Policy Preferences of the Peruvian Government, 1946-1968
MYRON J. FRANKMAN
economic policies that have been implemented in Peru since 1968 by the military
government have been the object of considerable attention.
By contrast, evaluation of Peruvian economic policy in the preceding two
decades has received rather limited attention. It is our objective in this
article to put into perspective the export bias of important elements of
Peruvian economic policy in the period following World War II and to outline
some of the consequences of that bias.
the economist's conventional aggregate measures, Peru's economy grew more
rapidly than that of most of the other Latin American countries in the period
since the end of World War II. The growth propellant for Peru had been exports,
the dollar value of which grew at the average annual compound rate of 8.3 per
cent between 1946 and 1968. Whereas severe foreign exchange shortages at times
represented a constraint of some consequence in the process of development in
Argentina, Brazil, and Colombia, such difficulties were largely absent in Peru,
except in the immediate post-war years of 1946 to 1949.
documents of the United Nations Economic Commission for Latin America and the
United Nations Conference on Trade and Development have for some time
proclaimed the dim prospects for the exports of the primary producing countries
within the existing international economic framework. Simultaneously, academic
observers have reported that the granting of extensive privileges to the export
sector by developing countries is a thing of the distant past, having ceased
when the race to industrialize got under way. Both of these generalizations
must be abandoned when examining the Peruvian experience in the two decades
following the War, when exports did grow and substantial inducements were
provided to many firms producing for export, particularly foreign-owned mining
this paper we shall apply an approach inspired by the theory of sectoral
clashes, developed by Markos Mamalakis,
in evaluating the performance of the Peruvian economy: a mid-century economy in
which the export sector was 'dominant'. Our concern will be particularly with
the relationships between the Peruvian government and the export sector. It is
our belief that emphasis on the sectoral nature of public policy aids
indispensably our understanding by broadening our perspective from that of
economic analysis to that of political economy.
relative contribution of the various export sub-sectors to Peruvian growth
cannot be unambiguously determined by an examination of sectoral income and
product accounts. In Peru the contribution to gross output of the export
sub-sectors is intertwined with the value of production for the domestic market
in the data for agriculture, fishing, mining, and industry. Agricultural output
includes the production of export crops such as sugar, cotton, and coffee as
well as food crops for the domestic market and for subsistence consumption.
Industrial output includes the processing of sugar, coffee, anchoveta (to
produce fishmeal) and metallic ores. Fishing and mining may be regarded largely
as export sectors, but sectoral data tend to understate their growth and
relative importance owing to the industrial processing of the output of both
sectors. Consequently, a comparison of changes in sectoral shares of national
product or of sectoral growth rates does not provide a clear picture of the
significance of changes in value added in export production in Peru.
fishing, and industry all increased their relative share of gross product in
the period between 1950 and 1968 (Table 1). The quinquennial growth rates
(Table 2) show that mining and fishing experienced the most rapid growth during
the decade ending in 1960, while industry grew most rapidly from 1961 to 1965.
Agriculture has been a lagging sector. Although the real value of agricultural
output grew more rapidly than population,
it was not adequate to meet the growth of demand (as estimated by adjusting
initial food expenditure levels not only by population growth but also by
increases in per capita income and income elasticity of demand for food). The
expenditure elasticity would have had to have been no greater than 0.22 for
agricultural growth to have been adequate during the period from 1950 to 1965.
In fact, however, one estimate has placed elasticity at 0.69.
The deficit was met by food imports, the annual dollar value of which tripled
between 1950 and 1965.
his analysis of policy patterns, Mamalakis makes the distinction between
‘dominant’, ‘neutral’, and ‘suppressed’
sectors, depending on whether a sector has been favoured, overlooked, or
penalized by government policy.
Dominance may or may not be associated with high rates of sectoral growth,
depending in part on the effectiveness of the policies employed, as well as on
the situation of the favoured sector. Rapid growth rates do not necessarily
imply that a sector is dominant in the sense of having obtained preferential
treatment from the government. Fishing, for example, grew largely in response
to external demand. The fishing sector was a neutral one in that no special
privileges were extended by the government to the sector until 1960, by which
time the fishmeal boom was already well under way. The dominant sector in Peru
throughout the 1950's was mining, while from 1960 mining had to share its
dominance with industry. In the discussion which follows,
Sectoral Shares of Real Gross National Product (at 1963 prices),
attention will be directed primarily to the policies that provided dominance
and to the mechanisms of dominance.
Annual Compound Sectoral Growth Rates of Real Gross National Product (at 1963
prices), 1951-55, 1956-60, 1961-60, 1961-65, 1966-68
and Sources: as Table 1.
rapid growth of Peruvian exports (and of the Peruvian economy) since 1949 is
frequently attributed to Peru's liberal foreign exchange policy. The belief is
reinforced by sophistic comparisons between Peru's experience in the 1950s and
1960s and that of her neighbours, as well as that of Peru itself between
1946-49. Exchange policy is, however, only one area in which generalized export
dominance was manifested; tax, credit, and tariff policy were also relied on to
varying extents to advance the fortunes of particular export commodities.
Peruvian exchange policy was characterized largely by avoidance of exchange
control and periodic recourse to devaluation, with the resultant gains
consistently accruing to the export sector. Only during the administration of
Josè Bustamante y Rivero (1945-48) was a concerted effort made both to
prevent devaluation and to allocate foreign exchange on the basis of
Even Bustamante capitulated before his overthrow by varying the percentage of
exchange which had to be surrendered at the official rate, a measure equivalent
to a devaluation of the export rate. The ‘exporter-politicians’, as
Bustamante called them,
could not be satisfied with a half-way measure; they wanted the abolition of
the official rate.
found the administrations of General Manuel Odría (1948-56) and Manuel
Prado 0956-62) more obliging. Within thirteen months after ousting Bustamante y
Rivero from the Presidency, the Odría government abolished the official
rate and set the sol free to fluctuate. This was the first of three periods in
the 1950s during which the sol was allowed to fluctuate. In practice, the
fluctuating rate was a convenient device for facilitating depreciation of the
sol, and consequently met with the approval of the export sector. Depreciation
of the sol was tolerated and occasionally even assisted by the Central Bank. In
contrast, when appreciation of the rate began to occur, the Central Bank was
quick to intervene to peg, the rate before the favoured situation of the
exporters was eroded. A comparison of monthly exchange rates, Central Bank
foreign exchange holdings, and (infrequent) drawings from the International
Monetary Fund (IMF) amply demonstrates the export orientation of the Peruvian
devaluations of 1953 and of 1958-59 both followed declines in the prices of
agricultural and mining exports. The response of the Central Bank to cyclical
difficulties in each instance was to release the sol to speculative pressures
rather than to defend it. When recourse was made to the facilities of the IMF,
either through the negotiation of a stand-by agreement (line-of-credit) or
through drawing (borrowing), it was after most of the damage had been done.
While a stand-by agreement was established in the month preceding the 1967
devaluation, the Central Bank quickly capitulated in the face of the export
interests’ widely-held belief that the sol was overvalued.
attempt was made to recapture through taxes or other means the windfall gains,
which in some cases were quite sizable, that accrued to exporters as a
consequence of devaluation. For example, as a Consequence of the export rate
devaluations of September and December 1948, the sol value of cotton exports
increased by 126.5 per cent in 1949 relative to 1948, even though their volume
and dollar price changed very little.
devaluations may have brought gains for the export sector, they brought
temporary setbacks to consumers and to other producing sectors. Investment
levels and imports of capital goods either fell sharply or stagnated after each
devaluation. The ratio of gross fixed investment to gross national product fell
by six percentage points in the year following the 1953 devaluation, by five
percentage points following the 1958 devaluation, and again by six percentage
points following the 1967 devaluation.
The stimulus to domestic agriculture and industry resulting from the higher
post-devaluation local prices for imported substitutes was offset by the
increased cost of the imported investment goods necessary for expanding
productive capacity. Imports of capital goods for agriculture, in particular,
were strongly affected by the devaluations of the 1950's and of 1967. The
dollar value of capital goods imports for agriculture in 1959, for example,
were equal to less than one-half the value of those of 1957.
The same was true of capital goods imports for agriculture in 1968 relative to
gains from devaluation were concentrated; the losses, diffused. The periodic
devaluations slowed short-run growth by depressing investment and may have
moderated the rate and distorted the pattern of long-run growth by further
concentrating income in few hands. The obverse of increases in the
concentration of income is a limitation on the dispersion of purchasing power.
If market size is small and growing slowly, new firms are more likely to be
high-cost, low-volume operations. The blame for inefficient industry must
surely be shared widely, but one must not overlook the negative contribution of
an exchange policy which reflected export dominance in Peru.
The Central Reserve Bank of Peril, through its discount operations, effectively
favoured to an increasing extent one group within the export sector: cotton
producers. The Central Bank has generally provided virtually unlimited credit
at rates which, at their maximum, did not exceed four per cent per year to the
publicly owned Agricultural Development Bank.
The Agricultural Bank, in turn, increased the share of its total loans going to
cotton producers from one-third in 1945/46 to a maximum of almost one-half in
By 1964/65 the value of new lending for cotton production was equivalent to 36
per cent of the value of (1965) cotton exports.
These loans were extended to producers who accounted for one-half the area
planted in cotton.
writing in 1949 after being ousted from office, referred to the Agricultural
Bank as a specialized agency of the commercial banks.
Nineteen years later, despite changes in the Bank's organic law, Bustamante's
statement had a truer ring than when it was originally written. Loans by the
Bank to cotton producers were secured, short-term crop loans, and were extended
mainly to those who would probably have experienced no difficulty in obtaining
commercial bank credit. A World Bank-Food and Agriculture Organization mission
to Peru recommended in 1959 that the large-scale cotton producers be encouraged
to borrow from the commercial banks.
As of October 1968 little had been done to implement that recommendation.
the Central Bank had lent freely to the Agricultural Bank and other public
development banks (the Industrial Bank and the Mining Bank), its operations
with the commercial banks had been limited. At the ends of the financial years
from 1946 to 1968, the Central Bank's outstanding loan balances to commercial
banks as a percentage of the outstanding loan balances of commercial banks only
once exceeded 10 per cent (1953), while in 1964 it fell to 0.2 per cent.
On the other hand, the indebtedness of the Agricultural Bank with the Central
Bank was equal to one-third of the former's outstanding balances in 1964.
Moreover, in every year from 1954 to 1967, except 1957, the indebtedness of the
Agricultural Bank to the Central Bank exceeded that of the entire commercial
Agricultural Bank's preference for lending to cotton producers meant that less
credit was available for food crops at a time when the growth of the
agricultural sector was not keeping pace with the growth of domestic demand.
While Agricultural Bank lending to cotton producers increased in relative
importance both in relation to the Bank's portfolio and to cotton production,
the value of cotton exports increased from $68.0 million in 1950 to a peak
value of only $97.1 million in 1962. The imports of foodstuffs, however,
increased from $38.7 million in 1950 to $114.4 million in 1965, while the
corresponding value of all agricultural imports grew from $59.4 million to
$167.0 million, the latter value being double that of 1965 exports of cotton .
the neglect of non-export agriculture was reinforced by the behaviour of one of
the very institutions which was ostensibly created to promote balanced
From 1950 to 1959 only one group of export producers had
tax preference: producers of all minerals (except petroleum, which is covered
by separate legislation). The Mining Code of 1950 specified that the mining
sector was to receive special tax treatment for a twenty-five year period.
included the provision of an allowance for depletion and exemption from the
stamp tax, the
tax of two per cent of taxable profits, and the excess profits tax (which
existed until 1959).
treatment was extended to all existing mining enterprises regardless of whether
they undertook new investments. No
was asked by the government in exchange for the tax revenues which it was
proposing to forgo. In contrast, a 1955 Chilean tax law imposed on large-scale
copper mining a fifty per cent profit tax rate plus a surcharge of twenty-five
per cent which could be increased or decreased depending on the relation of the
level of output to that of a designated base period. No allowance for depletion
was permitted in Chile.
In Peru all mining firms were subject to a twenty per cent maximum tax rate on
profits net of depletion from 1950 until 1964, when the maximum was increased
to thirty per cent.
The maximum was again increased in 1965 to thirty-five per cent
- still well below the Chilean rate. Moreover, the Peruvian depletion
allowance, which is calculated as fifteen per cent of the gross value of
production, could at its maximum reduce the already low tax liabilities by
Mining Code also provided for the negotiation of special contracts with mining
firms considering major new investments, but narrowly limited the range of
obligations which could be demanded by the government from the contracting
party: the maximum profit tax which the government could demand was twenty per
cent of profits net of the depletion allowance. In the agreement signed by the
Odría government with the Southern Peru Copper Corporation in 1954,
under which the company agreed to develop the porphyry deposits at Toquepala,
Cuajone, and Quellaveco, greater restraints were placed on the acts of the
government than on those of the company. The ,crovernment prohibited itself
under the terms of the agreement from placing restrictions on either imports
and exports made by the company or on future earnings of the company.
special tax treatment accorded Southern Peru Copper Corporation was to remain
in force for that period of time necessary for the sum of annual profits
of taxes, depreciation, and depletion to equal the amount of invested capital.
The Peruvian National Planning Institute estimated that for the Toquepala
investment alone (the only one of the three undertaken as of October 1968) the
method designated for computing amortization would have served to maintain the
system of privilege for eighteen years.
dominance : The Industrial Promotion Law of 1959
Industrial Promotion Law enacted by the administration of Manuel Prado in 1959
represented an attempt by the Peruvian government to elevate industry to
dominance both through tariff protection and tax credits for investment.
Paradoxically, the law,
extended export dominance by providing special treatment to the industrial
processing of sugar, coffee, and fishmeal. Under the terms of the law, sugar
mills and fishmeal plants located, as most of them are, in coastal provinces
other than Lima and Callao, could invest amounts of up to sixty per cent of net
profits free of tax. It seems reasonable to believe that some integrated firms,
combining both 'extraction' and processing, reported depressed earnings for
extraction and inflated earnings and claims of investment for processing in
order to minimize tax payments. This belief appears to be supported by the fact
that in the quinquennium 1961-65, the annual growth rate of real GNP generated
in fishing was significantly lower than the growth rate of the dollar value of
exports of fish and derivatives: 7.8 as against 30.0 per cent per year.
incentives are a blunt instrument which provides for the forfeiting of tax
revenues from all those who fall into a legal category regardless of whether
they would have increased investment without the tax concession. In Peru, the
legal categories were extremely broad and hence incentives proved to be a
particularly blunt instrument.
granting of tax privileges to segments of the export sector and to industry
resulted in a significant redistribution of the tax burden in Peru. It is
usually thought that one manifestation of economic 'progress' is an increase in
the relative importance of direct taxes (on income and wealth) as a source of
government revenue. In Peru, however, the share of central government revenue
accounted for by indirect taxes (on transactions) increased from 34.0 per cent
in 1950 to 58.3 per cent in 1968.
As a consequence of export and, later, industrial dominance, the share of
government revenue represented by profit tax receipts fell steadily from 46.3
per cent in 1950 to a low of 15.4 per cent in 1966.
Profit taxes paid to the government as a share of the taxable profits of
business fell from 30 per cent in 1960 to a low of 17 per cent in 1966.
offset the revenue lost through concessions, taxes on non-dominant activities
such as agriculture and commerce were increased, as were those which fell more
heavily on consumers, thus tending to reduce the rate of growth of market
demand. With the redistribution of tax obligations, sectoral clashes, whose
existence analysts might previously have inferred, tended to become overt. In
1964, for example, cotton producers argued that a proposal to increase taxes on
cotton was a direct result of earlier tax exemptions granted to the fishing
burdens could not, however, match tariff levels as a generator of
inter-sectoral polemic and of overt clashes. In 1950 the Peruvian National
Industrial Society complained that the recently enacted tariff law (Law 11048,
1 July 1949) did not 'correspond in even the most remote form to the
aspirations of Industry'.
Not only had tariffs been set at low levels, but both mining and agriculture
were subsequently granted the right to import many of their required inputs
Ten years later, after the enactment of the Industrial Promotion Law, the
situation had changed: an industry-government coalition was in its ascendancy,
with industry bidding, at a minimum, to share with the dominant export sector
the favours of an indulgent government.
guarantee of 'adequate protection' to industry made by the Industrial Promotion
Law brought an adverse response from the producer associations representing
agriculture, mining, and fishing. The National Society of Fishing was probably
the most outspoken, charging (in 1966), for example, that tariff protection was
excessive and was leading to the establishment of anti-economic, parasitic
industry which would increase the cost of living, benefit only a few, and would
live 'on the effort and efficiency of other firms'.
representation of interest groups in policy formation has been a
well-established practice in Peru. Someone not familiar with Peru might have
thought it curious that the National Agrarian Society, representing primarily
the large coastal agriculturalists, had complained of not being consulted prior
to the 1969 Agrarian Reform Law. In the Peruvian context, the accustomed
procedure would not have been mere consultation, but rather participation in
policy formation. In fact, such participation had been one of the major
vehicles for facilitating sectoral dominance. The National Agrarian Society,
for example, appointed members to the directorate of both the Central Reserve
Bank and the Agricultural Bank. The National Society of Industries participated
in the commission which reviewed the 1959 Industrial Promotion Law prior to its
enactment. Similarly, the National Society of Mining and Petroleum co-operated
in the framing of the 1950 Mining Code. The preceding are but a few examples of
the widespread participation of interest groups in economic policy-making in
was well recognized by producer groups in Peru that representation on public
bodies was a key to obtaining preferential treatment for a sector. Associations
representing fishing, mining, and agriculture had all sought unsuccessfully to
gain membership on the Superior Council of Industries, a body which guided the
application of the Industrial Promotion Law. The National Society of Fishing
announced in its biennial report of 1962-63 that it was working to gain for
fishing its ‘own direct access to the central nuclei in the economic
direction of the country, such as the Central Reserve Bank ...’
1950s were a decade of relatively unchallenged dominance of the export sector
(and, in particular, mining) in Peru. Before 1950, the government of Bustamante
y Rivero had unsuccessfully attempted to limit the privileges of the export
sector. In the 1950s,
export dominance became de lure dominance for mining, while the enactment of
the Industrial Promotion Law by the government of Manuel Prado in 1959 extended
privileges to a second major sector of the economy. The reformist government of
Fernando Belaúnde Terry (1963-68) attempted to honour that part of the
dominance pattern inherited from Odría and Prado which was represented
by tax concessions. Belaúnde’s programme to promote development
through public expenditure, agrarian reform in the Sierra and the construction
of the Marginal Highway of the Selva had to be financed by a marked expansion
of both government budget deficits and external public debt.
Pre-existing privileges remained intact until action was forced by the growing
as significant as the policies themselves were the growing structures for overt
and direct representation of interest groups in the formation of economic
policy. Representatives of producers' groups were being involved to an
increasing extent both in the framing of development plans and in the
determination of short-run policy. What effect these evolving forms might have
produced can now only be a matter for speculation. Since the military coup of
October 1968, new policies have been enacted and new relationships are
emerging. Those mechanisms of dominance which we have described have been
largely swept aside. For example, representation of interest groups on the
boards of public banking institutions has been replaced by representation of
the relevant government ministries and public bodies .
the two decades preceding the 1968 coup, wide-ranging policies of a general
nature (devaluation) and of a specific nature (credits, tax incentives, tariff
exemptions) were used to stimulate export growth. Market forces were generally
relied upon to spread the benefits of export growth to the rest of the society.
Today, export promotion remains one of the foci of economic policy, but now
mechanisms have been established (in the form of state marketing and/or
ownership) whose objectives are to ensure that the gains of export expansion
are put to the service of the community.
For a review of a number of books dealing with Peruvian policy since 1968, see
Colin Harding, 'Peru: Questions of Revolution',
American Review of Books,
No. I (Spring, 1973), 185-90.
Erik Thorbecke and Apostolos Condos concluded, for example, that Peruvian
private investment ‘is determined completely exogenously through the
changes occurring in the export sector’. Thorbecke & Condos,
'Macroeconomic Growth and Development Models of the Peruvian Economy,' Irma
Adelman and Erik Thorbecke, eds.,
Theory and Design of Economic Development
(Baltimore, The Johns Hopkins Press, 1966), pp. 189-99.
Markos Mamalakis, 'The Theory of Sectoral Clashes,'
American Research Review
IV (Fall, 1969), 9-46, and Mamalakis, 'The Theory of Sectoral Clashes and
American Research Review
VI (Fall, 1973), 89-126.
The value of the contribution of agriculture and forestry to real gross
national product grew at an annual average compound rate of 2.8 per cent;
population, at a rate of 2.6 per cent.
J. S. Coffey, 'Income Elasticities for Peru - A Preliminary Analysis ' (Lima :
University of North Carolina Mission, c. 1965).
Banco Central de Rcserva del Perú,
nacionales del Perú
1950-1965 (Lima, 1966), pp. 54-55.
Mamalakis, ‘The Theory...’ (1969), pp. 10-17.
Includes electricity, gas, water, housing income, government, commerce,
transportation, services, and banking.
Banco Central de Reserva del Perú,
nacionales del Perú 1950-1967
(Lima, 1968), p. 24 and
(Lima, 1970), p. 24.
The legislative record of the period is contained in Jorge Eugenio
(Lima, Casa Nacional de Moneda, 1949).
José L. Bustarnante y Rivero,
años de lucha por la democracia en el Perú
(Buenos Aires, 1949), pp. 235-36.
Myron J. Frankman,
Promotion and Developmental Priorities in Peru
1946-1965 (Austin, University of Texas Ph.D. dissertation, 1968), pp. 192-93.
The principal exchange rate was pegged following appreciation in October 1954
and in October 1959. In both instances increases in Central Bank official
reserves preceded and followed the fixing of the value of the exchange rate.
p. 26 and ibid., 1960-1969 (Lima, 1970), p. 12.
1950-1965, p. 55.
1960-1969, p. 44.
Banco de Fornento Agropecuario del Perú,
This was exceeded during the 1967-68 drought when the volume of cotton
production and exports fell markedly.
Bustamante y Rivero, p. 194.
International Bank for Reconstruction and Development and United Nations Food
and Agriculture Organization,
Agricultural Development of Peru
I. General Report
(Washington, August 1959), p. 42.
and Banco de Fornento Agropecuario,
. . . 1950-1965, pp. 54-55.
Law 11357, 12 May, 1950.
Organization of American States and Inter-American Development Bank, Joint Tax
tributarios de América Latina
Chile (Washington, Pan American Union, 1964), p. 35.
Law 14920, 27 Feb. 1964.
Law 15221, 16 Nov. 1964.
(13 Nov. 1954), p. 1.
Instituto Nacional de Planificación,
de la realidad socio-económica del Perú;. III. Análisis de
los sectores económicos (A)
(Lima, July 1963), pp. V-72.
Law 13270, 30 Nov. 1959.
(Lima, 1968), pp. 16, 44.
p. 34 and
1960-1969, p. 34.
1960-1969, p. 14.
Sociedad Nacional Agraria del Perú,
1963-1964 (Lima), p. 74.
Sociedad Nacional de Industrias,
1950 (Lima), p. 3.
Sociedad Nacional de Pesquería, 'Comunicado',
(Lima), 30 May, 1966, p. 3.
Sociedad Nacional de Pesquería,
1962-1963 (Lima), p. 7.
Peru had one of the highest growth rates of public external indebtedness in
Latin America during the Belaúnde government. Inter-American Development
and Social Progress in Latin America, Annual Report 1972
(Washington, D.C.), p. 407.
The powerful National Agrarian Society, though a shadow of its former self
after the 1969 Agrarian Reform Law, was legally abolished by the government in