EXCHANGE AND REVOLUTION: PERU, 1968-73
use a somewhat imperfect analogy, one may compare the exchange rate for a
nation's currency to a maiden's honour. The traditional morality held that both
were to be defended vigorously. A government which has once devalued its
currency, like the maiden who has lost her virginity, may be less wary should a
second or third occasion arise. While the new morality has "liberated" both
some governments and sorte maidens from former restraints, the traditional
morality has not lost its hold completely.
governments, defense of the traditional economic honour associated with fixed
exchange rates requires that either adequate foreign currency be available or
that controls over economic transactions be reasonably effective.
Paradoxically, prolonged defense of a fixed exchange rate in an inflationary
environment may erode the very ability of a country to earn through exports the
foreign exchange necessary to defend its exchange rate. Moreover, if exports do
not increase regularly in value, a country Pay be unable to acquire the
imported goods necessary not only for developmental investments, but even for
the maintenance of production and employment. Production and employment may
further be threatened by imports of competitive goods which, with a fixed
exchange rate, tend over time to become much less expensive than homeproduced
goods. The preceding scenario is a familiar one which might even be referred to
as the textbook model of the Latin American case.
analogy breaks down insofar as a government, in order to protect the honour of
a fixed exchange rate, may have to compromise itself in other respects, such as
modifying its attitude toward foreign investment or acceding to follow
otherwise unpalatable economic policies in order to acquire., additional
inflows of foreign exchange.
with the recurrent balance of payments crises and the economic shock waves
which generally follow massive currency devaluations has spawned a major change
in economic strategy in South America -- what we have chosen to call the new
economic morality. A key component of that policy revolution is recourse to
regular small currency devaluation. Such mini-devaluations have now been in
effect for a number of years in Brazil, Chile, Colombia, and Uruguay. The new
economic morality has both positive and negative socio-economic consequences,
but it is not our purpose to explore them here.
Instead, we shall look at the policies of a revolutionary government, that of
Peru, which on the issue of exchange rates has been a strict adherent of the
traditional economic morality of defense of a fixed rate, a position held
equally firmly by the former oligarchic owners of some of Lima's major
is important to note that Peru, through either good fortune or good economic
management -- more likely the former -- has in recent history had fewer
exchange crises and fewer devaluations than many other Latin American
countries; hence Peruvians have never come to take devaluations for granted as
have apparently Argentines, Brazilians, and Chileans, among others. The 1967
devaluation of the Peruvian sol by over forty per cent was one of a number of
factors which contributed to the ouster of President Fernando Belaunde Terry by
the Peruvian military in October 1968. The military, having been critical of
the Belaunde devaluation, appear to have been committed to maintain the value
of the sol which was established in September 1967.
rate defense as we have noted requires foreign exchange reserves and/or a
system of controls over foreign transactions. Let us examine the means used by
the government of General Juan Velasco Alvarado to mobilize foreign exchange
not merely for the conservative task of exchange rate defense but also to
contribute to the revolutionary objectives of the Peruvian military. The
traditional conservative objective require increasing receipts of foreign
exchange and/or limiting foreign expenditures. The revolutionary objectives
require that foreign exchange be expended on goods and services that will
contribute to the development and socio-economic transformation of Peru. A more
general statement of the revolutionary objective is that Peru should break its
historic relationship of dependence upon and domination by the industrialized
capitalist nations. The mere statement of these objectives is sufficient to
suggest that one might detect a certain schizophrenic quality in the set of
Peruvian measures relating to international transactions.
examining some of the policies pursued by Peru, let us first look at some
aggregate data for Peru for the period 1968-1973. The Peruvian real gross
domestic product was stagnant in 1968, partly as a consequence of the shock
waves of the late 1967 devaluation of the sol. While the dollar value of
imports fell by 25.1 per cent and that of exports rose by 11.7 per cent in
1968, Peruvian exchange reserves actually declined. In 1969 both exports and
imports declined. Since 1969 imports have increased steadily; while exports
peaked in 1970, fell by 14.6 per cent in 1971, and rose in both 1972 and 1973
to regain ~n the latter year the dollar value attained in 1970. The 1973 export
level did not reflect the success of any particular policy, but rather the
benefits reaped by Peru from the worldwide increase in commodity prices: the
I.M.F. index of Peru's export prices showed an 80 per cent increase relative to
the preceding year.
If export volumes had been maintained at that of 1970 or 1972, then 1973 would
have been a bumper year, but instead the export volume in 1973 was 27 per cent
below that of 1970, owing to the disappearance of the anchoveta, the principal
ingredient for Peru's fishmeal and fish oil exports, a drought affecting cotton
production, and a decline in copper production. With respect to foreign
exchange reserves, these have increased annually since the military takeover,
except in 1971. Peru's salvation has been based as usual on the bounty with
which she has been provided by nature. The variety of Peru's exports serves to
limit the impact of an extreme change in any single commodity. In 1973, for
example, Peru's exports of fishmeal fell in volume by 78 per cent, while fish
oil exports virtually ceased.
assure an increase in available foreign exchange as well as to assure the flow
of that exchange into priority uses Peru has established a number of government
bodies to handle the international marketing of certain export products as well
as the acquisition of some classes of imports. By late 1971, public agencies
had already been created to market internationally non-ferrous metals,
fishmeal, and sugar, which at the time accounted for up to 78 percent of Peru's
exports. In the case of metals, Mineroperu was not expected to be in full
control of sales operations until 1977 and was negotiating a contract with a
group of foreign firms to handle the sales in the interim.
Exempted from Mineroperu’s control were joint venture companies formed by
the Peruvian government and foreign firms; these firms were to be permitted to
negotiate long term supply contracts abroad in order to be able to borrow
On the import side one agency was established to acquire certain industrial raw
material, while Petroperu was assigned the monopoly over the import of crude
oil and derivatives.
advantages of state trading agencies are well known: the ability to use
monopoly power to negotiate higher prices for exports and lower prices for
imports as well as to align more closely economic and social objectives; to
assure, as Peru's 1971-75 development plan observes, "that the surplus
generated... remains in the country"
and to assure that the surplus be channeled into priority uses. One may well
ask whether this constitutes a “revolution”? One is inclined to
provide an emphatic yes for the Peruvian context. The statist solution surely
does represent a departure from the control of export marketing
either commercial or producing elites or foreign enterprises for private gain,
gain which was frequently transferred abroad. In the Latin American context,
there are state trading precedents such as Petrobras in Brazil or a more
encompassing agency, Peron's IAPI-- the Argentine Institute for the Promotion
of Trade. Reference to IAPI in particular raises questions on the other side of
the state trading coin: the use of monopoly power by state enterprises against
domestic firms. What recourse does a producing unit, say sugar cooperatives,
have against government decreed prices or terms of remuneration?
one adheres to the dictum of Velasco's adviser Carlos Delgado that the
substitution of one form of non-participation for another or the substitution
of state monopoly for private monopoly does not constitute revolution,
then one must add one's reservation to those of the deported Peruvian social
scientists Anibal Quijano and Julio Cotler in expressing doubts about the
nature of the Peruvian revolution.
Participation does not figure in the operation of the state trading
organizations, nor in the state *production monopolies. created in the
predominantly export-oriented fishmeal and-Mining industries. Indeed the state
takeover of the fishing industry during its 1973 crisis effectively eliminated
worker participation. The question of incorporating the worker or the citizen
into major decisions on the directions of development is one which must be
confronted not only in the realm of state trading but throughout the growing
Peruvian governmental operations. The lesson of history-must surely be that
without adequate safeguards on centralized power the good intentions of today's
leaders may with great facility be swept aside tomorrow.
quest for foreign exchange has also led in a more traditional direction, a
direction which invokes memories of the Government of Odria (1948-56); a
comparison which Velasco would hardly have regarded as a flattering one. This
softening to foreign capital followed exchange difficulties in 1971. As in the
Odria period numerous contracts have been signed with foreign enterprises to
develop Peruvian mineral deposits; no less than seventeen of these contracts
have been with foreign oil companies. Abraham Lowenthal in a recent article in
has said of these contracts:
their terms are probably more satisfactory to Peru than previous contracts,
they appear to be at least as generous to the foreign firms as comparable
arrangements in other countries, such as Indonesia, not noted for their
the avowed objective of the Peruvian Government is to end dependence and
domination and to foster participation, a new influx of foreign capital can
hardly be seen as serving these ends. The inner logic to which one may see
these seemingly contradictory policies conforming is the logic of the defense
of an exchange rate. The Government as a foreign debtor and as an importer of
capital equipment -and other inputs for development has an interest in a stable
exchange rate. The self-avowedly apolitical military governors of Peru
as-creatures',-with a memory of supposed past failures of economic management
wish to avoid the embarrassment of devaluation. The Government as an exporter
of commodities, the price of most of which is outside of its influence, sees
partnership with foreign enterprise as one means of increasing revenues to meet
debts, make purchases, and avoid humiliation. The logic of economic expansion
based on growing externally supplied physical resources and the logic of
lessened external dependence and achievement of a more egalitarian distribution
of wealth and access t o power may well be inherently irreconcilable. The
conflicting policies implicit in each approach lead, if the growth of exchange
receipts falters, either to the clear predominance of one objective over the
other or to a pathological response. In the Peruvian case, the quest for social
justice was the casualty of the necessary compromise.
Myron J. Frankman, "The South American Crawl: Exchange Rate Variation in
Developing Countries," McGill Centre for Developing Area Studies Working Paper
No. 12, (August 1975).
XXIX (June 1976), 316. The figures of-the Banco Central de Reserva del
Perú put the increase in prices at 52 per cent.
V (Oct. 29, 1971), 347.
International Monetary Fund,
Report on Exchange Restrictions, 1972
Instituto Nacional de Planificación,
nacional de desarrollo para 1971-1975
(Lima, 1971), p. 42.
Carlos Delgado, "Social Mobilisation in Peru," lecture presented at Annual
Meeting of Canadian Association of Latin American Studies, Edmonton, Alberta,
May 27, 1975.
and Capitalism in Peru: A Study in Neo-Imperialism
(New York, 1971) and Julio Cotler, “Bases del corporativismo en el
(Lima), I (Oct. 1972), 3-11.
Abraham Lowenthal, "Peru's Ambiguous Revolution,"
LII (July 1974), 805.