peru, Bolivia, and Argentina were

shipped from there to Spain via Panama.

Colonial Coins (17th Century)

The Lima Mint

Potosí silver mine (Viceroyalty of Peru)


4/9

However, perhaps the most lasting

inheritance of the colonial experience was

that it turned Peru into the ethnic and

cultural melting pot that it is nowadays.

The initial times after the declaration ofIndependence from Spain in 1821 were

difficult. The war of Independence

exhausted the country’s material

resources and the new republican

authorities forced the colonial economic

elite to leave, depriving the fledgling

nation of their expertise and internationalconnections.

Civil wars, border conflicts, and a serious

deterioration of the state’s fiscal powers

marked the first years of independent life.

However, an unexpected natural resource

boom took primary importance towards

the mid-nineteenth century: the price of

guano (seabird manure), a highly effective

fertilizer due to its exceptionally high

content of nutrients essential for plant

growth exploitation, and over which Peru

held a virtual monopoly, reached record

highs in the world’s main stock

exchanges.

The exploitation of the massive guanodeposits on the islands off the coast of

Peru brought immense wealth and

influence to a new economic elite and

boosted fiscal revenues. Several

infrastructure works, especially

associated with railroad expansion, were

launched to modernize the country.Nevertheless, many remained incomplete

or did not yield the expected results due

to poor planning and corruption leaks.

Furthermore, instead of buoyant

surpluses, the outcome of the guano era

was a disproportionate growth of public

debt (five times the public budget as of themid-1870s). It is widely accepted that the

guano era represented a regrettable lost

opportunity in Peruvian history.

Real Felipe Fortress (Port of Callao, 18th

Century ) Guano mining site (mid-19th century)


5/9

As a round-up for those years of fiscaldeterioration and governance problems, a

disastrous war (1879-1883) over yet

another coveted commodity, this time

saltpeter, left the country devastated and

without its resource-rich southern

provinces. The reconstruction efforts

carried out in the wake of the warincluded important administrative

reforms, especially a profound redesign of

fiscal and monetary policy in 1885-1900.

The governments of that period reformed

the tax system and adopted, by the end of

the 19th century, a British-style gold

standard to restore monetary stability in

response to the high inflation that ensued

during and immediately after the war. The

revamped macroeconomic framework and

a commodity export boom laid thefoundation for solid growth during the

first three decades of the 20th century.

Those years also witnessed a greater

diversification in the domestic economy

and, particularly, the appearance of a

sound banking system linked both to

export activities and to an emerging localmanufacturing sector.

Nevertheless, a robust industrial

development proved elusive due to a deep

territorial fragmentation coupled with a

still considerable inequality in the

distribution of wealth, income, and

opportunities, which in turn preventedthe full formation of an integrated market

economy. On a brighter note, the 1920s

in particular were a time of important

Construction of the Central Andean Railway

Saltpeter mining site (Southern Peru, 1870s)

Early industrial development(turn of the 20th century)


6/9

public works in response to the

aspirations of a growing middle class. In

addition, after the crisis of the gold

standard, fiduciary money was finally

accepted by the public, after severalunfavorable experiences in the past, due

to the guarantee and control provided by

the newly founded central bank.

In these circumstances, the ripples from

the 1929 Wall Street crash reached Peru

and heralded a time marked by important

social shifts. Between the 1930s and the

end of the 20th century, the countryexperienced a crucial demographic

transition: the population tripled and a

massive migration from the inland

highlands to the coast and from rural to

urban areas radically changed the social

landscape.

In 1930, two-thirds of the population lived

in rural towns and communities and just

one-third lived in large and medium

cities. Towards the last decades of the

20th century, those proportions had

reversed. In the absence of an adequate

production infrastructure and with

limited legal powers, the migration to thecities encouraged the emergence of a large

informal sector, which continues to be a

considerable policy and social challenge

to this day.

Particularly, that period saw an

alternation of free-market andinterventionist regimes, with a clear

predominance of the latter. Timidly

towards the end of the 1950s, and more

openly in the 1960s and 1970s, the

country adopted an import substitution

model under the view (upheld by the

schools of economic thoughtpredominating in Latin America at the

time) that commodity export-oriented

strategies promoted growth but not

Reserve Bank of Peru headquarters

(end-1920s)

Urban development picked up since the first half

of the 20th century (Lima main square, 1920s)


7/9

development, as enclave-based extractive

activities failed to create linkages with the

rest of the economy; and that it was

therefore necessary to reinforce the

domestic market and buttressindustrialization by means of

interventionist and protectionist policies.

Moreover, the “national security” doctrine

advocated the identification of “strategic”

industries to ensure national sovereignty.

The military government of the 1970s,

which embodied this mindset, set out to

change the composition of the economic

elite and the production structure. A

radical land reform was put in place to

expropriate large and medium estates and

hand them over to thousands to peasant

families; the energy industry (including

large mining projects, oil fields, and

refineries) and other productive sectors

were nationalized; the public sector was

enlarged significantly to take over and

supervise a wide range of economic

activities; and the tariff and exchange rate

regimes were aligned to protect the

domestic industry.

Inadequate implementation and the

inefficiencies inherent to the system,

together with the implementation of

expansionary fiscal and monetary

policies, led to an economic crisis and

initiated a period of economic stagnation.

However, despite its flaws, the essentials

of the model lingered into the 1980s.

The main policies adopted during the

second half of that decade were an

extreme expansionary stance in monetaryand fiscal policy, widespread controls,

and strong economic interventionism

(notably an attempt to nationalize the

banking system), all of which seriously

eroded public confidence. In this context,

production fell drastically; the country

experienced one of the most severehyperinflation episodes in history; fiscal

expansion and the erosion of tax revenues

resulted in massive public sector deficits;

Import substitution (1970s)

State-run oil refinery (1970s)


8/9

official reserves where depleted; and

around two-thirds of the foreign debt fell

into default. The economic crisis was

accompanied by growing poverty, gaping

income inequalities and an

unprecedented escalation of political

violence.

However, in a dramatic reversal from the

economic pattern that had prevailed in

previous decades, since 1990 Peru

established a prudent macroeconomic

framework and introduced key reforms

that in a comparatively short period

resulted in high growth, a solid externalposition, and a considerable reduction in

poverty.

In stark contrast with previous decades,

the authorities put in place a strong

macroeconomic framework and launched

a set of structural reforms to promote

efficiency, reduce vulnerabilities, and laythe foundation for sustainable growth. In

this context, they set out to reduce the

fiscal deficit by rationalizing

expenditures, overhauling the tax system,

normalizing the prices of government-provided goods and services, moderating

the size of the public payroll, and

liquidating the state-run development

banks; redesign the monetary framework

and, crucially, enact the central bank’s

constitutionally-mandated independence;

liberalize trade and capital flows; privatizeseveral economic activities previously

confined to the public sector; introduce a

private pension fund system; and

strengthen financial supervision.

Due to these policies, and helped by an

exceptional global boom cycle, the

ensuing years saw an impressive

economic performance. The period

running from the first years of the 21st

century until the onset of the

international financial crisis was one of

longest expansion cycles in Peru’s history

(32 quarters of consecutive growth).

Spurred by domestic consumption andinvestment, GDP grew around 7% on

average in 2001-2008; and GDP per

capita grew 43% over the same period.

The 1980s hyperinflation: 1 New Sol = 1

million Intis (Numismatic Museum of Peru)

The New Sol


9/9

The record growth achieved in 2008

(9.1%) put Peru among the world’s most

dynamic economies. The country risk

dropped drastically in response to Peru’s

declining public debt and substantialfiscal and foreign reserve buffers. On the

monetary front, the formal adoption of an

inflation targeting regime in 2002 (after

gradual implementation during the

1990s) kept inflation low, anchored

expectations, and promoted a decrease in

dollarization.

Steps were also taken to further open theeconomy, notably through the signature

of several free-trade agreements. At the

same time, considerable challenges

remain, especially improving targeting in

poverty-reduction programs; bridging the

infrastructure deficit through effective

public investment, public-private

partnerships, and concessions; further

reducing financial vulnerabilities, a main

concern in the wake of the international

financial crisis; and, crucially, better

aligning education with the demands of

development. The authorities aredetermined to tackle these weaknesses to

definitely pave the way for sustainable

and inclusive growth.

Peru is now among the world’s twenty -

plus emerging market economies and is

regarded as one of the best-performing

countries in the region. For its transitionfrom a state of deep economic and social

crisis to strong growth and high

optimism, Peru can justly be considered a

remarkable success story in economic

history. In contrast with other periods in

its history, Peru learned the lessons from

the past, mainly the need to put in placea sound macroeconomic framework, build

substantial buffers, and reinforce market

confidence.

Trade openness plays a key role in Peru’s

development (Port of Callao)

Lima Financial Center

economic history of peru_brochure

Documents