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Sunday, December 21, 2008 CE

Peru, 1987-1992: Memories from Tough Times.


Recession: the reduction of a country's gross domestic product (GDP) for at least two quarters.

Depression (economic): any economic downturn where real GDP declines by more than 10 percent.

Hyperinflation: an extreme rate of inflation in which the general price level of goods and services, usually measured by the Consumer Price Index (CPI), rises very rapidly.

Stagflation: an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.

Terrorism: the calculated use of violence (or the threat of violence) against civilians in order to attain political goals.

Epidemic: a widespread outbreak of an infectious disease; many people are infected at the same time

Nobody knows how things started; however, many of us know what happened. Many theories float in the air. They blame the Spanish colonial rule of the 16th, 17th, 18th centuries, the Chilean invasion in the late 19th century, the Great Depression, the World Wars, the Cold War, the military governments, el Nino phenomenon, the Oil crises, the debt crisis, etc. Nobody knows the real answer. The truth is that in those 5 years Peruvians experienced all the words that were defined at the beginning of this post.

In 1987, Peruvians had Alan Garcia as president. A young politician from an old party, elected president in 1985, and, probably, the best orator of modern times. He brought a social-democrat agenda and his populism filled up the Peruvians with hope. By mid 1987, the dream of getting rid of the epithets of “poor country” and “third world nation” was starting to become true. The country’s GDP had grown 12.1% in 1986 and it was growing at a similar rate during 1987. That year, the president decided to confront the economic elite because “they were not investing in the country”. This, together with ill-conceived financial decisions, worsened what was already in place: a high rate of inflation. The year ended with an annual inflation rate of 114.51% (One hundred and fourteen). At the same time, the Shining Path, a radical Maoist movement was challenging the government forces with ambush tactics and terrorizing the civilian population as a means of gaining power. Their actions, which had been restricted to the distant Andean regions started to pound the larger cities.

1988 was the end of the dream. The monthly inflation rate was over 12% and people were starting to feel the pain. Many people, especially government officials, had their salaries adjusted to inflation, but many people did not. In September, the government attempted to solve the issues announcing a package of economic measures. Many of these included getting rid of certain government subsidies, however, without tackling the fiscal deficit and the printing of new money. The result of the measures was that September had a monthly inflation rate of 114.12% and left a residual monthly inflation rate for the rest of the months of the year of around 40%. As a consequence of the economic problems 1988’s GDP dropped 9.4% placing us in the territory of an economic depression. The total inflation rate for 1988, was 1722%, completing the picture of stagflation. On top of everything, the Shining Path was gaining strength, causing massive blackouts in Lima, the capital city, and destroying the infrastructure of the country. Bridges, railroads, police stations, city halls, tunnels, etc, were blown up by explosives.

1989 was a year that seemed no government was taking care of the issues. The inflation rate remained at a monthly rate of 40%. People bought their groceries as soon as they got their paychecks and housewives got used to “cook for a whole week”. Businesses closed, restaurants and shopping centers were empty, and a curfew was in place which did not let people in the capital city wander in the streets after 10 pm. More than 80% of the country was under de facto military rule due to the suspension of the constitutional rights that came with the “state of emergency” caused by the Shining Path. The GDP fell for a second consecutive year at a rate of 13.4%. The overall inflation rate reached 2774.98% in 1989.

1990 brought some hope. It was election year. A new government was supposed to change the state of chaos that had engulfed Peru. Mario Vargas-Llosa, the famous writer, was leading in the polls as the leader of a right-wing coalition. He spoke clearly about the need of change and about the harsh measures needed to correct the economic and political environment. Alberto Fujimori appeared in the scene around March, out of nowhere. His campaign appealed to the people because the economic plan to solve the issues did not seem as hard as Vargas-Llosa’s. Eventually, Fujimori defeated Vargas Llosa. Due to the anxiety and speculation caused by the coming new government, inflation rate picked up steam and reached the level of 63.23% by July. By then, the inflation rate was being measured in a daily basis. It was common to watch the news at night and get the report of a 2% or 3% inflation rate for a given day. When Fujimori was sworn in as president, chaos caused by speculation soared in anticipation of the new package of economic measures. Gasoline was scarce, long lines in gas stations were common. Finally, 11 days after Fujimori took power, the Economy Minister delivered the economic measures. So harsh were the measures that he ended his address to the nation with the phrase: “God help us all”. The day after, the naturally chaotic streets of Lima were desolate. Soldiers were patrolling them. Violence was not absent. Supermarkets were sacked by desperate people; the highways were blocked by peasants. The fact was that the price of the most basic items went up by a factor of 5. Gasoline was up 33 times higher than the previous day. The whole country was paralyzed. August ended with a inflation rate of 396.98%. The year was the third in a row showing a negative growth in GDP, 5.1% and the inflation rate for the year was 7649.65%. The Shining Path did not stop its attacks; in fact they claimed to have achieved a strategic equilibrium in their battles with the army in the Andean regions.

1991 saw inflation slowing down due to the collapse in the buying capacity of the people, mainly because salaries were not adjusted anymore to it. However, as if being pounded by a depression, hyperinflation, a Maoist terrorist group were not enough, a cholera epidemic ravaged the country. Vibrio cholerae thrived in the collapsed water and sewer systems. 322,000 people suffered from it during 1991. Amazingly, the death rate was less than 1% due to the many years of people’s preparation (through TV ads and government programs) to treat acute gastroenteritis at home, especially in children. The Shining Path continued its offensive, showing for the first time deadly car-bombs in Lima, the capital city. 1991 ended with an inflation rate of 139%, taking into account that the monthly inflation rate by the end of the year was close to 3%. The GDP grew 2.1% that year meaning that the country could have been emerging from the depression.

In 1992 the country appeared to be failing as a country. Car-bombing by the Shining Path was common in Lima, together with “armed strikes” which would not allow people in the poorer areas of the city go to work. It was common to drive by a blown up building and to walk by police stations barricaded with cement bags. Inflation had been contained, but recession reappeared. The GDP dropped again 0.4%

Between the end of 1987 and the end of 1992, the Peruvian GDP dropped 24.6 %, the inflation rate was over 2 million percent. The buying capacity of the average Peruvian dropped by more than 50%. Unemployment an underemployment were the rule. The Shining Path was finally controlled after the capture of its leader in September 1992. During those years, people got used to a lifestyle characterized by uncertainness. Finances, health, and life were not taken for granted and people learned to live like that. Above all, Peruvians did not lose their sense of family, their sense of friendship and their sense of humor, which anyone who knows Peruvians well would be able to describe.

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2 Comments:

Anonymous Anonymous said...

Marco,

That were tough times. Wow.

Things are pretty crazy now too. 90% of Americans have very little net worth - upside down on mortgage, plus home equity loan, multiple car loans (with 0% down and 7 years), max credit card debt (average $12,000), near zero in savings, already dual-income households. Bottom line: Americans bought more than they could afford.

Many economists now fear the possiblity of deflation. Makes sense. Americans can't get anymore loans (nothing to use as collateral, and most collateral is not considered to be dependable), so how can they spend? Americans need to restrict their purchases to food, clothing, and shelter - start paying off the debt.

Now throw in the global nature of economics. Lots of countries will have problems and that will affect the U.S. economy.

We are likely in for a few years tough times. Probably not like Peru in 1990, but not wonderful either.

Still, spend less than you make. Pay off debt and life will be good.

Happy Holidays!

Q

5:48 PM  
Anonymous generic viagra said...

These are the most impostant things in the contries,Recession,
Hyperinflation and Stagflation are so good in our country.

2:44 PM  

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