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Economic History of

Throughout history, many nations have stood out for their economic and technical accomplishments; but only a handful of —including what is now Peru— did so autonomously. The first cultures created in this part of the date as early as 3,200 B.C.E. according to recent scholarship. Later the , ruled from the historic of , 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 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 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 ( of the Central Reserve Bank of Peru) Their achievements include impressive architectural works, of which the citadel of , 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 (a strategy art (, 100-800 AD) known to modern scholars as “vertical archipelago”). Apparently they had no In 1532, the Spanish conquerors written 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 ) for accounting, establishment of Spanish rule, which was engineering, and scientific purposes. to last for three centuries. At its peak in the , before its division into of Peru at the center of the several jurisdictions under the Bourbon international monetary system of the day. dynasty, the extended On one hand, under the viceroyal system over most of Spanish . 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 Mint economic system relied largely on the colonial times the agricultural expertise large-scale mining of precious metals that had served pre- civilizations (mainly ), 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 of was the commercial hub of the region: virtually all goods produced in present- day Peru, , and were Potosí silver mine (Viceroyalty of Peru) shipped from there to via . 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 ) mining site (mid-) 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, 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-). 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 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 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 . 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 , 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 . 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 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 and the Particularly, that period saw an end of the 20th century, the country alternation of -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 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 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 stance in monetary radical land reform was put in place to and fiscal policy, widespread controls, expropriate large and medium estates and and strong hand them over to thousands to peasant (notably an attempt to nationalize the families; the energy industry (including banking system), all of which seriously large mining projects, oil fields, and eroded public confidence. In this context, refineries) and other productive sectors production fell drastically; the country were nationalized; the public sector was experienced one of the most severe enlarged significantly to take over and episodes in history; fiscal supervise a wide range of economic expansion and the erosion of tax revenues activities; and the tariff and exchange rate resulted in massive public sector deficits; The New Sol The 1980s hyperinflation: 1 New Sol = 1 million Intis (Numismatic Museum of Peru) expenditures, overhauling the tax system, normalizing the prices of government- official reserves where depleted; and provided goods and services, moderating around two-thirds of the foreign debt fell into default. The economic crisis was the size of the public payroll, and liquidating the state-run development accompanied by growing poverty, gaping banks; redesign the monetary framework income inequalities and an unprecedented escalation of political and, crucially, enact the central bank’s constitutionally-mandated independence; violence. liberalize trade and capital flows; privatize However, in a dramatic reversal from the several economic activities previously economic pattern that had prevailed in confined to the public sector; introduce a previous decades, since 1990 Peru private pension fund system; and established a prudent macroeconomic strengthen financial supervision. framework and introduced key reforms Due to these policies, and helped by an that in a comparatively short period resulted in high growth, a solid external exceptional global boom cycle, the ensuing years saw an impressive position, and a considerable reduction in economic performance. The period poverty. running from the first years of the 21st In stark contrast with previous decades, century until the onset of the the authorities put in place a strong international financial crisis was one of macroeconomic framework and launched longest expansion cycles in Peru’s history a set of structural reforms to promote (32 quarters of consecutive growth). efficiency, reduce vulnerabilities, and lay Spurred by domestic consumption and the foundation for sustainable growth. In investment, GDP grew around 7% on this context, they set out to reduce the average in 2001-2008; and GDP per fiscal deficit by rationalizing capita grew 43% over the same period. The record growth achieved in 2008 reducing financial vulnerabilities, a main (9.1%) put Peru among the world’s most concern in the wake of the international dynamic economies. The country risk financial crisis; and, crucially, better dropped drastically in response to Peru’s aligning education with the demands of declining public debt and substantial development. The authorities are fiscal and foreign reserve buffers. On the determined to tackle these weaknesses to monetary front, the formal adoption of an definitely pave the way for sustainable inflation targeting regime in 2002 (after and inclusive growth. gradual implementation during the Peru is now among the world’s twenty- ) kept inflation low, anchored plus economies and is expectations, and promoted a decrease in regarded as one of the best-performing dollarization. countries in the region. For its transition from a state of deep economic and social crisis to strong growth and high optimism, Peru can justly be considered a remarkable success story in economic history. In contrast with other periods in its history, Peru learned the lessons from the past, mainly the need to put in place a sound macroeconomic framework, build substantial buffers, and reinforce market confidence.

Trade openness plays a key role in Peru’s development (Port of Callao) Steps were also taken to further open the economy, notably through the signature of several free-trade agreements. At the same time, considerable challenges remain, especially improving targeting in poverty-reduction programs; bridging the infrastructure deficit through effective public investment, public-private partnerships, and concessions; further Lima Financial Center