To 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.
For 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.
The 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.
Discontent 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. [1] 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 newspapers.
It 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.
Exchange 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.
Before 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. [2] 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. [3]
To 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. [4] 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 investment funds. [5] 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. [6]
The 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" [7] 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
by 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?
If 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, [8] 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. [9] 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.
The 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 Foreign Affairs has said of these contracts:

Though 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 revolutionary credentials. [10]

If 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
May 1975
McGill University

1 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).
[2] International Financial Statistics , XXIX (June 1976), 316. The figures of-the Banco Central de Reserva del Perú put the increase in prices at 52 per cent. Memoria 1973 , p. 122.
[3] Banco Central, Memoria 1973 , p. 123.
[4] Latin America , V (Oct. 29, 1971), 347.
[5] International Monetary Fund, Annual Report on Exchange Restrictions, 1972 , p. 349.
[6] Ibid., pp. 346, 350.
[7] Instituto Nacional de Planificación, Plan nacional de desarrollo para 1971-1975 , I. Plan global (Lima, 1971), p. 42.
[8] Carlos Delgado, "Social Mobilisation in Peru," lecture presented at Annual Meeting of Canadian Association of Latin American Studies, Edmonton, Alberta, May 27, 1975.
[9] Aníbal Quijano, Nationalism and Capitalism in Peru: A Study in Neo-Imperialism (New York, 1971) and Julio Cotler, “Bases del corporativismo en el Perú,” Sociedad y política (Lima), I (Oct. 1972), 3-11.
[10] Abraham Lowenthal, "Peru's Ambiguous Revolution," Foreign Affairs , LII (July 1974), 805.