CHAPTER I THE EVOLUTION OF THE PERUVIAN ECONOMY 1985-87
A.
Background
1.01 Peru is a small and moderately open economy with a long history of heavy dependencyon mineral exports for its performance. Well endowed in natural resources,Peru is now the world's largest producer of silver and fifth largest producer of copper. In addition, it has considerablefishing potential and hydrocarbon resources. The country is divided into three physically distinct regions. Efforts to forge physical, economic, linguistic, and cultural links between the highlands (Sierra), the rain forest (Selva),and the coast regions confront the formidablenatural barriers of the Andean mountains. About half of Peru's populationof about 20 million (1987) live in the coastal region,while 40 percent live in the Andean highlands and the rest in the Amazon region. Income per capita, which has declined steadily since the mid-1970s, is now about US$1,200. Peru's greatest challenge is to provide jobs and social services at the pace of population growth, now at 2.6 percent per annum. Income distributionhas been reported to be one of the most uneven of Latin America, and other welfare indicators,such as life expectancy and infant mortality, are among the lowest in the region. More than half of Peru's poorest 30 percent live in the Andean highlands and are self-employed peasants. Agriculture and mining have long lost their predominance in the economy due to the import substitutionmodel followed since the mid-sixties which graduallymade industry the mainstay of the economy. State-owned enterprises,whose number grew steadily since the late 1960s, control several key sectors, such as hydrocarbons,electricity and part of mining, and generate about 10 percent of GDP. In turn, Peru's tax burden ratio, of around 9 percent of GDP, is one of the lowest of the group of countries with comparable income per capita, and the mix between direct and indirect taxes is heavily biased toward the latter. B. Recent History 1.02 Peru's modern history has been marked by political and economic instability. One term democraticallyelected governmentshave usually been followedby periods of military "juntas"and vice versa in an almost mathematical sequence. In turn, recurrent expansionaryeconomic policies have ultimately run into foreign exchange crises and subsequentstabilization episodes. The Peru of the 1950s has been characterizedas a laissez-faireeconomy. The country was open to foreign trade; exports of raw minerals, mostly exploited by foreign interests,and fishmeal paid for importedmanufactures. In turn, Governmenthad little direct participation in the economy and economic activitywas largely unregulated.Industrialization by import substitutionand heavy government spending in infrastructure started with the first Governmentof Belaunde Terry, between 1963 and 1968, that ended with an economic crisis and a military coup. During the nationalisticrule of General Velasco Alvarado (1968-75),the Government embarked on an inward-lookinggrowth strategy, nationalized in mining--and undertook a global foreign corporations--particularly agrarian reform. Large scale public investmentprojects brought about a