Peru 1990-2004Peru 1990-2004:Changing Economic Policies

and the Decline in Malnutrition Rates

Michelle JurkovichEconomics 465

Winter 2008

The QuestionThe Question

According to the 2007/2008 UN Human Development Report, Peru’s malnutrition rate dropped from 42% of the population (average taken between the years of 1990-1992) to 12% of the population (average taken between the years of 2002-2005).

The obvious question is both WHY and HOW?

According to the 2007/2008 UN Human Development Report, Peru’s malnutrition rate dropped from 42% of the population (average taken between the years of 1990-1992) to 12% of the population (average taken between the years of 2002-2005).

The obvious question is both WHY and HOW?

UNHD Report can be obtained from:http://hdr.undp.org/en/statistics/data/

To CompareTo CompareDuring the same span of years, Latin

America witnessed the following changes in malnutrition rates:

-Chile: 8% to 4%-Mexico: no change at 5%-El Salvador: 12%-11%-Brazil: 12%-7%-Venezuela: 11%-18%

During the same span of years, Latin America witnessed the following changes in malnutrition rates:

-Chile: 8% to 4%-Mexico: no change at 5%-El Salvador: 12%-11%-Brazil: 12%-7%-Venezuela: 11%-18%

Picture taken from: www.bio-pro.de/.../ulm/hunger_338x464.jpg (originally from the Eiselen Foundation)

Statistics taken from UNHD Report (2007/2008) which can be located at: http://hdr.undp.org/en/statistics/data/

The HypothesisThe Hypothesis

The decline of malnutrition rates in Peru must have been the result of political and economic reforms in the 1990’s.

The decline of malnutrition rates in Peru must have been the result of political and economic reforms in the 1990’s.

Summary of FindingsSummary of FindingsWhile we cannot prove causation, the

correlation of the following with the decline in malnutrition rates will be examined:

Increase in privatization and liberalization Increase in foreign investment (and domestic

investment) Decrease in trade deficit (increase in exports) and

stable currency Increased political stability Increased agricultural output Modest increase in agricultural credit

While we cannot prove causation, the correlation of the following with the decline in malnutrition rates will be examined:

Increase in privatization and liberalization Increase in foreign investment (and domestic

investment) Decrease in trade deficit (increase in exports) and

stable currency Increased political stability Increased agricultural output Modest increase in agricultural credit

The HistoryThe History

Chart taken from:Alvarez, E.H. (1995). Economic development, restructuring and the illicit drug sector in Bolivia and Peru: Current policies. Journal of iNteramerican Studies and

World Affairs 37(3), 125-149.

Chart taken from:Alvarez, E.H. (1995). Economic development, restructuring and the illicit drug sector in Bolivia and Peru: Current policies. Journal of iNteramerican Studies and

World Affairs 37(3), 125-149.

Economic Problems-1960sEconomic Problems-1960s

Underperforming export industriesLack of risk-taking and investment in

improving export industries (neither domestic nor foreign investment sufficient)

Economy heavily dependent on mining industry which was controlled by foreign firms

Other industries (agriculture, oil, fishing) faced constraints and/or required funding to expand

RESULT: Upset the balance of payments

Underperforming export industriesLack of risk-taking and investment in

improving export industries (neither domestic nor foreign investment sufficient)

Economy heavily dependent on mining industry which was controlled by foreign firms

Other industries (agriculture, oil, fishing) faced constraints and/or required funding to expand

RESULT: Upset the balance of paymentsSource: Bertram, G. & Thorp, R. (1978) Peru 1890-1977: Growth and policy in an open economy. Columbia University Press, New York: 287.

Juan Velasco 1968-1975Juan Velasco 1968-1975 State intervention

-Expropriation of the International Petroleum Company

-Agrarian Reform Law-Mining industry

removed from foreign control -Industrial Reform Law-Fisheries Law-State control of banks

State intervention-Expropriation of the

International Petroleum Company-Agrarian Reform Law-Mining industry

removed from foreign control -Industrial Reform Law-Fisheries Law-State control of banks

Source: Bertram, G. & Thorp, R. (1978) Peru 1890-1977: Growth and policy in an open economy. Columbia University Press, New York: 301-302.

Fernando Belaunde (1980-1985)

Fernando Belaunde (1980-1985)

Attempted economic liberalization, but resorted to a populist focus

1982 Debt Crisis

Attempted economic liberalization, but resorted to a populist focus

1982 Debt Crisis

Return to state intervention and redistribution

Hyperinflation (1988-1990)

Populism

Alan Garcia (1985-1990)

Photo (attributed to AP) taken from: http://www.britannica.com/eb/art-93962/Alan-Garcia-campaigning-for-president-of-Peru?articleTypeId=82

Source: Crabtree, J. & Thomas, J. (1998). Fujimori’s Peru: The Political Economy. University of London, London:11-13.

FujishockFujishock

“Orthodox economic management”Removed subsidiesRemoved price/wage controlsFinancial liberalizationReduced trade restrictionsIncreased privatizationResult: Reduced inflation (from 7,417% in

1990 to 15% in 1994)

“Orthodox economic management”Removed subsidiesRemoved price/wage controlsFinancial liberalizationReduced trade restrictionsIncreased privatizationResult: Reduced inflation (from 7,417% in

1990 to 15% in 1994)Source: Alvarez, E.H. (1995, Autumn). Economic development, restructuring, and the illicit drug sector in Bolivia and Peru: Current policies. Journal of Interamerican Studies and World Affairs 73(3):131-132

Picture from: news.bbc.co.uk/.../ _705482_fujimori300.jpg

Economic IndicatorsEconomic Indicators

Chart in: Alvarez, E.H. (1995, Autumn). Economic development, restructuring, and the illicit drug sector in Bolivia and Peru: Current policies. Journal of Interamerican Studies and World Affairs 73(3):133

Chart in: Alvarez, E.H. (1995, Autumn). Economic development, restructuring, and the illicit drug sector in Bolivia and Peru: Current policies. Journal of Interamerican Studies and World Affairs 73(3):133

Attracting Foreign Investors

Attracting Foreign Investors

Brady Plan allowed for 50% debt reductionSuccessful resolution to hostage crisisDecline in the trade deficit (down 21% in only

two months (1997)--exports increased by 15%/imports by 7%)

INVESTMENTS:Telfonica (Spain)--$600 million in 1997Southern Peru Copper Corp.--$3billion

investment on infrastructureNestle buy-up of D’Onofrio stock (1997)

Brady Plan allowed for 50% debt reductionSuccessful resolution to hostage crisisDecline in the trade deficit (down 21% in only

two months (1997)--exports increased by 15%/imports by 7%)

INVESTMENTS:Telfonica (Spain)--$600 million in 1997Southern Peru Copper Corp.--$3billion

investment on infrastructureNestle buy-up of D’Onofrio stock (1997)

Moffett, M. & Vogel, T.T. Jr. (1997, April 25). Investors are breathing easier in Peru--End to hostage siege may help Fujimori’s reforms. Wall Street Journal (Eastern Edition): A10.

Increases in PrivatizationIncreases in Privatization

Chart found in: Kay, B.H. (1996, Winter) “Fujipopulism” and the liberal state in Peru, 1990-1995. Journal of Interamerican Studies and World Affairs 38(4): 65.

Chart found in: Kay, B.H. (1996, Winter) “Fujipopulism” and the liberal state in Peru, 1990-1995. Journal of Interamerican Studies and World Affairs 38(4): 65.

Peru’s Financial SuccessPeru’s Financial Success

Rank Country Exchange Rate Interest Rates Inflation

1 Peru 1 1 1

2 Mexico 4 5 2

3 Chile 5 2 6

4 Brazil 6 7 4

5 Colombia 3 3 5

6 Argentina 2 4 7

7 Venezuela 7 6 3

Source for data: O’Brien, M. (2006, March 1). New frontiers, new challenges: Latin America’s central banks are winning the fight against inflation, but better economic standing has created new hurdles for them. LatinFinance (175):34-36.

“A Heroic Political Gamble”

“A Heroic Political Gamble”

Fujimori made an agreement with Shell and Mobil to develop petroleum industry Initial $800 million investment$6 billion to Peru’s government

during 30 year timeframeUnpopular with Peruvians

Fujimori made an agreement with Shell and Mobil to develop petroleum industry Initial $800 million investment$6 billion to Peru’s government

during 30 year timeframeUnpopular with Peruvians

Source: Unlisted author. (1996, May 25). Fujimori sells. Economist 339(7967):48-49.

Agricultural IndustryAgricultural Industry

Chart found in: Crabtree, J. & Thomas, J. (1998). Fujimori’s Peru: The Political Economy. University of London, London:96.

Agricultural CreditAgricultural Credit

Chart found in: Crabtree, J. & Thomas, J. (1998). Fujimori’s Peru: The Political Economy. University of London, London:101.

Agricultural OutputAgricultural Output

Chart found in: Crabtree, J. & Thomas, J. (1998). Fujimori’s Peru: The Political Economy. University of London, London:98.

Chart found in: Crabtree, J. & Thomas, J. (1998). Fujimori’s Peru: The Political Economy. University of London, London:98.

Alejandro ToledoAlejandro Toledo

“In Spain on a state visit this week, Alejandro Toledo warned of growing discontent in Latin America because of a ‘divorce between economic policies and the concrete results people see in their pockets’…Since he took office in 2001, Peru’s economy has grown at 4% a year or so. But he is the most unpopular president in Latin America, his approval rating in opinion polls below 10%.”

“In Spain on a state visit this week, Alejandro Toledo warned of growing discontent in Latin America because of a ‘divorce between economic policies and the concrete results people see in their pockets’…Since he took office in 2001, Peru’s economy has grown at 4% a year or so. But he is the most unpopular president in Latin America, his approval rating in opinion polls below 10%.”

Source: Author unlisted. (2004, July 10) Strikes, sleaze and violence. Economist, 372(8383):32.

While We Cannot Conclude Causation….

While We Cannot Conclude Causation….

It should be considered that malnutrition rates dropped after/during the following:

Increase in privatization and liberalization Increase in foreign investment (and domestic

investment) Decrease in trade deficit (increase in exports)

and stable currency Increased political stability Increased agricultural output Modest increase in agricultural credit

It should be considered that malnutrition rates dropped after/during the following:

Increase in privatization and liberalization Increase in foreign investment (and domestic

investment) Decrease in trade deficit (increase in exports)

and stable currency Increased political stability Increased agricultural output Modest increase in agricultural credit

Possible Reasons for Poverty

Possible Reasons for Poverty

High numbers of unskilled workers available relative to jobs drives down unskilled wages (in contrast to higher wages for skilled workers)

-Perhaps should have developed additional “labor-intensive exports.” Instead, exports were not diversified, and mining sector favored (where comparative advantage already existed)(pp. 120-121).

Inefficient taxing system (p.120) Lack of access to education in midst of population boom (p.

120) Concentrated wealth (p. 130) The question of economic growth and its effects on

“particular kinds of poverty” (p.123)

Source: Sheahan, J. (1999). Searching for a better society. University Park, Pennsylvania: Pennsylvania State University Press.

High numbers of unskilled workers available relative to jobs drives down unskilled wages (in contrast to higher wages for skilled workers)

-Perhaps should have developed additional “labor-intensive exports.” Instead, exports were not diversified, and mining sector favored (where comparative advantage already existed)(pp. 120-121).

Inefficient taxing system (p.120) Lack of access to education in midst of population boom (p.

120) Concentrated wealth (p. 130) The question of economic growth and its effects on

“particular kinds of poverty” (p.123)

Source: Sheahan, J. (1999). Searching for a better society. University Park, Pennsylvania: Pennsylvania State University Press.

ReferencesReferences

-References were included on each slide -http://en.wikipedia.org/wiki/Peru was consulted for general information

Questions?Questions?