Peru - Overview of economy

Since the Spanish conquest in 1532 and the Declaration of Independence from Spain in 1821, Peru has been a raw material exporting nation that has experienced cycles of short-term export booms and long periods of economic stagnation, the last of which began in 1997. The first major boom was gold and silver, which the Spaniards found in abundant supply in the Inca Empire. The Spaniards sent tons of gold objects home annually. Peru became the principal vice royalty of the Spanish Crown during colonization. In addition to minerals, the Spaniards also brought numerous examples of domesticated plants to Europe. Peru has supplied the world with 120 domesticated plants, the largest number of any country, according to the UNDP.

Minerals have remained the mainstay of the Peruvian export economy, with gold topping the list in the last decade. Peru exported US$1.1 billion in gold in 2000, with the Yanacocha (Cajamarca) and Pierina (Ancash) mines ranked among the top 5 most profitable and productive gold mines in the world, according to the World Gold Council. Peru is the world's eighth-largest gold producer, second in silver and copper, and ranks in the top 5 in zinc and lead.

Other export booms have included guano and rubber, but the cycles were short-lived in the late 19th and early 20th centuries. One export product that has remained important since the early decades of the 20th century is fishing, with fishmeal (used as animal feed and fertilizer) being the chief export in the sector. Peru is the world's leading fishmeal producer, supplying nearly one-third of worldwide production in 2000, according to the Paris-based Fishmeal Exporters' Organization. Fishmeal accounted for US$900 million in exports in 2000. Major agricultural export crops have included coffee, sugar, and cotton. Coffee continues to be a major export, but sugar and cotton exports have crashed, with Peru currently importing both products.

In the 1960s, Peru attempted to break its dependence on exporting raw materials with a new nationalistic approach to economic management-based import substitution . Under the leadership of Gen. Juan Velasco, a socialist military government took power in 1968, immediately nationalizing most industries and implementing a sweeping agrarian reform program that took over all major farmlands, either distributing land to peasant communities or forming cooperatives to run them. The government took control of most industries, including nearly all mines, public services (telephone, electricity, and water), and the media. The government adopted an aggressive import-substitution program, trying to stimulate local production and making imports difficult by applying exorbitant tariffs . The Velasco experiment lasted until 1975, when a more conservative military junta (an internal military revolt against a government) overthrew him. The economic model remained basically intact, however, until the late 1980s.

The final years of the statist model were disastrous. Under the leadership of former president Alán García (1985-90), the government attempted to stimulate growth by freezing prices and raising wages, and offering businesses below-market exchange rates for exports and imports. The result was 7,600 percent inflation (1990), an annual GDP decrease of 5 percent, and depleted reserves.

Peru began changing the economic model with the election of Alberto Fujimori in 1990, adopting an International Monetary Fund-designed (IMF) program that lowered or eliminated most tariffs, privatized nearly all state-owned industries and courted foreign investment in banking, telecommunications, and service industries. The program promoted raw material exports, specifically mining—an industry that was offered tax incentives. Along with garments (US$693.6 million in exports in 2000), Peru's principal exports are minerals (49 percent of exports in 2000) and fishmeal. A large percentage of manufactured goods are imported, with the country running a trade deficit for 2 decades. The economy became increasingly "dollarized" throughout the 1990s, with 80 percent of bank deposits and 85 percent of debts now in dollars. Industry grew increasingly concentrated in Lima, with approximately 80 percent of manufacturing now based in the capital.

The government is dependent on foreign assistance from multilateral institutions (IMF, World Bank, and Inter-American Development Bank) and foreign governments. The government missed the IMF-set fiscal deficit target of 1.5 percent of GDP in 1999 and 2000. The foreign debt (US$31 billion in 1998) represents 56 percent of GDP. Foreign debt payments for 2001 and 2002 total US$3 billion, and the government signed a standby agreement with the IMF in early 2000 that frees up US$1.5 billion to service its debt.

It is difficult to calculate the value of the black market in Peru, but the impact is significant. The International Intellectual Property Alliance estimates (1998) that 50 percent of motion pictures, 85 percent of recordings, and 60 percent of computer programs are pirated. Peru's 5 borders make it relatively easy for many manufactured goods to illegally enter the country. In addition, an estimated 10 percent of the country's hundreds of thousands cable television hook-ups are illegal. The largest illicit sector, however, is the drug trade. Peru is the second-most important producer of coca, used to make cocaine, and cocaine itself. Black market money from drug sales and money laundering are calculated to be worth between 1 and 2 percent of GDP.

Unemployment, according to the International Labor Organization, stands at 10 percent, but underemployment is approximately 60 percent. An estimated 54 percent of the population lives in poverty, earning the equivalent of US$1.50 a day.