Talk:Economic policy of the Alberto Fujimori administration

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From hyperinflation to inflation Fujimori's extreme but economically necessary ´Fuji Shock´ therapy August 7, 1990 In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large-scale privatization of previously public-owned assets.As shock policy, the term was coined by economist Milton Friedman. In time, it became absorbed into the group of ideas about economics, that are sometimes referred to as neoliberalism. The economist Jeffrey Sachs coined the expression of shock therapy. The alleged difference between the two shock expressions lies only in the degree of economic liberalisation. Sachs' ideas were based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day.[1] Whereas, Sachs' shock therapy notion views liberalisation as a necessary evil, a fast—as well as nasty—way to achieve economic stabilisation. The first instance of shock therapy were the neoliberal pro-market reforms of Chile in 1975, carried out after the military coup by Augusto Pinochet. The reforms, dubbed a shock policy at the time by Milton Friedman, were based on the liberal economic ideas centred around the University of Chicago. Many of the Chilean economists who drafted the reforms came from there and were collectively dubbed the "Chicago Boys". The term was truly born after Bolivia successfully tackled hyperinflation in 1985 under Gonzalo Sanchez de Lozada, using Sach's ideas. In particular Sachs and Sanchez de Lozada cited West Germany as inspiration where, during a period over 1947–48, price controls and government support were withdrawn over a very short period, kick-starting the German economy and completing its transition from an authoritarian post-War state. Neoliberalism rose to prominence after the 1970s and neoliberal shock therapy became increasingly used as a response to economic crises, for example by the International Monetary Fund (IMF) in the 1997 Asian Financial Crisis. Neoliberal shock therapy became very controversial, with its proponents arguing that it helped to end economic crises, stabilise economies and pave the way for growth, while its critics (like Joseph Stiglitz) believed that it helped deepen them unnecessarily[2] and created unnecessary social suffering. Sachs' ideas were applied to the post-communist states in their transition to capitalist systems with very mixed results. Some countries that used shock therapy (e.g., Poland, Czech Republic) did better than those that did not. To further cloud understanding, China made its highly successful transition in a gradualist fashion. An opinion [3] is that successful market economies rest on a framework of law, regulation, and established practice[4] that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised and subject to state ownership of assets. The evening of August 7, 1990, is known in Peru as the D-day of the neoliberal shock therapy that the Fujimori administration imposed upon Peru and the beginning neo-liberal economic scheme that governs the Peruvian economy to this day. The term ´Fuji Shock´ was truly born in Peru after Fujimori's government successfully tackled hyperinflation in 1991, using Sach's ideas. In particular Sachs and Fujimori cited Chile as inspiration where, during a period over 1973–1976, price controls and government support were withdrawn over a very short period, kick-starting the Chilean economy and completing its transition from a soviet inspired cold war to a liberal state. Fujimori's shock therapy was a total reversal of practically all the economic policies of the previous 20 years by preceding governments, from Velasco's soviet socialism to Alan Garcia's yugoslav inspired socialism in conditions that clearly required drastic corrective action. Its main immediate target was to stop the runaway course of inflation. Beyond that, the goals included repudiating protection and import substitution, returning to full participation in the world trading and financial systems, eliminating domestic price controls and subsidies, raising public revenue and holding government spending strictly to the levels of current revenue, initiating a social emergency program to reduce the shock of adjustment for the poor, and devoting a higher share of the country's resources to rural investment and correction of the causes of rural poverty. In practice, new measures came out in bits and pieces, dominated by immediate concern to stop inflation; actions taken in the first year did not complete the program. Preoccupation with inflation was natural enough, after the steep rise of 1989 and the months immediately preceding the change of government. The monthly rate of inflation ranged between 25 percent and 32 percent in the second half of 1989, exceeded 40 percent in June 1990, and amounted to 78 percent by July. The deficit of the central government increased from 4 percent of GDP in January 1990 to 9 percent by May. The money supply of the country increased six times over from January to the end of July. The new government had to act quickly, and did. The most dramatic immediate action was to eliminate price controls for private-sector products and to raise prices of public-sector products to restore financial balance for public firms. The price of gasoline, previously driven down to the equivalent of twelve United States cents a gallon, was multiplied by thirty times. For the consumer price index (CPI), the shocks caused an increase of 136 percent in one day. Eliminating price controls in the private sector and raising prices charged by state firms had three objectives. First, the price increases for the public-sector firms and government services were meant to restore revenue to a level that would allow the government to stop borrowing from the Central Bank. Second, the rise in prices was intended to reduce aggregate demand by cutting the liquidity of business and the purchasing power of the public. Third, with everything priced far higher relative to public purchasing power, it was expected that market forces would begin to operate to drive some prices back down, reversing the long trend of increases in order to help break the grip of inflationary expectations. To back up the impact of the price shocks, the government declared that it would keep its own expenditure within the limit of current revenue and stop the other two large streams of Central Bank credit creation: Central Bank financing for agricultural credit and for the system of subsidies supporting differential exchange rates. The multiple exchange rates in effect under García were to be unified, and the unified rate was to be determined by market forces. Further, competition from imports to restrain inflation and access to imported supplies for production would both be improved by taking away quantitative restrictions and reducing tariff rates. The new policies helped greatly to bring down the rate of inflation, although they fell short of accomplishing full stabilization. Against an inflation rate that had reached approximately 2,300 percent for the twelve months to June 1990, the rate of 139 percent for the twelve months to December 1991 can be seen as a dramatic improvement. But the latter was still more than double the government's intended ceiling for 1991 and still extremely high relative to outside world rates of inflation. The last quarter of 1991 looked more promising, with the monthly rate down to 4 percent, but it had risen to 7 percent by March 1992. Inflationary dangers clearly remained troublesome, especially in view of two factors that should have stopped inflation more decisively: a deeply depressed level of domestic demand and an unintended increase in the real exchange rate, making dollars cheaper. Domestic demand has been held down by the combination of the price shock at the start of the stabilization program, steeply falling real wages, reduced government deficits, and much tighter restraint of credit. All these were deliberate measures to stop inflation, accepting the likely costs of higher unemployment and restraint of production as necessary to that end. In 1990 GNP fell 3.9 percent, aggravating the plunge of 19 percent between 1988 and 1990. In 1991 production turned up slightly, with a gain of 2.9 percent in GNP. That situation left output per capita essentially unchanged from 1990 and at 29 percent below its level a decade earlier. The incomplete success in stopping inflation created an extremely difficult policy conflict. Recovery could in principle be stimulated by more expansionary credit policies and lower interest rates, which would favor increased investment, depreciation of the currency to help producers compete against imports, and improved exports. But continuing inflation and the fear of accelerating its rate of increase argued instead for keeping a very tight rein on credit and thereby blocked the actions needed for recovery. This conflict became particularly acute over the question of what to do about the exchange note: the real exchange rate went in exactly the wrong direction for recovery by appreciating when depreciation was both expected and needed. The decision to remove controls on the exchange rate had been expected to lead to a much higher foreign-exchange price, to encourage exports, and to permit import liberalization without a surging external deficit. But when the rate was set free, the price of dollars went down instead of going up. That initial effect could be explained by the tight restraints imposed on liquidity, which drove firms and individuals who held dollar balances to convert them to domestic currency in order to keep operating. This movement should presumably have gone into reverse when holdings of dollars ran out, but fully eighteen months later no reversal had occurred. Dollars remained too cheap to make exports profitable and too cheap for many producers to compete against imports for several reasons, including the continuing influx of dollars from the drug trade into street markets and then into the banking system. A second reason has involved the continuing low level of domestic income and production, and corresponding restraint of demand for imports as compared with what they would be in an expanding economy. But perhaps the most fundamental reasons have been the continuing squeeze on liquidity in terms of domestic currency and the resulting high rates of interest for borrowing domestic currency, which strongly favor borrowing dollars instead or repatriating them from abroad. All this means that the economy has had no foreign-exchange problem, but also that incentives to produce for export have been held down severely, when both near-term recovery and longer-term growth badly need the stimulus of rising exports. The government was more successful in the part of its program aimed at trade liberalization. As has been noted, the average tariff rate was cut greatly in two steps, in September 1990 and March 1991. Quantitative restrictions were eliminated, and the tariff structure was greatly simplified. Effective protection was brought down to a lower level than at any point since the mid1960s, with a more coherent structure that left much less room for distorted incentives. Fujimori is credited by many Peruvians for bringing stability to the country after the violence and hyperinflation of the García years. While it is generally agreed that the "Fujishock" brought short/middle-term macroeconomic stability, the long-term social impact of Fujimori's free market economic policies is still hotly debated. Neoliberal reforms under Fujimori took place in three distinct phases: an initial "orthodox" phase (1990–92) in which technocrats dominated the reform agenda; a "pragmatic" phase (1993–98) that saw the growing influence of business elites over government priorities; and a final "watered-down" phase (1999–2000) dominated by a clique of personal loyalists and their clientelist policies that aimed to secure Fujimori a third term as president. Business was a big winner of the reforms, with its influence increasing significantly within both the state and society.

Add back to the article with proper sources if necessary.--WMrapids (talk) 09:32, 10 April 2021 (UTC)