Two hundred years of hopes
Since the independence of Peru in 1821 the country has experienced bursts of optimism and long periods of disappointments. The new Peruvian Republic inherited colonial institutions that lasted well into the twentieth century and others such as the Indian tribute and slavery were abandoned earlier.
Starting in 1845, the country experienced economic recovery and prosperity due to its export of guano to European markets. The extraction and commercialization of guano was a monopoly run by the state. The income from the guano was redistributed and invested in military artillery, expansion of the state bureaucracy, and the settlement of its national debt. It also allowed the country to build a railway system and new highways to access and transport natural resources. The economic boom ended when the supply of guano run out. The government of Ramon Castilla found itself in a fiscal crisis due to loans it took to finance capital investments and its own bureaucracy. The economic backwardness inherited from the colonizers did not improve much as the majority of the population was as poor as when the boom started. However, the rich class got richer and the income gap widened.
After this period the country started a long decline. The war with Chile and Bolivia, world crisis of 1872, political instability and military governments, all contributed to its economic decline.
In the 1890s Peru embraced its first period of globalization, allowing foreign companies to invest in the exploration of natural resources, this time it was in rubber and mining. The rubber boom ended in 1920 but the mining industry kept growing.
In the 1970s Peru adopted a series of bad policies, nationalizing many industries and making them less competitive. In order to protect the local industry and to keep the population happy the government intervened in the economy imposing price controls and restricting foreign trade in the form of high tariffs to imports. In 1980 the country returned to democracy but the government of Belaunde and the subsequent government of Garcia run into fiscal and monetary deficits triggering inflation. In the 1990s the government of Fujimori adopted tight economic policies and opened its economy to foreign investment. Since then the two following governments of Toledo and Garcia have continued the same economic policies and the country’s economy since the early 1990s has been growing at an average pace of 4.5% annually. Prosperity can be seen in the widening of its middle class.
Peru follows the same economic trend as many other countries in Latin America basically, periods of economic recovery followed by periods of bad policy, political instability and economic decline. There is much ideological debate as to the causes of Peru’s relative failure to develop. Popular explanations include its religious cultural heritage, a mentality of being the victims of exploitation by foreign powers and a difficult geography. However, scholars believe that among the main causes are the extreme and persistent social inequalities exacerbated by political instability. Corruption and the undermining of the rule of law are the main causes of the weakness of its institutions.
Peru has a market oriented economy. Its economy is driven by services which account for 53.2% of its GDP, followed by industry 26.2% and agriculture 8.7%.
Much of the economy depends on the international price of its main commodities, its main export is copper. Its main market is the United States which accounts for 23.6% of its total exports.
Some of the reasons why the Peruvian economy remains relatively inefficient are structural: the informal economy, lack of infrastructure, high payroll taxes, lack of access to credit, badly designed taxes and lack of competition.