Growth without Development: Peru in Comparative Perspective 2018041811, 2018042951, 9781498550741, 9781498550734

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Growth without Development

Growth without Development Peru in Comparative Perspective

Rubén Berríos

LEXINGTON BOOKS

Lanham • Boulder • New York • London

Published by Lexington Books An imprint of The Rowman & Littlefeld Publishing Group, Inc. 4501 Forbes Boulevard, Suite 200, Lanham, Maryland 20706 www.rowman.com 6 Tinworth Street, London SE11 5AL Copyright © 2019 by The Rowman & Littlefeld Publishing Group, Inc. All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without written permission from the publisher, except by a reviewer who may quote passages in a review. British Library Cataloguing in Publication Information Available Library of Congress Cataloging-in-Publication Data Names: Berrios, Ruben, 1950- author. Title: Growth without development : Peru in comparative perspective / Ruben Berrios. Description: Lanham : Lexington Books, [2019] | Includes bibliographical references and index. Identifers: LCCN 2018041811 (print) | LCCN 2018042951 (ebook) | ISBN 9781498550741 (Electronic) | ISBN 9781498550734 (cloth : alk. paper) Subjects: LCSH: Economic development—Peru. | Economic development—Chile. | Economic development—Korea (South) | Peru—Economic policy. | Chile—Economic policy. | Korea (South) —Economic policy. Classifcation: LCC HC227 (ebook) | LCC HC227 .B46 2019 (print) | DDC 338.985—dc23 LC record available at https://lccn.loc.gov/2018041811 ∞ ™ The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI/NISO Z39.48-1992. Printed in the United States of America

Contents

Preface vii 1 Development Outcomes: Why Some Countries Develop and Others Fall Behind 2 Growth without Development

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3 Close Neighbors, Distant Paths: Comparing Development Outcomes in Chile and Peru 49 4 Extractive versus Productive Economy: A Case Study Comparison of Peru and South Korea

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5 Human Capital and Technology Deficiencies

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6 Conclusion 115 References 123 Index139 About the Author

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Preface

This study arose from a paper presented at a conference held at the Instituto de Estudios Peruanos in 2007. It focused on some of Peru’s development obstacles, and as much has happened during the past ten years it was an opportunity to rethink and explore more deeply some of the issues raised in the paper. Although Peru is a relatively small economy it represents a complex case of development that serves as a fascinating laboratory for any social scientist. This study is a refection on a country that is striving to compete within its own limitations in an increasingly competitive globalized world. Technological change is occurring at an accelerated pace around the globe. As the world today is more interconnected, production costs are falling, and there is increasing economic integration. Yet despite progress after a few years of higher growth in Peru, the average citizen there is losing confdence in representative democracy because of the lack of good governance. People are frustrated and angry at ingrained political corruption and political parties that work for themselves rather than for the country’s well-being. The predominant economic approach in Peru to try to achieve development is extractivist. It is a shortsighted strategy, and its reliance on primary commodity exports has not led to success. Peru has had an erratic growth trajectory and has had its share of disappointing policy choices. This book is inspired by the scholarship of many Peruvianists over the years. It provides a brief historic review as well as a snapshot of Peru’s current development efforts and the challenges it faces. There are examples of countries that have shown that economic development is possible even in the face of many challenges. But Peru, as a relative late comer, might have missed its opportunity to shift to a higher gear and successfully compete in an increasingly competitive global market.

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The principle objective of the study is to try to identify and understand how some countries complete the transformation to become developed economies and what lessons can be drawn from these experiences. Peru is an instructive example of the challenges of development, as it is a country that has plenty of natural resources and the potential to move in the right direction but still faces a long road ahead. Much of Latin America, Peru included, has changed substantially since 1990. There was an overhaul in economic policies and institutions. Some of the factors that led to such change were the stagnation of the economy due to mismanagement and the debt burden; the success of the East Asian economies, which showed that some countries could industrialize and compete; and fnally, the collapse of the state-centered Soviet system. All this made possible the ideological shift to market liberalization and an effort to restore macroeconomic stability. The Fujimori regime (1990–2000) in Peru was to some degree imitating the authoritarian policies and economic formula imposed on Chile in the mid-1970s. While there has been economic growth socioeconomic development is still lacking. For instance, poverty rates have fallen over time but inequality remains, productivity levels are low, and the informal sector has not shrunk. The book is a comparative analysis of economic development and explains the strikingly different development performance of three countries: Peru, Chile, and South Korea. The frst chapter is an overview of the development literature and provides some general perspectives on the current mainstream arguments on economic development. The second chapter provides much of the groundwork for the rest of the book by examining the failed policies that have slowed development in Peru. Although the country’s policies have resulted in greater market orientation and integration into the world economy, the many faws in the policies and lack of consistent implementation of sound approaches has led to a current state of affairs where democracy is fragile and faces potential setbacks because of institutional weaknesses. Chapters 3 and 4 are country comparisons with Chile and with South Korea. Chapter 4 was initially published in the Journal of Global Initiatives and appears here with permission of the editors with a few modifcations. Finally, chapter 5 examines the diffculties faced with the educational system and the challenges regarding the lack of technological capabilities that prevent the country from being more productive and competitive. As Peru seeks to renew its growth potential, politicians are aiming to have the country admitted to the OECD by 2021. This is a long shot given current conditions. Not only is improved economic performance entirely due to the shift to economic liberalization but it is also due to changing world economic conditions. Also underlined here is that despite the rapid expanding economy

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of the last few years Peru has not been able to overcome institutional weaknesses and the low level of development for a large segment of society. I am enormously grateful to the University of Pittsburgh, which granted me visiting research fellow status to complete my work. I am also grateful to Lock Haven University, which granted me an alternative work leave to complete this study and to the Faculty Professional Development Committee that over the years funded my research trips to Peru and Chile. I am grateful to many Peruvian social scientists I have talked to over the years. Finally, all this would not have been possible without the encouragement and support of Lillian Thomas, who not only read and commented on the entire manuscript but also listened to me explain the arguments I put forth. At Lexington Books I owe special thanks to Nicolette Amstutz who provided the professional editorial assistance. Finally, I also want to acknowledge with thanks the reviewer of the manuscript who made a number of valuable comments that led to improvements in the fnal version.

Chapter 1

Development Outcomes Why Some Countries Develop and Others Fall Behind

The question of why some countries excel and some countries fall behind and fail to improve their socioeconomic conditions is not new. It has been debated for decades, if not centuries, and is one of the puzzles modern-era economists have tried to better understand. Achieving economic development has been one of the biggest challenges poorer countries have faced over time. Only a few nations in recent years have shown stunning success in some areas of social and economic development and have leapfrogged over the rest. Most still experience a large gap between rich and poor and a sharp divide between urban and rural, and most continue to struggle even if they are endowed with ample natural resources. This study reformulates the question: Why have some countries that are equipped to succeed fallen behind countries with similar assets? To address this question, it focuses on a specifc case, that of Peru. Why Peru? Because it is a country well-endowed with natural resources, but it has not been able to sustain its momentum when the economy has accelerated (Schuldt 2005, Thorp and Bertram 1978, Carranza et al. 2005). It is a country that has struggled to shift to a higher gear. Its modest economic growth during much of the twentieth century and its good macroeconomic performance for much of the past two decades have been insuffcient to generate overall prosperity. Despite the gains made in recent years, the country is falling behind relative to the Newly Industrialized Countries (NICs) of East Asia, and even relative to its southern neighbor Chile, which has outperformed Peru in many respects. To shed some light on what might constitute a successful development outcome, a comparative strategy is used to examine Peru relative to two other successful cases: Chile and South Korea. Contrasting their experiences via paired comparisons allows us to explore how and why some countries have 1

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taken the leap to development while others, like Peru, have lagged behind, and to reformulate ideas and approaches to the issue. Overcoming underdevelopment is a long process with no easy solutions, but there are lessons that can be drawn from approaches that have been successful in other countries (Acemoglu and Robinson 2012, Chung 2007, Davis 2004, Fukuyama 2008). The three countries were chosen for comparison because they were not signifcantly different in the early 1960s in terms of their level of development. All three countries have market systems and open economies. This study considers more than fve decades and compares their evolution over time. It makes use of multiple indicators to measure development outcome. It addresses the reasons why South Korea and Chile have outperformed Peru. Politically, all three have changed over time, but after transitioning to democratic governance, both South Korea and Chile―in contrast to Peru― experienced continuity and sustainability. All three have experienced policy changes and are currently more market-friendly. Chapter 2 explores some of the core issues involved, while chapters 3 and 4 will examine and compare Peru’s performance and policy orientation to that of Chile and South Korea respectively. In the early 1960s, Peru’s GDP per capita was higher than that of South Korea. Now Koreans are three times wealthier than Peruvians. In 1974, Chile’s GDP was about the same as Peru. Today Chileans are twice as wealthy as Peruvians. Within Peru, the contrast between urban and rural and between formal and informal sectors continues to be signifcant. While its higher rates of growth have led to improvements in social indicators, and while it has made progress in poverty reduction, literacy, and life expectancy over the past two decades, Peru still lags behind in overall socioeconomic development (Hunt 2011, Jimenez 2016, Parodi 2014, Oriehuela and Tavara 2014). Throughout the past twenty-fve years, Peru has experienced signifcant changes, as have Chile and South Korea. But those changes have not been suffciently profound to allow Peru to achieve the ultimate goal of development. Peru still has no clearly defned blueprint to follow. Economic growth has improved the lives of many, and poverty has been reduced, from 54.7 percent in 2001 to 22.7 percent in 2014. This is signifcant, considering that in 1990 Peru’s economy was unraveling. It was faced with hyperinfation, and it was on the brink of defaulting on its loans (Parodi 2000). Having emerged from this disastrous position, Peru has made signifcant gains in economic growth in recent years that have had a positive effect on the economy as a whole. But much of this trend has come about as the world economy was growing and there was a higher demand for commodities, particularly from China and other emerging economies. Thus one could argue that poverty reduction has been a global phenomenon. But even if the economic pie has

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grown, many still seem to be dissatisfed with public institutions and the democratic political process because little gets done and many are left behind. There is a strong disconnect between economics and politics (Carrion et al. 2014, Jimenez 2016, Orihuela and Tavara 2014). According to the World Bank’s World Economic Indicators 2016, Peru has attained high-middle-income country status, but the challenges it faces are enormous. The data show that while GDP growth has translated into greater output, more tax revenue, and more exports, social indicators other than poverty reduction have not shown signifcant increases in welfare. While there have been advances in the macroeconomy, the transition to institutional development has not kept pace (Orihuela and Tavara 2014, Parodi 2014). From a broader perspective, for the past ffteen years Peru has sought a more mature political system even as the traditional parties have diminished in stature and almost ceased to exist (Levitsky 2013, Tanaka 2005). The country also has sought to construct a more effcient state by revamping its public administration to be more expeditious (Crabtree 2006). Its biggest task is to formalize the informal sector, where about than two thirds of the labor force works, so the economy will be able to generate greater levels of productivity (Ganoza and Stiglich 2016, Alvarez 2012). Loayza (2016a) emphasizes that productivity is the key to promote growth and development. DEVELOPMENT REDEFINED In order to effectively compare and analyze development for a study like this one, it’s necessary to defne what is meant by development and what elements are being compared. Development is a multidimensional term that comprises historical, economic, geographical, political, and social dimensions. It can be viewed in terms of a comprehensive approach because it has been discussed from different angles within different disciplines (Graboski et al. 2013). As the conditions experienced by initially similar countries are better understood, it is possible to begin to understand why some move faster and discern what can be done to achieve measurable development goals. Policy debates continue on some issues because approaches vary on whether there should be more reliance on free markets or whether the state has a role to play in steering the development effort. Nevertheless, there is much to be learned, and lessons can be drawn from successful development models. All countries were initially underdeveloped, but some countries eventually achieved development. Underdevelopment is characterized by low levels of per capita income, high levels of poverty, inadequate basic needs in human development, low quality of life in terms of human rights, and low levels of happiness. Peru’s obstacles to development are similar to those many

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countries in Latin America have faced: Weak governance capacity, high population growth relative to income gains, weak infrastructure that raises the cost of getting goods to market, low levels of human capital, heavy reliance on commodity exports that are vulnerable to price shocks, ethnic fragmentation, a large informal sector, a deep divide in the urban-rural link, and the social exclusion of and discrimination against indigenous peoples. One other feature of underdevelopment is the limited application of technology. These are features of underdevelopment that need to be overcome. In this sense, economic development should be seen as the socioeconomic transformation of a given country (Cypher 2014, Graboski et al. 2013, Roland 2013, Taylor and Lybbert 2015). Development as it is known today is a postwar phenomenon that has been analyzed from various points of view (Cypher 2014). The evolution of development theory has not been uniform. A number of approaches to development have emerged and generated debate among complex and evolving schools of thought. Briefy, these approaches can be summarized as follows: The modernization approach that was in vogue in the 1950s focused on prosperity and assimilation. Its proponents claimed that all societies pass through stages from tradition to modernity. An alternative approach that challenged modernization was dependency. Its advocates viewed the former as linear and inadequate because it was a one-size-fts-all outlook. The dependency school also had different variants, which mainly saw underdevelopment as a historical process and not as an original condition (Hunt 1989, Oman and Wignaraja 1991). Latin American underdevelopment was attributed to Iberian colonialism. This analysis has proven useful in highlighting the power relationships between the core or center, which is dominant and strong, and the periphery, which is weak (Cypher 2014, Franco 2007). In the 1960s, LDCs (less developed countries) pressed for collective selfreliance. They felt more empowered, and the nonaligned movement emerged as a representative force. In the 1970s, as many of these countries used the United Nations as a forum to air their grievances, there was an initiative to establish a new international economic order. During the 1970s and 1980s, other approaches emerged. One was the basic needs approach, aimed at satisfying the essential human necessities of the many. This brought a touch of realism to the development discourse. Although feasible, this became more ingrained in thinking about development aid (Easterly 2006). As a result of the debt crisis, the 1980s and 1990s saw the retreat of the state, manifested in the reduction of the public sector. This marked the advent of free market philosophies best exemplifed in neoliberalism. This new trend has dominated the development agenda since it was partly impelled by crisis and partly adopted as a reaction to it (Cypher 2014). One key and fundamental proposal was the structural adjustment program. These programs targeted countries

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with large trade and fscal defcits and high infation. They aimed to restructure the economy, making the state leaner and providing incentives to the private sector to stimulate a self-regulating market (Cypher 2014). The transformative process of economic development begins with economic restructuring and also aims at changing the social and institutional structure. The latter factor includes new sets of values and changes in the quality of governance. Policy prescriptions since the 1980s and 1990s have opened the economies of many nations, but have lacked more prudent policy orientation. Development is not an inevitable process but must be created and promoted. It can assimilate, create, or reproduce technology, which raises productivity and this becomes the driving force behind the generation of wealth and the improvement of living conditions. Economic historians have noted the causal link between manufacturing and technology, which in turn leads to economic growth (Savillon 2008). An aspect that was relatively neglected in the development literature was the institutional environment such as the lack of governance quality. Institutions are often defned as rules, enforcement mechanisms, and organizations. It refers to organizations such as the Congress, the ministry of justice, the tax regulatory agency. These are formal institutions. North (1990) also refers to it as not only the “rules of the game” such as the constitution but also other less formal ones such as customs or the way of doing things. For instance, corruption is a bad custom or habit that can be considered an informal institution. An economy that tolerates and functions within that institutional framework generates uncertainties and distrust. Institutions play a key role in the interaction between state and society. Weak institutions and the lack of governance quality has been one of the impediments in the development effort. Wellperforming institutions can help support and strengthen development. STATE VERSUS MARKET The neoliberal or “market-frst” approach calls for a minimalist state. Its proponents assert that as long as economic agents are free to interact, economic growth will propel the economy forward. When this happens, there is moderate optimism even if there is still inequality and many are left out. This is what has happened in Peru, where there has been a fundamental shift, the state has retreated and eliminated many controls to favor the private sector. There has been a change of course. Now much of the economic and fnancial sector is in the hands of new economic power groups with political ambitions (Durand 2010). It is a new form of accumulation that not only has revamped the old economic system but also brings with it new contradictions. The neoliberal promise of prosperity can run into complications and is vulnerable in

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the context of a country like Peru. There is a large informal economy, and many operate outside the rule of law or are not “licensed” to function. So, in the new model, about half of the population does not directly beneft from economic prosperity. Moreover, economic growth on its own does not necessarily lead to the strengthening of institutions and authority. The process can also lead to generalized distrust when there is lack of opportunity for large segments of society. Although the average skill of the labor force has increased, as measured by more years of schooling, education improvements has not kept up, and labor has not become more productive (Ros 2013, Centrum 2016, Vega-Centeno 2015, León and Valdivia 2015). On the opposite end is the state-centered development approach. Prior to the 1990s, the state had played a signifcant role in development in many countries, and in some countries of Latin America, state planning was a means for channeling resources and for coordinating investment and infrastructure projects. The main argument was that the state could allocate resources most effciently (Fitzgerald 1976, Saberbein 1987). But its role was questioned and scrutinized due to high defcits and debt burden (Franco 2007). Critics argued that state intervention tends to create allocative ineffciencies and thus results in slower growth. This line of reasoning eventually led to economic liberalization, streamlining, and a wave of privatizations of state-owned enterprises. As the traditional role of the state has changed during the past three decades, the market-based approach gained ascendency (Font 2015). More precisely, the role of the state has been transformed from one of state intervention or activism, known as dirigisme, to one of state support (Ros 2013). There are alternative views on the role of the state and the market in development. For instance, South Korea’s and Taiwan’s approaches have been characterized by what have been deemed successful public-private partnerships. Their success had been due in large measure to active government involvement in targeted sectors (Amsden 1992, Lee 1992, Wade 1990). Amsden argues that in the case of these late industrializers, the government had “to intervene and deliberately distort prices to stimulate investment and trade” (53). The success of these countries has raised questions as to whether they were truly as liberal as some have claimed (Tan 2005). In a relatively short period of time, these Asian countries excelled while Latin America and other regions’ conditions deteriorated. The emergence of China might be another example of a state-led approach that has turned it into a high-growth performer. Franco (2007) reminds us that a successful strategy relies on complementary institutions. In addition to subsidizing investment and providing low-interest credit, state-sponsored institutions can promote better fows of information, encourage standards for production, and facilitate cooperation between state and private frms. CORFO, Chile’s state development corporation, is a case in point. It promotes business linkages and helps frms to break

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into unknown foreign markets (Kwon 2015, Orihuela 2014). Even in Japan, the government had provided “administrative guidance” and facilitated a process that made it easier for frms to compete. This suggests that there is an appropriate role for government to support frms and coordinate among them without distorting incentives (Amsden 1992). These successful experiences suggest that economic development is facilitated by creating a healthy economic environment in which the state moves from a directing role to one of offering support to the private sector. When the mix of public and private institutions is optimal it refects a recognition that both have important roles to perform (Chang 2003). A point of clarifcation: For years, the literature on economic development has used the terms developing countries and Third World. The frst term is not entirely accurate because much of Africa and South Asia and parts of Latin America are not really developing per se. The second term seems to imply otherness and backwardness. Furthermore, it has an ideological connotation, because the term Second World traditionally referred to Soviet-type economies, which have since collapsed (Ma 1998, Randal 2004). But the old rationale for using these terms was never entirely accurate anyway because it lumped all these countries into one category. A more appropriate concept is less developed country, and for those that are very poor, the term least developed is more apt. In recent years, international organizations such as the World Bank have shown a preference for the use of high-income, middleincome, and low-income categories, with some variations. GROWTH AND DEVELOPMENT The goal of economic development is to create prosperity and enhance the welfare of the bulk of the population. The common assumption has been that economic growth is the key engine of development―it gets everything else moving. The thinking is as follows: As long as the economy grows faster, the country produces more, and the pie gets bigger. This translates into more resources that can be allocated to social areas such as education, culture, and health. Higher GDP (gross domestic product) growth, on the other hand, is an indicator of greater production but not necessarily of improved welfare. To measure the latter, other indicators such as poverty rate, infant mortality rate, access to clean water, quality of education, and so forth are needed. Higher GDP growth is ideal if this growth is achieved and promoted as a sustained and prolonged process. Sustaining such progress has been one of the biggest challenges non-industrialized countries have faced over the years. A nation with greater economic growth can end up with a much higher standard of living, such that accelerating GDP per capita has been seen by

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many economists as the main driver of development. A nation enjoys a higher ­living standard if it can produce more and better and is able to compete globally. The most obvious and recent example is that of China (Ang 2016). LDCs are a heterogeneous group; they pursue different development objectives and set their own priorities. But as de Janvry and Sadoulet note, “of all development objectives, income growth is likely the most important one; the other objectives―poverty reduction, reduced disparities, satisfaction of basic needs, and achieving a satisfactory quality of life―are diffcult if not impossible to achieve [without income growth]” (2016, 4). For instance, reducing poverty would be diffcult to accomplish without growth. The usual claim is that growth is necessary, but it might not be suffcient. Hence, growth is of paramount importance, as long as this can be a sustained process. Because of past economic growth, the richest or most developed countries today have left the smaller, less developed economies behind. The international differences in income, output, and wealth are striking. Nevertheless, some countries have made big strides and are now part of the high-income developed countries of the Organization of Economic Cooperation and Development (OECD) group. South Korea and Chile are two examples. Growth is highly effective if it can be sustained. The issue of sustained growth refers to the ability to maintain respectable rates of growth (above 5 percent) over a prolonged period. Sustainable development, on the other hand, goes beyond the management of natural resource use. Sustainable growth can be important in long-term poverty reduction, for example, South Korea, China, and Singapore. Income growth might be a key dimension of development, but development can go beyond that yardstick. Here we can go into other dimensions such as the quality of growth, which is delivered by higher income. Some of the successful high-growth examples, such as South Korea, Taiwan, Singapore, and Chile, experienced military dictatorships early on that were very concerned with achieving high GDP growth. They managed to deliver positive results with a heavy hand, but kept a stable political process. The trade-off was autocratic rule with limited freedoms, no unions, and suppressed wages. In the end, as Deaton (2013) argues, people are, on the whole, happier when incomes are rising. Over the past two decades, an expanded literature on development and growth has enriched the debate. One current of thought that has become more prominent focuses on institutional explanations of development (Acemoglu and Robinson 2012). The claim is that institutions are the fundamental determinants of the wealth and poverty of nations. One of the central arguments of institutionalists is that countries with better institutions will invest more and achieve a higher level of income. They also argue that state intervention in the economy should be kept to a minimum. Another factor is the unsettled

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debate over natural resource endowment. Lederman and Maloney (2007) openly questioned the position of those who viewed natural resources as a curse, something that was used to explain uneven growth performance (Sachs and Warner 1999, 2001). These contributions have provided new evidence that has generated more plausible explanations for differences in development performance. Chang (2003) provides a very different perspective with respect to the role of the state. He points out that “to assume the primacy of the market is to believe that it will naturally develop as long as the state does not interfere” (2003, 50). He points out that markets are not entirely free. Even in the nowdeveloped countries, there is no truly laissez-faire capitalism because the state still regulates, restructures markets, and sets the rules of the game. Even transition economies have had to set up a well-functioning state in order to allow a market-based economy to function. In this respect, some countries succeeded in the process, but others failed and continue to lag behind, for example, Russia, Bulgaria, and Romania. Social scientists often ask: Why are incomes so much higher in some countries than in others? Why are some countries better at producing goods and services than others? For instance, South Korea is a country where the average income growth was above 7 percent in recent decades. According to the simple rule of 70, at this rate average income would double every ten years. This is also the case with China, which in thirty-fve years has substantially reduced its income gap with the West. There is agreement among development economists that income and GDP growth are fundamental for development. Countries that have grown faster for prolonged periods, on the whole, have done better. Arias and Wen (2015) argue that economic growth has lifted many lowincome countries to middle-income per capita levels, but very few have been able to catch up with high-income-level countries. This is what they call the middle-income trap phenomenon. This argument contradicts what Robert Solow called global economic convergence (1956). Solow’s argument was that as technology spreads, income levels will grow faster in poor countries such as South Korea and Taiwan that have succeeded in reducing their income gap with rich countries. Between the majority of LDCs and the developed countries that are OECD members, the income gap is wide― somewhere between thirty and ffty times as wide. For the gap to be reduced in a period of forty to ffty years, LDCs would have to grow 8 percent faster than the United States, which has an average growth of 2 percent. China was one of the few countries that was able to maintain a 9–10 percent annual growth rate for many years. However, even though that rapid growth closed the gap between China and the United States, in 2015 per capita income in China was still one third what it was in the United States. While many

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LDCs have made substantial progress in one generation, the income gap is closing slowly (Ros 2013). There is general agreement that the level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a good gauge of economic progress. But growth should be seen as a means to an end rather than an end in itself. More importantly, a look at real GDP per person is key. But economic growth means more than an increase in output. To bring about economic prosperity, sustained economic growth also must be associated with higher rates of savings and investment. Countries that devote a higher share of GDP to investment tend to have higher growth rates. The role of investment is an important determinant of growth, and this has been theoretically used in growth models. It is also a well-known fact that some of the East Asian countries have maintained impressive investment ratios that have propelled their economic growth. However, investment alone does not guarantee economic growth, which hinges on quality and type of investment, as well as on investment in human capital and improvements in technological capability (Jones 2012). Economic growth is not necessarily synonymous with development, although it is a necessary condition for it. The process of economic growth involves many factors. Some of these factors are the quality of labor resources (human capital), physical capital inputs (machinery and equipment), technological capabilities (know-how), and appropriate government policy to stimulate the growth process. Beyond these, the following four potential sources of growth can be considered key determinants: Natural Resource Endowment and Favorable Geography Being endowed with natural resources is a blessing. Lederman and Maloney (2007) revisit this question. Since the 1960s, Latin American countries― which are rich in resources―have grown more slowly than East Asian countries, which have few resources. A number of LDCs, Peru included, are endowed with natural resources. Peru is essentially an exporter of primary commodities, particularly minerals such as copper, silver, and zinc. The Prebisch-Singer hypothesis (Prebisch 1950, Singer 1958, Sapsford and Chen 1998) that was developed in the early 1950s states that resource-based activities put LDCs at a disadvantage because commodity prices tend to fall and negatively affect the terms of trade vis-a-vis manufactured exports from developed countries. The World Bank study by Lederman and Maloney, on the other hand, insists that natural resource wealth is good for development and argues that there should be a more judicious use of this wealth. Sachs and Warner (2001, 2002), Schuldt (2007), and others point out that heavy reliance on commodity exports can be a blessing or a curse. In the next

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chapter, the question of why Peru is relatively poor despite being resourceabundant is discussed further. Schuldt raises this same question and addresses it in some detail, in contrast to the many others who have posed it but have provided ambiguous answers. One argument is related to the Prebisch-Singer thesis that commodity exports are susceptible to world market price volatility. History repeats itself, and Peru is the classic example of a country that has faced booms and busts in guano (1840s–1870s), silver (1870s–1880s), and fshing (1950s–1960s). Ascendency gained through the exploitation of a natural resource that is in much demand for a time can also come to a halt when the resource is depleted or a substitute is found. The question arises as to whether countries rich in natural resources can effciently diversify toward manufacturing and service sector exports. The World Bank is optimistic and stresses that this is possible through diversifcation of activities and the adaptation of appropriate technology (Lederman and Maloney 2007). The critical issue of geography and climate has been used to explain development and underdevelopment. The main argument is that there is a direct positive correlation between development and desirable geographic location and climate. Thus, countries in the Northern Hemisphere tend to have higher GDP. Those who have widely discussed the effects of geography insist that this correlation varies over time (Sachs and Warner 1995, 1999, 2001). Most countries in the tropics are at a serious geographical disadvantage because they normally have two distinct seasons: dry and rainy. Their climate is not adequate for farming and their agricultural productivity is low (Diamond 1999). Peru faces the Pacifc Ocean and has an extensive coast line; others are landlocked and are constrained to trade. Peru also has a large portion of the Amazon, rich in natural resources, and climatic conditions vary. Although favorable resource endowment and geography matter, Peru has not used them optimally and their potential as part of a growth-oriented policy has remained untapped. For instance, more than half of Peru sits in the Amazon basin, which is rich in natural resources. The literature on the role of geography also has sparked a growing debate since Sachs and others raised the issue, with disagreement hinging on some of the environmental premises posed and on whether the role of institutions is more important for development than the role of geography. Acemoglu and Robinson (2012) argue that the reversal of fortunes for countries that were once rich, for example, Peru under the Incas, and others that were once poor, for example, New Zealand and Australia, had to do mainly with the role played by institutions, not geography. They argue that the relatively poor regions attracted European settlers who established adequate institutions. In the prosperous areas (Incas), the Spanish settlers established extractive institutions of private property that were responsive to the crown. They argue that in such reversals the geography did not change―the institutions were

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what changed. The role played by geography versus institutions remains controversial. Robust Institutions Several authors have touched on this issue: North (1990), Acemoglu and Robinson (2012), Besley and Persson (2011), and Ugur and Sunderland ­ (2011). They argue that institutions matter and are an important determinant of development. Recognition of the importance of institutions dates back to Adam Smith, who championed property rights and the rule of law. More recent literature asserts that the quality of economic and political institutions plays a fundamental role in development. Institutions matter because they are governance structures and, therefore, are relevant to development. Institutions are necessary as regulatory entities; they facilitate effcient public policy. Countries with better and more-effcient institutions encourage trust/cooperation and provide more incentives for investment, contract enforceability, accountability in taxation and public expenditures, and judicial impartiality. A more transparent government reduces graft and corruption, which is a common phenomenon in LDCs that tends to drain resources (Berríos 2006). However, there is some controversy in the development literature between those who believe in the primacy of institutions and those who emphasize geography or culture. According to the OECD’s Global Development Report, much of Latin America, and Peru specifcally, has done poorly in strengthening and improving the quality of its institutional development. The country ranks very low in terms of independence of the judiciary, the institutionalization of Congress, and the quality of civil service (Ghezzi and Gallardo 2013). Traditional analysis of development until recently had not paid much attention to institutional obstacles to explain growth. The state is considered important because it sets the rules of the game and has the power to enforce contracts. In Latin America, institutional uncertainty is prevalent. For instance, uncertainty is deeply entrenched in the judicial system because there are inconsistent enforcement of contracts, unpredictable political changes, and sometimes outright corruption. The judicial system is considered at very low steam. Institutional uncertainties impact economic decisionmaking and affect investment and growth. There is the problem of credibility because of the lack of check and balances. Finally, constitutional consensus is in short supply. Overcoming some of these obstacles is a necessary precondition for accelerating growth. Good Governance There is extensive literature on the relationship between governance institutional quality and economic performance. How the government, through

Development Outcomes

13

its public institutions, governs or conducts public affairs and manages funds has signifcant implications for growth and development. Some authors assign a strong relationship between governance quality and development outcomes (Ugur and Sunderland 2011). The role of state institutions is to create conditions for the economic system to operate effectively. Institutions and governance are interrelated in that effective institutions improve governance in the political and economic spheres. Good governance is intended to create stronger institutions. Governance failures might result from institutional failures, ineffective policy formulation, and/or ineffective policy implementation. Effective governance requires transparency and makes leaders accountable to their constituents. It can also be seen through outcomes: for instance, in the provision of social services. Government policies are expected to promote investment and growth, a good business climate, and a social policy that encourages human development. Political scientists argue that a robust and secure system of democracy and thriving markets are crucial for development. In addition, others insist on a simpler administrative process, because the public administration system is still complex and its shortcomings generate a lack of trust in how public institutions operate (Crabtree 2006). Cohesive Cultural Norms The study of development might be dominated by economic perspectives but the culture factor is also of interest. Cultural norms matter because there is a diversity of values, practices, beliefs, and different ways of doing things (Parmar 2011). For instance, a country such as Peru is ethnically diverse. A given culture may be characterized by social exclusion, discrimination, and widespread distrust. A case in point is the Rohingya Muslims being persecuted in Myanmar. South Korea is very homogeneous, and Chile is much less diverse than Peru. Culture is an aspect of human behavior. Culture can infuence economic variables. But purely cultural explanations of economic success ignores standard economic factors. There is by now consensus that culture has an infuence on business. Graft in a country like Peru is still a way to get things done, and there has been some tolerance for the abuse of power, although that is changing because of a more open press that denounces such abuses. Some of Peru’s strong Iberian traditional norms have clashed with native beliefs. Cultural norms can have considerable infuence in changing a society because when people are less trusting of politicians, tax avoidance is widespread, and there is a lack of social engagement. This is an important difference between Latin America and East Asia (Davis 2004). Generalized trust can foster openness. Another issue is the perception of risk. In Asia risk is identifed as a central element in the political culture. East Asian countries have had a hospitable environment for investment.

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OTHER DIMENSIONS OF DEVELOPMENT This study discusses some development dimensions that have been widely debated but are worth examining from a broader and comparative perspective. There is much to learn from scholarly debates about current problems and emerging challenges and from detailed diagnostics on success and failure under different models. One major challenge is that the political, economic, and social environments are changing as the pace of technological transformation continues to accelerate, and the planet is now under environmental stress. In this context, the process of development is being redesigned and is undergoing reinvention, and a country like Peru has to redefne and propose its own specifc solutions. It can be argued that the country has to create and adopt its own institutional reforms and follow its desired goals rather than follow a cookie-cutter approach as promoted by international development agencies (Easterly 2001). Many development analysts, particularly economists, have argued for different solutions to achieve better development outcomes. Some have emphasized the role of basic institutions that need reform; others argue that simple technologies can help; others promote the availability of and greater access to credit, while others insist that facilitating property rights is essential. Yet others see economic development essentially as human development, meaning that people are at the center of it. Amartya Sen and Paul Streeten are two notable scholars who have raised these issues for years. This all suggests that new approaches and alternatives will have to be tested in a constantly changing environment. The useful point is that economic development is interdisciplinary, and each discipline may view these issues from the vantage point of different methodological premises. Development economists have identifed income, poverty, inequality, basic needs, and quality of life as key variables in development outcomes. Among the indexes of development that measure these variables are Peru’s national statistical data system (INEI). On a global scale there is the Human Development Index (HDI) from UNDP, the World Bank’s World Development Report, the OECD’s Global Competitiveness Index, the UN ECLAC, and other data sources. Measures of poverty also can be derived from indicators of low asset endowment, whether in land, education, or health, as well as from other factors such as lack of credit, poor infrastructure, and informality in the job market. The Human Development Index provides various social and economic indicators that can be used to determine quality of life. Poverty is an issue that has been widely discussed in the development literature. This issue is most often framed in terms of a phenomenon known as the poverty trap. The poor have no savings, there is demographic growth, and there are increasing returns to capital at low initial capital per person. Sachs

Development Outcomes

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(2005) argues that foreign aid can increase the capital stock, which can have positive effects on growth. But Easterly (2006) claims that the research on aid has failed to show evidence for this prediction. For example, Africa has received large amounts of aid and has little to show for it. Easterly points out that more aid has also resulted in lower rates of growth. The plea for more aid also overlooks the growing literature on bad governance, weak institutions, and inadequate policy implementation. Sachs is an advocate for a Big Push (large increase in foreign aid) to end world poverty. The idea was to double foreign aid to about $100 billion a year, doubling it again by 2015. These ideas were initially proposed when Sachs led the UN Millennium Project, which was launched in at the UN in 2000. The project had a long list of items considered as obstacles to development that needed to be overcome and also hundreds of interventions it recommended in order to end world poverty. The millennium development goals (MDG), a set of objectives to be met by 2015, were to eradicate poverty and hunger; to achieve universal primary education; to promote greater equality and empowerment of women; to reduce child mortality by two thirds; to improve maternal health; to combat HIV, malaria, and other diseases; and to ensure environmental sustainability. The project was initially criticized for its ambition and largesse in carrying out one big reform rather than aiming for marginal or piecemeal improvements where aid could be most effective. At the conclusion of the MDG in 2015, notable progress had been made in various areas. Many LDCs in Asia, Africa, and Latin America had experienced a reduction in poverty, even if the promise to substantially reduce hunger was not met. School enrollment rose, gender disparity in primary education substantially improved, and the number of people without access to safe drinking water was cut in half. Child mortality rates also fell. Even though not all targets were met, some progress was made. To follow up on this development initiative, the UN organized a post-2015 development agenda (United Nations 2015). What has propelled these improvements, even if some of the targets were not met? One crucial factor is GDP growth, meaning that the economic pie had expanded in the global economy. Hence it has been effective in reducing by nearly one billion the number of people in extreme poverty. China and India opened up, and they alone succeeded in lifting hundreds of millions out of extreme poverty, even if many were unaffected (Bhagwati and Panagariya 2013). Some pockets of extreme poverty, particularly in Africa, have not been touched by globalization. While growth has been important in reducing extreme poverty, it has not been suffcient. Some countries remain vulnerable to shocks in food production due to climate change, or policy failures because of their weak economy and/or lack of political will. Achieving sustainable growth requires good governance, acceptable levels of investment, and in

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Chapter 1

some cases an effective use of foreign development assistance. It is this reassurance that can lead to economic stability. As mentioned, poverty is multidimensional. One way to measure poverty is through either income or consumption. Another way is to set a threshold—the poverty line. This might be understood as not having the monetary resources to purchase a minimal basket of goods. A household might have the means to purchase the minimal basket of goods but not have access to clean water, sewage, and electricity, and might have precarious housing. World Bank data show that the main vehicle for poverty reduction was GDP growth. China grew fast and was able to move some 600 million people out of extreme poverty in just three decades. The same can be said of other East Asian countries such as South Korea, Taiwan, and Singapore that rank high in the UN Human Development Index. Even though growth can improve welfare, there are instances in which it has generated or worsened inequality. Arguments in favor of lowering inequality with growth advocate increasing access to education, generating more employment in the formal sector, providing access to credit, and encouraging investment. However, when there is rising inequality, growth might create a regressive redistribution that benefts only the selected few. The World Bank (2006) insists that there can be a positive relationship between growth and equity if growth is done right. Since the concept of development can cast a wide net, there is increasingly broad agreement that some aspects of development might matter more than others. For instance, Sen (1988) argues that development must deliver income growth and poverty reduction, meeting basic needs and reducing vulnerability to shocks. While there might be trade-offs, in practice development is desirable if we are to live in a more secure and stable world. Some countries have been able to achieve considerable prosperity in a relatively short period of time. Davis (2004) argues that a key factor in development is the middle class, which is more consensual and inclusive than high income strata. For instance, South Korea achieved unparalleled success due to a more educated middle class and a meritocracy. Davis (2004) attributes some of its success to the role of Confucian tradition that fueled an ethic of hard work and a belief in the value of education. Davis notes that the years of authoritarianism in South Korea fostered a disciplinary ethos. It was initially a country of low wages, but there was a commitment to national progress and support for the government’s economic policies. There were distinct values of thriftiness and industriousness that are uncommon in other LDCs. These values can also help explain the higher rates of saving found in East Asia. Technology and development are closely interconnected. Technology is at the center of an unequal international division of labor. The accelerated pace of technological change has contributed to widening the gap between

Development Outcomes

17

industrialized and non-industrialized countries. This has become more apparent in recent years as new information technology has become a primary vehicle for change in different sectors. A country cannot grow at high rates without technological development. The overall process is called catch-up growth. An LDC does not have to invest in or create goods that are already available. This is the positive case or advantage of a late industrializer. But a country has to move the productive potential forward by investing in human capital and manufacturing. Foreign investment is a channel to boost growth, and foreign aid can also help, but the country itself needs to generate enough savings and investment. Hence, the development of technological capabilities to assist industry in the transformation of its capital goods is essential. As Sagasti (1979) notes, this requires the ability to select, evaluate, and adjust foreign know-how to local conditions. Soete et al. (2011) also stress that developing technological capabilities “requires learning through increased exposure to more advanced technologies,” which can lead to incremental innovation at the domestic level. A key issue in an economy such as Peru’s, with its large informal sector, is the need to allow people in the informal labor market to enter and compete in the formal economy in order to improve productivity. More people working legally would generate more tax revenue and encourage entrepreneurship. Informality, understood as workers, frms, and activities that operate outside the legal structure, can constrain the size of the domestic market and generate low productivity. The informal sector consists of small frms, low productivity, and no access to credit. Too much informality can be a sign of a rudimentary economy where workers are either “excluded” or they “exit” the formal sector. This is because the modern sector does not have suffcient capacity to absorb labor that is entering the work force. At some point there is an oversupply of workers that have no option but to join the informal sector. Informality is associated to unskilled work, and in the words of Loayza (2016b), is a fundamental characteristic of underdevelopment. In Latin America, Chile has been an exception to the growth of the informal sector. There is universal agreement that capital formation plays a signifcant role in economic development. Workers are more productive if they have better tools to work with. Thus, one way to raise productivity is to invest more in the production of capital. But this would require that fewer resources be devoted to consumer goods. An equally important determinant of productivity is human capital―the knowledge and skills acquired through education and training. Productivity is intimately linked to growth. Higher levels of productivity predict higher rates of growth, and vice versa. Productivity is also based on good public policy that increases competition. Finally, appropriate government policy does contribute to economic growth. Policies aimed at increasing a country’s savings rate can increase investment, and thereby increase economic growth. Another way to promote

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Chapter 1

investment is through foreign direct investment. Education is a form of investment in human capital, but its unintended consequence may be the “brain drain”―the immigration of a country’s most highly educated to countries that are wealthier and more advanced. This situation, which many countries face, can be labeled reverse foreign aid. Essentially, LDCs are sending their best and brightest to work in rich countries. All they can expect is some remittances sent back but this does not compensate for the amount of human capital lost. Other issues that are important for growth are political stability, control of population growth, the promotion of technology policy, and an outward-oriented policy of free trade. One important aspect of this study is to examine how the state, the market, and civil society interact and what their relative roles in the development process are. Since its independence from Spain in 1821, Peru has had a mixture of military regimes and civilian governments. Under various policies that have been implemented, the country has experienced market-driven policy failures and state-driven attempts that have also had their shortcomings. These policy shifts at various times have been the subject of major policy debates about the appropriate development strategies to pursue. Some failures were the natural outcome of the boom and bust of commodity prices, or the result of resource exhaustion, or simply of wrong-headed policy decisions that led to failures (Schydlowsky 1986, Sheahan 1999, Wise 2003). Investment in the form of physical and human capital provides essential capital to help spark the creation of productive enterprises. When a portion of income is saved, and invested it will augment output and income. A sustained increase in investment, both public and private, are benefcial in many areas including infrastructure. When investment is used more effectively and productively it will have better results. The capacity to absorb investment is also signifcant. This depends on a variety of complementary economic, political, and institutional factors. Investment depends on trust, confdence in the system, reliance on institutional development, and good governance. The data on East Asian countries shows that high rates of investment and capital accumulation are associated with rapid economic growth (Chang 2002). Public investment rates fell during the 1980s and 1990s in Peru and in much of Latin America due to fscal adjustments in the 1980s and the lesser role played by the state in the 90s. Growth strategies have a long-term horizon. In the meantime, Peru is still more than half a century behind the industrialized western countries, and at a rate of 3 percent to 4 percent GDP growth rate it is unlikely to catch up if its population is also growing. In 2000, the population grew at 1.75 percent per year but currently it is about 1 percent. Given the growth rate of national income, a higher fgure for population growth implies a lower growth rate of per capita income. For the economy to grow faster, there needs to be

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persistence as well as a social and political vision of where the country needs to be heading. A crisis or exogenous shock can reverse improvements that came with higher growth rates. For growth to be raised and maintained, the key ingredients are structural transformation, mobility, and fexibility in labor and capital markets. Equally important are the right policy choices and political stability. There are abundant studies showing that there is a positive relationship between political stability and economic development. The debt crisis that affected much of Latin America became evident in the 1970s, but it was not until 1982 that Mexico was the frst to admit it could not meet its payment obligations. The impact of the debt crisis was particularly severe in Latin America as many countries experienced a contraction of GDP as debt-service obligations increased signifcantly. Unable to borrow funds in the world’s capital markets they had to accept conditions set by international fnancial institutions. The process led to an overhaul in economic policies as required by the IMF. The reforms encompassed fscal and monetary policy and included trade liberalization. For many countries, it took a decade to recover. A serious problem that was hard to prevent was capital fight as countries were faced with a downward macroeconomic spiral. Eventually in the 1990s there was a steady improvement as countries “adjusted” their macroeconomic imbalances and adopted economic liberalization (Kuczynski 1988). The standard assumption in the development literature is that economic reform, openness, and better governance will boost growth. But that is not always the case. According to Ros (2013), in the 1990–2008 period, the average per capita GDP growth rate was 1.8 percent, well below the 1950–1980 rate of 2.7 percent. Ross notes that “only a few countries experienced a dramatic growth of productivity at rates above 2 percent per year since 1990” (2013, 383). He says that only four countries―the Dominican Republic, Chile, Peru, and Uruguay―of nineteen had better growth performance in the 1990–2008 period than in the 1950–1980 period. This low performance was mainly due to low productivity in informal activities, as the higher-productivity sectors were unable to absorb a larger share of the labor force. A review of the economic and social evolution of aspects of development reveals that some painful lessons have been learned. Countries such as Peru have reinserted themselves into the world economy, only to face greater competitiveness and volatility in external markets. Domestically, Peru has undergone a process of economic reforms and economic liberalization. Attempts to tackle immediate problems have not always been successful, given its diminished state and lack of political consensus in the legislature. A development model might work in some countries, but not in all. What is clear up to now is that there are no easy formulas. There is no doubt that economic stability and a faster growth are crucial, but to continue the long-term task of development, a better coordinated effort between the state and the private sector is needed.

Chapter 2

Growth without Development

This chapter examines why Peru has lagged behind and even regressed relative to other countries in the region and elsewhere. Analysis of Peru’s economic policies and other institutional factors of development shows that neither the state-led development model nor the neoliberal economic approach that replaced it has worked to put the country on a sustainable development path. The chapter also discusses the evolution of growth in Peru and the factors that have led to its failure to embark on a faster path to development. It addresses the challenges a peripheral, small-sized, middle-income country like Peru faces in its attempts to compete in an increasingly integrated global market. Peru often has been described by many analysts as “a beggar sitting on a golden bench,” a phrase coined by Antonio Raimondi in the 1860s. The reference is to the country’s relatively poor condition amid an abundance of natural resources. In order to understand why this has been the case, and why other countries with a similar or even less robust resource base have been able to perform so much better economically, it’s crucial to understand the recent political and economic history of Peru. This chapter details the recent history of Peru’s regimes and their economic policies and practices. First a quick observation. Growth theory has mostly relied on the neoclassical production function, where production is a factor of capital and labor and the total factor productivity. It stresses that adding successive units of capital and labor leads to diminishing returns (Solow 1956). Thus, a sustainable growth path to growth can only be achieved through technological change. But the model has its shortcomings because of some of its restrictive assumptions. This has allowed for other explanatory variables to be considered. More recent contributions to the literature stress that there are other important factors for sustained growth other than investment in physical capital, which gradually increases productivity over time, and expands 21

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Chapter 2

exports (Perez Caldentey and Vernengo 2017). Moreover, economic policy and institutional factors such as the rule of law, macroeconomic stability, and the degree of openness also helps to explain growth or lack of thereof. Other factors that can help sustain higher levels of growth are improvements in social standards, and a reduction in the degree of informality in the economy. Why did Peru perform more poorly than other countries in the region, such as Chile, or East Asian countries such as South Korea? There are different explanations as development strategies have undergone changes since the 1960s. The experiences of Peru and Latin America in general sparked a lively debate on key developmental issues: strong state intervention as opposed to market-frst approach, the relevance of institutions in development, the prevalence of new market-frst approach that has neglected the role of industrial policy in favor of a production structure that is resource based, and the dismal development performance that is tied to the current development strategy (Aguiar de Medeiros 2017). BACKGROUND TO PERU’S RECENT POLITICAL AND ECONOMIC EXPERIENCE A brief recap of the past ffty plus years is pertinent to highlight the growth trend and economic trajectory. The old oligarchic order in Peru, controlled by a small elite, was fnally dissolved in 1968 (Pease 1977). The military government headed by Gen. Juan Velasco altered state-society relations by redefning the role of the state. The military brass was intent on promoting a state-led and autonomous development strategy (Burt 2007, Cotler 1994). The state’s role in the economy expanded dramatically; there was an emphasis on development planning, and the government was more centralized with newly created state-owned enterprises (SOEs). As the government became more directly involved in economic decision-making, it sought to protect domestic industries (Fitzgerald 1976). It was an inward-looking approach on trade and development and was not an entirely pro-FDI policy. The government projected a nationalist orientation and favored the gradual divestiture of foreign ownership, but still had to rely on foreign loans and foreign capital investment for its major projects. Although politically nationalist in its rhetoric, the government adopted a more pragmatic approach and entered into joint-ventures with large multinational companies (Hunt 1975, Sigmund 1980). On the external front, the military regime took a more assertive position in the conduct of its foreign policy and became more actively involved in international organizations and forums. It had strained relations with the United States over nationalizations; it took a more active role in the Non-Aligned

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23

Movement, called for an end to the embargo on Cuba, recognized all the socialist countries, became a signatory member of the Andean Pact regional integration agreement, and staunchly defended its two-hundred-mile maritime limit. Peru also demanded the overhaul of the OAS and the Inter-American Treaty of Reciprocal Assistance (Berríos 2003, Gorman and St John 1982). During the second half of the 1970s the military’s nationalist experiment softened in the wake of the need to attract foreign investment to tap Peru’s large mining deposits (Hunt 1975, Sigmund 1980). But as the growing foreign debt and fscal defcits made the economy more vulnerable, the state found itself in a weaker negotiating position with creditors (Kuczynski 1988). As economic conditions worsened, labor unrest became a destabilizing force. By the end of the decade a transition from authoritarian to civilian rule had taken place and some of the economic policies of the earlier years of military rule were dismantled (Conaghan and Malloy 1994). The changing political climate and policy miscalculations led to growing imbalances. In 1980, the newly elected government of Fernando Belaúnde, which promoted a more market-friendly orientation, became a neoconservative experiment. It sought to reduce state involvement, promoted private investment, and even proposed liquidating SOEs. In addition, it deregulated, lowered taxes, reduced state subsidies, and promoted trade liberalization. In the end, the experiment to go back to a more market-oriented management model was advanced but the privatization of SOEs did not fully pan out until the 1990s. The Belaúnde administration was unable to eliminate many of the distortions generated from previous erratic policies and the stabilization effort as proposed by the IMF led to an economic downturn. There was also negligence in social policy and income distribution worsened. The Belaúnde administration did not have much of a development strategy to pursue as it worked to reduce state-led management. It embraced a market strategy but failed to create a coherent approach to promote development (Parodi 2000). The APRA party led by Alan Garcia, who was only thirty-six when he was elected, assumed power in 1985. The Garcia style of governance has been labeled as populist. This term refers to a political posture and discourse that is anti-elite and relies on a popular base following. Initially his policies mainly sought to transform the political trajectory and were aimed at creating a new type of national capitalism. The ideological narrative was nationalist: it favored import-substitution state-led development, used anti-establishment rhetoric, and promised more than it could deliver. The economic approach favored redistribution to beneft the popular sectors. The move to reactivate the economy had both a domestic and an external political component. Domestically the government introduced a heterodox strategy, overvalued the currency, subsidized food imports and loans, favored increasing aggregate demand, and promoted decentralization. Externally it adopted protectionist

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Chapter 2

measures and promoted a nationalistic posture in response to the external debt burden (Crabtree 1992, Paredes and Sachs 1991). The Garcia government adopted policies better known as macroeconomic populism. This is defned as an economic effort emphasizing economic growth, increase in demand by raising wages, and redistribution to favor low-income sectors (Dornbusch and Edwards 1991). It was a policy designed to improve the lot of the working poor while downplaying the risk of infation and looming fscal defcits (Kaufman and Stallings 1991). Because foreign exchange was insuffcient and debt payments were falling due, the government decided to limit its foreign debt payment to 10 percent of export earnings. This political move sent Peru back in arrears and led to a confrontation with the IMF (Berríos 1986). In July 1987, García also announced the nationalization of the commercial banking system. Garcia’s government was unable to correct distortions and some of his economic policies became fscally unsustainable. The result was an unprecedented infationary spiral. From 1988 to 1990 Peru faced hyperinfation, the economy was in free fall, the state was bankrupt and on the brink of collapse (Crabtree 1992, Paredes and Sachs 1991, Parodi 2000). The García administration had lost the public trust and was becoming increasingly politically isolated. In addition, there was a growing threat of terrorism from Maoist insurgents that resulted in an institutional breakdown (Palmer 1992). Although Alberto Fujimori, son of Japanese immigrants, won the 1990 election, he did not have a congressional majority. Once in offce, Fujimori’s proposals were different from those he had campaigned on. He immediately launched an orthodox shock policy (known as the fujishock) intending to stop hyperinfation dead in its tracks and lead the Peruvian economy along a market-friendly course. For this the new government had the backing of the international fnancial institutions. The government adhered to free-market principles of liberalization and embarked on structural economic reforms favored by conservative economists (Bowen 2000). This approach has since become the new narrative of economic development for much of Latin America. Fujimori had inherited from his predecessor a severely depressed economy with unraveling hyperinfation. Economic estimates are that Peru had regressed thirty years in terms of per capita income. As conditions worsened, hundreds of thousands of Peruvians had emigrated to other countries seeking work (Altamirano 1992). The economic reforms implemented in 1990 redefned the role of the state and the market approach became the new norm. Structural adjustment, as proposed by the IMF, consisted of imposing fscal discipline, reducing public spending, tax reform, fnancial liberalization, trade liberalization, promoting FDI, privatization, and deregulation. The new institutional framework made the private sector the main driver of the economy,

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not the state. Some of the reforms were intended to deepen economic liberalization, capital market liberalization and labor liberalization, and others to promote private investment both domestic and foreign (Parodi 2000). This allowed the previously protected economy to open. Initially, Fujimori’s lack of legislative support had prevented him from implementing these reforms faster. In 1992, accusing Congress of being incapable of resolving the crisis, Fujimori launched an autogolpe with the support of the armed forces and dissolved Congress. With this move the Fujimori regime undermined democracy and its institutions (Bowen 2000, Carrión 2006). He accused Congress of being incapable of resolving the crisis aggravated by ultra-leftist insurgents and sought the institutional support of the armed forces to allow him to implement his policies. For the remainder of the decade his administration became increasingly authoritarian. His regime fnally collapsed in 2000 when it was discovered that his government was embroiled in corruption and human rights violations. Fujimori fed the country and resigned. THE LEGACY OF ECONOMIC REFORM The process of liberalizing reforms had as backdrop two episodes of nationalistic statism: the experience of the military government and the frst Garcia administration. From 1968 to 1990 the state played a key role in managing the economy. Peru’s economy faced recurrent fscal crises that eventually led to a reduction in the scope of state action. The 1980s had been a period of volatility, high infation, and economic decay. The centerpiece of the state-centered approach was import-substitution industrialization (ISI) policies seen as a way to promote industrialization. The emphasis was on promoting domestic demand rather than export promotion. ISI was a state-centered approach relying on protectionism to promote industrialization. This inward strategy focused on industrialization for the internal market. This approach was the opposite of what East Asian countries were doing, which was progressively shifting to export promotion. ISI had reached a point of exhaustion and contrasted unfavorably with the success of East Asian countries. In the end, for many, the East Asian strategy proved to be more successful (Ranis 1990, Gereff and Wyman 1990, Henckel 2012, Singh 1993, Song 1997). For Peru 1990 was a watershed year. It marked a change in course as Peru began to undertake a major overhaul of its economic policies and institutions. The dominant paradigm and policy orientation ever since has allowed the private sector and market forces to drive economic policy. This trend, branded neoliberalism, is the heir of liberalism that thrived in the late nineteenth century. The main tenet is that as the economy grows there will be a trickledown effect and all boats rise. But the doctrine has been questioned and the

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new economic order criticized by many analysts because the promised effects were insuffcient; furthermore, it undermined the use of social expenditures to reduce the levels of inequality (Durand 2010, Gonzales de Olarte 1998, Jimenez 2017, Wise 2003). This shift in the policy framework transformed the economic base. Proponents of these type of economic policies were intent on promoting reform programs aimed at downsizing the state through privatization and deregulation. Its premise of development promises growth if the proposed recommendations are followed and the market is left alone. The evidence suggests that liberalizing reforms have promoted growth and this has led to poverty reduction. But the growth trajectory has not been sustained. The economy since 2013 has substantially slowed. Economic reforms have actually led to a reduction in productivity-enhancing activities. Ocampo et al. (2009) and Rodrik (2012) suggest that growth can be sustained if it is based on a change of the structure of production in higher productivity activities. Paus (2012) asserts that the new growth model, based on “productivityreducing structural change,” can only exacerbate the problems of underdevelopment. Reliance on commodity booms, as Peru exemplifes, can only result in generating greater inequality. Paus argues that the key to sustained growth is manufacturing, internationally traded services, or higher value-added activities of the primary sector. She adds that it is important to focus on where “production is shifting increasingly toward activities with greater technological spillovers” (2012, 6). The development literature provides a wide range of examples showing that countries with a larger share of their production in high-value activities experience higher rates of growth (Hausmann et al. 2007, Ocampo and Vos 2008, Paus 2012). The implementation of development policies requires an activist government, particularly in expanding technological capabilities and industrial policy. The government can target certain industries and promote higher value-added activities that can generate sustained growth. Under current circumstances, the state remains a player as a regulatory agent and it still retains involvement in a range of activities. However, the state is in a weaker position as advocates of neoliberal policies seek more deregulation and liberalization. But further liberalization has led to segmentation and has not made a dent in reducing the informal sector. Instead it has led the labor market to rely more on temporary work, low wage jobs, resulting in less security for many. In retrospect, the changes made set up a new political dynamic. The most obvious are governability problems, high levels of corruption, legislative incompetence, and a degree of business uncertainty because the new model is not reliant on production upgrading. As a consequence, the average citizen feels disenfranchised and has lost trust in government authorities and its institutions (Crabtree 2011, Seligson et al. 2009). Swift pro-market liberalization

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under democracy has ignited some popular resistance, weakened and fragmented traditional political parties, and generated economic insecurities, distrust, and disconnectedness particularly from low-income groups. Arce (2014), Jimenez (2017), Levitsky (2013), and other observers assert that today many Peruvians feel more vulnerable because of employment insecurity, low compensation, and cuts in social programs. The Toledo administration (2001–2006), the second García government (2006–2011) and Ollanta Humala (2011–2016) continued with the basic liberalized economic strategy, with some variations. Although these were elected governments, they were weak and precarious, with waning popularity. In spite of some accomplishments, at the end of Toledo’s tenure his administration’s approval ratings were in the single digits. The presidents who followed experienced a similar fate. Despite their relative success during the growth boom years, Levitsky notes that “Peruvians remain deeply unsatisfed with their government and democratic institutions” (2013). Cotler calls this the “paradox of development” (2011). That is, even amid economic expansion people remain dissatisfed and distrustful of the government. By 2003, a dose of luck helped: prices of commodities and the world demand for them rose; in addition, there was a greater infux of investment. The bonanza lasted for six years. To its credit, Peru had signed free trade agreements with the United States, Chile, and China. The model, however, was not signifcantly modifed even after Alan García was elected president for a second term. García received support from powerful economic elites and interest groups and thus veered from the earlier populist position of his frst administration, became more conciliatory and centrist in his political rhetoric, and adopted a more market-friendly approach to managing the economy in his second term (Crabtree 2011). Humala had a nationalist discourse early on but modifed his rhetoric and remained sympathetic to business. Table 2.1 shows that from the advent of the new millennium, Peru has changed and experienced GDP growth and improvements in macroeconomic outcomes particularly the last two decades. As growth took off, it produced Table 2.1 Peru’s Real GDP per Capita Years

Percentage Average Growth

1951–1960 1961–1970 1971–1980 1981–1990 1991–2000 2001–2010 2111–2016 Source: Banco Central de Reserva del Peru, Memoria 2016.

2.8 2.3 0.9 −3.2 2.1 4.3 3.5

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prosperity. This is consistent with what economists had predicted (Easterly 2001). However, other social indicators have not substantially improved in spite of reductions in poverty rates. In the overall context of the economy, some of the necessary attributes are not fully in place to obtain better outcomes. Some disenchantment and malaise is manifested in the very low approval ratings of recent presidents. McNulty reminds us that “Peru’s political system is often characterized as a fragile democracy with ineffective and weak state institutions, high levels of corruption, and severe leadership problems” (2011, 17). A challenge for Peru’s democracy is the lack of established political parties, which collapsed under Fujimori (Tanaka 2005). Politically the state and political parties remain fractured. The executive is weak and indecisive because it has minority representation in Congress. The legislature is often dysfunctional because many elected offcials lack political commitment and are not competent at policy implementation. Many of these representatives do not fully understand the institutional framework and lack negotiating skills. Some seek only their short-term gain (Ganoza and Stiglich 2015). On the whole, Peru remains prone to executive-legislative conficts due in large part to state weakness. Since 2013, the economy has shown signs of deceleration resulting in lower rates of growth and investment. Advocates of the neoliberal approach blame the state for excessive regulations and the absence of policy signals (Paredes 2015). Critics of this view stress that the production structure and exports are resource-based that the primary export model stimulates the production of non-tradable goods such as commerce, services, construction. They also argue that the emphasis has been on self-regulating markets and the role of industrial policy has been neglected (Jimenez 2017). The two extremes—state-centered and market-driven—have not performed as expected. The middle ground of public-private partnerships is relatively new to Peru but has fourished elsewhere. In Chile, CORFO came early and was maintained, giving rise to successful collaboration on transportation and infrastructure. Korea also recognized the benefts of such partnerships decades ago. In public transportation, for example, riders have a choice of many companies, some private, some public, and some a mix. In Peru, economic reform paved the way to allow the private sector to participate through concessions and partnerships (Font 2015). The Peruvian state came to realize its limited ability to meet demand and in 2005, the government turned “to concessions and public private partnerships for the construction and improvements of highways” (Font 2015, 10). In the end, the collaborative arrangements can reduce some of the risk for both parties. In addition, the state can also create and promote the expansion of the domestic market by funding research and development and by promoting access to external markets by domestic frms.

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Given the rapid changes over the last two decades particularly with the use of modern technologies, Peru has changed somewhat but not as fast as a few selected countries that have leapfrogged it and other similar economies. This is mainly the case of the Asian tigers—Korea, Taiwan, Singapore, Hong Kong—and now China. In fact, most of Latin America, Africa, and Asia have been unable to keep up with the affuent northern countries in fostering structural change, and even much less in promoting innovation and technological progress. In the wake of these contrasting experiences, Peru has shown mixed results as its development strategies have failed to gain substantial ground in economic development. The “beggar sitting on a golden bench” image illustrates the irony of a country with many resources nevertheless remaining in poor condition (Schuldt 2005). Some of those resources were used to generate export booms, which increased government revenues that at one point in time largely benefted Lima’s elite. These export booms led to growth, but each time ended in collapse because external demand diminished over time, alternative substitutes were found, or there was a lack of marketing or adequate policy-management to maximize revenues (Hunt 2011, Roemer 1970). As this export-led strategy ran out of steam, the economy became more vulnerable and unable to deal with short-term crises (Gonzalez de Olarte 1994, 1996, Thorp 1987). Economic historians raised concerns that this type of growth was uneven and brought about no signifcant reductions in inequality (Hunt 2011, Roemer 1970, Gootenberg 1989, Contreras et al. 2015). Nevertheless, the country has continued to rely on the export of primary commodities. Table 2.2 shows an

Table 2.2 Manufacturing Sector in Peru (Net Value Added) 2001–2015 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Percentage Participation of GDP 15.7 15.9 15.8 16.2 16.3 16.2 16.5 16.4 15.2 15.4 15.7 15 14.9 14.4 13.7

Source: Instituto Nacional de Estadística e Informática, 2017.

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indication of this trend being followed; it shows the percentage of manufactured goods, which continues to be small relative to GDP. Peru is proud of its Inca past, but many of its indigenous people still live in poverty and suffer discrimination (Contreras et al. 2015, de la Cadena 1998). Many also form part of the informal sector, either self-employed or working for a small enterprise. Cotler (1994) notes that much of the country’s postcolonial history has lacked a national collective identity. Historians recant that development shortcomings were tied to political, societal, and institutional weaknesses (Contreras and Cueto 2000). At various times Peru experienced extended and unresolved political crises that have rendered government ineffciencies (Crabtree 2011). In recent years, policy making has been severely constrained by the lack of coordination and/or continuity among different administrations. Incoming governments make promises but are not always able to deliver. Liberal democracy has not always been a forward march for Peru as political parties have been discredited and the approval rating of these democratic governments has been dismal (Levitsky 2013). According to measurable indicators of development, these governments have been unable to resolve long-standing social problems. During much of the twentieth century, Peru was still searching for its own identity. A number of Peruvian intellectuals wrestled with the problem of national identity, and some even questioned whether Peru could become a unifed nation. Critics point to the absence of a future vision and the lack of well-defned planning among the political leadership (Drinot 2006, Orihuela 2014). DEVELOPMENT PERFORMANCE: AN OVERVIEW As discussed in chapter 1, development is an elusive concept, and for many countries it has become an illusory goal. Generally, development refers to a qualitative jump, a sustainable process by which the welfare of the people is enhanced. It is not something that just happens automatically with the help of the invisible hand. It requires well-defned policies that foster structural change. The current production structure in Peru does not promote technological capabilities; rather it is a return to extractive activities. The challenge of development is to move resources from low-productivity areas to modern industries such as manufacturing. But this requires state interventionist policies, which goes against the current neoliberal model (Rodrick 2012). The experiences of Peru and other LDCs make it clear that the goal of development must be not only to achieve economic growth but also to attain other qualitative social goals that can be approached in the context of a democratic setting. Economic growth (rise in national and per capita income or product) is a necessary condition but there are other qualitative social goals

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Figure 2.1  GDP per Capita, Current Prices US Dollars. Source: IMF. Graph Created by R. Berrios.

that include meeting and enhancing basic needs (education, sanitation, health care, housing), generating employment opportunities, and reducing large disparities in income distribution. In essence, one key element of development policy is social policy. But this is an area that has not been properly addressed under a leaner government to mitigate some barriers to development. The liberalization of markets targeted macroeconomic policy reforms but did not result in structural change. Peru has experienced growth but its growth has not been a sustained process. There have been periods of rapid growth followed by economic downturns. Figure 2.1 shows GDP per capita growth since 1980. The graph shows that periods of rapid growth are followed by periods of average growth rates. The line is an estimate of GDP per capita measured in terms of purchasing power parity (PPP). But what has prevented Peru from achieving sustained growth? Has there been too much reliance on commodity exports making the economy vulnerable when prices fall or demand decreases? It is a fair question because some countries in East Asia have been able to sustain high levels of growth. This is a great challenge for any country. Growth should not be exclusively coming from one productive sector or beneft just one sector of the population. Sustained growth implies maintaining a much higher level than population growth, producing and offering more, diversifying, improving the levels of human capital, and it requires that this be maintained for relatively long periods. For much of the twentieth century Peru had rates of economic growth that were above the Latin American average (Thorp 1987, 1998). It was during the frst decade-and-a-half of the millennium Peru became one of the top performers in the region. Table 2.1 shows that from 1991 to 2000, the average rate of growth was 3.24 percent but from 2001 to 2010, it was 5.71 percent. From 2010 to 2013, it was above 6 percent, but since 2013 there has been

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a deceleration. In 2015, growth was only 3.25 percent, in 2016 it was 3.9 percent, but in 2017 it had fallen to 2.5 percent. A big factor in 2017 was the natural disaster caused by El Niño in the northern coast and the unveiling of corruption scandals linked to the Brazilian construction company Oderbrecht that won infrastructure projects with political payoffs. A faster recovery is not expected until 2019. One important fact worth noting is that a large part of this growth has been achieved by just three sectors (mining, energy, and commerce). While in 2008 the GDP rose by 9.8 percent, the following year in 2009 this was merely 0.9 percent, which was refective of the world recession and the aftermath of the fnancial crisis in the United States. Again, this is an indication of Peru’s vulnerability to external conditions and unexpected negative shocks. Development economists generally assert that fast growth can result in signifcant reductions in poverty (Easterly 2001). This is evident of Peru’s recent experience. Figure 2.2 illustrates longer periods of faster growth have led to poverty reduction in recent years and to improvements in other social indicators, but this has not been suffcient to boost Peru’s political aspirations to request membership in the OECD, which Chile has already achieved. Economic growth is desirable but it might not always be suffcient to bring about improvements in other social indicators such as health and education. As the economy grows more employment is generated but some people are

Figure 2.2  Population in Conditions of Monetary Poverty, 2001–2015 (percentage). Source: Instituto Nacional de Estadistica e Informatica, 2017.

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left behind and many still remain underemployed. The 2007–2015 period was an achievement for Peru. Notice that there was a 20 percent drop in poverty levels between 2007 and 2015, from 43 percent to 22.7 percent. This has been cause for optimism even if these improvements have raised some questions. For instance, is this simply the result of just faster growth? What about actions taken by the government, NGOs, and international organizations such as the United Nations Development Program (UNDP) that launched an aggressive campaign to eradicate poverty in its most extreme forms in the new millennium? The emergence of China, which increased demand for commodities, may also have played a role. In any case, there was a deliberate policy to reduce poverty, and there was action taken on different fronts. Economic historian Rosemary Thorp (1998) has noted that during the course of the twentieth century, Peru, and also the Latin American region in general, made substantial progress with improvements in real income, higher levels of literacy, longer life expectancy, and better health. But periods of rapid growth were followed by economic downturns. When Solow (1956) speaks of the importance of sustained growth, this implies a rhythm of growth that can be maintained long-term. In other words, an economy grows on a sustained basis if it is capable of maintaining the levels of increases in real income. Sustained growth indicates that the economy can become more robust and thus minimize volatility. Without sustained-growth there cannot be a substantial reduction in poverty and other socioeconomic changes. Macroeconomic conditions must be consistent with the pattern of long-term growth to generate enough employment to reduce poverty and improve social conditions. The most recent fgures from the National Statistical Institute (INEI), poverty for 2017 and 2017 has edged up as growth slowed. As the data shows, the growth pattern in Peru has been uneven. During the 1990s even during periods of economic expansion, there was continued exclusion of the poorest sectors through poverty and inequality. Iguiñiz (1994) insisted that even though economic growth and poverty reduction should go hand in hand, there was no strategy in place to reduce levels of absolute poverty. So even as the economy was improving it failed to share in the fruits of its periodic bursts of growth and economic prosperity. As Table 2.1 and Figure 2.2 show, in the new millennium, particularly during the second half of the frst decade, growth steadily increased and the levels of poverty started to fall and standards of living improved. This is signifcant when looking back at recent history. In 1970, 50 percent of Peru’s population was considered poor (Sheahan 1999). For the next twenty-seven years, the percentage change was not signifcant. Peru’s economy was severely depressed in the 1980s and poverty rates increased. The next decade was known as the diffcult 1990s and was characterized by a slow, negligible marginal decrease in poverty rates. In the new millennium Peru experienced an export-led boom and an

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Table 2.3 Peru’s Poverty Rate, 2001–2015 Sectors

Total

Urban

Rural

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

54.8 54.3 52.3 58.7 55.6 49.2 42.4 37.3 33.5 30.8 27.8 25.8 23.9 22.7 21.8

41.6 42.1 40 37.1 36.8 31.2 30.1 25.4 21.3 20 18 16.6 16.1 15.3 14.5

78.3 77.1 75.2 69.8 70.9 69.3 74 68.8 66.7 61 56.1 53 48 46 45.2

Source: Instituto Nacional de EstadÍstica e Informática

appreciable reduction in the rates of poverty. Figure 2.2 shows that it is only after 2005 that poverty frst fell to under 50 percent. An important aspect that becomes evident in Table 2.3 is that the incidence of poverty has continued to be substantially higher in the rural sector. Some of these issues alluded to raise other questions: Whether poverty is just a matter of social exclusion and lack of both resources and opportunities, defcits that could not be stretched to tend to the poor, or whether it is a product of the structure of inequality in a less developed market economy. The frst three issues might be addressed by being more inclusive, providing assistance, and initiating institutional reform. The last question is more diffcult to address because it involves social change in the relations of production (Rodriguez and Francke 2017). The failure to reduce extreme inequality had been for years one of the thorniest issues to be resolved. Although during the second half of the twentieth century Peru experienced rising incomes across all sectors, income distribution continued to worsen (Sheahan 1999, Webb 1991, Contreras et al. 2015). Webb argues that unequal distribution in a country like Peru, which exhibits high inequality, is mainly due to market imperfections or rents derived in an extractive economy. Inequality has also been linked to exclusion from markets and other mechanisms of social exclusion. Escobal and Ponce (2014) emphasize that the differences in poverty between urban and rural continue to be striking, and that rural areas experienced much higher poverty rates than urban areas. Contreras et al. (2015) argue that there is still dualism, a deep divide between modern and traditional sector coexisting alongside one another.

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Poverty can be measured in monetary terms such as household spending, or non-monetary such as access to social services, human capital. The results can vary depending on the measurement (Ghezzi and Gallardo 2013). Although offcial data might not count some as poor, in practice they are. Traditional poverty reduction programs have done little to alleviate the problem. They usually provide temporary relief. One study concludes that these programs address the consequences rather than the causes of poverty (Attanasio and Székely 2001). The challenge posed is to go beyond the problem of low incomes and ask what prevents the poor from having the same opportunities. It is argued that unequal access to assets such as education and credit puts people at a disadvantage and underlines the problem of poverty. People with few productive assets receive lower wages. This is what is known as the asset-based approach. Peru is considered a middle-income country, but it still has 22.5 percent of its population living in poverty and has high levels of inequality. The lack of income-earning assets such as education, labor experience, and savings can help explain the persistence of poverty. Ways to measure income inequality are also not always accurate but some argue that there has been a modest improvement. Offcial poverty fgures are often measured in monetary terms (household income). Another issue is subjective poverty—those who feel poor and lack opportunity or access to social services, but are offcially not counted as poor. A common measure of the degree of inequality is using the Gini coeffcient. The coeffcient is a number between 0 and 1. There is perfect inequality when it is 1 and perfect equality when it is 0. Note that the degree of inequality during the last two decades has followed a descending tendency, and has been lower irrespective of whether poverty has increased or decreased. From 2007 to 2015, the Gini coeffcient dropped from 0.41 to 0.34. But offcial fgures based on monetary terms have been seriously questioned because of the limited methodology used. The mode of inequality is still prevalent particularly in the rural sector, even if there has been an overall drop over the ten-year period. Even if there is a noticeable reduction in poverty and some in inequality, it has proven to be unsustainable (Escobal and Ponce 2014). As growth rates have slowed, the latest INEI data for 2017 show that poverty has edged up and inequality persists. Poverty reduction and development require a substantive change in inequality, and this process requires further institutional reforms and policies that promote effective social policies. THE EXTERNAL FACTOR Trade liberalization is trade reform to open up the economy and shift to more productive activities. Many countries in Latin America had undertaken trade

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liberalization and reduction of trade barriers in the 1980s; Peru followed suit in 1990. Chile had done so much earlier, in the 1970s. In all cases, with some variations, tariffs and other quantitative restrictions were lowered signifcantly. A number of commercial procedures were simplifed. In Peru, these reforms were implemented in the context of a broader structural reforms process that resulted in the expansion of trade. In reducing tariffs, Peru moved away from a relatively uniform tariff structure, making all tariffs ad valorem. Trade as a proportion of GDP has increased considerably since the 1990s. The rapid growth in trade has been accompanied by changes in its composition and direction. The role of trade openness in the growth process can be signifcant. A generally accepted assertion is that openness is a necessary condition for growth, which in turn can promote development. It is a well-known fact that East Asia and Chile have done well as export-driven economies. Newcomers like China, India, and Vietnam also have benefted from free trade (Bhagwati and Panagariya 2013, Henckel 2012). However, the push to survive in an increasingly open or globalized trade system can be dicey. Are trade and open capital movements suffcient to generate faster growth? The trade question has been raised by some of the pioneers of development economics so it is worthwhile to revisit the subject. However, the theory is not entirely conclusive on the relationship between openness, growth, and development (Ros 2013). Trade liberalization can generate benefts and costs. East Asian economies that followed this path (Korea, Taiwan, Singapore) registered high growth rates and became stronger economies. The opening to trade can generate incentives to frms that can raise their productivity, which in turn obligates them to improve the quality of their exports. Impressive export performance resulted in imports of machinery and equipment embodied in advanced technology (Bhagwati and Panagariya 2013). This helped improve their productivity. The evidence shows that with free trade there will be winners and losers, but the whole idea of trade is that benefts will outweigh losses (Husted and Melvin 2013). Those frms that lose out can seek government assistance when they are at a disadvantage and, therefore, might require commercial advice and support. Trade can lead to a transformation as new opportunities open up, workers are retrained, and frms upgrade their standards. However, it should be noted that an opening to trade does not automatically guarantee growth. Historically Peru has relied on the external sector and has been dependent on the international price of raw materials, the growth and prosperity of the developed countries, and the interest rate on a return to investment. In recent years, China has become a signifcant player as an importer of minerals and as investor in Peru’s extractive sector. The rosy performance of Peru’s economy from 2003 to 2013 is attributed to high commodity prices, a better performance of the world economy, and China’s growing demand for raw

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materials. As trade has evolved during the growth years so did FDI rise but has signifcantly fallen as trade slowed. It is precisely these exogenous factors that also can make a country like Peru vulnerable to adverse external shocks in a volatile world economy. The current model has made Peru’s economy more dependent on foreign capital and the international context for its export goods. Exports of traditional and some non-traditional goods have increased. But the latter are linked to the manufacturing process of primary goods (e.g., canned tuna, t-shirts rather than raw cotton). The export of manufactured goods has not grown due to the main characteristics of this model. According to Jimenez (2017), economic growth and trade expansion have postponed industrialization. Now the economy is more reliant on imports. The current model is a primary-export model that promotes export of primary commodities and the use of lowwage labor. It is not reliant on industry or on the production of manufactured goods. The capital-labor ratio relation has not been substantially modifed in the last few decades and has lost relative importance. In essence, this reveals the decreasing effciency of investment as a large percentage of workers are employed in low productive sectors. In addition, the current primary-export trend does not guarantee suffcient demand to support growth capable of generating more socially acceptable jobs. Signifcant growth for a decade, which Peru experienced between 2003 and 2013, can generate enthusiasm and great expectations among entrepreneurs and those whose lives are affected by growth. A slowdown causes confusion and can even generate political noise. But the cooling off of the economy could be the result of a range of issues, both internal and external, that might have been downplayed during the rapid growth years. Investment during the past twenty-fve years has not modifed the levels of productivity. The trap of low-productivity growth can become an obstacle to recovery. Low productivity can contribute to delays to get back to previous levels but the recovery efforts have been barely adequate. Added to the list of impediments to faster growth is lack of political consensus, no reductions in informality of the labor force, and the malaise caused by rising crime and corruption in government circles (Ganoza and Stiglich 2015, Ghezzi and Gallardo 2013, Paredes 2013). A more productive development would also entail encouraging more innovation and promoting better technological practices in manufacturing activities, which is absent in the policy discussions. Furthermore, there is still insuffcient commitment and determination to transform institutional factors that continuously impede faster growth. On the global market scale, the impact of changes in commodity prices can be signifcant. According to the US Geological Survey 2018, Peru occupies a prominent position as a world exporter of metals. It is the second largest exporter of zinc, the second largest exporter of silver, the third largest

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exporter of copper, and sixth largest exporter of gold. Between 2003 and 2013, the prices of these metals rose signifcantly. While the level of demand for mineral exports remained high, prices rose to unprecedented levels and that also led to more investment in the mining sector. This trend led to more tax revenue captured by the government, which led in turn to more public spending. Higher export earnings also weakened the currency, which reduced infationary pressure. Continued low interest rates remained low and hence stimulated investment. Finally, as incomes rose so did consumer demand. With higher growth rates Peru experienced a boom of sorts during those years (Ganoza and Stiglich 2015). The evidence suggests that favorable world economic conditions have been benefcial to Peru. Favorable external factors such as high commodity prices and higher demand, rather than industrial or agricultural development, were primarily responsible for Peru’s economic growth (Jimenez 2017). But by 2014, China’s economic growth had slowed, demand from China had slacked off, commodity prices had fallen, and interest rates were on the rise. The economic presence of China is such that since 2014 it has become Peru’s main trading partner, surpassing the United States. What scenario might play out in the next few years is hard to foresee because there is no other country that can supplant the Asia giant’s demand for commodities if it were to undergo a prolonged slowdown. One thing is certain: past experience shows that episodes of rapid growth for some years have been followed by a signifcant slowdown, leading to average or below average growth rates. Once again, all this points to the vulnerability of Peru’s economy when external conditions suddenly shift and future prospects remain uncertain. NEGOTIATING CAPACITY A critical element in international economic relations can be a country’s negotiating skills and capacity. The Peruvian diplomat Garcia Bedoya (1981) stressed the importance of strengthening the country’s negotiating capacity at the bilateral, multilateral, and regional levels. A country like Peru does not have much of a presence in the international scene so there needs to be more bargaining leverage and a coordinated effort to negotiate better deals. The lack of negotiating capacity was evident in debt restructuring with the IMF and with other countries and banks. Peru’s negotiating team was at a disadvantage not only over debt issue but even negotiating restructuring textile exports to the United States, which in the 1980s became a point of friction between the two countries (Alvarez 1990). Alvarez highlights the diffculties faced in international negotiations, which are the result of defciencies in institutional coordination, particularly

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among the different entities within the public sector. These entities seem to lack the ability or the willingness to craft a coherent, well-thought out plan with a long-term economic perspective. Politically, appointed offcials intent on pursuing their own agenda have short-term interests and do not always strive for what might be the best possible outcome. Moreover, young diplomats on assignment often have inadequate knowledge of how the international trade system works and insuffcient skills in negotiation, international trade law, in international marketing, and in arranging investment deals. Another problem has been related to frequent diplomatic shifts as a result of changes of administration and lack of political continuity. For instance, during the 1990s Peru had established strong links with Japan, yet knowledge of this potentially large market was quite limited. Peruvian experts on Japan were almost non-existent (Berríos 2006). The same was the case with China as it rapidly entered Peru’s market particularly during the past two decades. Although Peru does not have a signifcant world dimension, as South Korea does, there have been diplomatic achievements in the signing of free trade agreements with a number of countries (United States, EU, China) and joining regional blocs (APEC, TPP). Yet Peru is still setting pre-conditions for take-off but needs some acceleration. A more outward-looking approach requires increased capacity to stimulate more trade and investment. Peruvian exporters need to step up, take the risk, and venture out by offering their products to buyers abroad. At the government level, it was not until the Toledo administration that the ministry of commerce was created to better coordinate trade policy. Finally, Peru’s public sector bureaucracy has been slow and ineffcient resulting in long delays and improper coordination of the various entities in the public sector in formulating commercial policy strategy. It is only in recent years that Peru sought to negotiate bilateral and multilateral trade agreements in hopes of generating more trade. But agreements to have more market access is not a guarantee to a win-set outcome, even if they do give Peruvian exports a boost. Rather, they offer a way to seize an opportunity (Morón et al. 2005). Peru already has had signifcant trade relations with the United States. It has an abundant supply of foodstuffs and minerals to sell but it is not a major producer of manufactured goods. The United States until recently had been Peru’s most important trading partner and with the approval of the Andean Preference Pact (ATPA) signed in 1991, this resulted in the Andean Trade Promotion and Drug Eradication Act (ATPDEA) signed in 1993, which provided a big boost to its exports (White House 2002). According to Mincetur (2005), Peru’s exports to the United States up until 2005 were growing by an average rate of 15 percent annually. It gave Peru preferential access to the United States market for a wide variety of products, thereby providing a much-needed incentive for Peruvians to shift away from coca production and to cultivate alternative crops such as fruits

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and vegetables for export. This arrangement was put in place as an incentive for compensation to drug eradication, mainly coca (von Braun 2012). Whereas goods sold to China are concentrated in minerals and fshmeal, there is a more diversifed line of products it has been selling to the United States, particularly foodstuffs, textiles and apparel, and other nontraditional products. The larger question remains as to whether Peru’s commercial policy can go beyond the free trade agreements signed and offer more goods with a higher value added content. Its current development strategy will have to fnd ways to enhance its external performance by going beyond simply primary commodities (Perez-Caldentey and Vernengo 2010, 2017). THE LOW PRODUCTIVITY DILEMMA Why has the Peruvian economy been unable to overcome low levels of productivity? During the period of high growth, many frms expanded capacity and hired more workers, but effciency did not increase. A more effcient frm can produce more at a lower cost; it can raise worker productivity and can generate incentives to invest in machinery and technology. One study notes that during those years of growth, productivity represented only 35 percent of GDP growth, but in both Korea and Chile, it represented 58 percent respectively (Cespedes and Ramirez 2014). This shows that productivity in Peru is low relative to those two countries. A study by Daude and Fernandez Arias (2010) note that in 2005 Peru was ranked 18 in productivity in Latin America. In 2008, it had managed to climb to 13, but it is still below the median in the region. These studies show that labor intensive sectors such as commerce and services are less productive than more capital-intensive sectors such as mining. When productivity rises the economy can produce more with the same amount of resources. One issue the Peruvian economy faced was its inability to achieve higher productivity despite a booming economy, which may be related to Peru’s insignifcant improvements in the quality of education, no major labor reductions in the informal sector, and lack of any major technological development, and few improvements in infrastructure. In all these areas, the World Economic Forum insists that Peru has shown meager improvement (WEF 2016, OECD 2016). A return to high levels of growth (say, 7 percent or higher) is unlikely in the short term given current conditions in 2018. The state sometimes looks at megaprojects as a way to boost growth but more urgently needed are incentives to invest in areas that would raise productivity. Ganoza and Striglich (2015) argue that to overcome the productivity trap would require serious reforms. They might be diffcult to achieve because of the political impasse and without a more decisive involvement on the part of the state. Institutional

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defciencies need to be fxed but they will not be fxed by market forces or simply by short-lived bursts of high growth alone. The informal economy remains a thorny issue in that it refects underdevelopment. There are two distinct positions on informality. One holds that the informal sector consists of an industrious and creative force that is unable to prosper because of the weight of governmental regulations. The argument is that there is exclusion because of entry barriers or regulations and excessive taxes in the formal economy. This is Hernando de Soto’s main argument (De Soto 1989). Others who also have studied the problem insist that the levels of productivity in the informal labor market is much lower than those frms in the formal sector. That is, the informal economy has critical implications for its low productivity in most types of employment (Perry et al. 2007). Cespedes (2015) corroborates the hypothesis that informal labor is negatively correlated with economic development. The study notes that growth alone does not reduce informality. The fndings show that growth mainly affects formal employment. According to Loayza (2016b), estimates of the size of the informal sector as part of the total labor force in Peru ranges somewhere between 53 percent and 70 percent. ILO data estimates it is about 68 percent and INEI about 73 percent. Informal workers have lower levels of education, contribute little in terms of tax revenue, tend to be self-employed, do not have easy access to credit, and may not have access to social security benefts. A reduction in informality would require higher levels of investment to attract and train workers and offer higher wages as well as improvements in human capital, reform of labor market policies, and simplifcation of tax laws. Without such improvements and new incentives, productivity in the informal sector will continue to remain low. If, despite average and above average economic rates of growth, development has not blossomed, then perhaps some aspects of the quality of growth need to be re-examined. The process of economic growth itself is not always stable. The economy has suffered a discontinuous process of leaps and falls as Peru has experienced periods of growth, slowdown, and at times, severe economic contraction. Reliant on the external sector for foreign exchange earnings, the country sometimes has had to endure price instability, external economic shocks, counterproductive trade policy decisions by governments in offce, and climatic factors that have made exports vulnerable. History shows that spurts of high growth emerged, only to be undone by periods of decline and crisis (Parodi 2000, Sheahan 1999; Thorp 1987, 1991). For a country to spur economic growth, investment is essential, both domestic (public and private) and foreign. For this to occur macroeconomic stability and sound public policies must be in place to make it attractive enough for the private sector and foreign capital. One challenge faced has been to sustain the levels of investment during high periods of growth.

42

Chapter 2

The most worrisome aspect has been the low levels of labor productivity. Part of the problem is the low levels of human capital as well as the absence of incentives to produce and innovate (Pagés 2010). In recent years, the economy has experienced a shift from secondary activity (industry) toward mostly primary activities. The shift from easy importsubstitution industrialization (ISI) to producing manufactured goods for export never materialized, as was the case of East Asia. Peru and other Latin American countries did not make the structural transformation to a higher level of development by shifting resources toward the expansion of industry and manufacturing. This would be a chance to move to higher productive activities and thus attract labor to more value-added and skilled-type of tasks. The slow pace of transformation is evidence that much of labor is stuck in low income activities and small-size frms (Cypher 2014). The core economic model (market-frst approach) that has been in place under the last fve Peruvian presidents, irrespective of their ideological tendencies, has been preserved. Private investment has contributed to propel growth and public investment has played a complementary and supportive role particularly in areas where there is little or no competition. A determinant factor for FDI is competitiveness. However, the overall economy might not have the attributes, particularly skilled labor, reliable infrastructure, and institutions such as an independent judiciary, transparency, and low-levels of corruption, needed to make it more attractive to investors. Other impediments are of an administrative nature: excessive controls and regulations. According to the Global Competitiveness Report, which is put out by the World Economic Forum, Peru placed 72nd out of 132 countries with respect to productivity and relatively low costs. This has generated some uncertainty as the country still faces institutional weaknesses even as it seeks to foster quantity and quality investments. THE POLITICAL IMPASSE The political picture today is also quite different as traditional parties no longer carry much clout and voters have rejected the status quo. Current political parties are weak, lack cohesion, and show no interest in building solid institutions to promote the necessary reforms to spur development. Democracy has waned with weak and unstable political parties and weak institutions holding sway (Levistky 2013). Today’s elected offcials are mostly inexperienced and many seek their own self-interest for short-term gain. This debilitating presence in the political system makes governance diffcult. An outcome of decentralization, which started in the second half of the 1980s, was that certain regions or zones would have more autonomy, but

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43

they now have little or less or no accountability to the central government. In some instances, leaders of these regions engage in rent-seeking behavior. A case in point is the regional government of the department of Ancash, where state funds were misappropriated but the regional leaders answer to no one. The central government is now in a weaker position. This is perhaps one of the reasons why the approval rate of elected offcials and government institutions is at an all-time low in Peru (Castillo 2017). Peru’s presidential system, the judiciary, and the executive branch are part of a fragile democracy. Any reform in an institutionally weak country does not have the potential impact intended. While the constitution provides for an independent judiciary, in practice, the judicial system is considered ineffcient and corrupt (Carrión et al. 2014, Levitsky 2013, Seligson et al. 2009). According to WEF data, Peru is now ranked 129 out of 137 countries in terms of “effciency in the judicial system to solve disputes.” It is also ranked 105 in terms of “protection of intellectual property,” and 106 in terms of “judicial independence.” The political system tends to be exclusionary and often has been polarized as vested interests seek to become more infuential. Widespread political ineptitude and economic vulnerability have raised concerns about the lack of good governance, which is a fundamental prerequisite to restoring distrust in its public institutions. Quality leadership in formulating and implementing policy is lacking, as is transparency in government transactions (Ganoza and Stiglich 2015). Budgetary operations, for example, are not always open to public scrutiny, and political patronage has often been the norm. In general, governments of different political persuasions have lacked the administrative capacity to implement policies effectively. Studies have shown that there is a direct link between institutional weakness and country-risk. The World Bank and other institutions keep tabs on governance and institutional weakness (Aron 2000, World Bank 2002). The most obvious example is corruption. The Lava Jato case involving bribery of former presidents and political campaigns is just one of the most recent examples. This generates a perception of widespread corruption that have affected two former presidents and other offcials. While democracy and capitalism have fourished over the last three decades, so has corruption and the lack of accountability. Since 1990 all three presidents paid lip service to the need for change, today two of them have served time in jail (Fujimori and Humala), one is under extradition orders to return and face justice (Toledo), and the other is under investigation (García). President Kuczynski was forced to resign before completing his two frst years in offce. Repeated policy failures by successive governments have thrown Peru into recurrent crises. Governments, for the most part, have been unable to

44

Chapter 2

deliver on their promises of social prosperity and the average citizen views the government with distrust and disappointment. Each government has faced diffcult challenges, yet at the same time it has had little capacity to meet its obligations. The government bureaucracy has been notoriously slow and ineffcient. Polls indicate that the general public does not place much faith in the country’s public institutions, and the traditional parties have lost their credibility (Seligson et al. 2009, Carrión et al. 2014, Levitsky 2013). This mistrust goes back decades: the rejection of politics as usual was refected in the election of Alberto Fujimori in 1990, a relatively unknown candidate and an outsider who came from behind to win the presidential election (Bowen 2000). As of 2015, 45 percent of congressional elected representatives were considered independent and only 18 percent had been reelected (Ganoza and Stiglich 2015). Since the start of the new millennium, Peru has experienced economic growth under Toledo (2001–2006) at an average of 4.2 percent, García (2006–2011) at 6.9 percent, and Humala (2011–2016) at 4.2 percent. If these numbers achieved desirable results, then why did they have such a low approval ratings? Part of the answer is that these governments were plagued by corruption. Market reforms implemented were timid, which is why many called it “leaving the economy in cruise control.” It was shown that monetary poverty fell during these years and income inequality showed small signs of improvement, albeit it is still high. However, polls show that the average citizen has not felt the trickle-down effect. The USAID-funded study led by Carrión (2014) notes that the average citizen has reached a point of fatigue with the political class. Moreover, these presidents did not really connect and did not execute the necessary corrective actions to sustain the growth process. All this tells us that Peru has yet much to travel to be considered as an “emerging economy.” According to various polls published in Lima’s newspapers, all of last three presidents ended their tenure with approval ratings in the single digits. Soon after current president Pedro Pablo Kuczynski assumed offce in July of 2016, he had a high approval rating of 59 percent, but after slightly more than one year in offce, one of the latest polls before he was forced out of offce, shows that his numbers have slipped to 22 percent (Perú 21 2017). A major reason for his struggles is that he did not have a majority in Congress. Although Kuczynski won the presidential election, it is Keiko Fujimori’s party who has a grip on Congress. Mr. Kuczynski initially only had twenty representatives from his party, whereas the opposition party (Fuerza Popular) had sixty-nine. His cabinet ministers have often had to appear before congressional committees and a few of them were forced to resign after the opposition in Congress gave them a vote of no confdence.

Growth without Development

45

LOOKING AHEAD IN COMPARATIVE PERSPECTIVE Over the past sixty something years Peru has tried different development strategies but not always consistent policy measures. Different policy directions have led to different outcomes and sometimes erratic performance. The dominant export model in the 1950s was the primary export model and the role of non-traditional exports was miniscule (Thorp 1988). Economic growth was fragmented, as the traditional and modern sectors coexisted. The outcome was uneven growth, and the economy had a weak industrial base and a passive entrepreneurial class (Parodi 2000). In the 1960s and 1970s, ISI was attempted to create a modern sector. But it turned out that import-substitution industries never fully matured, and protectionist measures generated an antiexport bias and dependence on imported capital inputs. Moreover, it failed to provide much stimulus to growth. From 1968–1974, state-led development was promoted by the Velasco government but this required foreign borrowing that resulted in burdensome foreign debt. The Belaunde administration in the 1980s favored free markets and deregulation, Garcia in the second half of the 1980s backtracked and continued to shelter domestic industries. It was Fujimori (1990–2000) who marked a new phase for Peru by liberalizing the economy and promoting trade liberalization. The state had to undergo a major transformation just to maintain involvement in a number of activities that are central to development. The dominant trend since the Fujimori administration has been an expanded role for private frms and a leaner role for the state. Why did Peru’s stylized development path diverge from other countries that have experienced success? Why did countries like Korea, or even Chile, experience more rapid progress while Peru underperformed? The evidence suggests that erratic and wrongheaded macroeconomic policies, lack of a coherent industrial policy, lack of policy continuity, low levels of investment, lack of trust in the political class, and weak institutional transformation have had a negative effect on Peru’s growth. Chapter 3 is an analysis of how Chile has stayed ahead of Peru by establishing public-private partnerships more successfully and maintaining macroeconomic policy direction under different presidents. Chapter 4 analyzes how South Korea’s pragmatic approach was built on macroeconomic stability, high rates of investment, a responsible political and entrepreneurial class, the promotion of human capital, and the ability to incorporate and assimilate imported technology. In Korea’s case, the evidence suggests that this formula has proven to be a good guide for growth and development. Peru’s use of a mixture of orthodox, heterodox, and neoliberal policies introduced over the past four decades generated expectations of a new era of

46

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viable development each time. The statist approach, perhaps best exemplifed under the frst phase of the military regime (1968–1974) and under the Garcia administration (1985–1990), has been criticized for its poor management of macroeconomic policy and weak institutional approach (Schydlowsky and Schuldt 1996, Thorp 1991, Wise 2004). In 1990, the state assumed a more market-supporting role in the economy. Sweeping liberalization brought about macroeconomic benefts but was insuffcient to absorb a sizable segment of the labor force that remains in the informal sector. As long as a signifcant portion of the labor force remains in the informal economy, productivity levels are not likely to increase by much. As the economy has signifcantly slowed after a few years of rapid growth, there is a degree of uncertainty in Peru because of the lack of clearly defned policy objectives. Although the long-term goals of any LDCs are to achieve development, there are no palpable specifcs or policy signals to stimulate closer collaboration between the state and the private sector. In other countries, there has been a tradition of such collaboration. CORFO in Chile is an example in this regard, a strong but relatively autonomous institution with the technical expertise to promote business ventures (Orihuela 2014, Centeno and Ferraro 2017, Font 2015). In the case of Korea, growth was ignited by not only the expansion of exports but also the promotion of manufacturing industries that required cooperative action from both the public and private sectors. The export-strategy was promoted and supported by the government (Amsden 1989). This type of pragmatic approach is absent in Peru as the government relies on export-promotion of primary commodities and waits for world economic conditions to improve. The very different paths of other countries, including Chile and Korea, have led to different results and are illuminating in understanding why Peru has fallen behind. The economic performance of East Asia and that of Latin America has aroused a discussion about the successful trajectory of the former over the latter. The success of the former is attributed to high levels of saving, export orientation, investing in human capital, and the importance of strengthening institutions. Latin America, on the other hand, made a shift in the 1980s–1990s after international fnancial institutions demanded liberalization, privatization, and deregulation. In the wake of macroeconomic reforms, Latin America has made headway, but it was insuffcient to catch up to the successful performance of the Asian economies. Aguiar de Medeiros (2017) summarizes three stages in contrasting Latin America and East Asia. In the 1980s East Asia followed a more “marketfriendly” state intervention, while in Latin America the state followed a more pervasive and distortive approach. In the 1990s, Latin America had a “stop-and-go” pattern of growth, relying on primary commodity exports. In the new millennium, industrial policies were no longer important even

Growth without Development

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though the successful Asian countries had based their productive structure on manufactured exports. Aguiar argues, along the same line as Amsden and others, that industrialization was the main driver of productivity. The use of new technologies was key to producing new products. This requires investment in machinery and equipment to create productive capabilities in some key industries. In order to grow and industrialize, East Asia exported manufactured goods. Initially, they started with light manufacturing. As exports grew, they invested in heavy industry. This required selective industrial policy. Public investment in economic and social infrastructure was also important to the economic development in the region. South Korea is a typical case in point. During the past decade, the terms of trade changed in favor of primary exports in LDCs. But this was a short-lived boom for countries like Peru. As growth rates have slowed, Peru still faces many economic development challenges. Social performance during the past decade has improved. But these improvements must be understood with some caveats. First, they have not been matched by improvements in the quality of services, particularly in health and education. Second, informality has not fallen and there has been little improvement in productivity. Finally, capital formation remains low, export performance is reliant on primary goods, and there is no investment in technological innovation. These are challenges the country must face if it is to seriously compete with other emerging economies. In the face of changing external conditions, Peru might have to reconsider its growth strategy. Given its slower growth and low productivity performance, it needs to apply a more active production strategy with a long-term vision. Its problems are associated with a process of deindustrialization in favor of low value-added extractive resource strategy. The share of manufacturing in GDP has remained unchanged. A long-term economic growth strategy should include improvements in education; the development of manufacturing activities; and an increase in research and development efforts, increased partnerships between private and public sectors; and a broader diversifcation of exports.

Chapter 3

Close Neighbors, Distant Paths Comparing Development Outcomes in Chile and Peru

The main question raised in this chapter is, What is it about Chile that has set it apart from Peru with respect to its economic development? Chile and Peru are neighboring countries. Both have market-based economies that are open and rely on commodity exports. Mining is a leading export sector for both countries. Both have a long coastal area facing the Pacifc but are constrained by their geography. Both are susceptible to natural disasters such as earthquakes and climatic phenomena like El Niño that have caused severe damage in the past and are ever-present threats. Peru is larger geographically, has a more diversifed resource base, and has a population of thirty-one million to Chile’s seventeen million. Peru is more topographically varied, with its coastal region, its rugged Andes mountains, and its dense forest of tropical lands. The ethnic composition of the population in Peru is more diverse than in Chile. It includes Amerindians, mestizos, whites, and some blacks and Asians. The indigenous population makes up about 45 percent of the population. Most of the population today lives in urban centers. Chile’s population consists mainly of people of European descent, mestizos, and smaller indigenous groups (12 percent of the total) and also is predominantly urban (88 percent). Peru, though, has experienced rapid migration to urban centers in the past forty to ffty years (Matos Mar 1985) and those cities weren’t able to absorb the rapid infux into the traditional labor force. The rapid urbanization is thus closely associated with a vast informal economy that operates outside of regulatory and organizational structures. Many types of activities, from transportation, to construction, to the manufacturing of textiles and apparel, as well as other sectors, are informally run. Estimates are that a much higher percentage of Peru’s labor force is engaged in the informal sector than it is in Chile (Loayza 2016b). 49

50

Chapter 3

Despite Peru’s advantage in terms of resources, Chile has performed much better economically. Table 3.1 contrasts the profle of each country using selective indicators. The data provided show how the two countries diverge. Chile’s GDP is much larger than Peru’s. Chile also has a GNI per capita that is more than twice that of Peru. While Chile has had a faster rate of economic growth over the last four decades, it also has experienced lower population growth than Peru. In terms of trade participation as a percentage of GDP, Chile’s is higher at 48 percent, while Peru’s is 38 percent (in 2016). In terms of foreign direct investment (FDI) received, Chile outpaced Peru by a signifcant margin in 2000, 2010, and 2016 (ECLAC 2016). Peru and Chile have a long history of competition and animosity. The two countries still see each other with a degree of distrust and rancor that can be traced back to the War of the Pacifc (1879–1883). The Peruvian state lost the war and lost part of its southern territory to Chile. At the time, Peru was experiencing not only a political crisis and economic diffculties, but a lack of unity exacerbated by a poorly equipped army. It lost due to its lack of preparation and strategy. The lesson of the war was that Chile’s military had undergone a process of military professionalism that was absent in Peru. The defeat has had great psychological impact on Peru, an emotional trauma and animosity focused on Chile (Klaren 2000, Rodriguez Elizondo 2014). In some sense, the same forces are at play in the modern-day economic competition between the neighboring countries. Peru should have the edge—it should win—but it lacks unity, organization, discipline, preparation, and is consistently outmaneuvered by Chile. Despite the issues between the two countries, bilateral commercial links have been signifcant. Peru’s exports to Chile have consisted mainly of raw materials while Chile’s exports to Peru exhibit more diversifcation and have a higher content of value added. Moreover, Chile has substantially higher levels of investment in Peru than Peru has in Chile. In recent years Chile has become an important trade partner for Peru. Although Chile pulled out of the Andean Pact in 1974, in 2009 the two countries signed a free trade agreement. This has given large Chilean frms new concessions to investment in Peru. Chile also now buys more from Peru than any other country of the Andean Community (Fairlie and Queija 2007). SIMILAR BUT DIFFERENT STATIST ORIENTATION During the late 1960s and early 1970s, both countries undertook a dramatic shift in policy emphasizing state control, Peru from 1968 to 1975 and Chile from 1970 to 1973. In October 1968, the Peruvian military brass toppled the democratically elected government of Fernando Belaunde. Until 1968, Peru

 

48

4,860

77.86 5,020

49

661

33.11 2,260

218.54 10,800

16,153

60

 

247.03 14,100

12,225

48

 

26.41 880

41

22

1,285.20

78.70%

756.1

 

 

88.90%

 

2.1 (1990)

1.0 (2015)

1.3 (2000)

1.6 (1990)

1.1 (2010)

31.4

Chile

17.9

51.74 1,970

810

28

 

 

1.4 (2000)

Source: World Bank, World Development Indicators, 2016; ECLAC, Statistical Yearboolk of Latin America and the Caribbean.

Population (millions 2016) Population growth rate (%) Urban population (2015) Geographic area/ size (th km) Trade participation (%) Foreign direct investment GDP (billions) GNI per capita ($)

Table 3.1 Basic Indicators for Chile and Peru

147.53 4,260

8,455

45

 

 

1.3 (2010)

Peru

192.09 6,130

7,817

38

 

 

1.3 (2015)

Close Neighbors, Distant Paths 51

52

Chapter 3

had a weak state and little administrative effectiveness (Hunt 1996; G ­ onzalez Olearte 1996). The core of offcers was led by Gen. Velasco Alvarado, who proposed ambitious economic reforms. The military regime that seized power in 1968 was not the typical military elite. It was set on altering the pattern of development by putting in motion a process of economic and social change that included the creation of many state-owned enterprises. It favored a stateled effort to transform the domestic economic structure, to achieve greater national integration, and to reorient Peru’s foreign relations. The state played a predominant role in production, regulation, and resource allocation. Evidence of this growing role of the state was that public investment as a percentage of gross fxed investment jumped from 29.5 percent in 1968 to 52.3 percent in 1974 (Portocarrero 1982). The reformist military regime in Peru attempted to create a new pattern of development, not only by removing some obstacles to development (e.g., the landed oligarchy) but also by assigning the state a substantial role in the economy. Peru had previously had a very weak institutional structure, but as the state began to play a much larger role in the economy, it created a panoply of legal structures and a number of government institutions and laid the basis for the modern Peruvian state. Although the military regime had a nationalist orientation it was also considered developmentalist in that it followed the premises and ideas being debated at the UN Economic Commission for Latin America that promoted structural reforms (Gorman 1982, Lowenthal 1975). The nationalist posture was immediately apparent when the Peruvian government seized and expropriated American-owned companies such as the International Petroleum Company, W. R. Grace, and Cerro de Pasco Corp. Taking advantage of its diversifed resources, Peru’s military government created state-owned companies in fshing (Pescaperu), petroleum (Petroperu), and mining (Mineroperu), among others. The military followed interventionist policies and favored import-substitution policies to promote an indigenous industrial base. In the latter half of the 1970s, the economy weakened as the expansionist role of the state became costly. In 1979, faced with infation and a growing foreign debt, the military relinquished power, resulting in a peaceful transition to democratic rule. The economic crisis of the late 1980s led to a weakening of the state. In the early 1990s, these state-owned enterprises were slated for privatization (Crabtree 1992, Parodi 2000). In Chile, Salvador Allende, a socialist, was voted into offce in 1970 with the backing of a leftist coalition. Chile under Allende took a more radical turn. The intention was to transition gradually to a more democratic socialist regime. The state under Allende’s Popular Unity government controlled 39 percent of GDP in 1973. In some sectors like mining, state frms controlled 85 percent of the sector. Allende was overthrown and killed in a violent military coup led by Gen. Augusto Pinochet in September 1973.

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53

During those years, both Peru and Chile had expansionary fscal policies and both were relying on more spending by borrowing. Social expenditures in Chile rose by 30 percent. Both countries faced growing fscal defcits. Initially, the expansionary macroeconomic policies led to higher rates of growth. Chile was growing at 9 percent in 1971, much faster than the 4.4 percent it grew during the period from 1960 to 1970. However, expansive fscal and monetary policy led to high levels of infation, which rose to 508 percent in 1973. The Allende government gave priority to income distribution policies through the expansion of social services (Bosworth et al. 1994). Unlike Peru, Chile had a strong tradition of parliamentary democracy and judicial independence; it also had low levels of corruption. This is signifcant because Chile was a case of stable democracy with strong political parties. This political stability gave Chile an economic advantage during early decades of the twentieth century, something Peru did not experience. Flores-Macias (2012) argues that Chile’s highly institutionalized party system played a central role in explaining the pro-market orientation of the government, even when the left was in power. The system provided incentives for consensus-building to reach accommodation of interests and coalitions. The adherence to pro-market policies was a moderating trajectory within party politics that favored compromise over executive discretion. In addition, the country’s economic performance with since the mid-1980s did not call for change of the model if it was working relatively well. When the military intervened in 1973, there was political polarization, nationalization, the seizure of plants by workers, and high infation. This led to the breakdown of Chilean democracy. Pinochet blamed the statist (socialist) orientation of the economy and reversed course by imposing a free market approach and decentralized decision-making. The state was downsized and had drastically reduced functions. The Allende and Pinochet governments were in sharp contrast politically and had diametrically opposed approaches to managing the economy. The Allende government was more concerned about distributional justice, which it thought could be achieved through measures such as expropriation, nationalization, and price controls. Pinochet promoted a market-driven neoliberal approach, but this came at the expense of individual liberties (banned parties, trade unions, and suppression of news media) and human rights (thousands killed, jailed, or exiled). The regime insisted that its actions were justifed to implement the changes required to move Chile forward (Solimano 2012). As Chile opened up its economy in the mid-1970s, the country’s growth was propelled by its exports. The military government imposed a farreaching program of economic liberalization and privatization. It severely reduced public spending, ended subsidies, deregulated industries, downsized

54

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government economic agencies, and implemented tax reform. All in all, there was a substantial reduction in the size of the state (Velasco 1994). Chile experienced a transformation from a mixed economy to a free market economy with a neoliberal orientation. The ideological principle that markets should be free and be self-regulating is the basis of neoliberalism. To be clear, the fact that an authoritarian regime was in power when this transformation was taking place does not imply that dictatorship is necessary to change a country. But authoritarian governments in South Korea, Singapore, and China did resort to the heavy-handed approach to make transformative changes. Since the mid-1980s, Chile has implemented a pragmatic and orthodox macroeconomic policy. For the past three plus decades, Chile has had one of the most vibrant economies in Latin America. Rates of domestic savings and investment have risen, poverty levels have fallen, business confdence levels have been stable, and trade and fnancial liberalization has taken place. Chile’s economy was injected with a neoconservative ideology that blended political authoritarianism and economic liberalization. The authoritarian model of capitalism imposed by the military government lasted sixteen years. The military dissolved Congress, prohibited political parties from organizing, and banned trade union activity. Economic reforms were implemented from the top down. One of the legacies of the military government in Chile is that since 1974 it has carried out neoliberal reforms, whereas in Peru and in much of Latin America this was not done until the late 1980s and even early 1990s. In this sense, the Chilean economic approach, despite the early criticisms, was the one to emulate. The structural adjustment programs in most Latin American countries were similar to those reforms implemented in Chile, but carried out under democratically elected governments (Solimano 2012). An important reform implemented by the Chilean military was the liberalization of foreign trade and capital markets. For the most part trade barriers were substantially reduced and customs regulations simplifed. A key objective of the new economic policy was to promote exports and increase competitiveness in the world market. To complement this, PROCHILE was created in 1985 to promote nontraditional exports and to establish a network with Chile’s commercial offces in more than two dozen countries. The Peruvian government replicated the idea by creating PROMPERU, but it did not materialize until 2007. For decades, Chile has had a commitment to trade. Merchandise trade accounted for nearly half of GDP in 2016. In 2004, Chile signed a free trade agreement with the United States and also has signed other twenty-two agreements covering some sixty countries (including the EU). Chile has also actively attracted FDI because of its available resources and because it has a reputation for strong legal, fnancial, and economic institutions. In terms

Close Neighbors, Distant Paths

55

of exports, Chile has been successful in marketing its fruits, wines, seafood, minerals, and lumber. Although it has an ample export base, like Peru, it still relies mainly on natural resources for its exports and light manufacturing. Chile’s impressive turnaround was based on a combination of internal state reform and the modernization of government-business relations. The size and function of the state is different today. It has assumed a more streamlined role even if it is more engaged in some areas like foreign trade. Chile had made an explicit commitment to a trade-led strategy by promoting non-traditional products with higher value-added (Meller 1997, Edwards 2010). By the time the transition to civilian rule took place in 1990, Chile’s competitive trade strategy was very much in place. The Chilean approach was based on welldesigned incentives to promote exports, including subsidies, tax exemptions, cheap credit, strong marketing efforts, and a devalued currency. This promotion was also made possible by the active participation of the state development corporation (CORFO). From its creation in 1939, CORFO participated in promoting development and investment initiatives that were channeled through it. The state encouraged greater knowledge-sharing and improved technical capabilities (Ffrench Davis 2010, Orihuela 2014). This study emphasizes the post 1970s, but from the work of Guajardo (2016) and others, Chile’s efforts to industrialize can be traced even prior to the 1930s. Orihuela (2014) notes that Chile’s institutional evolution of development policy-making provides a signifcant contrast in comparison with Peru. In contrast to Chile, Peru exemplifes a case of poor quality bureaucratic evolution. The argument is that Chile exemplifes a case of rational bureaucratic management. This is the case of the national development corporation CORFO. Although Peru created development state structures such as the National Planning Institute, it was established rather late (1960s) and created mainly because it was required by the World Bank. CORFO was involved in the early development and promotion of various industries. It was a wellrun entity, had autonomy, and had control of its own resources. Under the conservative government of Alessandri, the agency was substantially downsized (Orihuela 2014). But during the years of military rule under Pinochet CORFO was preserved and continued to support public-private partnerships. In contrast, when Peru adopted a “free market” approach under Fujimori in the early 1990s, state planning and development agencies were closed down. Chile’s shift to market reforms transformed Ofcina de Planifcación (ODEPLAN) into a Ministry of Planning (MIDEPLAN). Peruvian economists advising Fujimori did not have the restructuring vision when launching state reform but were intent on reducing its size and reach (Abusada et al. 2001). This example says much about styles of management. Although the pendulum has shifted from time to time, it is clear that the market alone cannot generate the best possible outcome for economic

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development. Even the World Bank suggests that the state and the market are complementary institutions. Franco (2007) notes that the need to complement the market with strong institutions for growth has been downplayed by analysts. The state is needed, but it has to be effective. When there is a lack of transparency, whether due to weak public administration or to lack of accountability and enforcement, problems emerge. One costly outcome is corruption. Peru’s external opening, privatization, and liberalization also led to rapid growth. In 2004, it grew at impressive rates, peaking at 9.4 percent, but that was not enough to overtake Chile because the effort was not sustained. GDP growth alone was not enough. Not only has Peru’s faster growth led to poverty reduction in the past ten years, but social programs and infrastructure development have not fully materialized signifcantly. Peru’s state at times was determined to promote development but showed signs of institutional fragility that was linked to its very weakness. Various political regimes showed no policy continuity and had to start from scratch. Institutional breakdowns and corruption was evident in the weak loyalty of public offcials to the state. This is also amplifed with the absence of political parties, which affects governance as the party in power did not always have much political representation. The economic role of the state can be assessed in terms of policy implementation and the degree of intervention in the economy. Because of economic liberalization and privatization, the state in both countries is leaner today. In Chile, the state’s power to forge policy is essential but it plays a secondary role in terms of its direct economic functions. Chile has had stable policies during the tenure of the six presidents who have held offce since Pinochet fnally stepped down. Continuity in policy has played a role in the positive outcome of Chile’s development efforts. The primary goal of the Chilean model was to create a market-friendly environment where private investment and trade would prop up the economy. The state was to provide a supportive role in this effort. In Peru’s case, the state has reduced its economic functions and the government has been streamlined. The state has a presence but is also absent in certain sectors, and it is not always setting the stage for new forms of state-private sector relations. Economic liberalization and privatization in the 1990s widened the role for the private sector to invest as well as to attract FDI. Policy reforms increased the effciency of the state even if it is still partially corrupt. With privatization that led to the sale of state-owned enterprises, regulatory agencies were created to monitor the market at work. While the state became smaller, there was still centralized decision-making. But institutional fragility is still linked to the weakness of the state and erratic governance. State agencies still lack credibility and accountability (Arce

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2005, Ghezzi and Gallardo 2013). Peru continues to face an urgent need to further transform the administrative activities of the public sector and corruption is still a drag on its development efforts. (Ganoza and Stiglich 2015). IS THERE A CHILEAN “MODEL”? French-Davis and Heresi (2015), argue that there is no such thing as only “one” Chilean model that accounts for its supposedly economic success since 1973. The claim is that there have been sub-periods of different economic policies and adjustments to the original economic liberalization program. After returning to democratic rule in 1990, Chile’s economic policies were adopted and modifed by various governments elected thereafter. The management of the macroeconomy has been praised by international fnancial institutions and it’s notable that modifcations and corrections were made by both centrist and leftist governments. When the Chilean military stepped down at the end of the 1980s, it negotiated with the democratic opposition a tacit agreement that whoever was elected would continue with the fundamentals of the neoliberal economic initiatives. Despite the weakened state of organized labor, this main policy orientation, with some variations, has continued to this day. The Aylwin administration, once elected, decided to invest in infrastructure and social programs, both of which had been neglected by the military regime. Subsequently, four elected presidents: Aylwin (1990–1994), Frei (1994–2000), Lagos (2000–2006), Piñera (2010–2014), and Bachelet (2006–2010, 2014– 2018) did not depart from the main tenets of neoliberalism even though Lagos and Bachelet were socialists. This is evidence that there has been continuity albeit with some modifcations. By 2010, Chile had reached the top spot in Latin America in per capita income alongside Argentina. That year Chile also signed a membership agreement with the OECD. Chile has joined the elite economies of the world. When it joined, per capita income in Chile was around $14,000, well above that of Peru, which was only about $7,000. But while Chile is better off than Peru and other countries in Latin America, it continues to face income and wealth inequality levels that are well beyond those of a developed European country. Nearly three decades since the military regime stepped down, Chile is considered one of the most stable countries in the region. As the basic development indicators in Table 3.1 show, Chile ranks much higher than Peru, and most of Latin America for that matter. Although GDP alone does not give us a clear sense of Chile’s stability when income is so unequally distributed, growth, particularly GDP per capita growth since the 1960s, nevertheless

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Figure 3.1  GDP per Capita for Chile and Peru. Source: The World Bank. Created by Rubén Berríos.

gives us a sense of how the two countries have fared. This is evident from Figure 3.1. Between 1990 and 2005, Chile had the highest average rate of growth in Latin America at 5.6 percent, whereas Peru’s was at 3.5 percent (ECLAC 2016). Peru, on the other hand, experienced slower growth rates and it was not until early part of the new millennium that the economy accelerated. There have been short-lived periods of growth, but gradually the economy was not able to sustain the pace as the external economic environment changed. The inertia started in the 1990s: President Fujimori’s program of market economic reforms such as liberalized labor markets, reduced tariffs, and privatization of state-owned enterprises were implemented. In 1992, Fujimori closed Congress and asserted control over the judiciary, strengthening his executive privilege. To carry out some of his policies, Fujimori relied on the backing of the military. The style was top-down management of the economic program to restore growth. By 1994, the economy was growing at an impressive 13 percent. Fujimori managed to stabilize the economy but his government was tainted with corruption, and ten years after he came to power he was forced to resign. He then fed the country. After an interim government, Alejandro Toledo was elected and served from 2001 to 2006. During those years, there were spurts of growth and macroeconomic management improved. Although Garcia had been discredited

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during his frst administration, he was reelected to succeed Toledo. Then Ollanta Humala, a nationalist and former military offcer, was elected. All fve former presidents have been under investigation for misappropriation of funds and have been accused of corrupt practices. Two, Fujimori and Humala, are presently incarcerated; Toledo is fghting extradition from the United States. Kuczynski did not even complete two years in offce and had to resign. These experiences have led to widespread distrust of public offcials in Peru. In the case of Peru’s development experience, there is no evidence of a coherent long-term strategy for investment. There has been no strategy to create globally competitive industries. This problem has been compounded by a lack of government support. In Chile, there has been a better partnership between the state and the national private sector (Font 2015). Peru suffers from lack of political unity that would facilitate such a partnership. There is a climate of suspicion and a deep divide between the executive and the legislative branch. Durand (2007) argues that Peru is a fractured country. There are deep divisions between those on top and those at the bottom, between the city and the countryside, and between the formal and the informal sectors. He claims that informal and illegal activities are more pronounced in Peru, and that they weaken the minimalist state and the idea of progress. Political uncertainty and incidents of corruption inevitably discourage investment. As Orihuela (2014) puts it, the evolution of the Peruvian state has been characterized by discontinuity due to instability, failures and fraud for much of its history. Peru also never had anything comparable to CORFO in Chile. Even before it engaged in free market investment activities, the government of Chile had agreed on the economy’s transformation. Its authoritarian regime set the basics of macroeconomic stability and there was a governmentled push for exports of nontraditional products. There are differing political viewpoints regarding the wisdom of this strategy; nevertheless, the overall strategy became more crystalized, and Chile has stayed on course. This is not the case in Peru’s fragile democracy, where President Kuczynski did not have a congressional majority and lacked a consensus to chart a development strategy. The opposition has shown intransigence. The public perceives political parties, the judiciary, and Congress as institutions that lack credibility (Ghezzi and Gallardo 2013, Levitsky 2013, Tanaka 2005). In terms of LDCs as a whole, Acemoglu and Robinson (2012), Przeworski and Curvale (2008), and others have identifed weak or defective institutions as a signifcant impediment to development. According to Solimano (2012), the neoliberal model launched in the mid1970s was based on market liberalization, but it introduced new values that have changed the culture in Chile. The country has undergone an economic transformation with a growth performance that has improved the standard of

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living. The cornerstone of the model has been rapid economic growth. This was particularly impressive from 1986 to 1998, when the economy grew at an average of 7.6 percent. Chile’s outward-looking strategy achieved a degree of success under a well-managed macroeconomic policy. The government provided a stable economic environment in which the private sector could fourish. Price distortions were minimized, and openness required cautious fnancial management by providing the right incentives. Initially, Chile gave priority to economic growth over social welfare spending, so it was not until much later that the frst Bachelet government promised to prioritize this area. To some extent, this was also the experience of some of the East Asian countries where it was only after the democratic transition had been consolidated that social spending became a priority. In Korea during the authoritarian government of Gen. Park they were earnest promoters of industrialization by imposing a great deal of discipline and putting off consumption (Davis 2004, Larraín 2001). SOCIOECONOMIC INDICATORS TO ASSESS COUNTRY COMPARISONS Table 3.2 provides a more direct comparison of these two countries on specifc social indicators, using data from different international institutions. This data, compiled by the UN Economic Commission on Latin America & the Caribbean (ECLAC), is laid out as time series and is presented in percentage terms. The comparison starts in 1995 and ends in 2015. The data for the fnal year is 2015, but when it is not readily available, 2014 is used. In terms of illiteracy, Chile shows the lowest rate, meaning that in 2015, only 2.3 percent of the population was illiterate, as opposed to Peru, which had a rate of 5.7 percent. In terms of public expenditure on health, Chile has progressively increased such expenditures as percentage of GDP from 2.4 percent in 1995 to 7.8 percent in 2014. Peru’s expenditures increased from 1 percent in 1995 to 5.5 percent in 2014. It is evident here that Chile has had outlays going to health at a higher rate. The same pattern is true for public expenditures for education. Chile was spending 4.6 percent of GDP on education in 2014, and Peru was devoting just 3.7 percent. On all selected social indicators compiled by ECLAC, Chile ranks higher than Peru in absolute terms. However, it is clear that in relative terms, both countries have improved over the last three decades. As the economies of both countries have improved, so have the social indicators. But it is also clear that Chile outperforms Peru in almost all indicators. Chile shows higher growth rates, but also higher levels of domestic investment in social areas, higher levels of literacy, higher levels of public spending on health, higher

2000

2.8

4.2 4.1

29

secondary 88.3 94

20.2/5.1

36,598

2,078.90

1995

2.4

4.8 3.1

…

primary 93 88.6b

22.6/7.1

24,125

1,632.28

2,444.54

48,044.10

13.7/3.2

tertiary 86.6 96

25

  3.8

2.8

2005

Chile

Source: ECLAC, Statistical Yearbook for Latin America and the Caribbean. a 2014. b 1990. c 2014.

Pop using improved drinking water and sanitation Poverty and indigent population Consumption of electric energy Motor vehicle fleet

Public expenditure on health (% of GDP current prices) Illiteracy age 15 or over Public expenditure on education as % of GDP Number of students per teacher Enrollment in 2014 (%)

Table 3.2 Social Indicators for Chile and Peru

  64,043c  

   

 

 

 

2.3 4.6

7.8a

2015

 

 

 

22

2.8 4.2

8

2010

862,589

12,849

47.6/9.1

primary 92.8  

19

11.3 2.3

1

1995

1,162.86

17,330

54.8/9.9

secondary 78.7 81

17

10.1 2

1.2

2000

1,507.26

22,346.50

44.5/4.9

 

tertiary

15

8.4 2.6

1.5

2005

Peru

 

 

 

85

 

16

7 2.7

5.1

2010

 

39,718.70

 

 

 

 

5.7 3.7

5.5

2015

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levels of educational funding, as well as higher levels of expenditures on water and sanitation, and this has had a direct correlation with the reduction in poverty. Chile also has higher levels of energy consumption and shows a larger motor-vehicle feet. Table 3.3 also provides selected economic indicators from the UN ECLAC that helps us make the proper comparisons and determine each countries’ performance. The frst item lists the GDP rate of growth in percentage terms. Chile has maintained on average a higher level than Peru for decades, but in recent years Peru has also rebounded. Chile also has a higher GDP per capita and lower population growth, although we see that since 2010 Peru has improved. But this improvement was short lived, because its rate of growth was only 2.5 percent in 2017. In terms of fxed gross capital formation in machinery and equipment, Chile has performed better. Chile has also been a lot more successful in terms of exports. In agricultural production per inhabitant, Chile and Peru are comparable even though Peru has much more land available. In terms of FDI, both countries have vast mineral resources, which is one area of interest for foreign investment. Finally, in terms of the proportion of total exports, in both countries most exports are in primary commodities. Another way to calculate development performance between countries is the human development index (HDI), which uses a set of socioeconomic indicators to measure performance outcome. For instance, the Human Development Report 2016, with data for 2015, shows that of 175 countries, Chile ranks 38 and Peru 87. This is illustrated in Table 3.4. Chile performs better than Peru in almost every indicator. This includes life expectancy at birth, expected years of schooling, mean years of schooling, GDP per capita. Peru today is at the HDI achieved by Chile in 1985 (UNDP 2004). Chile’s per capita GDP is twice that of Peru’s. Chile’s overall progress in human development has lifted that country to higher levels of development. Next, a dozen indicators from the World Economic Forum are used to measure competitiveness, quality of infrastructure, and so forth. According to all the available data, Peru still has a long way to go in order to catch up with its southern neighbor. WEF data show that Peru lacks suffcient roads, railways, and ports; nevertheless, high rates of economic growth in recent years have led to poverty reduction. In 2010, Chile’s poverty rate was 14 percent; Peru’s was 36 percent. Although Peru’s poverty rates were reduced to 24 percent in 2013, Peru still lagged behind Chile in poverty reduction. The World Economic Forum considers Chile to be a top-ranked developing economy on the basis of a number of policy and institutional indicators, or a number of performance metrics, used for each country. The report then derives a composite index that ranks countries on the basis of their combined key performance indicators, which is the Inclusive Development Index (IDI). Chile is one that stands out as a developing economy (WEF 2017).

44.4

5.3

55.9

8.9

5.6

74.1

4,902.90

4,902

2005

Chile

0.5

70

373,660

218,538

2010

873.40

99

2,204.80

98.6

104.6

4,801.10

 

6,351.10

23,293.10 48,401.00 81,727.70

5,530.70

4,706.20

19358.9

4,278.60

4,278.60

2000

Source: ECLAC, Statistical Yearbook for Latin America and the Caribbean, 2016.

GDP at constant prices (bnS) Fixed capital formation Degree of openness of the economy (%) GDP growth Rates Export of Goods and Services (million dollars) Net Foreign Direct Investment (million dollars) Agricultural Production Indices per inhabitant (base year 2000)

1995

Table 3.3 Basic Economic Indicators

4,854.50

?

 

4,663.30

?

2.3

79.5

2,549.00

6,622.50

7.4

30.7

1,977.20

264.79

59

1995

2015

101.5

309.70

8,510

2.7

34

4,468.10

2,079

2000

Peru

8.8

47.9

1,956

147,070

2010

106

3,578.70

 

7,062.40

19,656.90 39,257.60

6.8

44.2

5,019.90

2,404.10

2005

 

7,690.40

 

3.3

45

?

501,598

2015

Close Neighbors, Distant Paths 63

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Table 3.4 Human Development Index: Chile and Peru HDI rank Life expectancy GNI per capita (PPP 2011) Expected years of schooling Mean years of schooling Populations with at least secondary education Government. spending on education Internet users (% of the pop) Inequality Export-import of GDP (%)

Chile

Peru

38 82 21,665 16.6 9.9 76.5 4.6 64.4 0.692 60.4

87 74.8 11,295 13.4 9 61.5 3.7 40.9 0.58 44.6

Source: UNDP, Human Development Report, 2016.

Chile ranks 10th in the IDI, refecting good performance across a wide range of indicators. It is praised for its high labor productivity and median standard of living. It is also praised for its infrastructure, its basic services, and its markedly improved educational system. Peru, on the other hand, ranks only 24th in the IDI, but has been labeled a much-improved developing economy. In terms of inclusion, Chile is ranked 30, whereas Peru is ranked 40. Inclusion refects net income, poverty rate, and median income, among other indicators. Chile is also now regarded as a highly competitive country, ranked 33 of 144 countries by 2017. Peru ranks 72. According to Global Competitiveness Report 2017–2018, Chile shows “strong institutional set-up, effcient government, well-functioning markets and openness to foreign trade” (p. 41). In fact, the data from this report puts Chile ahead of the rest in Latin America. Other indicators rank Chile high for its low levels of corruption. Transparency International, in its latest report of Corruption Perception Index 2016, ranks Chile 24th in the world, and as one of the least corrupt in Latin America. Chile has shown a steady decrease in perceptions of corruption over the years. Peru, on the other hand, is ranked 101. In addition to former president Fujimori, who served ffteen years in jail for human rights abuses and corruption, the three most recent presidents of Peru are currently under investigation for embezzlement and graft. One other index (2016) is that of friendliness to business. Chile, again, is considered a friendlier country to do business in and ranks much higher than Peru. The 2017 Index of Economic Freedom ranks Chile 10th in the world. This index considers property rights, judicial effectiveness, government integrity, tax burden, fscal health, business freedom, trade freedom, investment freedom, and other considerations. It highlights Chile’s openness to trade and investment, which has created a basis for economic dynamism. It also notes that Chile has a transparent regulatory environment and well-secured

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property rights. Moreover, it points out that Chile has an independent judicial system and low levels of corruption. The report is from the conservative think tank Heritage Foundation, which was somewhat critical of socialist president Michelle Bachelet, who until then was completing her second term and had promised to reduce inequality. Peru, on the other hand, ranked 43 overall. The lower ranking, it notes, is due to regulatory delays and a lack of predictability in regulations. It also asserts that government corruption is a serious problem. Finally, it observes that some state-owned enterprises remain very active in the economy. In terms of Latin America as a region, Chile is ranked number one and Peru is seventh. It is worth noting that Peru’s ranking has risen by 1.5 points since the 2016 presidential election of well-known investment banker Pedro Pablo Kuczynski. Quality of education has been a major weakness for Peru. PISA is OECD’s Program for International Student Assessment, a standardized test of the performance of ffteen-year-old students. It is available to sixty-fve countries. In 2013, Peru was listed last. It showed that the average ffteen-year-old student in Peru is three years behind the average OECD secondary student. In 2016, the PISA scores were slightly higher, showing a slight improvement. This standardized test highlights Peru’s low quality of education and has prompted authorities to fnd ways to improve the quality of education and boost performance outcome. By nearly all accounts, Chile has outperformed Peru. GROWTH RATES Growth rates can be estimated in absolute and per capita terms. In the case of Chile, this data can be subdivided into the Allende years (1970–1973), the Pinochet years (1974–1989), and the period under democratic rule (1990– 2017). The Allende administration experienced high growth in the frst year, but this was due to expansionary fscal policy. During the next two years, there was stagnation and then decline. When population growth is factored in, per capita income growth can be calculated. These data show that Chile performs better because of its lower population growth. One notable aspect is that as incomes have risen and urbanization has increased, population growth has declined. In terms of trade participation and export diversifcation, as seen in Figure 3.1, it is safe to note that both countries rely on trade as a signifcant component of their GDP. Both countries have opened up signifcantly, Chile since the mid-1970s, and Peru since the 1990s. Chile’s exports grew faster because of its aggressive and more calculated marketing of its products in world markets, with the help of its commercial offces abroad. Peru, on the other hand, only discovered East Asia after Fujimori was elected president of Peru

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in 1990. Both countries do rely heavily on mineral exports, particularly copper. With increased globalization and free trade, both countries have diversifed their exports, particularly agricultural goods and semi-manufactured products. But all in all, Chile has been more successful placing its products (wines, grapes, fsh, apples, plums, and so forth) in world markets. Maintaining a rapid pace of economic growth has been a cornerstone of Chile’s economy. Peru has also fnally experienced higher rates of growth in recent years (2003–2013), which has led to many improvements, particularly in poverty reduction. Growth by itself has not been suffcient to reduce poverty, but it cannot be underestimated. Social policies and infrastructure development have also been helpful but insuffcient to eradicate poverty, particularly in the rural sector. In both cases, the right macroeconomic policies have been instrumental in stimulating growth. But what drives economic growth? More precisely, why did Chile’s GDP grow, on average, faster than the rest of Latin America’s did? A favorable external environment, prudent macroeconomic fundamentals, and political stability have been paramount. Proper management of the economy requires effecting both an increase in savings and greater effciency or growth in factor productivity. The basic economic indicators are laid out in Table 3.2. On the political order in post-Pinochet, Chile adopted a binomial electoral system that forced the creation of electoral alliances that, for good or bad, had given Chile relative political stability. In Peru, the Fujimori experience (1990–2000) put an end to traditional political parties. As a result, the support level for the political system in Peru is marginal. Political stability and policy continuity have been lacking in Peru. Chile’s growth accelerated from 1987 to 2000, and after that it decelerated. Peru, on the other hand, having started market reforms much later, has experienced faster growth than in previous years. Both countries have experienced spurts of growth, given their reliance on natural resources and the higher demand for them from China and other countries. Approximately 70 percent of Chilean exports (more than 35 percent of GDP) are raw materials and processed goods. Chile’s growth was built on the neoliberal paradigm, reliant on macroeconomic orthodoxy. Chile’s sustained growth propped up different sectors of the economy, resulting in lower unemployment and increased effciency. The success of Chile is what helped it to become a member of the OECD. This can also be interpreted as a claim that the country has almost reached the level of a developed country. Larraín (2001) notes that in the late 1980s Chilean intellectuals and offcials aspired to achieve development, rather than simply to eradicate poverty. In the 1990s, there was a growing consensus that it was not only possible to become a prosperous LDC, but that Chile was already relatively close to being developed. The author notes that the Lagos Administration’s objective was to ensure that Chile would be a developed country by 2010 (Larraín 2001, 259).

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THE COMPETITIVENESS CHALLENGE In recent years both Chile and Peru have beneftted from the global commodities boom. But this can have an uneven economic impact. While demand and prices of commodities rise, other sectors, for example, textiles in Peru and wineries in Chile, might be negatively affected. This means that Peru and Chile might have a tougher time with competition from American and Australian wines as well as textiles and apparel from China, which has inundated markets with cheaper clothing. Then, as demand for commodities falls, prices also fall, which can cause commodity suppliers to lose their competitive edge (Haar and Price 2008). The World Economic Forum has noted that Latin American competitiveness has improved, but still lags behind leading emerging economies. Since the collapse of the former Soviet Union, much of Eastern Europe, China, India, South Korea, and Singapore, among others, have broken from the pack. The overall improvement of a country is manifested not only in the competitiveness of its enterprises but also in improvements in such areas as education and training, infrastructure development, capital markets, and respect for the rule of law, among other factors. Low rates of growth and low productivity (the capacity to produce more) don’t lead the way to such a transformative stage. This chapter shows that one country was able to transform its productive structure and change its culture, and now relies on an outward orientation to compete in other markets. Chile has helped its frms launch and compete, despite the fact that it is geographically distant from many markets of the developed world. Higher levels of human capital have been properly used along with better managerial skills, better infrastructure and logistics, better access to credit, and regulatory reform. Often overlooked in comparing economic performance is total factor productivity (TFP). Peru lags in this measure. According to OECD estimates, nearly half of workers are employed in Peru’s two less productive sectors: retail and restaurants, and agriculture (OECD 2015, 23), which does not foster productivity and competitiveness. The labor force participation is high, but the quality of employment is low. Labor productivity can be broken down into capital (human and physical) and total factor productivity. A marked decline in the quality of education is a signifcant factor in making Peru less productive. The OECD report also notes that Peru’s TFP has grown by about 2 percent over the last two decades but has not been enough to close the gap with countries like South Korea and Chile. Another OECD (2017) report has noted that Peru’s percentage share of youth (ages ffteen to twenty-nine) with less than secondary education was at 44 percent in 2014. This is alarmingly high. Chile has the lowest percentage for the entire Latin American region at 13 percent. Chile also shows the highest number of students enrolled in tertiary education in all of the region

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at 83 percent. Finally, it is worth noting that Chile has the lowest homicide rate in all of Latin America. Three examples of different approaches of Chile and Peru are given below. Water and Sanitation Services Water and sanitation services provide a good illustration of local of how institutions work in actual practice. Water and sanitation are two essential services. The provision of these services also provide a glimpse into public management. The large cities of Lima, Peru, and Santiago, Chile, both have made reforms to better serve their respective populations. In the case of Chile, in a comparison of public and private utilities, it was determined that private frms invested more and kept prices lower than did those in the public sector. How to set the cost of water depends on how it is obtained; for example, it could come from rainfall, snow peak mountains, rivers, or be drilled and extracted from underground. Shirley (2008) illustrates the water system supply process by comparing Lima and Santiago: Lima is extremely arid, receiving less than 15 millimeters of rainfall a year. The city depends on ffty-three rivers for two thirds of its water, but twenty-fve of them dry up during the dry season. The main water source is Rio Rimac, which is heavily polluted because it goes through a mining region. The remaining amount is drilled. Shirley says that only 75 percent of Lima’s population is connected to the piped water system, but during the dry season only half of this population receives water for more than twelve hours a day. Santiago, on the other hand, relies on snowmelt from the Andes. The main river is Maipo. A large part of that goes to the treatment plant. Coverage in Santiago is nearly 100 percent of the population. According to Shirley, “A head-to-head comparison of Lima with Santiago would fnd costs much higher in Lima for geographical and hydrological reasons alone. For example, in the 1990s Lima’s intermediate costs per cubic meter of water production in constant dollars were twice as high as Santiago’s” (2008, 110). Natural Disasters The effectiveness of efforts to minimize the damage caused by natural disasters and handle the aftermath of such events is another way to compare the two countries. The 2007 earthquake in Ica, Peru, measured 8.0 on the Richter scale. The offcial death toll was 519 but others put it higher. The epicenter was 160 miles south of Lima. The quake destroyed 85 percent of the buildings. The Government of Peru led the response with the assistance of the international community, including NGOs. Despite the considerable relief

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69

effort, the initial response was chaotic and lacked coordination. As time passed, the recovery was slow, and for years people struggled because of the shortage of housing. The earthquake that struck Chile in 2010 had a magnitude of 8.8. This was vastly more powerful than Peru’s quake, yet about 700 people died as a result of the quake. Both Peru and Chile are prone to tremors and earthquakes. Why was the death toll in Chile not much higher when the magnitude was much greater? The main reason, according to many analysts, was that Chile was better prepared because of past experience, had stricter building codes, had effective building inspections, had better organized disaster relief, had lower levels of corruption so aid was not diverted, and there was better coordination of national and international relief efforts, all of which meant that the recovery process was shorter. Public Transportation Public transportation is another way to demonstrate the different approaches of Chile and Peru. Lima, Peru’s capital city, has approximately 12 million people. Santiago is Chile’s capital and it has 5.5 million as of 2015, or slightly half that of Lima. Santiago has a metro rail system that is considered the second largest after Mexico City in the Americas. It carries 2.5 million people every day. It has fve lines covering 103 kilometers with 108 stations. The system has been in operation since 1975 and the sixth line was due to open by the end of 2017. Lima only has one line that became fully operational in 2014. The length of Lima’s metro is 35 kilometers but Lima only has twenty-six stations. The system is used by 320,000 on a daily basis. Line 2 is under construction but it is quite likely that it will not be in full operation until 2020. Santiago’s metro system is modern and well maintained. It has been outsourced by the central government and runs effciently. Santiago also has a large feet of buses that covers much of the city. Lima, on the other hand, has a very congested and chaotic transit system. A large part of user demand is covered by “micros” or kombis that pack large numbers of people and they tend to be mostly informally run. Some relief to the large demand has recently come with the creation of the “Metropolitano,” large buses that transport people on a single lane, but there is only one line. Lima also has a very large informal taxi system. Santiago’s taxis are usually well-marked and use taximeters. Lima’s taxis do not and potential customers must negotiate the fare prior to entering the vehicle. This is just one more example of the differences between the two countries (www.​metro​.cl.w​ww.ar​c.gis​.com/​love/​item.​html?​ id=52​1c095​353ec​4dad9​0027a​ee51a​dc208​).

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LESSONS TO DRAW FROM CHILE According to offcial fgures, Chile’s success has led to a dramatic reduction in poverty rates since 1987, from 45 percent to about 15 percent, according to World Economic Forum statistics. Larraín Buscañan (2008) disputed these offcial fgures, arguing that the improvement was not as dramatic as had been claimed. He also asserts that the numbers for other social indicators were not as impressive. Furthermore, in 2010 the WEF ranked Chile 48th in R&D expenditures, which was less than 1 percent of its GDP. Nevertheless, Chile still outperformed Peru. For example, Chile’s per capita income of $14,000 put it at the bottom among OECD member countries, yet this was twice the per capita income of Peru. The chief reasons for this success: • Political stability—The military government stayed in power until 1990 and the subsequent democratic transitions have gone uninterrupted; although policy errors occurred, they were corrected, and the model has not been signifcantly altered. • Continuity—The Chilean economic approach has been steadily in place since its implementation in 1974, and although minor corrections were made, the emphasis remained on deregulation and liberalization. ISI was eventually abandoned and replaced by the promotion of nontraditional exports and the reduction of tariffs. • Greater accountability and lower levels of government corruption—Chile has been more transparent and respectful of the rule of law than Peru. Street crime, extortion, and corrupt practices are more common in Peru. Chile has the lowest homicide rate in Latin America. • Lower labor unrest—Under military rule, trade unions were banned, but as the standard of living has improved there has been less labor unrest. Peru has experienced many more work stoppages in recent years. • Less informal sector activity—Chile has much lower levels of informal sector activity than Peru. According to various estimates, approximately 50 percent to 60 percent of Peru’s labor force is in the informal sector. • Better educated labor force—This is evident from Table 3.2. While school enrollment has reached nearly 100 percent in both countries, educational quality in Peru is much lower. • Greater reliance on foreign trade—Chile early on switched from ISI to export orientation and the search for foreign markets in the 1970s, Peru started in the 1990s. • Cultural change—Solimano (2012) argues that Chile has fostered a new set of values that have changed the culture of Chilean society. Chile strived to gain OECD membership, and this was fnally achieved in 2010. Although

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it barely qualifes by advanced country standards, it is enough to set it apart from most other Latin American countries. What are some specifc lessons that can be drawn from Chile’s experience? How did Chile manage to maintain consistent economic policy through various regime changes after the military stepped down? In the policy area, a stable and outward-oriented strategy has been in place. This policy was intended to bring about a national consensus that would lead to stable, coordinated, and merit-based institutions, and to a partnership between the state and the private sector. Chile’s history has shown that there has been a national strategy and that it has proven successful. The national goal, as has been the case with some Asian countries, has been to develop long-term competitiveness. What can Peru learn from Chile’s success? While Peru has been able to overhaul the state and government-business relations have improved since 1990, policy makers have not yet formulated and articulated a competitive development model for sustained economic growth. Policy actions have been discussed in academic circles but have seen no traction at the government level. Peru’s economic reforms have fallen short of the kind implemented in Chile, which have been sustained over the past ffteen years. A competitive strategy for Peru would entail a better coordinated and comprehensive completion of market reforms through proper macroeconomic incentives, the adoption of an explicit export-led strategy, and the implementation of a cohesive social policy to upgrade human capital. For this to occur, there needs to be a stronger coordination of policy among political and business entities. Equally important is stronger institutional development in political, legal, and social arenas. Peru’s performance is undermined by political disputes between the legislative and the executive branch, overall distrust of government by the average citizen, and the inability to shake off corruption that has been corrosive and raises the cost of doing business. Finally, Peru’s economy is less productive because between half and two-thirds of the labor force is in the informal sector (Loayza 2016b). The activities of many small and even medium-sized frms could be a conduit to raising incomes if only they could transition and be incorporated into the main economy. From a purely economic analysis, this implies that the economy is unable to absorb half of the labor force, which is excluded and is not protected. Informality will continue to be a drag on growth and an impediment to social well-being. Progress on this front requires an overhaul of the educational system, simplifcation of regulatory burdens, fnancial support, and a more accessible approach to small business start-ups. Many businesses are not eager to formalize because of the many bureaucratic impediments they face and a tax system that discourages their participation (Arbaiza Fermini 2008, De Soto 1986, Perry et al. 2007).

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Over the last two decades, Peru has experienced signifcant improvements, particularly in poverty reduction and in implementing effective social programs, but it still faces challenges. These improvements came due to favorable external conditions and some sound domestic policies. The end result is that Peru was upgraded to an upper-middle-income country by the World Bank. According to the World Economic Forum ranking, Peru still ranks low in terms of competitiveness, in spite of notable improvements in social indicators due to higher rates of growth. Peru has made slow progress in transforming the quality of its institutions, achieving a more equitable distribution of income, and continuing to improve its overall welfare. Policy reforms have not put Peru on a sustainable economic development path that would transform its productive structure and allow it to achieve crucial increases in productivity and productive capacity. Peru still faces challenges because it has a fragile economic and political system, low productivity growth, a widespread informal sector, and overall institutional weakness. Policy has yet to achieve better social objectives and generate the type of cultural and economic transformation that Chile has experienced.

Chapter 4

Extractive versus Productive Economy A Case Study Comparison of Peru and South Korea

A priority of development is to promote sustained economic growth and achieve prosperity and the ability to compete internationally. Many studies have shown that the best way to combat poverty is to accelerate economic growth. Economists assert that fast growth can result in signifcant reductions in poverty. It is almost an undisputed fact that growth is the necessary condition for social and economic development of nations. It should not be viewed as an end in itself but as the means to achieve a wider set of objectives. This chapter argues that there are striking contrasts between a productive economy and an extractive economy. Some East Asian countries such as the Republic of Korea (commonly known as South Korea) are not resource-rich countries but have developed remarkably fast. Peru, on the other hand, is a resource-rich country but has shown uneven rates of growth and has stagnated in its development efforts. This is a case study comparison of Peru and Korea and shows how the former has lagged behind while the latter has achieved rapid progress toward development. South Korea is chosen as an example of a productive economy and Peru as an example of an extractive economy. Both countries share some broad common features but have followed different trajectories of development. The central argument is that Peru has had a lackluster development performance because it has heavily relied on extractive industries that have generated insuffcient employment and sluggish growth. Its development policies were often ineffective. Meanwhile Korea became a high-performing economy that achieved high rates of growth by implementing policies that emphasized increases in productivity and promoted an outward-orientation to industrialization and trade.

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Figure 4.1  GDP Per Capita of Peru and Korea (2000, US Dollars). Source: Graph Created by Rubén Berríos based on data from the World Bank.

TWO PATHS TAKEN Figure 4.1 shows the starting point of comparison between the countries based on GDP per capita since 1960. The initial conditions defned broadly (including per capita income levels and other quantitative characteristics) were similar, but the two countries pursued different policies and achieved different economic outcomes. The fgure shows that in 1960s Peru’s GDP per capita was higher than Korea’s. The latter was able to catch up by 1970. Korea’s GDP per capita shows a steep upward trend while Peru’s GDP per capita growth remained fat for the past four decades (1960–2000) until the start of the millennium. In a matter of twenty years Korea not only had surpassed Peru but the rest of Latin America. Peru’s overall performance since the 1960s has been less dynamic and somewhat uneven. Per capita income growth remained relatively fat. During the 1980s Peru experienced the “lost decade” due to high levels of foreign debt and low levels of growth. However, in the period from 1960 to 1999, Korea had moved from being an agricultural nation to becoming a prominent new industrializing country (NIC). By the year 2000, Korea was ranked twelfth in the world economy in terms of GDP. The same contrast can be seen using the most common measures for income and output comparisons, the GDP, including average annual growth, GDP per capita, and GDP per capita growth. Countries with a high GDP per capita have a lot of physical and human capital that is organized using technological knowledge to be more

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productive. “High quality growth” can be defned as growth that is sustainable, brings lasting gains in employment and living standards, and reduces poverty. This has been the case for Korea but not so much for Peru. These comparative fgures are evident in Table 4.1. The argument that reliance on extractive industries is not necessarily a key to economic growth has been made previously. Research on the subject has stressed that on average resource-rich countries have slower growth (Sachs and Warner, 1995, 2001, Auty 2001). However, research by Davis (2009), Lederman and Maloney (2007), and other studies show that the evidence is mixed regarding the relationship between the extractive intensity of economic activity and the level of economic growth. Davis claims that some economies with a substantial extractive sector have achieved higher levels of development. However, there is the recognition that extractive economies suffer from the erosion effect of resource wealth and the structural shift reduces manufacturing employment. In order to transform a LDC, it is necessary to set up the right mix of institutions and policies capable of generating economic success. Korea’s pragmatic policy approach and the ability of the government to perform institutional, technical, administrative, and political functions created opportunities for economic development. Korea was able to sustain high levels of growth, high rates of investment, macroeconomic stability, an adequate regulatory system, a responsible political and entrepreneurial class, provide strong support for education to generate high levels of human capital, and the ability to incorporate technological innovation (Amsden 1989, Breen 1999, Hira 2006, Koo 1996, León 2003, Song 1997, Acemoglu and Robinson 2012). Also relevant for growth and development are factors such as securing private property rights, degree of economic freedom, competitiveness, degree of corruption, and the ease of doing business. All these factors also provide concrete evidence to foster a better business environment. Table 4.2 shows that Korea is ranked very high in terms of global competitiveness. Korea is also ranked much higher than Peru in terms of economic freedom because of its more inclusive economic environment. The same is true for respect of property rights and the ease of doing business. DEGREE OF COMPARISON Although Peru’s geographic area is twelve times larger than Korea’s (1,285,000 square kilometers vs. 99,000 square kilometers), Korea’s population is almost twice as large (51 million vs. 32 million). Historically both countries were colonized. Peru achieved independence from Spain in

252,622 32,802

1,141,000 192,000

2016

9.4 −0.3

1990 6.5 6.3

2010

Average Annual Growth (%) 51 31.4

2015

Population (in millions)  1.5 2.0

1980–1999 0.3 1.0

2015

Population growth

34,541 11,295

2009

GNI per capita (ppp$)

Source: UNDP, Human Development Report, various years; UNESCO, Statistical Yearbook, various years; The World Bank, 2012.

Korea Peru

1970

GDP (US$ Millions)

Table 4.1 Basic Economic Indicators

37,740 6,176

2016

GDP per capita

3.8 4.1

2000–2009

GDP per capita growth

76 Chapter 4

26th 67th

23st 43nd

(Out of 156 countries)

(Out of 81 countries) 37rd 88th

(Out of 54 countries)

Level of Corruptionc

34th 65th

(Out of 129 countries)

Respect of Property Rightsd

Sources: aThe Global Economic Forum, Global Competitiveness Report, 2016–2017. b The Hetitage Foundation, Index of Economic Freedom, 2016. c Tranparency International, Corruption Perception Index, 2015. d International Property Rights Index, 2017 Report. e The World Bank, Ease of Doing Business Rank, 2015. f World Economic Forum, 2016.

Korea Peru

Economic Freedomb

Competitive Environmenta

Table 4.2 Comparative Business Indicators

4th 58st

(Out of 183 countries)

Cost of Complying with Bureaucracye

19th 116th

Innovation

13th 89th

Infrastructuref

Extractive versus Productive Economy 77

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1823 and Korea was liberated from Japanese imperial domination in 1945. In terms of resource endowment, Peru is rich in minerals, agricultural production, and fshing resources. Its exports consist mainly of minerals, agricultural products from the coastal region, and fsh and fsh products. Korea lacks the natural resource base, but it has greater human resources than Peru. Peru is more racially diverse while Korea is homogeneous. Both countries have open economies and rely heavily on external trade. Korea, however, has been more outward-oriented and has become a strong competitor in world markets of manufactured goods, automobiles, steel, and shipbuilding. On the relative importance of the public and private sectors, Korea has a larger private sector. Both countries rapidly urbanized over the course of the past fve decades. In 2010, 72 percent of Peru lived in urban centers while 82 percent of Korea’s population was urban. In terms of occupational activity, both countries have seen the manufacturing sector and services grow the fastest while the importance of agriculture as a source of labor has diminished. Korea rapidly accelerated the growth of manufacturing output and by 2010, manufacturing accounted for 45 percent of GDP. The Korean economy is now a predominantly industrial and service oriented economy. For Peru, the composition of GDP for industry was only 36 percent (UNDP 2004). A signifcant social byproduct of Korea’s successful development is the rise of a large middle class that is enjoying a newfound consumerism. The same could not be said of Peru, where the middle class is a small percentage of the population although it has expanded in recent years. Both countries have relied on foreign aid. Relative to the rest of Latin America, Peru has been for years a large recipient of foreign development assistance from rich countries. Korea received generous sums of aid particularly from the United States during the 1960s, but for the past two decades Korea has become a foreign aid donor. Interestingly enough, Korea has been providing development assistance to Peru since the 1990s. The “initial conditions” defned broadly include not only the factor endowments alluded to earlier but also the institutional and organizational factors. Both Korea and Peru started their post-war economic development with inward-oriented strategy to industrialization. This is what is known as ISI, which is a development strategy that governments adopted, where domestic production substitutes for some imported goods. ISI begins with the production of relatively simple non-durable consumer goods such as clothing, shoes, and canned goods. For the ISI strategy to work, the pattern of domestic production and exports must be altered and promoted by the state through the exclusion of foreign competition, bank credit, preferential rates for essential inputs, and specifc tax exemptions (Cypher 2014).

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ESSENTIAL CHARACTERISTICS OF AN EXTRACTIVE ECONOMY Extractive economies are those that physically remove resources from their environment primarily for exporting. Although there are potential economic benefts to resource extraction, there are also shortcomings. For instance, mining is assumed to be a powerful stimulus for the economy in generating foreign exchange earnings, but it is also relatively unstable owing to fuctuating commodity prices, the depletion of deposits, the impact of global competition, and frequent labor-management disputes. For many years in countries like Peru and Bolivia the mining sector has been the economic engine driving the rest of the economy. Extractive industries can contribute signifcantly to a country’s economic development by generating employment, foreign exchange, and government revenues. But they also can become a source of rent-seeking, can be poorly managed, and can result in excessive reliance on the extractive resource. In Peru’s case, income resulting from unstable world prices has brought erratic prosperity for the regions where the mines are located. A similar pattern is experienced in other sectors where lumber, fsh, oil, and other commodities are exported usually raw or unfnished. The producing countries are denied the commodities’ additional values, which in the end would beneft the core economies (Bunker 1984, Liebenthal et al. 2005). However, during the past decade the emergence of China has resulted in higher demand for commodities, which has led a rise in commodity prices. But since 2013 demand and commodity prices experienced a downturn. A key feature of extractive economies is their susceptibility to external shocks. Unfavorable price shifts lead to uneven terms of trade. Prebisch (1950) has warned that the specialization in primary goods, over time, leads to a deteriorating tendency on the terms of trade for primary producers relative to manufactured goods produced in the industrialized nations. When this happens, it triggers a decline in government revenues and the government is forced to seek foreign borrowing. Reliance on primary exports also makes the country more dependent because it misses the opportunity to diversify into more nontraditional goods with higher value added. Peru once had a silver boom, and a guano boom, and there has been a legacy of “bonanza” development through resource extraction. But it’s a boom-bust cycle; there has been a sequence of unsuccessful outcomes following every period of success based on a commodity. Another case is the fshing industry, which was successful in the 1950s and 1960s, but then suffered a precipitous decline as a result of climate change, over-fshing, and government policy failures. Schuldt (2005) has noted that the country’s poverty is

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the consequence of its natural wealth. This is what some scholars term the paradox of plenty (Karl 1997). Lederman and Malony (2006) disagree with this characterization because they argue this is not something that is inevitable because development trajectories can be altered. Rich natural resource endowment has been a blessing for some countries and did translate into increased prosperity (e.g., Australia, Canada, New Zealand, Norway). But in many LDCs rich in resources, it has in some cases become a “curse” (Sachs and Warner 1995, Sachs 2005, Davis and Tilton 2005). According to Auty (2001), empirical evidence suggests that on average resource-abundant economies of the less developed world have not performed well relative to those countries that are resource-defcient. Peru has remained an extractive economy since the colonial period. The process of commodity extraction responded to international demand. But excessive demand at various points in time and a short-term mentality on the part of the domestic elite contributed to a depletion of resources. Furthermore, lack of adequate planning and vision distorted the structure of the economy, and failed to bring about development (Morón and Sanborn 2006, Schuldt 2005). Increased dependence on export commodities has set limitations on opportunities for technological innovation, some of these commodities are likely to lose their utility when the extractive resource is depleted, when international demand changes, or when cheaper substitutes are found. This type of resource-dependent economy, also known as “enclave economy,” has been well documented (Hunt 2011, Levin 1960, Thorp and Bertram 1978, Bunker 1984). As an extractive economy, Peru’s development performance compared to that of Korea, based on the Human Development Index and other socioeconomic and business indicators so far has been disappointing. The evidence is shown in Table 4.3. As Bunker (1984) notes, “The crucial difference between production and extraction is that the dynamics of scale function inversely to the dynamics on the productive economies to which world trade connects them” (1056). In a productive economy the forces of production develop progressively because the unit cost of production tends to fall as the scale of production increases. However, extractive economy systems respond to increased external demand, and they tend to impoverish themselves by exploiting those resources beyond their capacity for regeneration, thereby forcing the per-unit cost of commodities to rise. While two centuries ago natural resources might have been a source of wealth, today the wealth of nations comes mainly from ideas embedded in new technologies. Nearly half a century ago, raw materials constituted about 30 percent of the world’s total output but today it is about 4 percent. Much of the world economy today is concentrated in services and manufacturing. At present a number of LDCs are negotiating free trade agreements and better

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Extractive versus Productive Economy Table 4.3 Human Development Indicators

Gini Index Agricultural production per worker Gross domestic investment (% of GDP) Genuine domestic saving (GDP %) Adult illiteracy (%) Mean years of schooling Public expenditure on education (billions $) Expenditure on health (% of GDP) Life expectancy PCs per 1,000 people R&D expenditures (% of GDP) Scientist & Engineers in R&D Motor vehicles per 1,000 people HDI rank

Year

Korea

Peru

1998 2010 1990 2010 1998 2011 2015 2014

31.6 19,807 38 29 25.9 — 16.6 5

44.1 (2015) 1,607 21 25 11.1 11.4 8.7 3.7

2014 2000 2015 2000 2010 2007 2009 2001 2015

4 73 82.1 405 3.74 2,319 267 30 18

3.3 69 74.8 41 0.15 (2004) 239 41 80 87

Source: UNDP, Human Development Report, various years; UNESCO, Statistical Yearbook, various years; The World Bank, 2012.

commercial relations with the United States and Europe, but this means that these countries are investing their energy in trying to get better terms on this small slice of the world economy (Oppenheimer 2005). THE DEVELOPMENT EXPERIENCE Peru over the past half a century has expanded its exports and diversifed them, but it remains predominantly a primary commodity exporter. Despite its resources and much aid received, Peru failed to attain development, has witnessed many failed projects, and has suffered from the symptoms of policy-induced distortions. At the end of the millennium, 43.3 percent of Peru’s exports were primary products, while Korea’s were only 1.3 percent. The expansion of Peru’s primary exports in recent years has led to higher levels of economic growth but has also caused distortions such as increasing inequality. Korea was able to achieve exceptional growth and success in expanding manufacturing exports in the 1960s. The contrast in economic performance between South Korea and Peru is the most glaring after the frst oil shock of 1973–1974. Korea’s real GDP expanded 8.9 percent per annum, compared to a mere 1 percent in Peru. Rapid economic growth was supported by a

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sharp expansion of exports that bolstered investment (Lin 1988). By contrast, Peru’s exports had a sluggish growth. It is only in recent years that Peru has posted higher levels of growth fueled particularly by Chinese demand for commodities. On the whole, Peru has had an erratic path to economic development and was at times plagued by balance of payments defcits, chronic infation, and a growing foreign debt (Sheahan 1999, Wise 2003). As development strategies, import substitution and export orientation are not necessarily mutually exclusive. Import substitution can be divided into an easy stage, where non-durable goods are produced, and a more advanced stage, where consumer durables and capital goods are produced. Export orientation also requires a stage of exporting manufactured products that is more labor intensive and a more advanced stage that requires more capital and is more technology intensive (Chen 1989, Cypher 2014, Todaro and Smith 2015). Korea went from the early stage of ISI to export substitution. The policy change was aimed at promoting export incentives. This was accomplished with the devaluation of the won, restrictions on imports, tariffs and tax concessions on inputs by exporting frms, and export credit subsidies. By 1980, about one-third of Korea’s exports were made up of manufactured exports. Korea was able to move rapidly from easy-ISI strategy in the beginning of the 1960s into a stage of export substitution. Peru, on the other hand, became stuck at an intermediate point and faced setbacks on the more capitalintensive industries (Beaulne 1975, Pease 1981, Wise 2003). Korean export expansion thrived on its industrial effciency. Peru, on the other hand, lacked the political commitment, policy continuity, and the necessary policy reforms to advance industrial development. Korea generated an extensive system of export incentives that were extended over the years. Although Peru did promote nontraditional exports in the 1970s and 1980s, the incentives system was inconsistent and at times biased against exports. Korea’s efforts were successful because once economic reforms were implemented they were fully supported by successive policy makers and the direction of reforms did not change over time. By contrast, policy reform in Peru fuctuated and there was a lack of consensus leading to policy shifts with subsequent administrations (Morón and Sanborn 2006, Wise 2003). As a late industrializer, Peru did not have much state-sponsored industrial strategy until the 1960s, and this was mostly an export-supporting activity infuenced by foreign capital. During this period, Peru was a primary commodity exporter and was in the consumer durable stage of ISI relying on protectionism (Beaulne 1975). The state was passively involved in increasing its role in the economy. The National Planning Institute was created in 1962, but the frst comprehensive plan was not drawn up until 1966 (Fitzgerald 1976). Although Peru’s economy became increasingly dependent on fshmeal and copper as the biggest foreign exchange earners, the manufacturing

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sector was growing rapidly and by 1965 it came to account for 20 percent of GDP. In terms of export growth, manufacturing was only second to fshmeal. But behind this, the ISI drive had its classic pitfalls. For instance, over half of the output was under foreign control, one-fourth of it was related to the processing of primary products, and a signifcant portion of production was assembly operations for foreign frms (Wise 2003). During the late 1960s and early 1970s Peru assumed a more conscious effort to industrialize. The state intervened more actively in the economy. This was evident with the nationalization of basic industries, the creation of the ministry of industry, and the passing of the General Law of Industry in 1970. Although priority was given to local industry the state-sponsored model ran out of steam quickly. In 1975 there was a retreat and by 1980 the same old politicians representing the Lima elite were back in power promoting a variation of a more market-based approach without much government interference. In Peru, as in many countries in Latin America, protection was prolonged rather than phased out. Easy ISI should be seen simply as a frst step on the path to industrialization. But industrialization must go beyond just being internally oriented. Korea was able to successfully follow the sequence from easy ISI to export substitution. It was able to reduce and overcome some of its problems through learning-by-doing. As the process evolved there were managerial improvements, technological adaptation, and improvements in human capital. The increasing share of Korea’s manufacturing exports, over time, refect the government’s conscious effort to promote exports (Amsden 1989, Chang 2002, Cypher 2014, Song 1997). Peru also might have benefted from large amounts of development assistance over the past ffty years, but its social indicators are very disappointing. Although education is mandatory and UNESCO statistics show that practically 100 percent school enrollment has been achieved, the average level of education in terms of quality performance is about third grade. The imbalance of economic growth and social development is what prompts us to label this “growth without development.” Peru provides a textbook case of a society in which the elite has not been very supportive of human capital investment. As a result, various studies remark that Peru remains a profoundly unequal society. While periods of primary-export booms generated wealth for a small group, these elites were resistant to redistributing the benefts of such bonanzas (Hunt 2011, Morón and Sanborn 2006, Thorp and Bertram 1978). Korea, on the other hand, has invested in improving the quality of education. Variation in the quality of education has improved the ability of its work force to perform effectively. Recent studies indicate that Korea ranks high in the level of training and performance of students in math and science, even higher than the United States and other developed countries. Data from the

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OECD (2011, 121), indicate that Korea ranks ffth in the world in research spending as a percentage of GDP (3.36 percent) and is fourth in the world with the highest percentage of twenty-four-year-olds with science degrees (OECD 2009, 179). Many economists have emphasized that technology is perhaps the single most important factor in generating growth and spreading prosperity. Most LDCs, however, lag behind and do not have the technological capacity to increase productivity. The application of new techniques in the production process requires engineers and a work force with proper training, but this is in short supply in many LDCs. Table 4.3 shows the largest gap between the two countries in terms of innovation. Another explanation of Peru’s underperformance is the government’s failure to steer the economy in a more pragmatic development path by generating the proper incentives. Most administrations did not have a clear plan or were unable to implement one. Most if not all tolerated corruption, did not create an environment conducive to investment, maintained a judicial system that was weak and ineffective, and devoted little attention to developing a greater endogenous technological capacity. Peru’s poor ratings on the Transparency International Corruption Perception Index (Table 4.2) shows that corruption is a serious issue that plagued the economy. In terms of the World Bank’s Ease of Doing Business, Korea ranks fourth but Peru is 58th. Other indicators in Table 4.2 such as the competitive environment, economic freedom, and respect for property rights, Korea does a lot better. This is evidence of the government’s failure to create a transparent, effcient system for business. World Bank data indicate that countries that are more corrupt have much lower per capita GDP. Peru’s performance in this area has been much lower than Korea’s. Another problem is the weak judicial system, which in Peru’s case is ineffcient and not reliable. Lawsuits can take many years to be resolved. A good legal system is more expeditious, facilitates contracts, and protects private parties. Finally, the ease to do business is essential. In Peru, formal businesses suffer from excessive red tape. According to de Soto (1986), this is one reason for the existence of a large “informal” sector in Peru. The World Bank estimates that in Peru starting a business takes seventy-two days and 32.5 percent of income per capita. This means that even before a business is launched, a Peruvian entrepreneur must invest extensively with government bureaucracy. Peru has the natural resources but lacks the administrative and productive capacity. Present and former governments have lacked organizational autonomy, have managed the economy poorly and have lacked a clear long-term vision of national objectives. They also failed to take advantage of crucial junctures and missed opportunities when growth was in a boom cycle. Social inequality still hampers the electoral process, and therefore, democracy itself.

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As Morón and Sanborn (2006) note, Peru has been hampered by a lack of clear objectives and the inability to implement a sustained development approach. Peru represents a paradox. Its economy has grown for much of the last ffty years. It has even entered an expansionary cycle for the past ffteen years but has not experienced a fully blossomed in that economic expansion cycle. This means that despite growth there has been some gain in employment opportunities but has not resulted in inclusive development. Today, in many respects, it is cheaper to import than to produce it domestically. This has, in some sense, generated a process of de-industrialization due to the lack of proper incentives. Can Peru realistically take advantage of globalization? De Rivero (2001) recounts how in 1967 he represented Peru in the Kennedy Round of negotiations under the GATT. At the time Peru was a major producer of copper, lead, zinc, fshmeal, cotton and sugar. Twenty years later as a senior diplomat, he also took part in the Uruguay Round negotiations under GATT. But by then trade negotiations centered on manufacturers with high technology content and trade in services. He notes that the content of Peru’s exports had remained the same. With no improvement in technological development, the country was virtually left sitting on the sidelines of world trade negotiations. What are, then, the possibilities of generating a cohesive collective project aimed at increasing export capacity? Peru’s Ministry of Trade, for instance, was only created in 2002 and is only in recent years that Peru has signed free trade agreements with the United States, China, and Canada. Peruvian authorities have invested more effort in diplomacy rather than in studying how to compete in world markets. To this day there is no strong desire or consensus in policy decision-making aimed at a sustained national development strategy. This is an important issue if a country like Peru is to drastically reduce poverty and become more prosperous. KOREA VERSUS PERU Korea outperforms Peru on nearly every type of economic and social indicator. Over a period of three decades Korea’s economy grew at a rapid pace from year to year. From 1965 its GDP grew from $2.3 billion to $442 billion in 1997. Per capita income during this period rose exponentially (Breen 1999). Korea’s per capita GDP is now three times that of Peru’s. Lewis notes that “in 1970, Korea’s GDP per capita was $2,500 in today’s dollars. In 1995, it was $12,600, or fve times higher. It took the U.S. almost a hundred years (1857–1954) to cover the same ground” (105). In 2003, Korea’s per capita GDP was over $15,000 (ADB 2004) and in 2010 it had reached $29,000 (see Table 4.1).

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Table 4.3, which shows the UN’s Human Development Index, indicates that Korea outperforms Peru by a large margin, whether it is agricultural productivity, life expectancy, education, research and development, and in the number of scientists and engineers. The data is evidence that Korea had leap-frogged other countries. At the pace Korea was moving, by 1990, it had reached advanced country status. In 1996, Korea joined the OECD, the club of high-income countries. Industrialization can be funded by extractive resources (mineral and agricultural), but resource-poor countries do not have this option, and must instead, as Ranis (1996, 156) says, “shift their attention to the development of their human resources,” that is, emphasize education and training to raise productivity. Korea was able to gradually assimilate industrial and information technologies in the 1970s and 1980s, but during those years Peru’s economy stagnated (Ranis 1990, 1996). The technological gap is evident today. The data in Table 4.3 shows that Korea spends much more on education, research and development, and has an impressive number of scientists and engineers. Peru and Korea were at one time engaged in an easy import substitution strategy, with emphasis on consumer goods geared for the domestic market. This required government intervention and entailed protecting infant industries, relying on overvalued exchange rates, and maintaining low interest rates. Lacking the resource base Korea was forced to export. Korea then successfully shifted toward easy export substitution, exporting nondurable consumer goods. Raising exports accelerated the pace of industrialization. As Korean exports became more competitive it shifted to export promotion by exporting more sophisticated manufactured goods that had a higher content of technology, particularly in engineering and electronics. According to IMF’s International Financial Statistics, exports for Korea in terms of its external orientation ratio (exports/GDP in percent) grew from 14.3 percent in 1970 to 37.7 percent in 1980 to 40.7 percent in 1990 to 42.6 percent in 2010. Taiwan had a similar experience. Peru, on the other hand, tried to proceed from easy ISI to secondary or vertical ISI, skipping export substitution and ran into diffculties. Korea’s economic success has much to do with its institutions that encouraged investment, the transfer of technology, industrialization, and trade. These institutions include educational, political, judicial and economic systems. A critical issue for LDCs is how to enforce the rules for the market to operate more effciently, ensuring that contracts are upheld, individual property rights enforced, and that economic transactions are done in a transparent way. Without property rights there are no proper incentives to invest. Economists have also linked rapid economic growth to free and open institutions that provide the right incentives.

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KOREA’S SUCCESS STORY The Korea case helps us understand how a country can emerge from a group of poor countries and become prosperous. During the 1960s Korea’s approach was initially state-led leading to a strong collaboration between business and government. The state in Korea aggressively promoted exports through special incentives. Initially, labor-intensive manufacturers dominated exports but later there was industrial diversifcation and upgrading to make exports internationally more competitive (Amsden 1989). Policy choices taken by Korea were properly implemented, adequately monitored, and they achieved the desired results. In Korea, subsequent administrations emphasized continuity in the policy that was central to the export-led strategy. Price stability also helped facilitate greater rates of saving and investment. The resulting outcome was an acceleration of economic growth and an increase in labor productivity in manufacturing (Lin 1988). Korea shows that rapid catch-up can be achieved through key ingredients to propel growth. Aggressive trade-oriented policies and improved opportunities for investment were important. Korea invested one-third of its GDP to achieve high rates of growth. As Haggard (1990) puts it, Korea’s turn to export-led was “state-led.” The state created the supportive measures and mechanisms to work closely with the private sector. It created credit incentives to exporters, provided technological assistance, and even marketing (Amsden 1989, Bradford 1986, Singh 1993, Song 1997, Stover 1986). The Korean government targeted “strategic” manufacturing industries. The plan was based on the notion that government could accelerate development by nurturing favored industries. In this sense, Korea has followed the Japanese model. An important aspect of the policy was the protection of these industries from foreign competition—the “infant” industry argument. The protection is needed because an infant industry is not able to compete against imports from more developed countries. The success of Korea also is partly due to United States assistance. The Korean War in the early 1950s left a divided Korea. The outcome became a symbol of the Cold War. The United States remained committed and aimed at turning South Korea into a modern society based on the Western model. The United States sought success in Korea because it would prove to the world the superiority of its approach to development. According to Ekbladh, “by 1980, the Republic of Korea had received $6 billion in non-military aid from the United States, and much of it during 20 years of intense effort in South Korea between 1948 and 1965” (2004, 12). The United States played a key role in post-war relief and laid the foundation for nation building. Korea launched land reform and an industrial development strategy.

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The Vietnam War in the 1960s was a big boost for South Korea. General Park committed two divisions of troops to fght in Vietnam alongside the Americans. The United States not only provided aid but it also awarded military contracts to Korean chaebols (corporate conglomerates). During the peak of the war, 94 percent of Korean steel exports as well as a signifcant amount of machinery and chemicals went to the United States (Ekbladh 2004). One factor often overlooked is that high rates of growth were achieved in a Korea under an authoritarian, autocratic and centralized rule. Washington was willing to overlook this approach that marked succeeding regimes for three decades as long as it could push its own agenda. The foundation of an export-oriented economy was laid by the government of General Park Chung Hee, beginning with textiles and light industry. He was determined to promote its heavy industry (steel, automobiles, ship-building and chemicals). First, he found willing partners in South Korea’s business class and then he attracted foreign direct investment, particularly from Japan. The government also made strong efforts to create an attractive environment for foreign manufacturers that made a signifcant contribution to the country’s export growth. All of this, in conjunction with the appropriate economic policies, made it possible to lay the groundwork for a more aggressive development strategy. By the late 1960s, Korea had “graduated” and was no longer reliant on United States aid, even if Korea continued to receive economic favors from the United States in the form of loans and other guarantees. It was only in the 1980s that Korea moved to democratic rule. Korea’s success is partly attributed to American aid, a strong authoritarian state that kept the lid on labor demands, and the extraordinary perseverance and initiative of the Korean people. WHAT MAKES A COUNTRY PRODUCTIVE? Productivity is a measure of effciency in the use of capital and labor resources in the production process. Productivity is critical to a country’s international competitiveness and its standard of living. Increasing productivity and effciency can be achieved through human resource development by enhancing the skills and education of the labor force, investing in physical capital, improving management and organizational techniques, and upgrading the domestic technological capability. In addition, there also must be institutional improvements as well as the promotion of a capital market and of trade policies, adequate management of macroeconomic policies, and a stable government. The concept of productivity is somewhat diffcult to measure. For instance, it might be easier to look into the manufacturing sector where output is readily

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identifed, but not so in the services sector. Also, productivity means different things to different people. To an assembly worker it means how quickly he can do the job, to a plant manager how many goods are produced, and to an executive it is proftability. All these are associated with results. However, economists tend to be more concerned with the effciency with which goods and services are produced. This refers to the relationship between inputs and the fnal product. Inputs are resources needed in the production process (i.e., labor, capital, and natural resources). But it is improvements in human and physical capital that enhance productivity. Over time technology also affects the economy’s productivity levels. Productivity refers to output per unit of aggregate output. The most frequently used measure in labor productivity is the output per worker hour. This is expressed as a ratio of output to the number of employees or to employee hours. Lewis (2004) notes that understanding productivity provides a new way to understand a country’s economic performance. Previously economists had emphasized that growth depends on an increase in the amount of people who work and the amount of equipment they use and on the increase in effciency with which they work. Korea’s automobile industry might not have reached yet the level of Japan’s, its automotive companies—Hyundai and Kia—have achieved their growth objectives and are successfully competing in international markets. Their growth has been remarkable, considering that in 1985 Korea produced virtually no cars. Today Korea is the ffth largest automobile producer in the world. Although labor productivity in this sector is still below Japan’s highquality manufacturing, there has been substantial improvement by the Koreans. An example of its high-quality manufacturing is the Hyundai Elantra, which is rated one of the best cars in its class. Another successful companies in electronics is Samsung. Korea’s capital inputs on a per capita basis are high for an upper middleincome country. Lewis notes that “in terms of total factor inputs, Korea is practically head to head with the United States, even if Korea only gets half of the beneft out of this effort that the U.S. does” (2004, 107). “Korea’s overall factor productivity is about 51 percent that of the U.S., but closer to Japan’s, which is 63 percent that of the U.S. The amount of capital available to each Korean worker in manufacturing is about 80 percent of the U.S. number. But in semiconductors, automotive and confectionary, the amount of capital per worker was equal to that of the U.S.” (Lewis 2004, 108). Korea also achieved success by targeting particular industries. Take for instance the case of steel. Labor productivity in Korea’s steel industry is about 10 percent higher than in the US Capital productivity in this sector is also higher than in the United States. Lewis notes that “they chose initially a simple product mix, minimized management, and maximized fexibility” (116).

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This was very similar to what Japan had done in automobile manufacturing. Korea has built its success on activist economic industrial policies patterned on Japan’s earlier experience in which it targeted specifc industries with government investments and/or subsidized credit. LDCs are characterized by low levels of productivity. This can be explained by the absence or lack of “complementary” factor inputs such as physical capital or experienced management. Productivity can rise through domestic savings and the use of foreign fnance to generate investment in physical capital. One must also take into account people’s attitudes toward manual labor, discipline and organization. The economic success of South Korea and other Asian countries is often attributed in part to the quality of this human resource, the organization of their productive system, and the institutional arrangements undertaken to accelerate their productivity growth (Todaro and Smith 2015). The contrast between the two countries outlined here illustrates that an inclusive economic system such as Korea’s fosters economic activity and prosperity. Government policy can help promote and provide incentives to generate investment and avoid distortions that discourage business activity. WHAT ARE THE LESSONS FOR PERU? Korea belongs to a small group of countries that have achieved spectacular success in expanding manufactured exports since the 1960s. Peru, on the other hand, has run into diffculties. Korea was able to move quickly from the simple type of manufacturing to a more capital-intensive method and with greater technological content to spearhead rapid industrialization (Amden 1989, Lal and Myint 1996). This process was more diffcult in Peru because of erratic political development, inappropriate macroeconomic policies, and weak institutions. Over the past fve decades Peru has lacked political continuity and the correct policy reforms to propel the economy to sustained growth. Explanations of Korea’s success lie mainly on the adoption of a coherent strategy of promoting growth industries, economic and technological planning, strong support for education, investment incentives, industrial restructuring, and the strong push for manufactured exports. An important difference with a country like Peru, which experienced faltering growth, was macroeconomic management (Sachs 2005, Lin 1988, Ranis 1996, Singh 1993). This implies lack of macroeconomic discipline, and above all, coordination failures and policy continuity. Peru’s macroeconomic policy shifted between strong state intervention and economic liberalism depending on which government was in offce. Explanations on Korea’s success have often emphasized its free market-oriented policies stressing private sector development and its outward-oriented

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strategy. But what is often overlooked is the government-led push for growth. The Korean government implemented an ISI strategy using high levels of protection but soon switched to export promotion. The government assisted in the process, subsidized credit, provided tax incentives, and depreciated its currency (Amsden 1989, Bradford 1986, Singh 1993, Song 1997). Much of Latin America, on the other hand, was more concerned with ISI than with export promotion. Other explanations stress the sociocultural factors such as the Confusian values: strong work ethic, loyalty, self-discipline of the labor force, and thriftiness (Koo 1992). Harrison (1985) has attributed Latin America’s underdevelopment to Iberian Catholic tradition that he claims considers work as punishment, while the Protestant ethic emphasizes hard work as a virtue. There is no implication of laziness on the part of Peruvians, it just simply shows that Koreans are driven and industrious. According to labor data, South Koreans work 240 hours more than the average American. A new law went into effect mid-2018 to cap the workweek at ffty-two hours. For the United States and many other countries, it is forty hours. There is a certain pride in working long hours in the Korean work culture (Lee and May 2018). The political explanation stresses the presence of a strong autocratic state that provided a stable environment as well as the role of government intervention to shape policies. This has certainly been the experience of Korea, Taiwan, Singapore, and Chile for years until the pressure was such that there was a transition to democratic rule. In terms of whether regime type really matters for economic growth, there is no defnitive or conclusive answer on the matter. Finally, US economic assistance to Korea in the form of credits and facilitating its market to Korean exports defnitely played an important role in providing a boost to the Korean economy. Peru’s development conundrum has been its inability to maintain sustained economic growth. Peru’s economy still suffers from structural weaknesses. A constant problem has been its enduring poverty and inequality as well as high levels of corruption. This remains as main contradiction, that Peru is a country rich in natural resources but faces so much human misery. Various studies on development remind us that widespread poverty, inequality, and corruption can be a drag on growth and development. In terms of management, many have voiced that Peru is a country without direction, no planning to speak of, and the government and its people seem to be “disengaged” (Schuldt 2005). Sustained development has much to do with providing a stable macroeconomic environment, creating the right incentives and maintaining policy continuity, generating political and judicial reform, having an active social policy, promoting investor confdence, and pursuing productivity-enhancing policies.

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Peru’s economy has remained dependent on an erratic course of traditional exports. The industrial sector has lacked competitive strength due to high costs, technological weakness, and lack of skilled labor (Sheahan 1999). Although nontraditional exports have risen in recent years, the industrial sector has been slow in raising productivity and has not achieved much capacity to compete in global markets. As long as governments in offce remain mainly concerned with short-term solutions to long-term problems, Peru will continue to face stumbling blocks. The country still lacks a viable development model and a coherent trade strategy to compete globally. Korea’s success serves as a meaningful lesson that its path to development has much to teach about failed policies in countries like Peru.

Chapter 5

Human Capital and Technology Deficiencies

Economists defne human capital as the accumulated knowledge and skills that labor acquires through education and training. Education raises the level of human capital and can enhance a country’s level of productivity and thus is a predictor of development. To generate faster growth, countries have to fnd ways to upgrade basic skills as well as increase the training and education of the labor force. A better educated population leads to better informed decisions. Education enhances the quality of life, is a vehicle for social mobility, and can be a catalyst for sustained development. It is not a magic formula but it can pay off in promoting development. From an economic standpoint, education creates positive externalities. This means that one person’s welfare is enhanced by increasing the educational status of another. The social rate of return on education even at the primary level exceeds the individual’s investment. Thus, people can make better-informed decisions when a country has an educated labor force. Improvements in literacy lead to a better-trained workforce and contribute to higher income. It is commonly accepted that education also has a high correlation with economic growth because a better-educated labor force will be more productive, more effcient, and make the country more competitive. In addition, education will tend to reduce fertility rates, will lead to improvements in living conditions, and will promote better health (Franco 2007). This chapter discusses the state of education in Peru relative to Latin America, and also uses South Korea as an Asian example for comparison purposes. It provides an overview of the progress made and efforts to reform the educational system. The second section briefy reviews the linkage between technology and education and how that weighs in the development process. The economic power of Latin America has hardly increased at all in the last few decades. This is in due in part to the lack of technological progress that 93

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affects the competitiveness of Latin American countries. The region has not developed a strong scientifc base in order to best utilize and assimilate advanced technologies as well as to develop further indigenous capabilities to use more advanced technologies. ENROLLMENT: MISSION ALMOST ACCOMPLISHED There is no question that in Peru, just as in much of Latin America, great strides have been made in increasing access to the educational system. Today there are more children in school than ever before. In fact, according to UNESCO data, the Latin American region has witnessed the highest gross enrollment among LDCs. In Peru, enrollment for school-age children is the highest it has ever been. This is particularly the case for primary school enrollment, but advances also have been registered for secondary and tertiary education. This is one of the reasons why literacy rates have substantially improved over the years around the world. Peru has achieved a literacy rate of 93.8 percent (INEI 2012). Primary education has reached almost 95 percent enrollment in Peru. Education is compulsory, so a high percentage of enrollment should be expected. In addition, a central tenet of the UN Millennium Development Goals launched in 2005 was “providing education for all” and that has to a large extent been accomplished. Table 5.1 shows school enrollment from 1999 to 2015 for primary school. The data from the National Institute of Statistics Table 5.1 School Enrollment, Primary (% net) and Education Expenditures 2001–2015 (Net Value Added)* Year

Percent

Percentage of GDP

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

97.8 97.6 99.5 96.5 96.2 96.2 95.9 95.9 96.1 96.1 95.9 90.9 93.1 92.8 94

5.2 5.2 5.2 5.2 5.1 5 4.8 4.5 4.5 4.2 4.1 4.1 4 4 4.1

Source: Instituto Nacional de Estadistica e Informatica, World Bank.

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suggests that enrollment growth has remained high in recent years. But enrollment is only an indicator of how many children are attending school; it does not provide an accurate picture of student or school performance. Full enrollment is a start, but Peru continues to grapple with a high repetition rates, low quality teaching, insuffcient quality books and materials, and insuffciently trained teachers. The quality of infrastructure is poor in many schools; schools that are usually the most affected are those in the rural areas where there are fewer resources available (World Bank 2007, Montero et al. 2009). Although education coverage is relatively high in Peru, Crouch (2007) reminds us that the system is unequal and is of low quality. Completion of secondary education is only 65 percent. But the numbers have to be carefully considered depending on what organization releases the data because it does not always match. UNESCO data are not always comparable to World Bank data or that of the Ministry of Education. Many children are poor, cannot afford the fees, or are faced with the need to work and leave school. In some regions of the highlands the numbers of those who do not complete primary and secondary school are much higher. Then there are others who are alienated and drop out, particularly in the barriadas. School absence also tends to be a more serious issue for indigenous children (Pasquier-Doumier and Risso 2015). Crouch stresses that in the case of Peru “economic inequality and educational inequality are closely correlated” (2007, 616). He observed that the system is ineffective in serving poor people, and this has yielded predictable results. Public expenditure on education has fuctuated over the years. The right column of Table 5.1 shows that education expenditures hovered around 5 percent and continued to increase during the frst fve years of the new millennium. But the trend began to decline during the Garcia administration (2006–2011). It continued to decline further during the Humala administration, but in recent years, the former Minister of Education Javier Saavedra pushed to have funding allocations raised. In 2015, it was only 4.1 percent of GDP. Inconsistent levels of public expenditures on education have refected deep-seated instability and unpredictability in resource allocation in Peru (World Bank 2007). The country spends approximately $1,000 per student in both primary and secondary school. This is low relative to Chile, which spends $3,180 per student in primary school, and puts Peru below the world average. Although the amount of spending is small, a more relevant issue is how monies are actually spent. Spending has mainly targeted increasing coverage; fewer resources have been dedicated to improving quality. This was highlighted by Crouch (2007) and by World Bank reports (2001, 2007). Both insisted that there had been a low correlation between spending and achievement. That is, there was a gap between access and learning performance. This also corroborated by studies from Peruvian researchers (Cueto et al. 2017, Montero et al. 2009).

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LEARNING OUTCOMES AND QUALITY OF EDUCATION Providing greater access to education is a desirable goal, and in analyzing the cost and benefts of education, the standard assumption is that more schooling generates more personal income and opportunities. The perception also is that more education can boost economic growth. However, Hanushek (2005) argues that spending more is not necessarily the answer. Studies on the economic aspects of education have focused on the quantity of education but not as much on the quality of education. Higher quantity does not translate into higher earnings over an individual’s lifetime. The quality issue is somewhat diffcult to defne because education is complex and multifaceted. Creating indicators that address quality is challenging. Economists use quantitative measurable outputs (e.g., number of students enrolled) to assess education. While in Peru there has been a visible improvement on some quantitative measures such as numbers of children attending school, the question we want to address is, Why are learning outcomes weak? Peru has done well in expanding coverage but has a distance to go to improve quality. Low achievement rates are the most daunting challenge that the educational system in Peru faces. To be competitive in the world, Peru must go beyond the basics of literacy and numeracy. One of the UN Sustainable Development Goals (post-UN Millennium Goals) has quality of education as a plan of action. It refers to ensuring inclusive quality that promotes life-long learning. It says that education should not just simply focus on literacy and numeracy but on getting children to eventually reach their full potential as productive citizens. The emphasis should be on how to make them active and productive members of society. The process is to be supported by three pillars: ensuring access to (i) quality teachers, (ii) quality learning tools, and (iii) a safe and supportive learning environment (UN 2015). UNICEF (2000) asserts that in the past the discussion was centered on infrastructure, pupil-teacher ratio, and curricular content. The emphasis now is on “how teachers and administrators use inputs to frame meaningful learning experiences for students” (13). UNESCO has a similar approach. However, on a more broad scale, others argue that for this to properly function attention should also be placed on nutrition, family stability and parental motivation, and a better social and cultural environment. A World Bank report (2006) stresses that Peru needs to upgrade its standards. This simply means that there should be greater emphasis on reading achievement in the early grades. Evaluations should be on children and teachers. To do this, basic standards should be established with the aim of measuring quality. This can be used as an international benchmark for comparison. The report shows the large gap existing between the number of graduates and

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their skills. The results in the previous decade were discouraging because they were below the Latin American average. Table 5.2 and Figure 5.1 show this comparison in mathematics performance in the PISA examination. Studies also showed that repetition, retention, and drop-out rates were indirect indicators of quality, and in this regard Peru did not score well (World Bank 2001, 2007). The 2007 World Bank report on Peru’s educational system Table 5.2 Performance in Mathematics (PISA points, 2012) Korea OECD mean Chile Mexico (Min OECD) Uruguay Costa Rica Latin America mean Brazil Argentina Colombia Peru (Spanish) Peru Total Peru (Quechua)

554 494 423 413 409 407 397 391 388 376 374 368 283

Source: OECD/PISA 2012 database.

Figure 5.1  Performance in Mathematics, (PISA Points, 2012). Source: OECD. Graph Created by Rubén Berríos.

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notes that “only 5 percent of Peru’s students perform at the OECD average” (2007, 4–5). Crouch (2007) interviewed 245 frst and second grade children. He found that more than half of those about to fnish frst grade could not read at all, and 35 percent of those who were about to fnish second grade could not read. He notes that the system did not have quantifable standards and goals regarding educational achievement. He claims that it was a system “that lacks broad-based management” (2007, 617). A decade later data from the Ministry of Education indicates the situation was not much different. The most direct measure of learning outcomes is student achievement. The most common indicators are national and international standardized achievement tests in mathematics and language (reading comprehension and writing). The data also showed that there is an achievement gap between private and public schools. There was also a disparity between urban and rural areas for public schools and between inner urban and suburban (where most of the marginalized poor live). Students on the coast have performed better than those in the highlands. There is also a gap between indigenous students who were Quechua-speaking and those who were Spanish-speaking. This is evident in Table 5.2, which shows that Peru does score poorly in math relative to Korea, scores below the average in the OECD, and also lower than Chile and other Latin American countries. Poor performance by students also has been associated with lack of school resources, unprepared teachers, and inequality in delivery. Teaching materials are poor, when they even exist. Some schools operate with primitive and scarce tools and materials. Teachers are not well trained and well prepared. Achievement in students is connected to the teacher’s qualifcation and motivation, instructional time, and school effectiveness, all of which are defcient in Peru (Benavides and Rodriguez 2006, Crouch 2007, World Bank 2007). In Peru as well as in much of Latin America, education still mirrors the inequality inherent in society, so targeting inequality will require making changes in the educational system. The neoliberal approach has criticized what they view as excessive government involvement in the system of public education, seeing the centralized management by government as a negative. The system of education has also been subject to political roadblocks. The opposition party in Peru forced the dismissal of two excellent ministers of education in what many critics said were decisions based on political rather than educational reasons (Caretas 2016). In economics supply and demand are two sides of the same coin in that they are closely related although they behave differently. On the supply side, structural reforms are warranted. This includes a set of incentives that encourages teachers, principals, and administrators to be accountable for failure and be rewarded by success. Low quality teaching and lack of accountability perpetuates inequality. Supply-side reforms are necessary through evaluations

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of teachers and administrators to encourage better quality education. There would be salary incentives, promotions, retraining programs. Those who underperform should receive appropriate training to bring them up to par with the rest. For years, qualitative metrics were lacking. Standardized tests have been used even though it is diffcult to measure the quality of learning over time. One such international standardized test used is PISA, which was developed as an international assessment of learning. In 2012 Peru’s educational system came under scrutiny because it was ranked last out of sixty-fve countries that participated. The test assesses ffteen-year-olds on math, science, and reading comprehension. We saw in Figure 5.1 that Peru is below the average for Latin America and much lower than Korea or the mean for OECD countries. By 2015 scores had risen but were still low relative to the OECD average. Part of the blame has been put on the poor quality of teaching and outdated methods to educate. Standards for the profession are low and teachers are grossly underpaid (Diaz and Ñopo 2016, Montero et al. 2009, Murrugarra 2012). Teaching is not valued as much as other professions. In this context, many analysts believe educational reform is critical to enhance the profession. Another important consideration is the need for more coherent standards, rules, and incentives to revamp the system. An attempt to restructure the system was conducted under Minister Javier Saavedra, an economist, but his tenure was short-lived because the opposition party did not approve of him and was eventually sacked by Congress. During his three years in offce, Saavedra spearheaded comprehensive reform, recruiting teachers, increasing their salaries, and promoting teacher education programs. Under his stewardship, Peru’s performance improved, refected in improvements in attainment levels for literacy, math, and science. Saavedra’s departure is a testament to the vicious cycle Peru faces in terms of sustaining good policies. The Economist magazine labeled it “an indictment of the country’s educational backwardness” (2016, December 32). On the demand side for education, the largest need is for those who are enrolled in the public schools, but there is defcient quality of supply. Although there are positive returns to education, what is available is costly. The opportunity cost to education—even free public education—is high for some families because the child could be out working to help make ends meet. Parents have a right to demand better quality education, but this can only come with both private and public initiatives to improve the standards of education. A nation can invest in people via education and through on-the-job technical training. This would increase the quality and skills of the labor force. More and better education, training, and access to better technology can account for faster growth in some economies. The performance of some Asian economies such as Korea, Taiwan, and Singapore attest to the

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importance of these factors (Chung 2007, Hira 2007). An OECD (2016) report recognizes that more vocational training is crucial for Peru’s economy. One of the challenges these programs face is how to meet the needs of employers who seek laborers with adequate training and skills. Peru faces a shortage of graduates in the sciences, math, and engineering, but it has an oversupply of accountants, lawyers, and students in business administration. The report suggests that more funding be allocated for the private institutions that provide this type of vocational training, and that more information about these programs be disseminated. The purpose is to guarantee and strengthen the quality of these programs. Although vocational programs are available, some are still defcient, and all require greater investment in their continued improvement. Many youths face considerable challenges in gaining access to high quality programs or additional education, particularly if they must pay for it. OECD is in favor of expanding and improving these programs, and it insists that they need to be more widely promoted. EDUCATION AND INEQUALITY A more serious challenge the system faces is inequality. Peru has had high levels of inequality, and this is refected in the educational system. There are large disparities between rich and poor, between rural and urban areas and between the public and private systems of education. One study stresses that poor children are less likely to attend pre-K education and tend to show low level of development by age fve. It also notes that they are more likely to attend schools with worse infrastructure and have teachers of lower quality. It is evident that these students will have a weaker performance in reading and math (Cueto et al. 2017). The disparity is also manifested in levels of achievement between indigenous and non-indigenous populations and between schools in the city and those in the outskirts of the city (PasquierDoumier and Risso 2015). Education in Peru is still highly segregated. Franco explains that “the wealthy send their children to the best private primary and secondary schools, capturing prized places in competitive public universities” (2007, 481). Inequality is displayed in different forms: by class, race, and geography. Early on children are treated differently, and they accumulate different levels of human capital (Ferranti et al. 2004). Pasquier-Doumier and Risso also validate this point. Education data in Figure 5.2 displays the difference between private and public education expenditures. The private school system spends far more than the public system on education in Peru. However, it should be noted that funding in recent years has expanded so that the new generation of poor children are somewhat better off than their parents were.

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Figure 5.2  Expenditures on Education, Public and Private (Millions of Soles). Source: Graph Created by Rubén Berríos.

Education is not only a vehicle for higher living standards and to promote access to opportunity but can also be a means of reducing inequalities. When there is inequality in the system of education and this is promulgated early on, it is much harder for members of disadvantaged classes to climb up the social and economic ladders of society. The poor represent a greater percentage of those enrolled in primary and secondary public schools; they also have a larger failure rate, and completion rates are much lower. Despite improvements in providing access to education for girls, the gender gap persists in Peru and other Latin American and Central American countries such as Guatemala and Bolivia. These countries have lower female literacy rates and lower secondary enrollment rates than males. These countries also happen to have the highest numbers of indigenous citizens. According to UNICEF (2004), many families cannot afford to send their kids to school because of the direct (books and other materials) and indirect costs (loss of the child’s labor) involved. This is reaffrmed by Leon and Valdivia (2015). Scarcity of resources continues to be a major problem that has wider implications (scarcity of skilled teachers, lack of materials, better use of computer technology). Despite improvements and achievements in coverage of basic primary and secondary education, there are other serious challenges. For instance, an education expert who visited more than 200 classrooms between 1993 and 2001 in Peru noted that most classrooms did not have books available for the students, there were no maps or posters on the walls, electricity was defcient,

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and instructional materials were not available (Hunt 2001). The author asserts that the instruction methods were defcient, dictation was often used in primary levels, there was no question and answer, and there were no assigned readings. A more recent comprehensive study with this level of detail is not available, but available data and educational outcomes suggest that these defcits still exist. Relative to other middle-income countries, the level of public spending on education by Peru was considered low, both in relative and absolute terms. In terms of the composition of spending on education, the largest portion is absorbed by personnel cost, followed by educational infrastructure, and then by capacity training. Education spending has been below the average in Latin America and spending patterns have been ineffcient. A large portion of expenditures goes to pay salaries, pensions, and administrative costs; not enough is spent to improve quality. It is evident that if Peru is to spend more on education the ultimate goal should be quality. However, there are those who do not agree with the argument that less spending leads to lower quality. The best example in support of this counterargument is the United States, which spends more per pupil but has achieved disappointing results relative to countries such as Finland, Singapore, and China (Morgan 2014, Hagan 2014). Japan, for instance, spends less than any of the OECD member countries but it is a high achieving country (Otake 2015). Gross enrollment records indicate how many students are studying; but it does not indicate how many are repeaters or adult learners, or how many are not attending. Nor does it indicate how many actually graduate. While graduation rates in primary education in Peru are relatively high, they are much lower for secondary schools. In terms of earning differentials the pattern is well-known. Those with only primary or basic education earn less than those who have a high school degree, and much less than those with university degrees. Gains in enrollment and literacy are important but are not suffcient to secure jobs for students or increase productivity. EDUCATION AND GROWTH Cypher (2014) cites World Bank studies that have examined the relationship between education and growth. The studies emphasize that improving human capital leads to higher growth rates, as the case of East Asia demonstrates. As a result, the levels of productivity and of “technical effciency change” grew quickly in a number of countries in East Asia. One way to view this is the basic economic model—the production possibility frontier (PPF)—as an outward shift of the curve as the country upgrades and becomes more technologically effcient. Increasing the number of years of schooling on average for

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secondary age students and improving the quality of education is a measure of human capital growth and can be referred to as human capital deepening (Cypher 2014). This provides potential for growth. There are many economic models and studies that have put forth the argument that nations with a larger stock of human capital tend to grow faster. Extending the number of years of schooling would seem to be an effective way to promote human capital growth, but Easterly (2001) disagrees. He argues that education is important but only in the right context. He stresses that there is no single approach that guarantees successful development. We see that in the case of Peru, completion of primary school is quite signifcant, although the numbers drop for completion of secondary school. But this has been the trend in all LDCs. These numbers are much better than ever before, but since the improvement in primary school completion hasn’t sparked the desired results, then perhaps the problem is on the qualitative side. There is a large amount of research in labor economics on the benefts of education, indicating that more schooling leads to social benefts that accrue to the economy as a whole. These include more knowledgeable individuals, more effcient workers, better informed consumers, and so forth. The social benefts of education exceed the individual beneft, and this leads to a positive externality. That is, society at large will be better off if more people in that society have more years of schooling. Peru has not been able to create a framework to improve its educational system. As opposed to other successful educational systems (Finish, Korean) the Peruvian system has not implemented a uniform and clear achievable goals that specify particular successful academic outcomes. Crouch says that the emphasis should be placed on early education and on setting clear goals for achievement. He also notes that the process should be standardized and be more transparent. The World Bank report (2007) points out that there is “a lack of standards and accountability” (xiii). The children are performing below standards, and the labor market that will eventually absorb these youths fnds that they do not have the proper skills. Until recently the system also did not have a comprehensive approach to perform teaching evaluations. Now that one exists, there has been resistance from the teachers’ union and a pervasive fear by those teachers who are being evaluated. Despite the political rhetoric about improving education that comes during every election cycle, there has not been suffcient political will to carry through the transformation of the educational system in Peru. Webb and Valdivia (2007) argued that Peru faces defciencies in the delivery of public education, which is a consequence of institutional weakness and policy direction. The low quality of teacher performance is related to low wages, defcient training, and lack of incentives. They note that the system needs better coordination. They argue that to improve delivery of

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public education, the institution needs to be strengthened. There should be verifable standards, and an enforcement of work discipline, and that there needs to be a merit-based system. Since the teaching profession is undervalued and teachers are underpaid, many often hold a second job (e.g., driving a taxi) to fulfll their immediate fnancial needs. There is weak enforcement of contracts; there is clientelism and corruption, and teachers for the most part are demoralized. The teaching profession in Peru, as well as in much of Latin America, attracts mainly women. They tend to be paid below the average level of other professions. The education literature emphasizes that there is a consensus that teaching is a key component of the quality of education. The infuence of a good teacher can be signifcant on the performance of the student. However, the World Bank report (2007) and other studies underline the defcient training and preparation teachers receive. Once they are on the job they seem to lack suffcient pedagogical support and adequate supervision (Diaz and Ñopo 2016). The fndings show that their performance is unsatisfactory. Part of the problem is that the teaching profession does not attract the most talented students. Moreover, the system of evaluations and promotions does not generate enough incentives to make further improvements to generate better teachers. While Peru has adopted educational policies such as the Plan Nacional de Educacion Para Todos 2005–2015 and Politicas Educativas 2011–2016 to promote the profession, but there is still much to be done (Diaz and Ñopo 2016). Education is a mere refection of the larger society. Disparities in opportunity and poor outcomes in education result in income inequality. Different governments in Peru were unable to mitigate structural inequalities. Korea, Taiwan, and Singapore invested heavily in education, particularly primary schooling. Korea allocates 1.1 percent less of its GDP than Peru and less as a percentage of government spending in education, yet the results have been a lot more effcient in the Asian country. The data in Table 5.3 show that completion rates for Korea are much higher for primary and secondary students. At the university level, the numbers for Korea are also impressive. Economic growth and indexes and achievements in education are closely related to quality of life. Successful countries such as Korea, Taiwan, and Singapore, whose populations have more years of schooling, have seen their social welfare and standard of living improve over time. PISA scores are an indication that these countries rank high and perform quite well. As these countries have become high achievers, they have prospered. Why have some of these Asian countries achieved such good performance? Education policies have been effective. They have been used to give resources across the board and to provide a sound educational base in primary and secondary education. Classrooms are similar and use the same resources. The educational system is more rigorous. The pedagogy places importance on

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Human Capital and Technology Deficiencies Table 5.3 Education Indicators and Expenditures for Peru and Korea (2015) Education Indicators Net enrollment primary Completion rate primary Net enrollment secondary Gross enrollment tertiary (2010) Adult literacy rate (2016)

Peru (%) 94 99 78 41 94

Korea (%) 98 102 97 93 97.90

Expenditures Expenditures on education as % of government spending Expenditures on pre-primary as % of total government spending Expenditures on primary education as a % of government spending Expenditures on secondary education as % of government spending Expenditures on terciary education as % of government spending Government spending as % of GDP (2015)

17.6

 

16.60

3.10

36.50

31.5

30.5

39.4

16.10

20.8

4

5.10

Source: World Bank Education Statistics, 2017.

group work, and children are in school for longer hours. Schools emphasize the importance of ethics and civic duties from the start. From a young age children are encouraged to have aspirations, and education is valued by the society at large, by families, and by the government. Finally, the role of parents in the educational experience of the children is important as is the strong support provided by the educators (de Moura Castro and Verdisco 2004). The East Asian countries we have alluded have surpassed Latin American countries not only in terms of economic indicators but also in educational achievement. In fact, some of these countries have outperformed and scored higher than many of the OECD developed countries. On balance, this leads us to underline that the performance of Latin America, relative to that of East Asian countries, has been defcient. There are many moving parts to the educational system, which is not easily fxable. CAN PERU’S EDUCATIONAL SYSTEM IMPROVE? The problems ailing Peru’s educational system have been widely discussed for years, and there is no shortage of recommendations on ways to improve it. In 2004, the Foro de Acuerdo Nacional was established with a set of policy suggestions. In 2005, policy reform initiatives were incorporated in the Plan Nacional de Educación. But there is often a considerable lag in implementation,

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and proposed changes are not always fully materialized. The plan was supposed to improve the quality of teachers and of the educational infrastructure, as well as to increase the number of hours spent in the classroom. That hasn’t happened, though granted it would take years to complete some of the proposed changes. But little progress has been made. For instance, in the latest exam given in 2017 to those who aspire to be teachers (carrera pública pedagógica), 95 percent failed the entrance exam the frst time around in the two tracks, with only about 14,000 out of 280,000 passing (Mareategui 2017). Since the system is centralized, the reform process would also require an overhaul of the Ministry of Education. A characteristic feature has been instability and lack of continuity. For instance, during the ten years of the Fujimori administration (1900–2000), there were nine different ministers that were at the helm of the ministry (Montero et al. 2009). Further improvements in management of the educational system are needed to make the intended reforms feasible. Experts on education who have studied Peru’s system agree that considerable progress has been achieved in certain areas. Quality measures took time to implement but they are now in place. Factions of the teachers’ unions have balked at evaluations but the Ministry of Education has plunged ahead. The general management of information has improved, even if there is more that can be achieved. There is no question that the system requires higher standards, particularly in terms of training and support of teachers. Various reports such as Políticas Educativas 2011–2016 (2011) and Poyecto Educativo Nacional (2013) have insisted that among other recommendations, there needs to be increased expenditures, incentives for teacher improvement, more emphasis on early education, and have greater accountability and standards. DILEMMAS OF HIGHER EDUCATION The rapid increase in coverage has also impacted university enrollment, which in recent years has witnessed an explosion in growth. In the year 2000 there were 72 universities (43 were private), but as of 2013, there were 140 universities, most of them for-proft institutions (89 private and 51 public). This means that in just thirteen years the number of universities has doubled. The traditional public university system has suffered from fnancial neglect. The schools are underfunded and overcrowded. The university system also refects the class division: those who can afford it attend private universities (Easterbrook 2002), though there are still a number of elite public institutions. Many of the for-proft universities accept students as long as they can afford the tuition and fees, thus running the risk of a system rife with diploma mills and the students with defcient educations who graduate from such institutions. However, a more serious problem a country like Peru faces is that many

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of the top and highly qualifed graduates of prestigious public universities in the hard sciences such as engineering and medicine are more likely to move to the United States or Europe. As Easterly puts it, “Those with university education are more likely to migrate than those with secondary education” (2001, 80). This is problematic because it is a huge drain of resources that benefts rich countries like the United States. Traditionally immigration policy in the United States has encouraged those who are highly skilled to apply for visas, and they have a higher chance of being admitted into the country. THE TECHNOLOGICAL IMPASSE The literature on technology transfer and domestic creativity is extensive. Raul Prebisch and ECLA were supportive of the ISI strategy and recognized the importance of research and development. But as ISI faltered, Latin America lagged behind in technological progress. Technological change on a global scale has brought about immense transformations in recent years. Manufacturing technologies have altered production methods and employment, and Latin America has been affected by these changes. Most LDCs today continue to be dependent on advanced technologies coming mainly from advanced industrialized countries. Most do not possess adequate research capabilities or institutions or the ability to generate new or advanced technologies. Often, they do not have the resources or sophistication to purchase the right or appropriate technologies. Shortcomings in science and technology faced by LDCs have contributed to the widening differences in world development (Freeman 1989). In the early 1970s, after much refection and consideration by local experts, a number of national institutes were established by governments in Latin America such as CONACYT in Mexico and ITINTEC in Peru. It was a frst serious effort in Latin America to develop autonomous national technology policy to promote industrial, scientifc, and technological development (Sagasti 1979). Although there were institutional ineffciencies at frst, it was a start toward fostering a more rational use of resources regarding technology imports and toward developing domestic know-how capabilities through research and development. Mechanisms were devised to link these institutes with the productive sector and with universities. The discussions that took place during those years highlighted the importance of strengthening local technological capacity and supporting organizations engaged in research and development (Sagasti 1979, 2014). In the early 1980s Peru’s National Research Council became CONCYTEC. But by the middle of the decade its budget had been reduced by more than half and expenditures allocated to fund research had practically disappeared. There was a setback in the 1980s because of the debt crisis;

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governments were running high defcits and operating under tight budgets. What followed was market fundamentalism as embodied by the Washington Consensus, in which market forces were now the dominant paradigm. Under such circumstances, technological development received less attention and science and technology policy efforts were undermined. Politicians since have been less inclined to support the idea of indigenous and autonomous technological capacity. Various attempts to design, to create the institutional framework, and to formulate science and technology policy failed when a new administration assumed offce (Sagasti 2013, 2014). Peru is an exemplary case because, as Sagasti puts it, the market on its own is not going to develop technological capacity without guidance from the state. This requires the articulation of initiatives of the state, the private sector, and civil society. Rapid technological changes have advanced the pace of economic growth with new innovations connected to the production process contributing to greater productivity and output. As the world has experienced these rapid technological advances, it is abundantly clear that much of Latin America has fallen behind (Knight and Marques 2008). A way to gauge or measure technological capacity is to look at patents on new inventions. In 2014, South Korea had registered 1,240 patents with the World Organization of Intellectual Property, while Latin America as a whole had registered just 1,200. Peru only registered 13. Another organization that provides a way to gauge innovation and change is the US Patent Offce, which maintains a registry of applications and patents granted. Of the total number registered in 2014, 148,000 patents were from the United States, 16,000 were from Korea, and 3,200 were from Israel. Peru had registered just 3 (Oppenheimer 2014). Table 5.4 shows the number of patents granted to Peru and registered at WIPO relative to Chile and Korea in recent years. The table shows that Peru lags behind and that the patents by residents are few and non-residents (MNCs) hold most of the patents. This, however, is not the case of Korea where residents hold the majority of the patents. Another indicator of advances and technological potential can be understood by examining the number of scientifc publications in the most prestigious science indexed journals. Again, the list is not signifcant for the region. In mapping out where these publications come from, we see that the bulk are from universities and institutes where there is scientifc creativity, mainly from the Boston area, Berkeley-Stanford, and so forth. Another way to measure advances is by examining the rankings of universities, and here the list for Latin America is also short. The numbers speak for themselves, and this is worrisome because the entire region has fallen behind. Trained personnel and equipped laboratories are scarce. Many scientists and engineers emigrate (a phenomenon known as brain drain) because they don’t have access to the resources needed to conduct experiments and

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Human Capital and Technology Deficiencies Table 5.4 Patents Granted Resident Peru 2010 2011 2012 2013 2014 2015 Chile 2010 2011 2012 2013 2014 2015 Korea 2010 2011 2012 2013 2014 2015

Non-Resident

4 9 11 2 7 19

361 376 420 285 325 343

95 104 113 119 156 150

925 909 657 779 1,012 908

51,404 72,258 84,061 95,667 97,294 76,319

17,439 22,242 29,406 31,663 32,492 25,554

Source: World Intellectual Property Organization, 2017.

scientifc research. While some funding comes from foundations abroad, state funding is not easily available. In negotiating with international frms, sometimes there is insuffcient capacity to select the technology, to negotiate its transfer, and to adapt it and assimilate it. The other aspect is how to generate technology for local use. All this takes fnancial expertise, skilled and professional personnel, and sound management. What is it that makes some countries more innovative than others? Countries that pursue the production and export of raw materials and invest little in quality education are going to be at a disadvantage. The great challenge for the region is to provide quality education, particularly in forming better capacity in science, engineering, and medicine. Although there are exceptions, overall there is no innovation culture. Latin America has produced great writers and lawyers but few scientists. Oppenheimer (2014), citing from World Bank data, says that in 2014, Latin America had 560 researchers for each one million people; Korea, on the other hand, had 5,451. This is emblematic of the current situation. Technological development goes hand in hand with economic development. Technology changes as a result new discoveries, experiments, or innovations. The development of national institutes and independent research centers is imperative to break from technological dependence. Spending

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more wisely is a way to broaden the base of technological culture to promote research and development (R&D). In high-income countries R&D usually takes place in both the private sector and the universities. In Latin America, private frms are seldom engaged in innovation because proft is the main short-term objective, and they tend to be risk averse; much of the research is conducted at elite universities and government funded institutions. In countries like Peru, collaborative efforts at R&D between private frms and the government have yet to take place in any signifcant way. Table 5.5 shows UNESCO data on the number of researchers in both Peru and Korea. This is an indication of how a small country like Korea has been able to catch-up technologically with the rest of OECD countries. Knight and Marques (2008) reminds us that closing the technology gap is imperative for Latin America in order to be more competitive. It is common knowledge that countries that invest more in R&D tend to generate more inventions that are patented. At present, Israel is the country that invests highest in R&D (4.3 percent of GDP), Finland is second with 4 percent, Japan third with 3.3 percent, and the United States with 3.3 percent. Other countries that are members of the EU also have a signifcant percentage invested. In Latin America, only Brazil allocates 1.2 percent of GDP to R&D. The rest are below 1 percent. According to the Consejo Nacional de Ciencia, Tecnología e Innovación Tecnológica (Concytec), Peru’s investment in science and technology has been between 0.1 and 0.2 percent. This is far less than other countries in the region (Gestion 2017). Note once again that Peru aspires to be a member of OECD, but these numbers are not encouraging. In Latin America, R&D is being conducted mainly in the most prestigious universities but not so much by the private sector. In much of the developed world, a larger percentage of research is funded through the private sector. In the United States, the fgure is about 70 percent. However, change is slowly coming, and a few well-established universities in Latin America are working with start-ups and microenterprises or incubators. One of the problems in the Latin American region has been an adversity toward risk because universities were somewhat insulated and didn’t have a tradition of working outside of academia, while the private sector had focused on maximizing profts in the short run. Start-ups require a long-term outlook and the willingness to take risk, and the government did not provide a climate or economic incentives such as tax breaks to encourage risk taking. CAN PERU STILL COMPETE? The global economy is becoming increasingly knowledge based. Technology is knowledge embedded in labor and capital (machines) to produce goods.

  300,050

2008

Source: UNESCO, 2017.

Peru Korea

 

  323,175

2009

Table 5.5 Number of Researchers 2010

434 345,912 1,128 375,176

2011 1,503 401,724

2012 3,502 410,333

2013

3,737 437,447

2014

  453,262

2015

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Peru can become competitive by entering specifc sectors based on comparative advantage and the level of technological capability. Peru has already been competing in agro-exports (foodstuffs such as avocados, asparagus, mangos, coffee), but these are low-end products that don’t lead to development. In textiles and apparel it is a race to the bottom as retailers seek lowwage countries such as Bangladesh, Vietnam, and Honduras, so it is not a good route for countries such as Peru to follow. Peru, and Latin America for that matter, have not been able to adopt a coherent innovation and national policy to create high-value-added employment (Hira 2009). Kuramoto (2016) stresses that an explicit policy of science, technology, and innovation in Peru was never integrated into economic policy and economic development. This lack of coordination in policy was not considered as a way to raise productivity, which is why the economy continues to be vulnerable to international economic conditions. East Asia serves as an example of a region that has been able to do so successfully and to become internationally competitive in different industrial sectors. As has been argued, developing and upgrading technological capacity goes hand-inhand with a successful export strategy, particularly of higher manufacturing content, as has been achieved in East Asian countries (Lall 1996). Peru’s expenditures on R&D have been minimal next to what is spent by Korea. The data is provided in Table 5.6. Peru has to compete with similar countries such as Thailand and Malaysia, but these two countries are now ahead of Peru because a much higher percentage of their exports is of higher-technology content. Peru exports mainly copper, fsh, fruits and vegetables, and textiles and apparel. Malaysia exports electronic equipment, chemicals, and natural gas. Korea exports semiconductors, automobiles, computers, cell phones, and ships. It is no wonder that Korean electronic goods are now competing with Japanese and American counterparts in these lines of production. East Asia’s sectoral production profle is now similar to that of many advanced countries. They have moved to telecommunications, autos, and petrochemicals. Peru and Latin America have been relegated to comparative advantage in traditional primary production for the most part. However, it could be added that instead of exporting low-end raw materials, Peru and other countries of the region could upgrade by producing organic food products and gradually shift to other higher-value added goods. Governments need to be more proactive by providing assistance, training, and advice to private frms to develop more competitive enterprises that can be launched into the international market. One of the most diffcult impediments faced is the re-establishment of trust between the private sector and the state. The former sees the latter as bureaucratic, inept, and corrupt. Meanwhile international fnancial institutions and

113

Human Capital and Technology Deficiencies Table 5.6 Research and Development as a Percentage of GDP Year

Peru

Korea

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0.08355 0.10047 0.09641 0.1124 0.11068 0.10597 0.10831 0.15573

2.28627 2.14709 2.06259 2.18087 2.34165 2.27363 2.35126 2.53257 2.62559 2.83082 3.00975 3.13619 3.29613 3.45314 3.75116 4.01812 4.14692 4.22746 4.22816

0.8283 0.05531 0.08167 0.10787 0.11729

Source: UNESCO, 2017.

aid agencies are focused on strengthening and reforming institutions. East Asian countries have found it easier to establish consensus and to promote their long-term vision. Although they have had incidents of corruption, they do not seem to be as destructive to the national interest as is playing out in Peru. We want to close by asking why public policy, particularly industrial policy has been so dysfunctional in Peru? There are different explanations from different quarters. One is the ongoing distrust between state and private frms. Another is inconsistencies in industrial policy. Another is purely political motivation that has been disruptive to the development process. Finally, the lack of leadership under different administrations and the non-existence of a well-trained and experienced cadre of professionals. As a late entrant in an increasingly competitive world scene, Peru faces advantages and disadvantages. The advantages are that many types of technology can be adapted and assimilated. But in the modern world of innovation and manufacturing, the country will incur costs over time as it takes learning and adaptation. East Asian countries, including China, have worked their way up the ladder. Peru still lags behind in terms of research and innovation particularly when compared to Korea or even Chile. This is illustrated in Tables 5.4 and 5.5, which shows that the difference between them is signifcant.

Chapter 6

Conclusion

LDCs face enormous challenges. Not many are able to transform themselves into nations with developed economies. South Korea and Chile are among those few that have made the leap toward successful development over the last few decades. Peru―despite having many similar characteristics―has not. This study has shown how Peru, a country rich in natural resources, has struggled to overcome challenges and still confronts many development problems. By contrasting Peru with Chile and South Korea, it has examined more fully the dilemmas faced by LDCs and shown what factors contribute to stalling progress and what factors are key to achieving more development. Over the past ffty years, Peru has followed an erratic pattern in policy orientation. Ambiguous policy choices, overdependence on primary commodity exports, lack of economic and political continuity under different administrations, weak institutional structures, the persistence of a large informal sector, and other factors examined in this study have contributed to its inability to move to the next level. Development economics has broadened its approach to problems of development by incorporating institutional, structural, and market perspectives on these problems. It makes use of basic economic principles and theories, but extends its analysis to take a more comprehensive approach. Economic development is multidimensional, with historical, economic, political, social, and institutional mechanisms involved in the process. All of those must be attended to in order to bring about large scale socioeconomic improvements faster. In many instances, economic decisions are also infuenced by domestic political tendencies and institutional factors. This study is not by any means exhaustive or conclusive. Conclusions have been drawn only when they could be based on reliable statistical information. 115

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Development not only involves increasing production, but raising living standards, providing employment opportunities, generating incentives, bringing about changes in attitude, and providing institutional transformation. According to the neoclassical perspective, the free fow of goods, capital, and knowledge is likely to lead to convergence. But as this study has pointed out, there are limitations. When the market is not suffciently developed, the state needs to assume a coordinating role. But if the state is predatory, rentseeking behavior on the part of the ruling elite can harm the economic wellbeing and progress of the rest of society. And if the state is incompetent or erratic, the free market will not fx the problems that result. While rapid capital accumulation can raise the rate of growth in the short run, technical innovation is more important in the long run. A country that seeks to move up the ladder has to become more adept at assimilating as well as developing new technology. This has been the case in Korea as well as China. Peru can beneft from the “late-comer” advantage, borrowing ideas, and learning from others’ experiences. When a country grows, it can stimulate further growth in small and medium-sized manufacturing. This has not happened in Peru suffciently. Economic historians have noted that Iberian colonization created an extractive―rather than a developmental―state whose main purpose was to extract wealth from its colonies. Its institutions were not created to provide checks and balances. Subsequent criollo administrations adopted predatory behavior (Quiroz 2008). This type of institutional structure persisted over time. New ruling elites did not fundamentally change their predatory behavior. Graft and extractive revenues and gains from the resource-based economy persisted. The new ruling elites were not committed to promoting overall development. Without a transformative governance and appropriate institutions, an LDC would be unlikely to catch up to the initial industrializers. The state was not able to create an environment more conducive to economic development by providing suffcient physical infrastructure, investing in human capital, and investing in research and development. Mainstream arguments as to why Peru has not been able to catch-up have focused mainly on internal causes. The dependencia approach blamed external factors such as excessive reliance on one export market or the high levels of indebtedness Peru’s economy experienced in the 1980s. Economic mismanagement under different economic regimes and lack of policy continuity have kept the country from advancing. South Korea, in contrast, was successful in maintaining sustained growth with equity in its drive to industrialization. This study has shown how South Korea fostered improved technologies, undertook land reform, emphasized education, invested in infrastructure, and promoted exports. Both countries experienced land reform and radical social changes. Korea’s outward-oriented

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model was favorable to export-led growth, and this was more conducive to foreign investment. More investment was a way to boost growth. In South Korea, as was also the case in Taiwan, the state engaged in managed trade, attempting to move up the technological ladder using tariffs, subsidies, and taxes. Korea also invested heavily in education and also received large sums of foreign aid. The state encouraged and supported large businesses and industries. Incomes grew and the standard of living rose. Predatory behavior on the part of the ruling elite was minimal. There was reliance on markets. But above all, the government was committed to playing economic catch-up. In Chile, the state promoted policies on foreign trade early on. The government fnance corporation (CORFO) played a role in formulating and supporting these policies. It was able to make loans to private companies in support of their investment activities. Initially, it was engaged in the planning of specifc projects, but after the 1960s it was involved in economy-wide planning. In Chile, the state made a commitment to catching up. It was able to mobilize resources effectively and provide an environment for faster growth, creating infrastructure, investing in human capital, and expanding its foreign trade. In recent years, business-government partnership collaboration has been strong, particularly in infrastructure projects. In world markets, Chile has been able to position itself by marketing its fruits, wines, and metals products successfully. Both Chile and South Korea are now members of OECD. A closer examination of the three countries leads us to conclude that in terms of economic growth, structural patterns of development, and policy implementation, Korea has performed much better. Chile has done well and now is a high-medium income country that has gained membership to OECD. All these countries are small, and although Korea has a larger population (forty million), its share of investment in national income has been among the highest in the world. This is a key explanation for Korea’s rapid rise. It led the country to become a dynamic economy, one more adaptable to assimilating advanced technologies. The relationship between technology and industrial policy led to improvements in productivity. This was the result of more learning by doing and more and quicker product development. The country was then able to fully integrate into the world economy and eventually compete with the industrialized countries. Korea was able to emulate Japan’s successful transformation, shifting from a poor LDC to a developed industrialized country with steady growth of capital stock, enhanced human capital, and an overall increase in GDP per capita. One key outcome was a decrease in the level of inequality. From the 1960s to 1990, Korea grew by more than 7 percent annually, and during the next decade became an even more mature economy despite the fnancial crisis of 1997, which it was quickly able to overcome. Since 2000, Korea has had

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a slower rate of growth, yet its growth was substantially higher than that of most other high-income countries. Irrespective of those who argued in favor of free markets, the Korean government was initially interventionist and used development planning. The state provided a range of tax subsidies and incentives to induce frms to follow government directives. These policies make a compelling case for the role of government in overcoming coordination failures. Korea today is a major investor in the industrial West and a foreign aid donor to many LDCs, including Peru. Chile has been singled out as a relatively successful case of the so-called Washington Consensus because macroeconomic reform was implemented in the mid-1970s, prior to the debt crisis that fared up in the early 1980s. While Chile was subsequently able to achieve higher levels of growth, the trickledown effect was not signifcant and levels of inequality persisted. Chile early on opted for internal and external liberalization, including the demise of its labor unions, to boost the economy. Because of economic expansion and its export achievements, Chile experienced improvements, but was not able to transform its manufacturing sector into an engine of growth as Korea had done. Chile has seen a boost in resource-based exports, has maintained political stability since the Concertación agreement in 1989, and has experienced social improvements―as measured by the HDI―even though inequality remains high. Nevertheless, in social indicators such as average life expectancy, infant mortality, schooling, access to health, and so forth, Chile scores above most of the rest of Latin America. Despite its growing affuence, Chile has been striving to catch up and is better positioned than Peru. Peru does not have and never has had a clearly defned vision or a competitive growth strategy for entering and competing in global markets. It has material resources but has not found a niche or an orchestrated commitment as some countries in East Asia have. Peru has not become a dynamic force to stimulate suffcient investment and job growth. Commercial openings have emerged but Peru is learning as it goes along. While Peru’s participation in global markets has increased terms of its openness, it has yet to shift to more value-added manufacturing activities. In 2006, there was a call for formulating a commercial policy along with increasing negotiating capacity as well as calls for simplifying trade rules at customs (Araoz 2006). There were calls for the simplifcation of bureaucratic procedures and ways to promote productivity. Despite clarity in the arguments put forth, there has been little change in terms of the overall objectives. In essence, some of these initiatives remain on paper and the economy continues to be vulnerable to market shifts. Peru has seen important gains in international trade due to trade liberalization, but they have been insuffcient to raise productivity, generate quality employment, and to put the country on the development track. Trade reforms

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were implemented in the 1990s and were based on the concept of comparative advantage. In essence, the country which is endowed with natural resources (minerals) should produce and export those goods. However, because of the extractive nature of the economy, these extractive industries are not labor intensive, which is what Peru has in abundance. China’s rapid growth has beneftted Peru as it turned into its most important trading partner. But as the Chinese economy slows down, this dependence has negatively affected Peru. Hence, this extractive approach to development is not conducive to a more creative and innovative development process. Development would come by upgrading human capital to achieve greater productivity in more dynamic sectors that can assimilate and absorb technological know-how. Another drag on the development process has been inaccurate diagnosis, ineffective public policy, inadequate coordination, and defciencies in design and formulation of such policies that lead to poor outcomes. Ghezzi and Gallardo (2013) single out the lack of quality of technical personnel in public administration. Public service is often not based on merit but are political appointments that generate ineffciencies. Institutional weaknesses can affect the overall economy and allows the state to be partially corrupt; it limits opportunities in quality employment and provides a defcient delivery of services. This argument has been made by North (2009) who notes that institutions is what generates economic interaction that extends to the political, judicial, and the quality of the bureaucracy. Acemoglu and Robinson (2013) extend the argument to characterize some economies as extractive, which tend to be exclusive, are institutionally weak, and it is where the rules of the game favors the few. This process is not bound to lead to sustained growth. This study has examined the question of which countries are more likely to grow faster. Economists would argue that it would be those that are doing ‘catch-up’ growth (e.g., China and India) as opposed to those that are doing ‘cutting-edge’ growth (e.g., United States). The argument is that a late-comer trying to catch up has it easier because technologies are already available, and it is a process of imitating or improving on existing ideas. Cutting edge, on the other hand, refers to those who are trying to invent new products by creating state of the art technologies. This is the reason countries are growing faster than the United States trying to bridge the gap. Over time the two Asian nations will most likely grow slower. The neoclassical argument emphasizes that as capital accumulates, the return to capital diminishes. Peru is a late-comer and is eager to catch up over time if it is able to use more sophisticated technologies. In 2014, politicians announced that Peru would aim at achieving membership to OECD but it is still far off the mark, not only in terms of per capita income but in many other respects (infrastructure, quality of education, rule of law, etc.). For faster growth to materialize, the catch-up country would have to generate higher rates of investment.

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However, because of political instability or exogenous factors such as falling prices for commodity exports, the country might not have enough savings for capital investment. Moreover, foreign investment might not be easily available when there are signs of institutional weakness and political instability. These limitations impede the country from moving to the next level and remain in what has been labeled as the “middle-income trap,” unable to achieve development. One initiative that has been used successfully by countries such as Mexico and China involves creating free economic zones and special development zones. Peru’s government has created two in the south (Tacna and Puno). Three other development zones are the north (Paita) and two in the south (Ilo and Matarani). Peru’s efforts are well intended, but are still miniscule compared to Mexico’s FDI in 2017, which was $6.2 billion that employs over 900,000 people. Mexico has the maquila plants along its border with the United States. China’s economic zones such as Shenzhen also grew exponentially and contributed to rapid economic growth, intended frst for production and then for export. These economic trade zones could stimulate trade and industrial production, and thus prop up private investment but investors have not been eager to invest in these clusters in Peru and the state has done little to promote the initiative. Economies have four engines that can be activated to propel growth: public spending, private investment, private consumption, and exports. Peru in the recent past has been hobbled because President Kuczynski was replaced by the vice president; the only engine running was exports. Faced with fscal constraints, the government has reduced spending and has been trying to boost tax revenue. Lower public spending still carries the stigma of corruption scandals in infrastructure projects. Private investment and private domestic consumption represents more than 85 percent of domestic demand, but private investment has been falling in the past four years. Peru is a case of inadequate policy coordination, as this study has documented. Peru has been slow at technological absorption since it did not prioritize manufacturing and has had an abysmal industrial performance. Although the preconditions for development were in place, political and economic misfortune impeded its efforts at development. Peru has suffered from ineffcient state enterprises, unnecessary red tape, lack of entrepreneurship, timid private investment, macroeconomic mismanagement (periods of high infation and fscal defcits), too much reliance on primary exports, and recurrent scandals of corruption. In sum, Peru has had unstable growth and a lackluster development. The economy has grown rapidly whenever there were short-term booms due to higher demand for its extractive resources. But this development process has created greater inequality and a host of other socioeconomic problems that have ensued. Lack of good governance,

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incoherent public policies, political instability, and weak institutional development have proven costly. What have learned so far, or what lessons can be obtained from the aforementioned arguments? Peru was chosen because it has a well-endowed economy with abundant extractive resources but remains trapped as a middleincome economy with high levels of inequality. An extractive economy can generate wealth and provide opportunities for the few but it is not entirely extended to the rest. This can lead to rent-seeking behavior of those who want to maximize short-term gain. Under these circumstances a weak state that allows this behavior has somehow infuenced a culture of excesses and opportunism. Today metropolitan Lima and other large cities are plagued by delinquency and citizens are unnerved about the lack of security. A weak state tolerates or is incapable of providing effcient services as well as incapable of solving problems such as corruption, contraband, extortion, and petty crime. One could argue that this is related to Peru’s institutional fragility and the lack of political accountability. Although there is certainly a strong support for democracy there is increased distrust in public offcials and the inability of the state to solve urgent problems. Ghezzi and Gallardo highlight that the economy and the state show limitations to solve problems that are outside the norm (informality, tax evasion, corruption, drug traffcking, and other illegal activities) because of Peru’s characteristics. Durant (2007) makes a similar argument: the clash of cultures, the lack of distrust in elected offcials, and widening economic inequality. This study makes it clear, however, that with good governance and effective leadership in a country with reasonable resources as well as more investment in human capital, development is possible. It will not be easy for Peru. It is a country in a fragile position, reliant on the external sector as long as there is a stable world economy; domestically with weak institutions the economy faces bottle necks that impede it from propelling it forward. As has been noted, there is no unique recipe for development but a country must follow its own path based on its own characteristics. In Peru’s case the economy still shows serious limitations to solve the problems posed by a large informal sector and all sorts of illicit activities that are so prevalent. Let’s not forget that preconditions are macroeconomic stability, upgrading human capital, market initiatives, and stronger institutions. There is a way forward for Peru, but an effective leadership determined to promote a transformative process will be key.

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Index

Africa, 7, 15, 29, 129 Allende government, 52–53, 65 Andean Pact, 23, 50 Asia, vii, 1, 7, 13, 15–16, 29, 31, 36, 38, 42, 46–47, 65, 102, 112, 118, 126–25, 128–29, 131, 134, 137 Asian countries, 49, 71, 90, 93, 99, 102, 104, 119, 125, 130, 134–35 ATPA, 39 authoritarian government, 54, 60; authoritarian rule, viii, 16, 23, 25, 54, 59–60, 88, 123–25 barriers to development, 31 Belaunde, Fernando, 23, 45, 50 Chile, viii “Chilean model”, v, 56–57 China, 2, 6, 8–9, 15–16, 27, 29, 33, 36, 38–40, 54, 66–67, 79, 85, 102, 113, 116, 119–20, 123, 125, 132; China’s demand for raw materials, 2, 33, 36, 38, 40, 66, 79 commercial policy, 39–40, 118, 128 commodities, 2, 10, 27, 29, 33, 37–38, 40, 46, 62, 67, 79–80, 82, 135; commodity prices, 10, 18, 36, 37, 38, 79 competitiveness, 14, 19, 42, 54, 62, 64, 67, 71–72, 75, 77, 88, 94, 137

Concertación, 118 Concytec, 107, 110 CORFO, 6, 28, 46, 55, 59, 117 Corruption, vii, 5, 12, 25–26, 28, 32, 37, 42–44, 53, 56–59, 64–65, 69–71, 75, 77, 84, 91, 104, 113, 120–21, 124 cultural change, 70, 131 cultural norms, 13 debt crisis, 4, 19, 107, 118 dependence, 4, 45, 80, 109, 115, 119 depletion of resources, 80 development, 1–19, 21–24, 26, 28–32, 35–28, 40–42, 45–47, 49, 52, 55–57, 59, 62, 66–67, 71–73, 75, 78–88, 90–93, 100, 103, 107–9, 112–13, 115–21; bonanza development, 79; development economists, 9, 14, 32; development outcomes, 13–14; development redefned, 3–5; development strategy, 22–23, 40, 59, 78, 85, 87–88, 133; underdevelopment, 2–4, 11, 17, 26, 41, 91, 124, 135 developmentalist, 52, 116 discipline, 14, 24, 50, 60, 90–91, 104, 126 distributional justice, 53

139

140

Index

diversifcation of exports, 47 East Asia, vii, 1, 13, 16, 31, 36, 42, 46–47, 65, 102, 112, 118, 126, 128–29, 131, 134, 137 ECLAC, 14, 50–51, 58, 60–63, 127, 132 economic development, vii–viii, 1–2, 4–5, 7, 14, 17, 19, 24, 29, 41, 47, 49, 72–73, 75, 78–79, 82, 109, 112, 115–16, 124–26, 128–32, 134–36 economic growth, viii, 1–2, 5–10, 17– 18, 24, 30–33, 37–38, 41, 44–45, 47, 50, 60, 62, 66, 71, 73, 75, 81, 83, 86–87, 91, 93, 96, 104, 108, 117, 120, 123–25, 127, 129–30, 132, 134–37; and education, 6–7, 14–18, 31–32, 35, 40–41, 47, 60–65, 67, 70–71, 75, 81, 83, 86, 88, 90, 93–109, 116, 117, 119; and investment, 6, 10, 12–13, 15–18, 21–23, 25, 27–28, 36–39, 41–42, 45, 47, 50–52, 54–56, 59–60, 62–65, 75, 81–84, 86–88, 90, 93, 100, 110, 117–19, 120–21 economic liberalization, viii, 6, 19, 25, 53–54, 56–57 economic performance, viii, 1, 12, 46, 53, 67, 81, 89, 132 economic reform, 19, 24–26, 28, 46, 52, 54, 58, 71, 82, 118, 127–28 education, 6–7, 14–18, 31–32, 35, 40– 41, 47, 60–62, 64–65, 67, 70–71, 75, 81, 83, 86, 88, 90, 93–107, 109, 116–17, 119, 127, 129, 131–33, 136–37; completion, 95, 103–5; enrollment, 15, 61, 70, 83, 94–95, 101–2, 105–6; primary, 15, 94, 102, 105, 129; public, 98–100, 103–4, 133; quality, 96–100, 109, 137 export expansion, 82;

export-led boom, 33; export orientation, 46, 70, 82 external sector, 36, 41, 121 extractive economy, 34, 73, 79–80, 121; extractive resources, 86, 120–21 extreme poverty, 15–16, 33 foreign aid, 15, 17–18, 78, 117–18; foreign development assistance, 16, 78 foreign direct investment, 18, 50–51, 63, 88; foreign capital, 22, 37, 41, 82 free market approach, 53, 55 Fujimori, Alberto, 24, 44 Garcia, Alan, 23, 27 GDP per capita, 2, 7, 27, 31, 57–58, 62, 74, 76, 85, 117 Gen. Juan Velasco, 22 Gen. Pinochet, 52–53, 55–56, 65–66, 131, 135 geography, 10–12, 49, 100 global competitiveness, 14, 42, 64, 75, 77, 137 globalization, 15, 66, 85, 129–30 governance, vii, 2, 4–5, 12–13, 15, 18–19, 23, 42–43, 56, 116, 120–21, 131, 136; effective governance, 13; good governance, vii, 12–13, 15, 18, 43, 120–21 government policy, 10, 17, 79, 90 graft, 12–13, 64, 116, 134 growth, vii–viii, 1–19, 21–33, 35–47, 50–51, 53, 56–60, 62–63, 65–67, 71–76, 78, 81–91, 93, 95–96, 99, 102–4, 106, 108, 116–20, 123–27, 129–32, 134–37; rates, 10, 19, 31, 35–36, 38, 47, 58, 60, 63, 65, 102; strategies, 18; sustained, 8, 21, 26, 31, 33, 66, 90, 116

Index

high quality growth, 75 Humala, Ollanta, 27, 59 human capital, 4, 10, 17–18, 31, 35, 41–42, 45–46, 67, 71, 74–75, 83, 93, 95, 97, 99–103, 105, 107, 109, 111, 113, 116–17, 119, 121 human development, 3, 13–14, 16, 62, 64, 76, 80–81, 86, 136; human development index, 14, 16, 62, 64, 80, 86 IMF, 19, 23–24, 38, 86 import-substitution industrialization (ISI), 25, 42, 45, 70, 78, 82, 83, 86, 91, 107 income inequality, 35, 44, 104 industrialization, 25, 37, 42, 47, 60, 73, 78, 83, 85–86, 90, 116, 123, 128, 130, 134, 137 inequality, viii, 5, 14, 16, 26, 29, 33–35, 44, 57, 64–65, 81, 84, 91, 95, 98, 100–101, 104, 117–18, 120–21, 126–27, 131 informal economy, 6, 41, 46, 49; informal institution, 5; informal labor market, 17, 41; informal sector, viii, 2–4, 17, 26, 30, 40–41, 46, 49, 59, 69–72, 84, 115, 121 institutions, viii, 3, 5–8, 11–15, 19, 22, 24–28, 42–44, 46, 52, 54, 56–57. 59–60, 68, 71–72, 75, 86, 90, 100, 106–7, 110, 112–13, 116, 119, 121, 124, 126–27, 129, 132, 134, 137; institutional development, 3, 12, 18, 71, 121, 127; institutional factors, 18, 21–22, 37, 115; institutional reform, 14, 34–35 international trade system, 39 investment, 6, 10, 12–13, 15–18, 21–23, 25, 27–28, 36–39, 41–42, 45, 47, 50–51, 54–56, 59–60, 62–65, 75, 81–84, 86–88, 90, 93, 100, 110, 117–21, 129, 133, 136

141

inward-oriented, 78 Japan, 7, 24, 39, 78, 87–90, 102, 110, 112, 117, 133 judicial system, 12, 43, 65, 84 Kuczynski, Pedro Pablo, 44, 65 labor unrest, 23, 70 late comer, vii, 116, 119 late industrializer, 6, 17, 82 Latin America, viii, 4, 6–7, 10, 12–13, 15, 17–19, 22, 24, 29, 31, 33, 35, 40, 42, 46, 51–52, 54, 57–58, 60–61, 63–68, 70–71, 74, 78, 83, 91, 93–94, 97–99, 101–2, 104–5, 107–10, 112, 118, 123–36 leaner government, 31 leapfrog, 1, 29 liberal democracy, 30 liberalism, 4, 25, 54, 57, 90, 125, 128, 130 literacy, 2, 33, 60–61, 81, 93–94, 96. 99, 101–2, 105 macroeconomic policies, 45, 53, 66, 88, 90; macroeconomic stability, viii, 22, 41, 45, 59, 75, 121 macroeconomic populism, 24 manufacturing, 5, 11, 17, 26, 29–30, 37, 42, 46–47, 49, 55, 75, 78, 80–83, 87–90, 107, 112–13, 116, 118, 120. 128–29; manufactured goods, 30, 37, 39, 42, 47, 78–79, 86 market frst, 5, 22, 42 market liberalization, viii, 25–26, 59 market oriented, 23, 90 market reform, 44, 55, 66, 71, 123 middle class, 16, 78, 126; middle-income country, 3, 21, 35, 72 middle-income trap, 9, 120 military regime, 18, 22, 46, 52, 57

142

Index

Mincetur (ministry of foreign trade), 39, 131 minimalist state, 5, 59 mining, viii, 14, 23, 32, 38, 40, 49, 52, 68, 79, 108, 126 modernization, 4, 55 nationalist, 22–25, 27, 52, 59 natural disasters, 49, 68 natural resources, viii, 1, 9–11, 21, 55, 66, 80, 84, 89, 91, 115, 119, 126, 130, 134 neoliberal economic reform, 21, 54, 57 neoliberalism, 4, 25, 54, 57, 125, 128, 130 nontraditional products, 40, 59 OECD, viii, 8–9, 12, 14, 32, 40, 57, 65–67, 70, 84, 86, 97–100, 102, 105, 110, 117, 119, 132–33 Openness, 13, 19, 22, 36, 60, 63–64, 118 outward oriented, 18, 71, 78, 90, 116 Peruvian exports, 39 PISA, 65, 97, 99 policy continuity, 45, 56, 66, 82, 90–91, 116 political stability, 18–19, 53, 66, 70, 118 poverty, viii, 2–3, 7–8, 14–16, 26, 28, 30, 32–35, 44, 54, 56, 61–62, 64, 66, 70, 72–73, 75, 79, 85, 91, 123–25, 127–28, 130–31, 133, 135–36 poverty reduction, 2, 3, 8, 16, 26, 32– 33, 35, 56, 62, 66, 72, 125 poverty trap, 14, 123, 133 primary products, 81, 83; primary commodities, 10, 29, 37, 40, 46, 62; primary export model, 28, 37, 45 privatization, 6, 23–24, 26, 46, 52–53, 56, 58 productive economy, 73, 75, 77, 79, 80–81, 83, 85, 87, 89, 91

productivity, viii, 3, 5, 11, 17, 19, 21, 26, 30, 36–37, 40–42, 46–47, 64, 66–67, 72, 73, 84, 86–93, 102, 108, 112, 117–19, 125–26, 131, 133 pro-market, 26, 53, 130 public institutions, 3, 13, 43–44, 106 public policies, 41, 121 public-private partnership, 6, 28, 45, 55 public transportation, 28, 69 research and development, 28, 47, 86, 107, 110, 113, 116 resource curse, 9–10, 80, 126, 130, 134 resource endowment, 9–11, 78, 80 reversed foreign aid, 18 social indicators, 2–3, 28, 32, 60–61, 70, 72, 83, 118 socioeconomic development, viii, 2 South Korea, viii, 1–2, 6, 8–9, 13, 16, 22, 39, 45, 47, 54, 67, 73, 81, 87–88, 90–91, 93, 108, 115–17, 123–25 state-directed, viii, 4, 6–7, 21, 24–25, 28, 45, 50, 52–56, 59, 82, 87, 108; state intervention, 3, 5–6, 8–9, 18, 22, 30, 46, 83, 90, 116–18 state owned enterprises (SOE), 6, 22– 23, 52, 56, 58, 65, 120 structural transformation, 19, 42, 133 sustainability, 2, 15, 133, 134 sustainable growth, 8, 15, 21 technology, 4–5, 9, 11, 16–18, 36, 40, 45, 82, 84–86, 89, 93, 95, 97, 99, 101, 103, 105, 107–13, 116–17, 128, 130, 135; technological capabilities, viii, 10, 17, 26, 30; technological dependence, 109; technological development, 17, 40, 85, 107–9 terms of trade, 10, 47, 50, 65, 79, 135

Index

Toledo, Alejandro, 58 total factor productivity, 21, 67, 125 trade agreements, 27, 39–40, 80, 85, 137 trade liberalization, 19, 23–24, 35–36, 45, 118 trade oriented, 87 UNESCO, 76, 81, 83, 94–96, 110–11, 113 United States, 9, 22, 27, 32, 38–40, 54, 59, 78, 81, 83, 85, 87–89, 91,

143

102, 107–8, 110, 119–20, 128, 134, 136 urban-rural, 4 War of the Pacifc, 50 water and sanitation, 61–62, 68 World Bank, 3, 7, 10–11, 14, 16, 43, 51, 55–56, 72, 76–77, 81, 84, 94–98, 102–5, 109, 124–27, 130–31, 133, 135, 137 World Economic Forum, 40, 42, 62, 67, 70, 72, 77, 137

About the Author

Rubén Berríos is associate professor of economics at Lock Haven University. He is the author of Contracting for Development (2000) and of more than forty articles in specialized journals and chapters in books.

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