Unorthodox reform fails the poor in Peru

Number 7 The World Bank December 1992 Unorthodox reform fails the poor in Peru Structural adjustment did not always succeed in the increased consumer prices by 114%. 1 980s. But neither did some alternative strategies. Ad hoc adjustment, consisting Bank economists look at Peru's experience primarily of price increases without real wage increases, characterized the last two years of the APRA T ~he often negative social progressive relief from poverty administration. By the time a new consequences of structural should also be part of the adjust- government came to power in 1990, adjustment in the short run ment process. inflation was running close to have been widely noted and criti- 3,000% a year. Production and cized. But far less attention has gone Peru's program wages were falling (see figure 1). to the consequences of avoiding In the early 1980s, Peru tried stabilization and adjustment efforts. stabilization programs with little Figure 1 Reforms led to That's why Peru's experience, as success. Its efforts could not over- macroeconomic decline chronicled by World Bank econo- come the effects of both world (index 1980 =100) mists Paul Glewwe and Gillette recession and the debt crisis. GDP per capita Hall, deserves study.* Economic conditions deteriorated, 1980 - During the 1980s Peru chose not inflation soared, and real output 1985 =_ _ to adopt a program of structural fell. The APRA (Alianza Popular 1990 adjustment-the Bank and IMF Revolutionaria Americana) govern- 0 50 100 prescription for renewing economic ment that took office in 1985 growth in developing nations. inherited an anemic economy. It Average real minimum wage, Lima Structural adjustment demanded decided to postpone further efforts 1980 austerity: it called for deep cuts in at stabilization and jump-start the 1985 government spending to cut budget economy with an injection of 1990 deficits. It also meant removing government spending. 0 50 100 price controls and freeing market The government also introduced forces to promote efficiency. price controls and broad-based Consumer prices In the long run, such a program income transfers and subsidies. The 1980' 100 promised to reduce poverty by focus of the APRA program was to 1985* 3,474 restoring fiscal stability that was to protect the poor while encouraging underwrite vigorous economic demand-induced growth. But it had 0 40,000 000 recovery. It soon became clear, exactly the opposite effect, accord- No1 to scale however, that the long run might be ing to Glewwe and Hall. decades, not just a year or two, and Peru's economy did expand Exports (dollars) Keynes once noted: "In the long rapidly at first. But the 1980 run, we are all dead." unsustainability of these so-called 1985 =__ The Bank's World Development "heterodox" policies was evident 1990 Report 1990 dealt with concerns that by mid-1987, when inflationary 0 50 100 strict structural adjustment might pressures and widening budget leave behind a whole generation of deficits appeared. Reactivation poor. The report recognized that policies nonetheless continued until Net international reserves September 1988, when the govern- 1980 ;j* 2Y;; _ -For more details, see Paul Glewwe and Gillette Hall. ment announced "El Paquetazo," a 1985 -X "Unorthodox Adjustment and Poverty in Peru," Finance & _ 1990 Derelopment Vol. 29, No. 4, December 1992. severe readjustment of prices that -20 50 100  What went wrong Figure 2 The poor suffered declines in consumption than the Several studies of Peru's most better educated. experience show why the And households headed by country went in economic Percentage change in per capita monthly unemployed individuals suffered freefall. By 1988, the govern- consumption more than those headed by em- ment was bankrupt, and it began -54.0 decile ployed individuals. Poor families to pay its expenses by printing 90 decMle were more likely to have lower more money. For a while, Peru 70 levels of education, and higher was virtually blacklisted by 50 unemployment. public and private 30 Poorest In sum, the APRA government international lenders. -62.4 10 decile adopted a policy it thought would Exports and national -65 -60 -55 -50 -45 encourage rapid economic growth reserves declined, while and more equitable distribution of average income plummeted. 86 and 1990 (see box). The surveys income. But by avoiding fiscal stabi- But until Glewwe and Hall reveal an average decline in con- lization, it threw the country into looked at the data, no study had sumption of over 50% from 1985 to deeper crisis and made it more diffi- conclusively examined how the 1990, one of the most rapid and cult for the poor to live better lives. overall economic decline in Peru severe deteriorations in living The orthodox policies that were had affected different segments of standards ever recorded (see figure rejected in Peru in 1985 were the country's population. 2). And the poor suffered the most, adopted in 1990 after a change of Glewwe and Hall based their with the poorest decile of the government. Peru now faces the inquiry on the results of Living population experiencing a 62% task of reviving economic growth Standards Surveys in Lima in 1985- decline in consumption. with much higher poverty rates than those prevailing in 1985. More and deeper poverty Glewwe and Hall conclude that LSMS data The Peru Living Standards Survey's some structural adjustment is data on consumption showed that necessary, but that governments Living Standards Measurement the poorest families had the largest can cushion the impact of such Studies (LSMS) household surveys drop in consumption, the some- reforms by directing social expendi- generate high-quality, policy what better-off less decline, and so tures for education and public relevant data in developing coun- on. In short, inequality increased. services towards the poorest sector tries. The studies look closely at Housing for the poor, made of less of the population. No quick fix inequality in expenditure durable materials, deteriorated more solutions exist for dealing with distribution, welfare, and poverty. Survey results are useful in assessing than middle-class and upper-class economic stagnation and poverty. the impact of development policies housing during the late 1980s. Access on different socioeconomic groups. to public services, such as water and For an in-depth analysis, see Surveys have been conducted in sewage systems, also deteriorated "Poverty and Inequality During ] Peru, Bolivia, Cote d'Ivoire, Ghana, most among the poorest. Unorthodox Adjustment: The Case Jamaica, Mauritania, Morocco, o eu 959"b alGew Pakistan, and Venezuela. New Two other significant points and Gillette Hall, Living Standards surveys are under way in Guyana, emerged from the surveys: House- Measurement Study Working Paper Nicaragua, and Viet Nam. holds headed by individuals with 86, World Bank, 1992. little education experienced greater - Development Briefs are issued by the World Bank to inform the media, business, academic, and government policy communities about development policy analyses and results from the Bank's research activities. They are drawn from the wvork of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attributed to the World Bank or its affiliates. Briefs are issued periodically by the Research Advisory Staff, Development Economics Vice Presidency, The World Bank, 1818 H Street, NW, Washington, DC 20433 Tel (202)473-3984, Fan: (202)477-0955. Briefs are not copyrighted and may be reproduced with the appropriate attribution. 2