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Peru The Second Bela�nde Government, 1980-85
https://photius.com/countries/peru/economy/peru_economy_the_second_belaunde_~795.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    The return to democracy allowed Peruvians to choose among strongly left, strongly conservative, or middle-of-the-road parties. They chose Bela�nde and his party as the middle road, but it led nowhere. The Bela�nde government tried to return the economy to a more open system by reducing barriers to imports, implementing financial reforms intended to foster private markets, and reversing the statist orientation of the Velasco system. But the new approach never had a chance to get very far because of a series of macroeconomic problems. On one side, the government was rightly concerned about continuing inflation but made the mistake of focusing the explanation on monetary growth arising from the export surplus it inherited at the start. That position made it seem undesirable to continue trying to promote exports and desirable to raise domestic spending and imports. On the other side, President Bela�nde's personal and political objectives included using public investment actively to develop the interior of the country and to answer evident needs for improved infrastructure. Seeing the export surplus as the key macroeconomic source of imbalance, the government decided to eliminate it by removing import restrictions, slowing nominal devaluation to allow the real exchange rate to appreciate, and increasing government investment spending.

    The real exchange rate appreciated through 1981 and 1982, public sector investment rose 54 percent in real terms from 1979 to 1982, and public sector consumption rose 25 percent during the same three-year period. The combination effectively turned the current-account surplus into a large deficit, as increased spending plus import liberalization practically doubled imports of goods and services between 1979 and 1981. The appreciation also turned manufacturing exports back downward, and a plunge in external prices of primary exports brought them down too. And then the mistake of focusing on the earlier export surplus as the main cause of inflation became clear: the increases in spending led to a leap of inflation despite the return to an external deficit. The rate of inflation went from 59 percent in 1980 to 111 percent by 1983.

    Nothing improved when the government then tried to go into reverse with contractionary macroeconomic policies and renewed depreciation. Output plunged, but inflation once more went up instead of down, to 163 percent by 1985. By this time, pessimism about the government's capacity to solve anything, inflationary expectations turning into understandable convictions, and the price-increasing effect of devaluation all combined to give Peru a seemingly unstoppable inflation despite the elimination of anything that might be considered excess demand. The government apparently lost its sense of direction, retreated from its attempt to reopen the economy by returning to higher tariff levels, and otherwise did little except wait for its own end in 1985.

    Data as of September 1992


    NOTE: The information regarding Peru on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Peru The Second Bela�nde Government, 1980-85 information contained here. All suggestions for corrections of any errors about Peru The Second Bela�nde Government, 1980-85 should be addressed to the Library of Congress and the CIA.

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