Peru Economy

In 1954 Peru became the first Latin American county to receive a Stand-by Arraignment with the IMF. Since this time Peru been supported by 24 IMF programs. However, not all of these IMF programs were successfully accomplished.

Prior to 1980 Peru was under the rule of two military regimes. In 1980 President Fernando Belaunde Terry, was elected into office. During his presidency his administration failed to design efficient policies and take action to stem guerrilla group activities within the country’s borders. These failures contributed to the country’s economic collapse. After Peru’s economy collapsed a member of the American Popular Revolutionary Alliance Party (APRA) named Alan Garcia was elected president. Alan Garcia put reforms and an
austerity program in place to control the country’s economic outlook. Some of these measures included controlling minimum wages and salaries of government workers and increasing the gasoline prices.

The Austerity program also included controls on the price of goods and devalued the currency. The action to introduce the Austerity program did not resolve to country’s high inflation rate and in turn caused the U.S. bank regulators to have to write off portions of the Peruvian loan debts. The IMF requested that Peru adhere to a repayment schedule, however Peru refused this measure and this resulted in the IMF and World Bank halting lending to the country in 1986.

The halting of the IMF and World Bank lending to the country forced the Peru to implement a macroeconomic policy that did not rely on outside funding.
Peru developed a poorly designed macroeconomic system that did not produce tangible investments and encouraged bribes to public officials, as well as the creation of informal economic systems and firms designed by its citizens in separate communities. These informal systems and firms found that in order for them to effectively do business, they often needed to bribe public officials, which directed money away from society, government taxes and solely profited public
officials.

An example that resulted from Peru’s poorly designed macroeconomic system was in the farming sector where the Columbian drug traffickers provided funding to the Peruvian farmers to cultivate coca leaves into cocaine for them smuggling into the United States and sell. Since, most of the coca crops flourished in the rain forest, the demand for land to grow the crops resulted in deforestation of portions of the rain forest.

In 1990 the IMF introduced a stabilization program which included streamlining the tax system, removing price controls, eliminating international trade restrictions and reducing the budget deficit. Soon after the stabilization program was implemented, a newly formed Peruvian government developed a program of macroeconomic, structural adjustments and the National System for Social Compensation and Development. The National System for Social Compensation and Development was supported by the public sector to assist the most disadvantaged with raising costs, wages and food subsidiaries. This program quickly produced positive results and began to boost the countries economy.

An IMF-monitored Rights Accumulation Program (RAP) was requested in 1991 to assist with resolving Peru’s financial obligation arrears to the IMF and to further improve the country’s economic outlook. The RAP was successful in achieving its objectives and eliminating the arrears by 1993.

Legislation was approved in 1999 called The Fiscal Responsibility and Transparency Law. This law introduced a Fiscal Stabilization Fund (FSF) that provided fiscal transparency and rules. Peru’s economic continued to improve and by 2014, additional reforms to improve areas of workplace training, private pensions, salaries and civil services were implemented. Today Peru is more competitive in the world’s economy and remains more stable.

I believe that some of the negative impacts of Peru’s IMF journey prior to 1990 could have been avoided if the IMF had of approached the government of Peru sooner to offer a stabilization program and coordinated efforts with the United States Agency for International Development (USAID), which began worked with the Peruvian government in 1998 to develop an alternative plan, funding and resources to allow the farmers in Peru to grow crops other than coca, as well as improving infrastructures such as roads, schools and irrigation.
These alternative resources and incentives assisted in slowly returning balance to the communities that were once involved in the illicit coca production. This as well as the IMF’s support after 1990 has strengthened Peru’s macro-economic structure and
growth.

The IMF could consistently provide assistance in an unbiased responsible manner, if the Executive board met more frequently rather than annually to review the health checks of their members’ countries and if they remove the quota-based voting system that determines their voting power. The IMF needs to implement a third party governance officer to review the daily decision making processes of the Execute Board and Board of Governors to ensure that all country members are provided with the same level of support.