The Peruvian economy

The Peruvian economy

This section offers a quick and non-technical overview on the economy of Perú, and on the social implications of these figures.

How rich is Peru?

The World Bank places Perú in a peer group which contains the following nations. If you have visited any of them, then your experience of their social and economic life will give you a rough guide as to what to expect in Perú. There are 54 countries which fit into the "lower-middle-income economies", as the World Bank terms them, and here are some of the more familiar:

Albania		Algeria		Brazil		Cuba		Egypt
Fiji		Guatemala		Honduras		Iran		Jamaica
Jordan		Morocco		Philippines		Romania		Russian Federation
South Africa		Sri Lanka		Thailand		Tunisia		Turkey

A useful if crude measure of relative prosperity is gross national product (that is, roughly the sum of all added value that is traded in the country divided by the number of people who live there.) This measure leaves out the environmental and social changes that are going on - either of which can be strongly negative - but it does give a rough measure of how well people live.

Perú has a figure of around $3000 per person per annum when this is measured directly. However, a dollar goes further in Perú than it does in the US, and so an adjusted figure of $4,800 per person per annum better catches the reality.

Obviously, not all of this passes through private hands, and by no means is it divided equally, whether by age, gender or social class. The rough estimate of personal income - that is, what the statistically-typical person has to spend - arrives at a much lower figure, nearer to $1000 per person per annum. A professional in the capital might make 10-20 times as much as this. A peasant farmer in the mountains might make a tenth of it.

The table compares some key facts between countries which have comparable incomes per capita. Perú fares relatively well on education but poorly on child care. This said, it is neither more nor less egalitarian than its peers and is in many respects very typical of its group. People who are offended by its relative poverty should note that this is not a particular fault of the Perúvian system, and should on no accounts visit parts of the world - such as India, or much of Africa - where matters are far worse.

	Guatemala	Iran	Russia	Perú	Tunisia
National income per capita (US$)	1680	1680	1750	1980	2070
Percent of adults who are illiterate	30.8	22.9	0.4	9.8	27.9
Percent of women who are illiterate	38.2	29.8	0.6	14.3	38.1
Life expectancy at birth (years)	65.2	69.0	65.6	69.6	72.4
Population growth (annual %)	2.6	1.7	-0.5	1.5	1.2
Births per woman	4.4	2.6	1.2	2.7	2.1
Child mortality, per 1000	58	42	21	39	27
Telephones per 1,000 people	162	201	281	137	149

Where does Peru generate its income?

The economy in Perú is centred on the cities. Mining, farming and fishing account for only 10% of the output, and manufacturing industry makes up about a third. The rest are services, predominantly small shop-keeping and trading, transportation and food retailing. Visitors can see this activity very directly on any street in the capital. Unemployment runs at around 10% of the labour force, but there is widespread underemployment. The best estimates is that around 40% of the population do less work than they wish, or than they are capable of doing.

Some 7 million people are economically active population. About a fifth have limited skills and a fifth are farmers. Only 5% of the population describe themselves as skilled technicians and about the same proportion as white collar workers.

Industry often operates through what is called the "informal sector" in developing countries. That is, a factory - making, for example, shirts - acts as a coordinating agency for a myriad of specialised workshops which make buttons and cut cloth, stitch seams and package the final goods. These workshops often operate in clusters, and are supplied with workers from villages or the peripheral slums through the actions of equally specialised middle men. The remnants of these practices can be seen in the capital cities of the Old World, as with London's Threadneedle or Leadbeaters' Street. It is likely that well over half of all added value in manufacturing in Perú is derived in this way. In the order of 40% of all economic activity consists of unregulated, small-scale commerce undertaken through a web of street vendors, hole-in-the wall workshops and personal relationships. There are estimated to be between 100 and 200, 000 street vendors in Lima alone.

Economic history

The economic past of Perú is shaped as much by political change as it is by anything innate to the country. The fashion for intervention that swept Latin America in the early 1970s had very bad consequences for the country. With a brief period of stabilization in the early Eighties, the economy entered a dark period between 1975 and 1990. Inflation touched 80% per month, agriculture was collectivised and millions of people moved from the depressed countryside to the equally inhospitable towns. Terrorist activity limited access to much of the hinterland.

Early attempts to stabilise the economy created to much pain to be sustained and a populist government was elected to oppose them. It attempted to print money, whilst managing prices by decree. This did not work, and the end of the Eighties was marked by acute crisis.

Later governments adopted strict stabilisation policies (economist-speak for spending only the money which you can raise in taxes, and not printing money) and inflation is now well controlled. The stability which this created encouraged foreign investors, and the early nineties were marked by good economic performance. The new Sol (el Nuevo Sol, the currency of Perú) has depreciated slowly against the major currencies. At the time of writing, one dollar bought 3.5 nuevo soles.

The extent of the impact of this period on real wages is obvious from the table.

Indices (1980=100)
	Real Salaries	Real Wages	Informal Incomes
1981	106	105	125
1982	110	105	125
1983	94	87	104
1984	87	74	102
1985	90	64	106
1986	100	87	152
1987	106	95	196
1988	70	62	76
1989	55	49	72
1990	46	37	67

Recent years have been touched by both natural and political disaster. The El Niño phenomenon causes Perú to suffer roughly biennial droughts, alternating with floods. The impact was particularly severe in 1998, passing right around the Southern hemisphere. The Asian financial crisis also impacted on Perú. This led directly in the series of scandals which saw the President leave office, and much-reduced the pace of inward investment.

Current opinion is that while Perú is still vulnerable to external shocks, it has nevertheless put the economic turbulence of the past behind it. Strong lessons have been given about the role of national institutions and probity amongst the governors. Only history will show whether these rules have been taken to heart. Their flouting has very often proved the undoing of Latin America's social and economic potential, but Perú at least shows awareness of their crucial nature.

Debt

Like many Latin countries, Perú has a substantial external debt, around four times its annual exports. Debt service, at around $2.6 bn per annum, is more than double the aid which it receives, and nearly two fifths of its export earnings. This is high, but by no means unusual for its peer nations.

	Guatemala	Iran	Russia	Perú	Tunisia
Exports as % of GDP	18.6	28.1	36.8	15.8	47.6
Debt service as % of exports	9.0	4.9	14.5	22.0	12.9

There are no easy solutions to this. Domestic saving is not enough to finance growth, so Perú must continue to borrow and to seek inward investment. The country is a net oil exporter, and possesses very large reserves of natural gas. Four fifths of its electrical power comes from hydroelectricity, for which there remains considerable untapped potential. Unhappily, the North American and Brazilian energy markets areas have yet to tap this resource. Exports remain almost entirely commodities: oil and minerals, cotton and other farm products. (Pima cotton comes from Perú, and visitors often buy textiles.) The US and Europe are its chief trading partners.

Perú became the world's second fishing nation in 1994. It is also the world's leading fishmeal producer, accounting for over 60% of world fishmeal exports in 2000. Visitors can see signs of this bounty all along the coast. However, it is a very volatile gift, prone to disappearing completely when the el Niño phenomenon is unfavorable.

Perú also has substantial informal earnings from the still-flourishing drug trade, which earns up to $1.5 bn dollars a year. Much of this money is not repatriated, however, and the peasants who grow cocaine and, increasingly, opium, see little of the earnings which it generates. Around 30,000 families of 'coca peasants' work on day wages in drug production. Some 4,000 land owners are responsible for cultivation on small, dispersed and mountainous plots. As with any society blighted by drug production, the sheer volume of this trade creates corruption and generates a culture of "easy money".