Economic History of Peru

Economic History of Peru Throughout history, many nations have stood out for their economic and technical accomplishments; but only a handful of civilizations—including what is now Peru— did so autonomously. The first cultures created in this part of the world date as early as 3,200 B.C.E. according to recent scholarship. Later the Inca Empire, ruled from the historic city of Cusco, tapped the knowledge built in the previous centuries and sprawled over an immense domain covering six present-day South American countries. During such a protracted period of self- sufficient development, ancient Peruvians attained no little success. In 1500, a few years before the European conquest, the territory now occupied by Peru hosted between five and nine million inhabitants. In order to support such a considerable population in a land with comparatively limited agricultural resources and a challenging geography, ancient Peruvians developed a highly complex and effective economic organization. Quipu (Museum of the Central Reserve Bank of Peru) Their achievements include impressive architectural works, of which the citadel of Machu Picchu, Peru’s flagship cultural icon, is but an example. Inca agricultural terraces (andenes) They excelled at using natural resources in harmony with the environment by means of massive agricultural systems and road networks cleverly adapted to the steep slopes of the Andes (a strategy Gold art (Moche culture, 100-800 AD) known to modern scholars as “vertical archipelago”). Apparently they had no In 1532, the Spanish conquerors written language as we know it; but they captured Atahualpa, the last Inca developed ingenious devices, such as a Emperor. This bold action triggered the system of recording knots and cords dismantling of the Inca state and the (known as quipus) for accounting, establishment of Spanish rule, which was engineering, and scientific purposes. to last for three centuries. At its peak in the 18th century, before its division into Viceroyalty of Peru at the center of the several jurisdictions under the Bourbon international monetary system of the day. dynasty, the Viceroyalty of Peru extended On one hand, under the viceroyal system over most of Spanish South America. the country experienced a demographic stagnation (particularly due to the introduction of European diseases) and specialized as a commodity exporter. On the other hand, even though during Colonial Coins (17th Century) The colonial or viceroyal period brought sweeping social and economic changes. The Europeans introduced new crops, animals, and technologies, as well as innovations such as the use of the currency. They also promoted urban development and established the large estate as the main link in the agricultural production chain. Especially, the The Lima Mint economic system relied largely on the colonial times the agricultural expertise large-scale mining of precious metals that had served pre-Hispanic civilizations (mainly silver), a new activity that put the well for centuries gradually fell into oblivion, the new technologies and economic institutions brought by the Europeans contributed to enhancing productivity. Another major innovation was the insertion of Peru into the international trade system. Until the first decades of the 18th century, the Peruvian port of Callao was the commercial hub of the region: virtually all goods produced in present- day Peru, Bolivia, and Argentina were Potosí silver mine (Viceroyalty of Peru) shipped from there to Spain via Panama. However, perhaps the most lasting content of nutrients essential for plant inheritance of the colonial experience was growth exploitation, and over which Peru that it turned Peru into the ethnic and held a virtual monopoly, reached record cultural melting pot that it is nowadays. highs in the world’s main stock exchanges. Real Felipe Fortress (Port of Callao, 18th Century ) Guano mining site (mid-19th century) The initial times after the declaration of The exploitation of the massive guano Independence from Spain in 1821 were deposits on the islands off the coast of difficult. The war of Independence Peru brought immense wealth and exhausted the country’s material influence to a new economic elite and resources and the new republican boosted fiscal revenues. Several authorities forced the colonial economic infrastructure works, especially elite to leave, depriving the fledgling associated with railroad expansion, were nation of their expertise and international launched to modernize the country. connections. Nevertheless, many remained incomplete or did not yield the expected results due Civil wars, border conflicts, and a serious to poor planning and corruption leaks. deterioration of the state’s fiscal powers marked the first years of independent life. Furthermore, instead of buoyant However, an unexpected natural resource surpluses, the outcome of the guano era boom took primary importance towards was a disproportionate growth of public the mid-nineteenth century: the price of debt (five times the public budget as of the guano (seabird manure), a highly effective mid-1870s). It is widely accepted that the fertilizer due to its exceptionally high guano era represented a regrettable lost opportunity in Peruvian history. standard to restore monetary stability in response to the high inflation that ensued during and immediately after the war. The revamped macroeconomic framework and a commodity export boom laid the foundation for solid growth during the first three decades of the 20th century. Those years also witnessed a greater diversification in the domestic economy and, particularly, the appearance of a Construction of the Central Andean Railway sound banking system linked both to export activities and to an emerging local As a round-up for those years of fiscal manufacturing sector. deterioration and governance problems, a disastrous war (1879-1883) over yet another coveted commodity, this time saltpeter, left the country devastated and without its resource-rich southern provinces. The reconstruction efforts carried out in the wake of the war included important administrative reforms, especially a profound redesign of fiscal and monetary policy in 1885-1900. Early industrial development (turn of the 20th century) Nevertheless, a robust industrial development proved elusive due to a deep territorial fragmentation coupled with a still considerable inequality in the distribution of wealth, income, and Saltpeter mining site (Southern Peru, 1870s) opportunities, which in turn prevented The governments of that period reformed the full formation of an integrated market the tax system and adopted, by the end of economy. On a brighter note, the 1920s the 19th century, a British-style gold in particular were a time of important public works in response to the cities. Towards the last decades of the aspirations of a growing middle class. In 20th century, those proportions had addition, after the crisis of the gold reversed. In the absence of an adequate standard, fiduciary money was finally production infrastructure and with accepted by the public, after several limited legal powers, the migration to the unfavorable experiences in the past, due cities encouraged the emergence of a large to the guarantee and control provided by informal sector, which continues to be a the newly founded central bank. considerable policy and social challenge to this day. Reserve Bank of Peru headquarters (end-1920s) In these circumstances, the ripples from the 1929 Wall Street crash reached Peru Urban development picked up since the first half of the 20th century (Lima main square, 1920s) and heralded a time marked by important social shifts. Between the 1930s and the Particularly, that period saw an end of the 20th century, the country alternation of free-market and experienced a crucial demographic interventionist regimes, with a clear transition: the population tripled and a predominance of the latter. Timidly massive migration from the inland towards the end of the 1950s, and more highlands to the coast and from rural to openly in the 1960s and 1970s, the urban areas radically changed the social country adopted an import substitution landscape. model under the view (upheld by the schools of economic thought In 1930, two-thirds of the population lived predominating in Latin America at the in rural towns and communities and just time) that commodity export-oriented one-third lived in large and medium strategies promoted growth but not development, as enclave-based extractive regimes were aligned to protect the activities failed to create linkages with the domestic industry. rest of the economy; and that it was therefore necessary to reinforce the domestic market and buttress industrialization by means of interventionist and protectionist policies. Moreover, the “national security” doctrine advocated the identification of “strategic” industries to ensure national sovereignty. State-run oil refinery (1970s) Inadequate implementation and the inefficiencies inherent to the system, together with the implementation of expansionary fiscal and monetary policies, led to an economic crisis and initiated a period of economic stagnation. Import substitution (1970s) However, despite its flaws, the essentials The military government of the 1970s, of the model lingered into the 1980s. which embodied this mindset, set out to The main policies adopted during the change the composition of the economic second half of that decade were an elite and the production structure. A extreme expansionary

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