Foreign Trade and the Economic Development of Peru René I
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Iowa State University Capstones, Theses and Retrospective Theses and Dissertations Dissertations 1967 Foreign trade and the economic development of Peru René I. Vandendries Iowa State University Follow this and additional works at: https://lib.dr.iastate.edu/rtd Part of the Economics Commons Recommended Citation Vandendries, René I., "Foreign trade and the economic development of Peru" (1967). Retrospective Theses and Dissertations. 3982. https://lib.dr.iastate.edu/rtd/3982 This Dissertation is brought to you for free and open access by the Iowa State University Capstones, Theses and Dissertations at Iowa State University Digital Repository. It has been accepted for inclusion in Retrospective Theses and Dissertations by an authorized administrator of Iowa State University Digital Repository. For more information, please contact [email protected]. This dissertation has been microfilmed exactly as received 67-13,009 VANDENDRIES, Rene I., 1938- FOREIGN TRADE AND THE ECONOMIC DEVELOPMENT OF PERU. Iowa State University of Science and Technology, Ph.D., 1967 Economics, general University Microfilms, Inc., Ann Arbor, Michigan FOREIGN TRADE AND THE ECONOMIC DEVELOPMENT OF PERU by René fvandendries A Dissertation Submitted to the Graduate Faculty in Partial Fulfillment of The Requirements for the Degree of DOCTOR OF PHILOSOPHY Major Subject: Economics Approved : Signature was redacted for privacy. In(Charge of Major Work Signature was redacted for privacy. Head of Major Department Signature was redacted for privacy. De£ 01 Graduate College Iowa State University Of Science and Technology Ames, Iowa 1967 ii TABLE OF CONTENTS Page I, INTRODUCTION 1 II. THE ROLE OF THE FOREIGN SECTOR IN A DEVELOPING ECONOMY 3 A. Opposing Views in the Existing Literature 5 B. Suggested Contribution of the Foreign Sector 23 III. THE PRESENT STRUCTURE OF THE PERUVIAN ECONOMY AND ITS 37 FOREIGN SECTOR (1950-1964) A. The Overall Situation 37 B. The Structure of Foreign Trade (1950-1964) 60 IV. CONTRIBUTION OF THE FOREIGN SECTOR TO THE MAIN MACRO- 96 ECONOMIC POLICY OBJECTIVES (1950-1964) V. ANALYSIS OF THE FACTORS WHICH MAY AFFECT THE FUTURE 119 STRUCTURE AND PROSPECTS OF PERU'S FOREIGN TRADE A. Impact of External Conditions, Supply Developments 119 and New Institutional Arrangements on Peru's Exports B. Development Policies and Future Import Needs 151 C. Effect of Growth and Inflation on the Balance of 180 ' " Payments VI. CONCLUSIONS AND POLICY IMPLICATIONS 192 VII. LITERATURE CITED 200 VIII. ACKNOWLEDGEMENTS 204 1 I. INTRODUCTION A major characteristic of Peru's recent economic history has been the very dynamic expansion of its foreign trade. The purpose of this study is, first of all, to examine in some detail the role played by the foreign trade sector in the past economic growth of the country. Secondly, the analysis is concerned with the extent to which foreign trade can be made to contribute to the economic development of Peru in the future. Considerable disagreement exists in the economic literature about the role of the foreign sector in the development of underdeveloped countries. Chapter II is devoted to a discussion of the conflicting points of view and policy conclusions derived from trade theory (centered on the principle of comparative advantage) on the one hand and modern growth theory on the other. In the light of this discussion, a review of the importance of for eign trade in the development process is then presented, with an identifi cation of the major variables relevant to the subsequent analysis for Peru. The evolution of the Peruvian economy from 1950 to 1964 is examined in Chapter III. Special emphasis is placed on the contrast between the per formance of the export sector and the evolution of the remainder of the economy. Accordingly, the basic features and weaknesses of the economy are reviewed. The second part of Chapter III is devoted to an analysis of the development of the major exports and imports over the period concerned. The analysis in Chapter IV is an attempt to measure the contributions made by the foreign sector, from 1950 to 1964, to a number of major policy objectives which would be included in a program for Peruvian economic de velopment. The principal policy objectives considered are a given increase 2 in national income, an improvement in income distribution (functional as well as regional), an increase in employment, balance of payments equilib rium and price stability. Chapter V starts with export projections for Peru's traditional export products and with an analysis of the importance for Peru of such interna tional institutional arrangements as the United Nations' Conference on Trade and Development and the Latin American Free Trade Association. On the basis of the prospects of future development of Peru's primary exports and the analysis of Chapter IV concerning the contribution (gains and shortcomings) made by the traditional export sector to overall economic development in the past, the desirability of alternative future develop ment policies is examined in terms of their respective contribution to the major planning objectives. In particular, the analysis attempts to deter mine the role of import substitution and export promotion policies in fu ture development. Special attention also is paid to the problem of infla tion in the development process. Chapter VI summarizes the main conclusions and policy implications. 3 II. THE ROLE OF THE FOREIGN SECTOR IN A DEVELOPING ECONOMY One of the most critical problems of our times is the attainment of increased economic development in the less developed economies of the world.^ Since the foreign sector in most of these nations constitutes a major part of their total economic activity, it is of great practical im portance to consider the extent to which their development can be promoted through trade. The role of international trade during the 19th century in the trans mission of growth from Britain to her suppliers of food and raw materials in the new countries overseas is universally recognized; trade, because of its very dynamic character, was more than a scheme for the optimum alloca tion of resources; it was, in the words of Sir Dennis Robertson, an "engine of growth". "Economic Growth" and "Economic Development" are used interchangeably throughout this chapter, in a broad sense, to indicate the higher level of attainment of a conceptual welfare function. The latter can be thought of including as elements not only the achievement of static economic efficiency and a high growth rate, but also various other objectives of economic policy such as a better income distri bution, price stability, full employment, regional equilibrium and balance of payments equilibrium. In any given instance appropriate weights have to be attached to these different elements of a welfare function. Classical trade theory is a special case where the full weight is given to static economic efficiency, which was believed to lead to maximum income growth. In the modern growth theory, the concept of static economic efficiency may conflict with growth of national income. Removing obsta cles which impede the dynamic growth of income such as monopoly elements, and taking advantage of external economies, for instance, may result in a higher rate of growth than if resources had been allocated purely on the basis of static economic efficiency considerations. 4 Current world economic conditions, however, differ greatly, and it is said that this transmission mechanism does not, consequently, work satis factorily. Expansion of foreign trade does not seem to help the growth process in developing economies very much and some economists argue that, among others, it has accentuated the dualistic nature of the underdeveloped countries, which leads other writers to claim that international trade may have been positively harmfi J- as an engine of development. The issue has led to much discussion about the optimum commercial policy to be followed by developing economies and accordingly the strategy and the optimum allocation of resources to induce growth. The main issue appears to revolve around the conflicting policy con clusions which are derived from principles of trade theory, on the one hand, and modern growth theory, on the other. Trade theory, based on gen eral equilibrium conditions and centered on the principle of comparative advantage and static economic efficiency, would rely on specialization of production and trade in order to promote growth. It is, however, a static theory (by definition) and thus ignores many dynamic elements which are inherent to the growth process itself. In contrast, growth theory is concerned with the changes which take place in the economy within and as between the production and consumption spheres over time. It makes a number of assumptions about underdeveloped economies which are quite different from those underlying trade theory. For instance, the following assumptions are usually made: structural disequilibrium may exist in factor markets, as a result of the growth pro cess the quality and quantity of factors of production may change over time and external and internal economies of scale exist. On this basis, a 5 pattern of growth can be determined which will lead to an acceleration of development and a maximization of income over time, but which, because of the difference in assumptions, will normally differ from the most efficient allocation of resources in a static sense. The differences between the two lines of thought must be resolved. Experience leads us to believe that international specialization alone fails to bring overall economic growth in the underdeveloped nations of today, while on the other hand, it can safely be said that the world is not rich enough to neglect considerations of economic efficiency. It is impor tant to analyze the extent to which a conflict may exist between the attainment of, respectively, economic growth and static economic efficiency and specify the weights to be attached to each, before a strategy and policies conducive to overall development can be derived.