Policy, Planning, and R.search
WORKING PAPERS
Macroeconomic Adjustment
and Growth            l
Country Economics Department
The World Bank
December 1989
WPS 316
The Macroeconomics
of Populism
in Latin America
Rudiger Dornbusch
and
Sebastian Edwards
The experiences of Chile under Allende and Peru under Garcia
illustrate that when populist policies fail they do so at a frighten-
ing cost to the very groups they were meant to benefit.
The Policy, Planning, and Research Complex distributes PPR Working Papen to dissaninate the findings of work in progress and to
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the authors, reflec only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the
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Pollcy, Planning, and Research
Macroeconomic Adjustment
and Growth
By "populism" Dombusch and Edwards mean                More research would be needed to support
an economic approach that emphasizes growth        the authors' thesis that populist policies could
and income redistribution and deemphasizes the     succeed only if they stayed far clear of foreign
risks of inflation and deficit finance, extemal    exchange constraints, emphasized reactivation
constraints, and the reaction of economic agents   only for a brief initial period, and then shifted to
to aggressive nonmarket policies.                  growth policies.
Dombusch and Edwards analyze two                   Most important, expansionary policies must
instances of populism -  Chile under Allende       reflect awareness of capacity constraints and
and Peru under Garcia -  that led to disastrous    must rely for financing on an extremely ortho-
consequences for those who were meant to           dox fiscal policy and rigorous tax ^.dministra-
benefit from them.                                 tion. Given those restrictions, there is signifi-
cant room for the redistribution for which
They describe these experiences in detail,     populism aims.
not as a righteous assertion of conservative
economics but as a waming that populist poli-          Dombusch and Edwards conclude by
cies ultimately fail -  and always at a frighten-  warning that IMF-style policies -  unconcemed
ing cost to the groups they were supposed to       with growth or social progress -  may establish
benefit. The very sincerity of the policymakers    financial stability in the short run, but inevitably
in Chile and Peru convinces the authors of the     open the door to yet another round of destructive
necnssity of laying out exactly how and why        reaction in the form of populist policies.
such programs go wrong.
The question is, are populist policies unsus-
tainable - or could some variant of them
succeed?
This peper is a product of the Macroeconomic Adjustment and Growth Division,
Country Economics Department. Copies are available free from the World Bank,
1818 H Street NW, Washington DC 20433. Please contact Raquel Luz, room Ni l-
059, extension 61588 (64 pages with charts and tables).
The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy. Planning, and Research
Complex. An objective of the series is to get these fmdings out quickly, even if presentations are less than fully polished.
The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.
Produced at the PPR Dissemination Center



The Macroeconomics of Populism in Latin America
Table of Contents
Page No.
I.   The Populist Paradigm . . . . . . . . . . . . . .3
II.   Economic Policies in Allende's Chile  . . . . . . . . . . .     9
II.1  The Short Run Economic Program  . . . . . . . . . . .   11
II.2  The First Year:  Rapid Growth with Repressed
Inflation ....  .  .  .  .   ......  .  .  .  .  .  .   .   18
II.3   The Second Year:  Failed Stabilization Programs . . .   23
II.4  The Third Year:  Economic Chaos and Coup  . . . . . .   28
III.    Growth with Redistribution in Garcia's Peru . . . . . . . .    30
II.1 From Belaunde to Garcia  . . . . . . . . . . . . . .    32
III.2  The Heterodox Program  . . . . . . . . . . . . . . .    34
III.3    What  Next?   .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  47
IV. Concluding Remark .52
References .54
Charts



THE MACROECONOMICS OF POPULISM IN LATIN AMERICA1
Rudiger Dornbusch        and      Sebastian Edwards
MIT and NBER                       UCLA and NBER
This paper addresses the macroeconomics of populism in Latin
America. We mean by "populism" an approach to economics that emphasizes
growth and income redistribution and deemphasizes the risks of inflation
and deficit finance, external constraints and the reaction of economic
agents to aggressive non-market policies. The purpose of our paper is to
show that policy experiences in different countries and periods share
common features, from the initial conditions, the motivation for policies,
the argument that the country's conditions are different, to the ultimate
collapse. Cur purpose in setting out these experiences, those of Chile
under Allende and of Peru under Garcia, is not a righteous assertion of
conservative economics, but rather a warning that populist policies do
ultimately fail; ar.d when they fail it is always at a frightening cost to
the very groups who were supposed to be favored. A central thesis we
advance is that the macroeconomics of various experiences is very much the
same, even if the politics differed greatly.
We are struck by the strong similarities in Chile, Peru, and in
other episodes not developed in detail here of the way policy makers
1This paper was presented at the second meeting of IASE, Bogota, Colombia, March 30-
April 1, 1989. The authors are indebted to conference participants, Eliana Cardoso,
Vittorio Corbo. Javier Iguinez, Richard Eckaus, Eduardo Engel, Jose de Gregorio,
Caterina Nelson, Eva Paus, Andres Solimano and Andrew Zimbalist for helpful
suggestions. The research reported here is part of a project supported by the World
Bank.



2
viewed the objective conditions of their economy, how they proposed that
strongly expansionary policies should and could be carried out, and how
they rationalized that constraints could be dealt with.2 And, of course,
we are impressed by the fact that in the end, foreign exchange constraints
and extreme inflation forced a program of violent real wage cuts that
ended in massive political instability, coups and violence. There is no
doubt in our mind about the sincerity of the policy makers who embark on
these programs, and we shars their conviction that income distribution is
unacceptably unequal. The very sincerity of these policy makers convinces
us of the usefulness, and indeed the necessity of laying out exactly how
and why the programs do go wrong.
The combination of external influences (debt crises,economic
blockades etc.), domestic policies (socialization of firms, bank
nationalization, etc.) and macroeconomic policies bring about an
unsustainable economy where inflation is out of control, and the foreign
exchange constraints force realism on policy makers. Accounts of these
experiences by sympathizers often emphasize politics and, especially,
external factors as central to the demise. Our purpose is not to belittle
these factors. There is no question in our mind that external
destabilization can be an important part of the unravelling of an economic
program. But we want to emphasize that the extreme vulnerability that
makes destabilization possible is, by and large, the result of
2See Sachs (1989) and Dornbusch (1988b) for this same theme.



3
unsustainable policies. This is one more reason to focus sharply on the
macroeconomics of populist programs.
In this paper, we analyze the most important historical features
of populist economic programs. We do this by contrasting the experiences
of Chile during Allende's Unidad Popular (1970-1973) and Peru under Alan
Garcia. It is clear that the Unidad Popula- of 1970-73 experience in
Chile had political goals that were very different from the experience in
Peru. Even so, we want to emphasize that the political mobilization
strategy had stongly similar elements. Moreover, we will show that there
are remarkable similarities between the Allende experience and that of
Alan Garcia's Peru. In fact, we believe that an important cause of the
Peruvian economic catastrophe was that the architects of the program, and
their economic advisors, failed to learn the lessons of recent Latin
American history and, in particular, of Allende's Chile.
I. THE POPULIST PARADIGM
Populism has traditionally been a fuzzy concept. In fact, for
many years political scientists have struggled to provide a meeningful and
precise definition. Drake (1982) emphasizes three elements of a tentative
definition: populism uses "political mobilization, recurrent rhetoric and
symbols designed to inspire the people", it draws on a heterogeneous
coalition aimed primarily at the working class, but including and led by
significant sectors from the middle and upper strata and, third, populism



4
"has connoted a reformist set of policies tailored to promote development
without explosive class conflict." He notes (Drake (1982,p.218):
"[The programs] normally respond to the problems of underdevelopment by
expanding state activism to incorporate the workers in a process of
accelerated industzialization through ameliorative redistributive
measures."
Conniff (1982,p.5) has argued that "populist programs
frequently overlapped with those of socialism". We emphasize that the
redistributive objectives are a central part of the paradigm. Whether
they are motivated by a strategy of massive social reform is
consequential, but is not central to our discussion.
We have asserted above that many populist economic programs
exhibit strong similarities. In this section, we set out in paradigmatic
fashion what we see as the critical common factors. In later sections we
document these for the experiences of Chile and Peru.3
Seers (1964), who endorsed the structuralist view, summarized
the great difficulty in achieving consensus in the debate between
"monetarists" and "structuralists." The names have changed, but the
discussion between those who emphasize the limited scope f-r financial
experiments and others who see the need for social progress and are
impatient about the means, who believe the special conditions of their
3In a larger project we expect to look at a significant number of experiences in
Latin America to get a sharper picture of the phases and ultimate breakdown of
programs.



5
country yields a fruitful yet unexploited strategy for social progress
continues. As Seers (1964,p.89) states:
"This is not just a technical issue ir ecconomic theory. At the hoart
of the controversy between "monetarists" and "structuralists" are two
different ways of looking at economic development, in fact two
completely different attitudes toward the nature of social change,
two different sets of value judgments about the purposes of economic
activity and the ends of economic policy, and two incompatible views
on what is politically possible."
The populist paradigm is typically a reaction against a
"monetarist" experience. The phases of the experience are the following:
* Initial Conditions. Dissatisfaction with the countries growth
performance based on the finding that the country could do better in
thgose instances where there was actually growth or, more often, on a
situation of stagnation. Most typically, though not always, the country
has experienced moderate growth, stagnation or outright depression as a
result of previous stabilization attempts. The experience, often though
not necessarily under an IMF program, has reduced growth and living
standards. Serious economic inequality provides economic and political
appeal for a radically different economic program. The preceding
stabilization will have improved the budget and the external balance
sufficiently to provide the room for, 'chough perhaps not the wisdom of, a
highly expansionary program.
* No Constraints: Policy makers explicitly reject the
conservative paradigm. Idle capacity is seen as providing the leeway for



6
expansion. Existing reserves and the ability to ration foreign exchange
provide room for expansion without the risk of running into external
constraints. The risks of deficit finance emphasized in traditional
thinking are portrayed as exaggerated or altogether unfounded. Expansion
is not inflationary (if there is no devaluation), because spare capacity
and decreasing long run costs contain cost pressures and; there is room to
squeeze profit margins by price controls.
* The Policy Prescription. Populist programs emphasize threee
elements: reactivation, redistributiomn of income and restructuring of the
economy. The common thread here is "reactivation with redistribution". The
recommended policy is a redistribution of income, typically by large real
wage increases that are not to be passed on into higher prices. Inflation
notwithstanding, devaluation is rejected because of the inflationary
impact and because it reduces living standards. The economy is to be
restructured to save on foreign exchange and support higheer levels of
real wages and higher growth.
* Phase I: In the first phase, the policy makers are fully
vindicated in their diagnosis and prescription: growth of output, real
wages and employment are high, and the macroeconomic policies are nothing
short of successful. Controls assure that inflation is not a problem, and
shortages are alleviated by imports. The run-down of inventories and the
availability of imports (financed by reserve decumulation or suspension of



7
external payments) accommodates the demand expansior. with little impact on
inflation.
* Phase II: The economy runs into bottlenecks, partly as a
result of a strong expansion in demand for domestic goods, and partly
because of a growing lack of foreign exchange. Whereas inventory
decumulation was an essential feature of the first phase, the low levels
of inventories and inventory building are now a source of problems. Price
realignments and devaluation, exchange control, or protection become
necessary. Inflation increases significantly, but wages keep up. The
budget deficit worsens tremendously as a result of pervasive subsidies on
wage goods and foreign exchange.
* Phase III: Pervasive shortages, extreme acceleration of
inflation, and an obvious foreign exchange gap lead to capital flight and
demonetization of the economy. The budget deficit deteriorates violently
because of a steep decline in tax collection and increasing subsidy costs.
The government attempts to stabilize by cutting subsidies and by a real
depreciation. Real wages fall massively, and politics become unstable. ic
becomes clear that the government has lost.
* Phase IV: Orthodox stabilization takes over under a new
government. An IMF program will be enacted; and, when everything is said
and done, the real wage will have declined massively, to a level



C
significantly lower than when the whole episode beganl Moreover, that
decline will be very persistent, because the politics and economics of the
experience will have depresEid investment and promoted capital flight. The
extremity of real wage declines is due to a simple fact: capital is mobile
across borders, but labor is not. Capital can flee from poor policies,
labor is trapped. The ultimate unmantling is often accompanied by major
political change, including violent overthrow of government. The middle
class sanctions these developments because of the economic threat of
populism.4
We now turn to t   experience of Peru and Chile to study in more
detail the policy makers' diagnosis and the actual events. We start with
the Chilean case, because the facts of the entire experience can be seen.
The results suggest what to look for in the Peruvian experience.
4Rosenstein-Rodan (1974, p.7) has captured this middle claass "legitmization" of th4
coup in the crass expression "Salvador Allende died not because he was a socialist
but because he was an incompetent."



9
1I. ECONOMIC POLICIES IN ALFENDE'S CHILE
In September of 1970, after a hard-fought election, Salvador
ALlende, the socialist candidate of the lJnidad Popular (UP), was elected
President of Chile. For Chile, this was the beginning of a unique
political and economic experience that contuinues to be analyzed and
discussed today.5 The Unidad Poptiar was a political coalition of left
and center-left parries dominated by the Socialist and Communist parties,
both of which had a Marxist-Leninist ideology and aspired, in the long
run, to construct an orthodox socialist type society. The smaller parties
comprising the coalition were of Christian democrat, middle class
extracticn. Although they backed profound structural changes, they did
not subscribe to the Leninist view of the world.6
Both communists and socialists initially recognized the
multiclass nature of the Unidad Popular and considered the alliance and
the politics that sustained it to be a tactical intermediate step that
would help set the basis for the transition to socialism.7 Vuscovic
(1973,p.50) noted:
"..economic policy is subordinate, in its content, shape and form, to
the political need for increasing the Popular Unity's support... .The
urgent need to achieve rapid recovery of the economy, and to extend
the benefits to the mass of the working population, cannot be
undertaken in isolation from the structural changes; they are all
necessarily inter-dependent. It is not possible to make deeper
5See Oppenheim (1989) for a recent review of the literature.
6See Stallings (1978) and de Vlyder (1974) for a discussion of politics and
economics in Chile.
See the discussion in Zammit (1973).



10
changes without broadening the Government's political support, and
ecoromic reactivation and income redistribution will provide an
impulse to thesc fundamental changes."
The UP program called for deep institutional and economic
reforms, including the replacement of the bicameral congress by a unique
legislative body -- the "People's Assembly", and the nationalization of
the mining, banking and, agricultural sectors and a substantial number of
large manufacturing firms. All of this was to be accomplished within the
existing legal framework. The prograi called for a democratic "Chilean
road to socialism."
The TIP program, and most of the technical literature written by
the UP economists, characterized the pre-1970 economy as "monopolistic"
and "dependent."This diagnosis was strongly influenced by the
structuralist thought developed in the United Nations Economic Commission
for Latin America (CEPAL) during the 1960s. Many of the top officials in
the administration were, in fact, CEPAL staff (on leave). It was argued
by the UP program, and in the related literature, that the most serious
problems faced by the country were unequal income distribution and chronic
inflation and unemployment. It was also argued that the structure of
internal demand, the semipermanent crisis in the external sector and the
low level of capital accumulation conspired to prevent a sufficiently high
rate of growth. It was then postulated that the implementation of deep
institutional reforms -- or "revoAutionary reforms" according to the
jargon of that time -- plus improvement in the distribution of income



11
would not only constitute an important step towards the construction of
socialism, but would also generate a fast pace of growth for the economy.
Upon taking power in 1970, the Unidad Popular faced a somewhat
stagnated economy with a rapidly increasing rate of inflation. Between
1967 and 1970, real GDP per capita grew only at 1.2% -- significantly
below the Latin American average -- while urban unemployment crept up to
9.2% in 1970. Inflation, on the other hand, had steadily increased during
the last few years of the Frei administration, reaching 35% in 1970. On
the positive side, the external sector was in good shape; the balance of
payments had experienced substantial surpluses during all but one of the
Frei years. As a result of this, when Dr. Allende became president, the
central bank had a significant stock of international reserves of
approximately $400 million U.S or half a year of imports.
II.1 The Short Run Economic Program
The most important short run economic objective of the UP
included:
* initiating, at a rapid speed, a whole range of structural
economic transformations, including the nationalization program;
* raising real wages, especially for the lower classes;
* reducing inflation;
* increasing the rate of output growth;
* increasing consumption, especially among the poorer groups and
* reducing the economy's dependence on the rest of the world.



12
The first objective -- the nationalization program -- was to be
achieved by a combination of new legislation, requisitions, and stock
purchases from small shareholders. The other goals -- output and
consumption growth, with rising salaries and declining inflation -- were
to be accomplished by a macroeconomic policy characterized by an increase
in aggregate demand, mainly generated by higher government expenditures,
accompanied by income redistribution measures and severe administrative
controls over prices.
This macroeconomic program followed the structuralist tradition
and was based on a number of key assumptions. First, it was believed that
there was ample excess capacity in the manufacturing sector. Second, it
was thought that this low rate of capacity utilization was closely related
to the existing pattern of consumption and income distribution. Third, it
was assumed that there was a dualistic manufacturing sector, where firms
producing "luxury" goods had excessively high capital/labor ratios.
Fourth, inflation was considered to be a reflection of the economic
structure, not of financial or monetary pressures. In what follows, we
will analyze these four key assumptions in some detail.
The assumption of significant excess capacity in the manufacturing sector
was at the center of the short run macroeconomic program and provided the
intellectual base for the belief that large fiscal deficits would not
necessarily be inflationary. This view is clearly captured in the
following statement made by Americo Zorrilla, Allende's first Minister of
Finance:
"The subutilization of installed capacity is another feature of
the current economic situation ... In 1969 it was possible to



13
increase production, due to subutilization, by more than 30 percent
... [A]ccording to recent studies ... unutilized capacity has
reached, in the last few years, 61 percent in the cloth industry, 50
percent in the baking industry ... 74 percent in the shoe industry,
etc.         (As reproduced in Garcia, 1972, p. 72)
An important corollary of the unutilized capacity hypothesis was
that firms in many sectors faced decreasing average costs so that, under
proper administrative price cortrols, demand increases would not generate
inflationary pressure. Moreover, to the extent that many of the larger
firms were indeed nationalized, as called for by the UP program, output
could be greatly increased even with price reductions. In a document
prepared by the Planning Office (ODEPLAN) in 1971, it was stated that by
"combining the increase in production derived from a higher use installed
capacity ... the former monopolies will be able to absorb, without
problems, the required wage increases, while maintaining, or even
reducing, prices and still generating the same surplus".
The lack of "full" utilization was, in turn, attributed to two
fundamental factors: The previously mentioned monopolistic nature of the
manufacturing industry and, the structure of income distribution.
According to this interpretation, the unequal income distribution resulted
in a highly diversified pattern of consumption. Vuskovic stated this view
as follows:
"[There is] ... an obvious association between income
distribution and the composition of demand and, consequently, the
structure of production ... Given current income distribution ... the
effective market is limited to higher income groups ... [I]t is a
restricted ... and highly diversified demand ... [A] broad range of
industries producing nonessential consumption goods operate an
insufficient scale ...          (Vuskovic, 1970)



14
Based on this diagnosis, it was thought that if income was
redistributed towards the poorer groups through wage increases and prices
were properly controlled, there would be a significant expansion of demand
and output. According to Sergio Bitar, former Minister of Mining in the
Allende government (Bitar, 1979, p.78),
"[I]n order to expand demand there would be a hike in white and blue
collar workers salaries, and there would be an increase in government
expenditure on education, health, housing and public works."
And with respect to the price effects of these measures, he said(Bitar,
1979, p. 79):
"Since there was a substantial margin for expanding supply, it was
concluded that the increase in demand would not provoke an
acceleration of inflation. With respect to costs, severe price
controls were supposed to ensure that the higher wages would not be
passed on to prices ... Since sales were supposed to grow
substantially, global profits in each firm would be affected only
slightly, even though the per unit profit would decline ..."
An important component of this short term macroeconomic program
was the existence of substantial international recerves. It was expected
that because of these reserves, the expansion of demand would not run into
foreign-exchange related bottlenecks. Moreover, the program expected that
the nationalization of the large copper mines plus planned increases in
copper production would allow the central bank to maintain a relatively
high level of international reserves.
In spite of the fundamental role assigned to increasing capacity
utilization, the UP economic team was aware that investment was required



15
to sustain the expansion in the medium to long run. Here, however, the
program was based on two important assumptions. The first was that with
the new structure of demand, lower investment would be required to achieve
significant growth. This was based on the belief that until 1970 the
industrial structure had emphasized on the production of "luxury" goods,
which required excessively high capital/labor ratios. It was argued that
basic consumption goods, however, had a much lower capital/output
requirement. A very convenient side effect of this change in the demand
structure was that employment could grow very fast. Vuskovic's
fundamental article captures this view quite vividly:
[T]he new dynamic sectors ... will, in general, be characterized by
lower capital requirements and greater capacity to absorb labor;
consequently, a rapid increase in savings and capital formation will
cease to be a requisite to accelerate the global rate of growth .."
(Vuskovic, 1070, p. 58)
Regarding inflation, the UP program followed the structuralist
approach, which emphasized rigidities, bottlenecks, and the role of
monopolistic pricing and played down the role of fiscal pressures and
money creation.8 In accordance with this position, the UP paid very
little attention to the financial sector when implementing its short run
program. In fact, in his memoirs, the former Allende Minister and Vice
President Clodomiro Almeyda relates how in the first meeting of the
economic team after the elections the CEPAL-oriented technocrats
expressly, and convincingly it would seem, argued that monetary and
8See Sunkel (1960) for a discussion of structuralist inflation theory. See, too,
Baer and Kersternetzky (1964).



16
financial management did not deserve too much attention.9 Alfonso
Inostroza, the President of the Central Bank, stated in early 1971 that
the main objective of the monetary policy was to
"transform it into a key instrument ... to achieve the complete
mobilization of productive resources, and their allocation to those
areas that the government gives priority to ...
The final component of the short run program referred to
reducing Chile's external vulnerability. The UP basic program stated
that, along with a reduction in import dependence, a priority of the new
government would be to "execute a foreign trade policy tending to expand
and diversify our exports ... I (Unidad Popular 1969, p. 24). What is
interesting, however, is that this objective was to be achieved without
providing any price incentives. Quite the contrary, the UP economists
thought that changes in the exchange rate had very little, if any, effects
on exports or imports. In fact, in the same paragraph where the program
called for expanding and diversifying exports, it was stated that an
important goal of the policy was to "avoid the scandalous devaluations of
[the] ... currency" (p. 24). In line with this belief, one of the first
measures undertaken by the Allende administration was to eliminate the
system of crawling peg that had been adopted, with great success, by the
Frei administration. It was expected, then, that expansion of exports
9See, for example, the 1971 CIAP Report reproduced in Panorama Economico, No.260
Feb.-March 1971, p.36.
l°See Inostroza (1971,p.8).



17
would be the result of administrative decisions geared towards
centralizing foreign trade activities.11
An important, indeed crucial, objective of the economic program
was to broaden the UP's political base of support very quickly. The UP
leaders thought that it was necessary to obtain the support of the middle
classes and, more specifically, to draw a large number of voters that had,
until then, supported the Clristian Democrats into the UP in order to move
towards a socialist system. This political objective plays a significant
role in explaining the heavily populist content of the short run program
and ;hould be kept in mind when evaluating the short term achievements of
the Allende government.
To sum up, the short run macroeconomic program of the UP was
aimed at provoking a rapid economic recovery after years of semi-
stagnation and at generating a significant improvement in the living
conditions of the poorer groups. The main tool for achieving this was a
fast growth in government expenditures geared especially at increasing the
real incomes of the lower classes. The intellectual underpinnings of this
plan were basically given by the structuralist model that attributes a
great role to rigidities and bottlenecks and looks with great contempt at
the financial and monetary sectors. A key element of the plan was the
belief that, if channeled to the appropriate groups and if accompanied by
the right kind of administrative controls, fiscal deficits would not be
inflationary.
11See Plan Anual 1971 (Odeplan, 1971).



18
Needless to say, this view of che way the ecnnomy functioned
ignored many of the key principles of traditional economic theory. This
was not only reflected by the greatly diminished role given to monetary
policies, but also by the complete ignoring of the real exchange rate as a
key variable in determining macroeconomic equilibrium.  Moreover, the
macroeconomic view of the Unidad Popular failed to recognize that their
policies would only be able to generate a burst of economic activity that
would be unsustainable in the medium term if the issue of capacity
constraints was not to become an unsurmountable obstacle to sustainable
growth. Also, the UP technocrats greatly underestimated the role of
expectations and the capacity of the public to react to severe
inflationary pressures. Bitar (1986, chapter 5) portrays very clearly the
government's inability to control events, to shift from redistribution to
accumulation.
"It turned out to be very difficult to contain the forces unleashed
in 1971. The sequential conception of redistribution followed by
accumulation asbumed that basic political and social conduct could be
altered and popular expectations changed virtually instananeously. In
the next few months [early 1972] it proved impossible to apply this
thinking with the facility that had been hoped for."
II.2 The First Year: Rapid Growth Wi-h Repressed Inflation
Armed with the intellectual framework analyzed above, the UP rapidly began
to implement its program in late 1970. In terms of structural reforms,
two basic measures were immediately undertaken:12 First, the Agrarian
Reform was greatly intensified with a very large number of farms being
.2
The agrarian reform law passed by Congress during the Frei administration provided
the necesssary tool. See Alauf et al (1972).



19
expropriated.  Second, a project for a Constitutional Amendment aimed at
nationalizing the large copper mines -- until then jointly owned by large
U.S. firms and the Chilean state -- was studied.13 Their reforms of the
banking system and large manufacturing firms were somewhat more difficult,
because the government lacked the institutional channels for implementing
the nationalization program. Initially, this obstacle was overcome by
purchasing blocks of shares -- especially bank shares -- at very high
prices. These acquisitions were, in turn, financed with loans from the
Central Bank to the CorRoracion de Fomento de la Produccion (CORFO).
These acquisitions were complemented by a process of requisition
based on an old, and until then forgotten, decree law promulgated during
the short lived Socialist Republic of 1932.
In terms of macroeconomic policy, the government rapidly applied
measures that were consistent with its program. Salaries and wages in the
public sector were raised, on average in 1971, with wages for the lower
segments of the bureaucracy increasing relatively faster than those for
the higher echelons. Salaries in the private sector grew at approximately
the same rate. Unions used public section salary adjustments as a
benchmark in their negotiations. Figure 1 shows the gain in real wages.
Also, government expenditures were greatly boosted via the so-called
"Special Programs for Expansion and Development." This higher expenditure
130n June 11, 1971, Congress unanimously approved the constitutional reform that
nationalized large copper mines. See Geller and Estevez (1972), and Ffrench-Davis
and Tironi (1974).



20
was mainly directed towards construction, farming and social security14
and was financed with loans from the Central Bank (i.e., with money
creation). The short run package was topped by a severe and quite
generalized scheme of price controls.
The expansion of demand quickly affected sales and production.
During the first and second quarters of 1971, manufacturing output
increased 6.2% and 10.6% compared to the same periods in the previous
year. Manufacturing sales grew at even faster rates: 12% during the
first quarter and 11% during the second quarter. Overall, 1971 was a good
year. Real GDP grew at 7.7 percent, average real wages increased by 17
percent, aggregate consumption grew at a real rate of 13.2 percent, and
the rate of unemployment dipped below 4 percent. Not too surprisingly,
given the behavior of real wages, there was a significant improvement in
income distribution. In 1971 labor's share of GDP reached 61.7 percent,
almost 10 points higher than its 1970 level of 52.3 percent; and this
happened without an acceleration of inflation. What was even more
important for the UP was that the policies rapidly paid off politically.
In the municipal elections of 1971, the UP parties saw their share of the
vote climb from the 36% they had received in the 1970 presidential
election to around 50%.l5
Needless to say, all of this created a sense of euphoria in the
government. The program was working as planned. The fact that the fiscal
The new program assigned 66% of its resources to these three sectors.
15The strong showing in early municipal or congressional elections was not uncommon
in Chile. In fact, the Frei government had a similar experience in 1965.



21
deficit had jumped from less than 3% of GDP in 19'0 to almost 11% in 1971
did not worry the UP technocrats. Nor did they think much of the fact
that the rate of growth of the money supply had surpassed 100 percent in
anuiual terms in the fourth quarter of 1971, and that the rate of growth of
domestic credit to the public sector was approaching 300 percent. All of
this, in fact, was part of the plan. When evaluating the results from the
first year of Allende's government, Julio Lopez, a prominent UP economist,
stated that
"the economic recovery policy was based on a significant increase ...
in the government deficit. We ignored those orthodox recommendations
that look for ... budget equilibrium."
And, then, he added that it was precisely because of these
policies that it was possible to "achieve the political objective of
quantitatively broadening the base of support for the government".
Of course, these macro policies were rapidly generating a highly
explosive situation of repressed inflation. The rapid growth of GDP in
1971 rested heavily on an almost 40% increase in the imports of
intermediate goods. As a result, the stock of international reserves
inherited by the Allende government was reduced by morA than one half in
that year alone.  A steep reduction of inventories was mr,other important
factor contributing to the expansion of consumption.
By the end of 1971, the mounting inflationary pressures became
evident. (See Table 1) The combination of the expansion in demand and
price controls resulted in growing scarcity of some consumption goods.
Production responses, on the other hand, became more and more sluggish.
The supply problem was aggravated by a series cf labor disputes in many



22
large establishments that resulted in the takeover of those firms by their
workers. In fact, this procedure became the institutionalized way in
which the government seized a large number of firms. The government made
use of a 1932 Decree-Law that provided that whenever a labor dispute
generated a serious disruption in supply, the authorities could take over
the firm in question.
Table 1 Chile: Main Macroeconomic Indicators
1970      1971       1972      1973
Inflationa                   34.9       34.5        216.7      605.9
Growth                        2.1        9.0         -1.2       -5.6
Real Wages (1970:3-100)      98.4      115.1       103.5       70.3
Gov't. Revenueb              23.7       20.4        18.2       20.2
Gov't. Spendin b             26.4       31.1        31.2       44.9
Budget DeficitV               2.7       10.7        13.0       24.7
Money Growtha                52.9       99.3       100.9      264.4
Int'l. Reserves ($Mill.)    320         129        95          36
Trade Balance ($ Mill.       246         73       -161        -73
Black Market Premium          99        358         898        2349
a Percent of GDP b Percent, Dec.-Dec.
Sources: Yanez (1978); Banco Central de Chile; International Monetary
Fund; Edwards (1986); Edwards and Edwards (1987), Solimano (1988).
By the end of 1971, the government had used this channel to
expropriate more than 40 large firms. Naturally, this process disrupted
production not only in the firms that were seized but also in the rest of
the industrial sector where uncertainty was quickly mounting. Moreover,
the level of productivity in the nationalized firms began to drop rapidly,
contrary to the thinking of the architects of the UP plan, these firms



23
generated no surpluses but instead incurred huge losses that resulted in
additional pressures on the government's budget.
II.3 The Second Year: Failed Stabilization Programs
During 1972, the macroeconomic problems continued to mount. As can be
seen in Table 1 above, in that year inflation reached 217% and the fiscal
deficit surpassed 13% of GDP. The rate of growth of domestic credit to the
public sector reached almost 300%, and international reserves dipped below
$77 million. Consumption growth dominated the expansion in demand. (See
Table 2)
Table 2 The Growth Rate of Real GDP and Demand
(Percent per year)
1970      1971       1972     1973
GDP                   2.1      9.0        -1.2      -6.6
Consumption
Private         -0.5     13.2         7.7     -6.6
Government       5.9     12.4         5.7      1.7
Investment          6.5     -2.0       -20.1     -6.0
Exports             2.1      0.8       -15.1      2.8
Imports             0.9      8.5         3.2     -5.4
Source: Banco Central de Chile Indicadores Economicos v Sociales 1960-
1985.
What was even more serious was the continuous growth of the
underground economy. As more and more activities moved out of the official
economy, more and more sources of tax revenues disappeared. In this
context, a serious vicious cycle took over. Repressed inflation encouraged



24
the informal economy, which in turn resulted in reduced taxes, higher
deficits, and, thus, in even higher inflation. In 1972, two
stabilization programs were implemented, and failed.
When evaluating the causes of difficulties, the dominant view
among UP economists was that the authorities had failed to impose
appropriate controls in implementing the program. For example, when
discussing the severe external crisis already evident in late 1971, Garcia
argued that it was incorrect to attribute the loss of reserves to the
significant real overvaluation of the escudo. He then pointed out,
matter-of-factly, that "since the Central Bank has the power, and
administrative mechanisms, to slow down imports, it is possible to control
them [imports] without devaluing ..." (Garcia, 1972, p. 206). And with
respect to the overall strategy, he recommended that in order to solve the
mounting disequilibrium "the State should, necessarily, increase the
degree of direct control ...n (Garcia 1972, p. 255).
This dominant view was indeed the one that guided the first,
rather weak, attempt at stabilizing the economy which was launched in
February of 1972.16 This package sought to: (a) solve the problems
derived from the growing underground economy and the related scarcity of
goods at official prices; (b) avoid an outburst of inflation; (c)
maintain, or further improve, income redistribution; and (d) solve the
16Bitar (1986) in his insider's account of policy making tells of how this view was
opposed by a small group of technocrats who argued for a correction of the
fundamental source of the disequilibrium. But they encountered two difficulties, the
technical accuracy of their position was in doubt and the politics of major budget
and exchange rate correction was perceived to be too costly.



25
serious crisis of the external sector. However, no serious measures aimed
at solving these problems were undertaken. For instance, it was argued
that it was not convenient to reduce government expenditures, the policy
of granting salary increases that exceeded inflation was maintained, and a
significant devaluation was ruled out.17
The combination of generalized price controls and unchecked
fiscal and monetary policies acted as a major encouragement for the black
market economy. What made things even worse was that the government
completely lost control over wages. Unions in both nationalized and
private firms demanded increasingly higher wage adjustments. This
produced a dilemma for the government. If it had refused to grant the
wage adjustments, it would help the macroeconomy but deeply hurt its
political constituency and objectives. Under these circumstances, the
government chose, every time, to uphold its revolutionary label.
Moreover, a number of economists argued that higher real wages could be
sustained as long as the government was able, via increased controls, to
extract additional "surplus" from the private sector.18
By mid-1972, it became apparent that the February stabilization
program was a failure. The underground economy was now generalized,
output began to fall, open inflation reached an annual rate of 70 percent
in the second quarter, foreign exchange reserves were only $82 million,
and the black market rate was climbing at a very fast pace (see Figure 2).
17In 1971 a small devaluation was followed by the instituion of four separate
exchange rates.
18See Bitar (1979).



26
From a political perspective, what made the situation particularly
difficult was that parliamentary elections were scheduled for March of
1973.  It was increasingly clear that the economic crisis was going to
work against the UP in those elections. In August of that year, and under
the political overview of the Communists, a new stabilization program was
launched. The Communist party favored tackling-the financial
disequilibria.
Unlike the previous plan, the cornerstone of the August program
was a massive devaluation of the escudo. The exchange rate for imports
was raised by almost 90 percent, while that for exports increased by 33
percent. It was expected that, as a result, the ever-mounting pressures
on the balance of payments would subside. The program called for two
basic measures to contain the fiscal pressures. First, price increases
for the nationalized firms were authorized. It was thought that their
losses would decline and, consequently, there would be a reduction in the
financing requirements of the newly formed nationalized sector. Second,
the program called for a massive increase in production as the major way
to close the gap between aggregate supply and aggregate demand. This
increase in output was expected to be a response to political rather than
economic incentives. In fact, at that time, the Communist Party's main
slogan became "Let's win the battle for increased production!" The
devaluation immediately affected the prices of those goods not still
subject to severe controls. This plus the authorization of a large number
of price increases resulted in a rate of price increase of 22.7% in August
and 22.2% in Septamber.



27
In spite of the action taken on the exchange rate front, the
program was destined to fail as no change in the wage rates policy was
introduced. In the second week of August, the government announced that
it had reached an agreement with the national federation of workers
(Central Unica de Trabajadores, CUT) with respect to an across-the-board
wage adjustment to be granted on October 1st except for firms subject to
private bargaining. The new wage policy called for an increase in public
and private sector wages by a proportion equal to the accumulated rate of
inflation between January and September. In addition, the new policy
called for more frequent wage adjustments.19 In this way, by a stroke of
the pen, the effects of the devaluation were fully offset.
In order to combat the general scarcity of goods and of food in
particular, the government tried to organize a rationing scheme, where a
certain amount of food (the so-called "popular basket") was made available
to each household through neighborhood orgeanizations specially created for
this purpose. This rationing scheme, however, generated a massive
reaction by the opposition, wlho argued that Chile was being transformed
into "another Cuba". In October, 1972, the opposition parties organized a
national strike as a protest against what were considered to be erroneous
and antidemocratic government policies. The protest was particularly
directed against the government's economic and educational policies. This
strike generated significant economic costs and greatly aggravated the
19Que Pasa No.70, August 17th, 1972,p. 14.



28
situation. In fact, the strike could only be solved after President
Allende included representatives of the armed forces in his cabinet.
II.4  The Third Year:  Economic Chaos and Coup
During the first quarter of 1973 Chile's economic problems reached chaotic
proportions. Compared to the first quarter of 1972, inflation reached an
annual rate of more than 120%; industrial output declined by almost 6%;
the real exchange rate was even more overvalued, and foreign exchange held
by the Central Bank was barely above $40 million. The black market by now
covered an ever widening range of transaction in foreign exchange. The
fiscal deficit continued to climb as a result of ever higher expenditures
and of rapidly disappearing sources of taxation. ln that year, the fiscal
deficit exceeded 23% of GDP!
Once more the government faced the options of implementing a
major corrective stabilization program or of furthering the extent of
controls. And once again it opted for the latter. This decision, made in
March of 1973, sealed the fate of the government. The extent of the
economic crisis quickly alienated the middle classes; and, after March
1973, the political confrontation with the opposition became increasingly
severe. Of course, it must be remembered that, in the midst of this
polarization, the support commanded by Allende actually grew: whereas in
1970 the UP received the votes of 30% of the electorate, in the municipal
elections of 1971 it reached 50% and even in 1973 its share still stood at
44 percent.



29
The opposition, after an important victory in the parliamentary
elections of March 1973, became extremely impatient. By mid-1973, the
opposition parties were demanding the resignation of President Allende.
In addition, an even more serious problem within the UP was developing.
The UP parties -- in particular the Communists and Socialists -- had
entered into a serious feud, strongly disagreeing on how to face the
crisis.
In concluding, we must comment on the role of domestic economic
opposition and the foreign economic blockade. There is 'ittle doubt that
the strategic use of economic disruption by the opposition, foreign
enterprises and foreign governments played a role in the ultimate
unravelling of the Allende policies. We doubt, although we certainly
cannot demonstrate this point, that a more neutral external environment
would have allowed the Allende experiment to continue for some time. But
the uncontrolled side effects of the consumption growth policy (shortages,
inflation etc.) sufficiently weakened the ability to govern.20 As a
result, destabilization by domestic opposition forces and foreign
companies and governments could be effective. We advance this view as a
hypothesis and propose further research to substantiate this critical
feature of the unravelling of populist experiences.
20Rosenstein-Rodan (in Orrego Vicuna (1975 p.219-220) notes of the Allende policies
oriented toward consumption:" This part of Allende's policies was more Populism .han
Socialism, Even Fidel Castro is supposed to have observed 'Marxist socialism is a
reviolution of production-- this is a revolution of consumption.' I speak not as a
man wise after the event, but like many other economists, said it in a lecture in
November 1972. I forecast then that the system could not possibly last another
year.'



30
On the 11th of September 1973, the Allende presidency came to a
sudden and shocking end. That day the armed forces staged a coup. When
the military took over, the country was politically divided and the
economy was in shambles. Inflation was galloping, relative price
distortions -- stemming mainly from massive price controls -- were
generalized; black market activities were rampant; real wages had dropped
drastically; the economic prosppsts of the middle class had been greatly
damaged; the external sector was facing a serious crisis; production and
investment were falling steeply; and the government finances were
completely out of hand. This was the stage where frightful real wage
cutting (see Figure 1 above) took over.21
III. GROWTH WITH REDISTRIBUTION IN GARCIA'S PERU
When Alan Garcia assumed the Peruvian Presidency in August 1985,
he captured the world's imagination: a dynamic, charismatic leader taking
charge of a country desperately in need of social and economic progress.
The fact that he adopted a confrontational attitude on external debt did
not hurt his image, either in Latin America or in progressive circles in
Europe and the United States. On the domestic front, he had an unambiguous
message: growth and redistribution. That policy lasted two years before
running aground in a catastrophic manner.
2lEven if the real wage decline of 1974-75 is in part due to the dramatic terms of
trade deterioration, one should not minimize the aftermath of the Allende policies.



31
In early 1988, Alan Garcia's populist government staged a
dramatic turn-around on the policies that had driven the country to
bankruptcy: budget cutting, real wage cutting and massive exchange
depreciation were the predictable aftermath of three years of reckless
mismanagement. But that was not the end of the story, hyperinflatuon was
to follow and the political consequences of economic destruction and
pauperization are still to come. Real wage cutting and yet worsed poverty,
in the Peruvian context, may well be the opening phase for massive and
perhaps violent confrontations.
More so than in any other country of Latin America, economic
performance is central to maintaining the very precarious social peace in
Peru. At issue is not only tl,e possible confrontation between left and
right. Far more dangerous is the widening conflict opened by the Maoist
Shining Pat guerilla. The outcome is wide open because of the divisions
between rich and poor, the city and the sierras, white and indios. Further
deterioration of economic performance with declining per capita incomes,
bouts of explosive inflation and real wage cutting would make Peru
ungovernable. Yet these events almost certainly lie ahead. Unless a
massive improvement of export prices or external assistance on a major
scale provide foreign exchange resources to help achieve (together with
policy reform) a gradual adjustment, an out-and-out unmantling of social
cohesion is inevitable. After 2 years of crisis, can things become worse?
The answer is surely, yes!



32
III.1 From Belaunde to Garcia22
In the 1950s and 1960s Peru experienced significant growth of
real per capita income and moderate inflation. Table 3 shows that the
problems of declining per capita income and high inflation date from the
second half of the 1970s.
Table 3   Growth and Inflation
(percent per year)
1950-60  1960-70  1970-75  1975-80   1980-85
Growth Per Capita         2.8      2.6     1.6       -1.0       -4.2
Inflation                 8.0     9.3    12.6       50.0       102.1
Source: Kuczynski (1977), Central Bank and Ministry of Finance
In the past 25 years, three major stop-go phases can be
discerned. The first was the Belaunde expansion which crashed in 1967-68.
The growth program faltered because it ran into external constraints.
Budget correction and real depreciation were undertaken and prepared the
ground for the economic expansion of the military government in the early
1970s. The extremely favorable world environment permitted a massive
expansion until 1974, with an average growth rate of per capita income of
3.7 percent per year in the 1969-74 period. Figure 3 shows the rapid
increase in real income during this period.
22See R. Thorp "Trends and Cycles in the Peruvian Economy." in P.Bardhan et al
(eds.) International Trade. Investment. Macro Policies and History. North Holla
1987, R.Thorp and G.Bertram Peru 1890-1977, Columbia University Press, 1978; an
P.P. Kuczynski Peruvian Democracy under Economic Stress, Princeton University P
1977 for history and extensive references.



-53
Deterioration of the terms of trade (a 27 percent decline
between 1974 and 1977) occurred at the same time that the government was
undertaking a massive investmenL program. As a result, the noninterest
current account balance showed a deficit of 6 percent of GDP in 1974-77.
This straining of external financing opportunities forced a slowdown of
growth and a reshaping of economic policies. Exchange rate and trade
policies introduced in 1978-79 emphasized export growth rather than
government spending. While the resource transfer had been inward in 1973-
78, now came three years of large external (noninterest) surpluses.
The second Belaunde administration (1980-85) had to cope with
extraordinarily adverse conditions. Belaunde inherited an economy with
deep social problems: Per capita income had declined since 1974 and, the
external balance improvement of the late 1970s notwithstanding, the
interventionism of the military government had created pervasive
distortions. The possibility of advancing the economy was drastically
limited as a result of a combination of shocks: the world recession of
1980-82, terms of trade deterioration, the explosion in world interest
rates and the resulting rise in debt service obligations, external credit
rationing, and natural disasters. These shocks combined to choke off any
room for expansion. In 1982-83, under an IMF program, real GDP per capita
declined by 16 percent and inflation nearly doubled to 112 percent.
The disastrous economic performance of the Belaunde government
led to a total rout in the elections and thus brought Alan Garcia into
power in 1985. In 1980 Belaunde had won the elections with the largest



34
majority in history. In contrast, in the 1985 elections, his party was
devastated in that they came out with a meager 6.2 percent of the vote!
Alan Garcia's APRA party took 45.8 percent of the vote, and the United
Left took another 21.3 percent.23
The election which swept Garcia into office in a landslide
victory carried one clear message: growth first!24 This message,
regardless of its feasibility, conditioned the economic policies of the
Garcia Administration from the very beginning and is now taking the
country to the brink.
1II.2 The Heterodox Program
In July 1985, the last month of the Belaunde administration,
inflation reached 250 percent at an annual rate. Unemployment was
pervasive, idle capacity abounded, and real wages had been reduced in an
effort to cope with the external crisis. Against this background, Garcia's
government developed a populist project of expansion entitled "Growth with
Redistribution" emphasizing economic recovery combined with disinflation.
Premises and Policies: Three points are central to an understanding of why
economic policy took the form it did. The first is the impressively
unequal distribution of income. Figure 4 shows the Peruvian distribution
23See Wise (1988) and Ortiz de Zevallos (1989) for a review of politics.
24See Ortiz de Zevallos (1989).



35
with a diagram widely used in Peru. The striking fact is that 1% of the
population receives nearly half the national income.25
The second is that policy makers were impressed with the large
gap between actual and potential output. In Carbonetto et al (1987, p.41),
it is estimated that actual output was only 66 percent of potential output
in 1984 leaving a 34 percent gap to be made up by the judicious choice of
policy.
The third consideration is that Peruvian economists, in company
with economists throughout Latin America, were unimpressed with the
effectiveness of IMF programs. It will be remembered that at this time
Israel and Argentina made their heterodox stabilization efforts, as did
Brazil shortly afterwards. The orthodox approach to stabilization had been
discredited by the strong recessionary effects and the absence of any
success stories. The alternative, heterodoxy, had all the appeal of
offering an end to inflation without the attendent costs of
unemployment.26
Against this background, the general theme of economic policy is
summarized in the Plan Nacional de Desarrollo 1986-90 (p.63) from which we
quote extensively.
"The new economic policy seeks to pass from an economy of conflict
and speculation to one of production and consensus. In this economy
it is possible to make compatible stability, growth, distribution and
development in a context of national planning which finds concrete
expression in dialogue and social and economic concertation.
25See Glewwe (1988).
26See Dornbusch (1981, 1988a), Bresser Pereira and Nakano (1987) and Bruno et al.
(1988).



36
Planning of economic development will be full, decentralized and
participatory and concertation will center on the effort to make
compatible the generation of saving and productive investment with
attention paid to the undelayable priority attention to social needs.
We need to reconcile economic efficiency with social equity in a
productive dynamics which is fundamentally sustained by domestic
resources."
Specific premises and prescriptions in the national development strategy
can be paraphrased as folloes : (op. cit. p.63-65)
* The complementarity of internal and external markets,
rejecting the apparent dilemma between import substitution and
exports and reaffirming the primacy of the internal market.
* The necessity to redistribute income as a means for sustained
growth and the possibility to bring together with the redistribution
process the necessary capacity to save and invest.
The heterodox management of economic policy starts from a
reinterpretation of traditional economic concepts in terms of their
implications for the Peruvian economy.
*Prices and Rentability: Profitability cannot increase from an
increase in profit margins because that would lead to a generalized
decline ir. sales. Smaller margins yield lower prices, higher demand,
higher sales and better utilization of capacity; higher sales allow a
fuller scale of production.
eSalaries and Profitability: The generalized and open-ended
restraint on wages reduces profitability because it reduces workers'
purchasing power, bringing about recessive effects that reduce demand
and thus the benefits of dynamic economy.
* The Recessive, Inflationary Crisis: This follows from the
increase in costs and the fall in demand, not from an excess in
demand. The contraction of public spending, credit and salaries
reduces demand; at the same time devaluation and increases in
interest rates incessantly raise costs. To talk of excess demand is
erroneous when there idle capacity in almost all sectors and ample
supply of unemployed labor.
* The Fiscal Deficit: The fiscal deficit is not necessarily
inflationary. It only is if domestic demand exceeds potential output.
With substantial idle capacity there is a need for a certain
deficit....



37
* Money Creation: Must increase demand, thus allowing ani
increase in real liquidity and disponibility since the opposite would
slow growth.
* Interest Rates: Increased real interest rates do not raise
saving, since the latter depends fundamentally on income, but they
discourage productive investment...
* Exchange Rate: Depreciation of the exchange rate does not
constitute an effective means of balancing the external accounts
since only 15% of imports and 20% of exports are sensitive (elastic)
to exchange rate changes. As a consequence, although it is necessary
to avoid devaluation, the external flows muist be handled by more
efficient selective methods.
The specific targets of the economic program are set out in
Table 4.
Table 4 The 1986-90 Economic Development Plan
1985   1986   1987    1988    1989    1990
Growth
GDP                   1.4     6.5     6.2    6.1      6.3    6.2
Consumption           0.1     8.5     6.3    5.7      5.0    5.2
Exports               3.5   -13.6     4.8    5.8      5.9    5.9
Imports             -24.6     5.0    13.7   11.9      5.6    7.4
Investment          -12.3    12.0    14.4   11.8    11.6   10.7
Budget Deficita         0.6     2.3     2.3    2.1      1.8    1.6
a Percent of GDP
Source: Presidencia de la Republica (1986)
The new economic policy was based on four measures, as noted in
Carbonetto et al (1987,p.15):
* Rapid expansion of effective demand via real wage increases.
* Financial de-strangulation to give firms relief and contain
cost pressures by reducing financial costs of enterprises, effective
interest rates, indirect taxes and other elements of costs.
* Reestablishment of selective exchange rates and abandonment of
the devaluation policy.



38
* The external accounts are to be kept in balance by growth in
exports, import substitution and limitations on debt service to be
compatible with acceptable growth. Of course, many of the foreign exchange
and growth policies on which any success of the plan might depend never
saw the light of day. This is particularly the case for foreign exchange
savings strategies.
External Debt: The most widely noted measure of the Carcia government is
no doubt the limitation of external debt service to 10 percent of exports.
The move followed a Dolicy of quiet arrears of the Belaunde government. It
attracted attention because it was openly unilateral and thus potentially
invited sanctions from the commercial bank -reditors. The policy made the
best of a situation where a conventional rescheduling, including an IMF
agreement, was entirely impossible from a political puin. of view. Since
then, debt service arrears have been extended to official creditors,
including the IMF and the World Bank.
The policy of limiting debt service was not only an essential
step on the political front. It effectively suspended the external
constraint. With the foreign exchange savings resulting from limited debt
service, a widening of the trade deficit became possible. Thus external
constraints on growth, and the resulting need for realistic exchange rate
policies, were suspended, at least for some time. That temporary reprieve,
as we will see below, was already exhausted by mid-1988.
The quality of Peruvian debt, as viewed by the secondary market,
has steadily declined since 1985. In July 1985, when Mexican debt traded
at 60 cents on the dollar, Brazilian at 75 cents and Argentinian at 60
cents, Peruvian already -as down to only 45 cents. By January 1986, the



39
price had declined to only 25 cents per dollar face value. By the end of
1987, the external debt stood at $16.4 billion, with arrears on principal
and interest of $6.1 billion. By early 1989 Peruvian debt could be bought
at 5 cents per dollar. The low price is certainly explained by one single
factor: it would be exceptionally difficult politically to achieve a
stabilization in which real worker incomes were cut for the purpose of
external debt service.
The First Two Years The immediate priority for the Garcia administration
was to introduce a "heterodox" program of stabilization: inflation
reduction via an incomes policy combined with a massive reactivation of
the economy.
In the short term, the heterodox program was immensely
successful. Inflation declined sharply (as shown in Table 5), employment
increased, and the real wage was pushed up substantially (as shown in
Figure 5). In the last quarter of 1987, the real wage stood 52 percent
above the level of 1985! Growth, too, had been very substantial. In 1986,
the economy grew by 9.5 percent; and, in 1987, by another 6.7 percent.
Table 5 Peruvian Macroeconomic Indicators
1985       1986        1987       1988
Inflationa            158         63        115          1722
Growth                2.5         9.5       6.9          -8.4
Real Wageb            111        126        137          105
Trade Balance ($)   1173          -67       -463         -84
Gov't. Revenuesc      42.7        32.1      25.9         23.5
aDecember-December b Index July 1985-100 cPercent of GDP
Source: World Bank, Ministry of Finance, National Institute of Planning.



40
It is important to recognize just how successful the heterodox
approach is. Given enough foreign exchange and a depressed economy,
expansion of dogestic demand can work. In fact, the success is broadly
shared because the recovery of demand can raise firms' profitability by
raising capacity utilization. That was, in fact, the case. A year after
the program started Garcia was celebrated by the business class for the
success of his recovery strategy. Private investment increased by 24
percent in 1986 and another 18.6 percent in 1987.27
By early 1987, the program was at the peak of its success: real
CDP had grown cumulatively more than 20 percent since the third quarter of
1985. Inflation had been reduced from 188 percent to only 75 percent. But
while the success was startling, the strain was starting to appear in
rising cost pressures and a growing loss of foreign exchange. But these
strains, while obvious to economists, were far from alarming to policy
makers or the public.
The Turning Point: The turning point came in July 1987, ahead of the
economic unravelling of the program, as a result of a proposal to
nationalize the banking system. On July 27th, 1987, President Garcia
declared:28
27See Centro de Economia Applicada (1988) and especially Iguinez for an evaluation
of the first three years of the program.
28See Presidencia de la Republica (1987b,p.1).



41
"In Peru, today, the financial system is the most powerful instrument
of concentration of economic power and thus of political influence;
it is the major obstacle to the democratization of production and the
accumulation of the surplus."
The immediate motivation for the nationalization was to get a
hand in the allocation of credit and a better control of the saving
generated by the business sector. Control of the financial system was also
expected to help monitor profits and capital flight by the privileged
groups in the economy. The private financial system was reproached for not
belonging " to the necessities of economic development", with large parts
of the country's saving being channelled by the few rich families who
captured these savings into inventories, nonproductive assets, or accounts
abroad.
The nationalization crisis represents the beginning of open,
dramatic political conflict. It represented the moment where the right,
with public appearances of Vargas Lhosa, dramatized the shift in
government policies toward socialism. It also represented the end of the
recovery policy and the turning point toward inflation and foreign
exchange crises. Although the constraints tightened only gradually and
bottlenecks emerged only in few places, during the remainder of 1987, it
is fair to say that July-August of that year represented the turning
point, after which the continuation of expansionary policies could no
longer be defended.
Populist programs such as that practiced in Peru fail when the
economy runs out of foreign exchange and when the controls that support



42
the initial redistribution and expansion have to be dismantled. By late
1987, growth was petering out and inflation, brought about by external
constraints, bottlenecks and the adjustment of severe price distortions,
was exploding.
To understand what went wrong it helps to return to the basic
philosophy of the program which is fully documented in a book, El Peru
Heterodoxo: Un Modelo Economico, the economic architects of the program
published in July, 1987.29 The most striking revelation of this book is
the extraordinary extent to which policy makers in the Garcia
administration diverged from accepted economics. Thus we learn (p.75-76)
that
"An examination of the Peruvian record reveals that periods of
moderate inflation are associated with expansionary fiscal policies.
And periods of major inflation are associated with fiscal restraint.
Thus, the record shows exactly the opposite of what is predicted by a
theory which explains inflation by fiscal deficits."
And, to dispel any doubts:(p.82)
'If it were necessary to summarize in two words the economic strategy
adopted by the government starting in August 1985 they are control
(meaning control of prices and costs and recognizing that this could
be done only temporarily for the first twelve month) and spend,
transferring resources to the poorest so that they increase
consumption and create a demand for increased output, thus
'justifying' that idle capacity be put to use.
It is necessary to spend, even at the cost of a fiscal deficit,
because, if this deficit transfers public resources to increased
consumption of the poorest they demand more goods and this will bring
about a reduction in unit costs. Thus the deficit is not
29See D.Carbonetto, I.de Cabellos, O.Dancourt, C.Ferrari, D.Martinez, J.Mezzera,
G.Saberbein, J.Tantalean, and P.Vigier El Peru Heterodoxo. Un Modelo Economico,
National Planning Institute, Lima, 1987.



43
inflationary, on the contraryl This constitutes without doubt the
basic premise on which the economic team acted and the major
departure from the earlier strategy that had emphasized adjustment
from the demand side"
Peru learned in 1987-88 that continued rapid growth and massive
real wage increases are incompatible with m;oderate inflation. In 1986,
inflation was only 63 percent, far below the level at which the program
started. But the experience of high growth with moderate inflation, after a
while, became an artifact of the controls and subsidies on public sector
prices and on foreign exchange. Subsidies and controls were used to avoid
price increases in politically sensitive areas. In 1987-88, most petroleum
products sold at one-third their July 1985 price. Electricity prices, the
price of rice, and bus fares had declined by more than a third, as had the
real price of foreign exchange.
Table 6 Real Levels of Controlled Prices
(July 1985-100)
Dec.1986      Dec. 1987      Dec. 1988
Averagea              75             59             58
Rice               73             61            47
Light Elect.       49            40             16
Telephone          84             87            32
Gas                58             33            25
aWeighted by expenditure shares
Source: ADovo
When adjustments in the controlled prices had to be made,
inflation accelerated rapidly. Initially, the real wage gains and demand
expansion pushed up inflation, but the catching up of lagging prices became



44
increasingly important as the government had to undo, at least in part, the
large drop in the real prices of subsidized goods, of foreign exchange, and
of controlled goods. In 1987, inflation already reached 115 percent; and,
by early 1988, the program was unraveling as inflation exploded. In the
first quarter, it reached 470 percent per month. In March 1988, inflation
at an annual rate already exceeded 1000 percent; and the year closed with a
December-December inflation of 1722 percent. In December itself, the
annualized rate of inflation was in excess of 6000 percent. Even at the end
of 1988, after repeated attempts to realign controlled prices, the real
level of prices in the public sector remained at less than 60 percent of
their 1985 level.
Inflation was also a result of the massive increase in the
budget deficit. The policy of subsidies, and the extraordinary decline in
real tax collection increased the budget deficit. In 1975-86, tax
collection had averaged above 12 percent of GDP, and in 1985, it rose to
13.2 percent. By 1988, because of a sharp decline in compliance, tax
collection had fallen to only 7.5 percent of GDP.
The decline in revenue and the large cost of subsidy programs,
including interest subsidies in credit markets, created a vast budget
deficit. The Central Bank's policy of multiple exchange rates contributed
an important part of the deficit. It involved losses amounting to 2 percent
of GNP from buying foreign exchange at a high price from exporters and
selling it at a low or subsidized price to importers.



45
Table 7 Public Sector Financing Requirement
(Percent of GDP)
1985     1986      1987    1988*
Overall Public Sector Deficit             4.4      6.7        9.9     6.1
Budget Deficit                        2.4       4.9       6.5      5.3
Central Bank Losses                   1.9       1.8       2.8      0.8
Credit to Development Banks               0.8      1.4       1.9      0.8
Public Sector Financing Requirement       5.1      8.1      11.2      6.9
Domestic Financing                        1.2      5.7        9.8     6.9
*Estimate
Source: World Bank, Central Bank and Ministry of Finance
The large budget deficit had increasingly detrimental effects on
the economy's performance. It directly contributed to inflation, but it
also affected the allocation of credit and hence investment. While foreign
exchange reserves lasted, the government could sell off foreign exchange
rather than borrow in the home market or print money. Now, with reserves
precariously low, there was no room left for further reserve sales to
finance the deficit. 30 (See Figure 6) The declining reserves now forced a
more consistent exchange rate policy which immediately raised the inflation
rate.31 Thus external financing of the budget deficit ultimately had an
inflationary cost, even though it may have been delayed by a year or two.
Another way to finance the deficit was through the banking
system. High reserve ratios for banks or direct financing requirements
3OThe net reserves included on the liability side $800 million of arrears to the
IMF. The gold position of the central bank had been revalued at various points and
gm,ounted to $659 billion in December, 1988.
'By April 1989 the decline in economic activity and the restrictions of imports had
become so massive that an actual reserve recovery had taken place. The reserve gains
were sufficient to feed a rumor of another reactivation program.



46
effectively achieved this. The counterpart of this policy was a 30 percent
decline in real bank credit to the private sector in the past three years.
The Central Bank could finance the deficit by printing money. That, too,
had occurred and was one of the reasons for the accelerating inflation.
Since September 1987, the World Bank and Peruvian authorities
have been discussing stabilization. But the political impetus for major
policy changes so far has been missing. The only impetus for change came
from the external balance side where a crisis has been building up quite
visibly. The trade surplus of above $1 billion in 1985 had become a deficit
by 1987. Reserves declined by over $1 billion to the point where net
reserves were negative at the beginning of 1988. The response to the
looming foreign exchange crisis was a major real depreciation in late 1987.
This depreciation was one of the reasons for the sharp acceleration of
inflation.
The real depreciation helped stem capital flight and the
widening trade deficit for some time. In a vicious cycle, accelerating wage
and price increases which were triggered by this depreciation eroded the
initial gain in competitiveness. The renewed real appreciation of the real
exchange rate for imports since the end of 1987, and the resulting exchange
losses of the central bank, signal the government's inability to force a
real depreciation. And that simply foreshadows a certain foreign exchange
crisis. In other sectors, too, real prices remain grossly misaligned as we
already saw above in Table 6. This is the case frr interest rates as well
as for politically sensitive prices.



47
III.3 What Next?
By early 1989, there were less than $500 million in foreign
exchange left as reserves. Another $628 million in gold were available, but
trade had become a hand-to-mouth operation. Ships would not unload until
receipt of payment abroad was confirmed. From this position, the Peruvian
economy could move in one of three directions. The first possibility is a
draconian stabilization. This would require a drastic increase in real tax
revenues, a unification and real depreciation of the exchange rate, and a
realignment of those relative prices which today sustain the overly high
real wage. Policy reforms in these areas must eliminate the budget deficit
and lessen the external constraint. The cost would be a decline in real
wages and hence, at least in the short term, a reduction in growth of
output and employment. In terms of Peruvian history, this amounts to a
1983-style program which is "politically impossible". Of course, that does
not mean it will not happen. It merely means that it will come too late and
hence will be far more expensive in economic and political terms.
The second possibility is a gradual. stabilization, supported by
increased tax compliance, exchange rate reform, and external support from
improved export prices or resources provided by foreign governments. Many
debtor countries have the capability of incurring arreurs on interest
payments or amortization of their external debt. This provides them with a
temporary cushion on the foreign exchange side while gradual adjustments
are made. Peru has already used and fully exhausted that capability: debt



48
se.rvice was halted in 1985, and there now is a deficit ev, without
interest payments. Only fresh external resources (net transfers) can do the
job, but it is difficult to know whence they might come. The main reason to
contemplate such a possibility at all is political. The U.S. has a lot at
stake if Peru, as a result of political disintegration, comes to the brink.
The growing power of the United Left and extremism of the Shining Path
suggest possibilities much more difficult to live with than Nicaragua. But
it is extremely unlikely that a stabilization program with external support
would fall from heaven; more likely it would be the maiden gift after a
right wing coup.
The third, and the most likely way, is a gradual but
accelerating disintegration of the Peruvian economy. As the growing foreign
exchange crisis forces more and more rapid depreciation, there will be
demands for the maintenance of real wages. With both wages and the exchange
rate showing accelerating inflation, prices will quickly follow. In fact,
to avoid mammoth deficits or violent strikes, the government will be forced
to run a fully indexed economy. But even as the economy becomes fully
indexed, the real exchange rate has to be brought down and real public
sector prices must rise. Accelerating inflation is the only way that can
happen: prices and the exchange rate have to outrun wage increases, even as
wages try to catch up. Moreover, as prices, the exchange rate and wages
chase each other not only the size of increases but also the frequency of
adjustments increase. Adjustment periods shrink from a year to, the
adjustment to hyperinflation. Pazos (1972, p.92-3) has described the
dynamics as follows:



49
"When the rate of inflation approaches the limit of tolerance, a
growing number of trade unions ask for raises before their contracts
become due. And management grants them. These wage increases give an
additional push to inflation and bring about a further reduction of
the adjustment interval. Probably the interval is initially shortened
to six months, and then, successively. to three months, one month,
one week, and one day. At first the readjustment is based on the
cost-of-living index; but since there is a delay of one or two months
or more in the publication of this index, it must soon be replaced by
another. The best-known and more up-to-date of the possible
indicators in Latin America is the quotation of a foreign currency,
generally the U.S. dollar."
The process is well underway, as inflation was running at ar.
annual rate of 6000 percent at the end of 1988. The financial
disintegration was apparent in the massive demonetization of the economy
which was so significant that financing of the budget deficit was not
consistent with stable inflation even at this incredible level. Real
wages, as seen in Figure 4 above, had declined to a level far below 1985,
the starting point of the program.
Somewhere in this process, the government might fall. But even
that would not solve the problems of an economy where the basic fight is
about income distribution. While foreign exchange reserves lasted, the
country could spend more than the whole pie and grow in relative harmony.
With reserves gone, the real income gains have to be paid back unless they
can be earned by sharply higher productivity. Peru today is far away from
the kind of policy reform that would try to make the best of its
resources; and, hence, maximum pessimism is warranted.
Peruvian policy makers do not like to hear this, but the most
likely course of Peru is that taken by Chile under Allende in the period



50
from September 1970 to September 1973. The exact timing and details of the
Peruvian experience may not match that of Allende, but the broad outline
certainly does.
The unfortunate implication of having allowed so radical a
deterioration of the Peruvian economy is that there is no longer any broad
political support for reform. The center-left political concentration is
vanishing, and new poles of concentration are emerging far away from where
Garcia started his presidency: the right around de Soto and Vargas Llosa
which is agitating for a Chilean style free market approach, and the
United Left for whom the unfortunate nationalization of the banking system
in 1988 was merely a first step in the direction of pervasive
socialization. And then there is, far off at the extreme left, the Shining
Path whose vision is nothing short of a civil war along racial lines.
Against this background of deteriorating economics and politics, where
will the Peruvian economy be a year from now?
Economic mismanagement need not be shortlived. If the politics
are supportive and external destabilization is not a factor, such a regime
can last another year or even more. Garcia can make time by radicalizing
his own position and policies in the direction of populism and increasing
government intervention. A massive program of nationalization and control
would give the government more than a few months of breathing space,
except if it were overthrown. Garcia could adopt a gradualist, reformist
policy and attempt a shift to the right! In the meantime, the political
scene remains relatively calm: coups are not in sight for one simple



51
reason: the righL does not want to let Garcia off the hook, doing the hard
and ungrateful work of stabilizing the economy only to see Garcia come
back for another round. But while there is apparent stability, the extreme
reduction in living standards and the growing number of strikes do suggest
that surviving to the elections in April 1990, will not be easy. The very
depth of the economic collapse in late 1988 caused so sharp a fall in
imports that the external constraint, for a while, was lessened. The real
exchange rate in the informal market (see Figure 7) actually declined to
pre-1987 levels.
But the collapse of real wages and activity was devastating.
Table 8 Peru: Real Wages and Real Per Capita GDP:1985-1989
(I-idex July 1985-100)
…
Real Wages                      Per Capita GDPb
National Average    Minimum Wage   Government
1985                111               120           113          100
1986                126               124           118          107
1987                137               131           136          112
1988                105               lid           101          110
1989a               56                 64            43          81c
aJulyl989 bIndex 1985-100 cApril 1989
Source: Peru: Ministry of Economics
Official estimates placed the decline in per capita real income,
betwwen 1987 and April 1989 at 25 percent! Just how far the disintegration
of the economy has gone is apparent from a survey in Jamuary 1989 reported
by ADOyO, an economic consulting service in Peru. Middle and upper income
respondents predominantly indicated that they would buy dollars given



51-A
PERU: REAL INFOR :MAL EXCHANGE RATE
(INDEX 1987:1-100)
250-
240
230
220
210
200
190
180
170 -
160 
150-
140-
130 
120-
110 
100 
90 
80 
70-
1987                         1988                         1989                         1990



52
extra income. Of the lower inoume groups, more than half reported that
they would spend the extra income on food.
IV. CONCLUDING REMARK
We want to conclude with another quotation from Seers (1964,p. 103), this
time to emphasize that IMF-style policies, without concern for growth or
social progress may well establish short run financial stability, but they
inevitably open the door to yet another round of destructive reaction in
the form of populist policies:
It is clear that the two instances of populism discussed here
led to disastrous consequences for those who were meant to be the
beneficiaries. The central question then is wherher populist policies are
outright unsustainable, or whether there is a variant which, properly
executed can in fasct succed. We leave to further research the elaboration
of the thesis that populist policies can succeed provided they stay far
clear of foreign exchange constraints, emphasize reactivation only for a
brief initial period and then shift to growth policies. Most important for
success, expansionary policies need to be aware of capacity constraints
and have to rely for their financing on an extremely orthodox fiscal
policy and rigorous tax administration. Within those restrictions, there
is significant room left for the redistributive objectives of populism.



53
Table A-1    Peru: Macroeconomic Indicators
Growtha   Inflationa    Terms of    External    Resource          Real
Tradeb        DebtC      Transferd    Wages
1970        7.3         5             100            3.68         4.1
1971        5.1         7              85            3.69         0.8
1972        5.8         7              80            3.83         1.0
1973        6.2        10             101            4.13        -0.6
1974        6.9        17             103            5.24        -5.4
1975        2.4        24              88            6.26        -9.8
1976        3.3        34              84            7.38        -5.6
1977       -0.3        38              79            8.57        -3.4
1978       -1.7        58              75            9.32         3.3
1979       4.3         67             100            9.33        12.5
1980        2.9        60             111            9.59         3.8         100
1981        3.0        73             104            9.63        -4.4          98
1982        0.9        73              94           11.1         -3.7         101
1983      -12.0      125              104           12.4          0.2          84
1984        4.7      112               96           13.3          4.5          70
1985        2.3      158               82           13.8          6.9          60
1986        8.9        63              64           14.4         -2.0           76
1987        6.5      115               61           15.4         -3.8           80
1988*      -8.5     1720                            16.2                        61
*estimates aPercent per year, b Terms of Trade Index, 1970-100, c Total external
debt,Billion $; d Resource transfer abroad as a percent of GDP. Resource transfer i
measured in the national accounts as net exports excepting factor payments.



54
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in Zammit,J.A. (ed.) The Chilean Road to Socialiosm Austin: University of
Texas Press.
Wise, C. (1988) "Peru in the 1980s:Political Responses to the Debt
Crisis." mimeo. Columbia University.
World Bank (1985) Peru. Country Economic Memorandum. Washington DC
-----------(1988) Peru: Policies to StoR Hvperinflation and Initiate
Economic Recovery. Washington: DC
Yanez,J. (1978) "Una 4,orrecion del Indice de Precios al Consumidor Durante
el Periodo 1971-73." in F. Contrereas (ed.) Commentaruiosd Sobre La
Situacion Economica Santiago.
Zammit, J.A. (ed.)(1973) The Chilean Road to Socialism Austin: University
of Texas Press.



59
CHILE: THE REAL WAGE
(Index 1970:3' 100)
80g  
70 -
610 
50
40
1967    1968    1969    1970    1971    1972    1973    1974    1975    1976    1977



60
CHILE: THE BLACK MAPUET IN DOLLARS
B 301
K 2
R
19&4    1967    1970    1973    1976    1979    1982    195
YEAR



61
PERU'S REAL PER CAPITA INCOME
(INDEX 1980-100)
'I0-
105-
100- 
95-
90 
85 
80        6
75-
60    62    64    66    68    70   72    74    76   78    80    82    84    86    88



62
Peruvian Income Distribution
Per Capita                                              Percent of the
income (1979 Intis)                                     Population
12 .746 6                          \.0%
45.4
253                   30.8                        46.1.
223                   13 8-\                         23.5.
129                       10 0                          29.44



63
P;:RU: THE REAL WAGE
(INDEX 1982:2-100)
100 
70 -
50 -
40 -
1980     1981     1982     1983      1984     1985    1986      1987      1988     1989



64
PERU: NET FOREIGN RESERVES
(Billion tUS)
0.9 
0.8 
0.7
0.6
0.5
0.4
0.3
0.2
-0.1
0
O-0.1\
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7-
-0.8 -
198S             1986              1987             1988              l9B9



PPR Working Paper Series
Contact
IWa                             Author                   DA&            forpager
WPS294  Irreversibility, Uncertainty, and  Robert S. Pindyck     October 1989    N. Carolan
Investment                                                              61737
WPS295  Developing Country Experience    Vinod Thomas            October 1989    S. Fallon
in Trade Reform                                                         61680
WPS296 How Serious is the Neglect of     Lawrence Haddad         Noverrber 1989  J. Sweeney
Intrahousehold Inequality?      RaviKanbur                              31021
WPS297  Effects of the Multi-Fibre       Refik Erzan             November 1989   L. Tan
Arrangement on Developing       Junichi Goto                            33702
Countries Trade: An Empirical   Paula Holmes
Investigation
WPS298  Evaluating Global Macroeconomic   Ahmad Jamshidi         December 1989   M. Divino
Models: A Case Study of                                                 33739
MULTIMOD
WPS299 The External Effects of Public     Carlos Alf redo Rodriguez  November 1989   R. Luz
Sector Deficits                                                         61588
WPS300  How the 1981-83 Chilean Banking   Mauricio Larnain
Crisis was Handled
WPS301  Myths of the West: Lessons from    Collin Mayer          November 1989   WDR Office
Developed Countries for Development                                     31393
Finance
WPS302  Improving Support Services for   Sherry Keith            November 1.989  J. Cheeseman
Rural Schools: A Management                                             61703
Perspective
WPS303  Is Undernutriion Responsive to   Martin Ravallion        November 1989   C. Spooner
Changes in Incomes?                                                     30464
WPS304 The New Political Economy:        Merlee S. Grindle
Positive Economics and Negative
Politics
WPS305  Between Public and Private: A    Lawrence F. Salmen
Review of Non-Governmental      A. Paige Eaves
Organization Involvement in World
Bank Projects
WPS306 A Method for Macroeconomic        Ali Khadr
Consistency in Current and      Klaus Schmidt-Hebbel
Constant Prices



Contact
iC1a                            Author                    2              1or paper
WPS307 On the Accur& 'v' of Economic      Alexander J. Yeats      November 1989   J. Epps
Observations: Do Sub-Saharan                                             33710
Trade Statistics Mean Anything
WPS308  Harmonizing Tax Policies in Central  Yalcin M. Baran      November 1989   T. Watana
America                                                                  31882
WPS309  Honduras-Public Sector Finances,   Yalcin M. Baran        Nova -mber 1989   T. Watana
Issues, and Policy Suggestions                                           31882
to Resolve Thsm
WPS310 A Macroeconomic Consistency        Ali Khadr
Framework for Zimbabwe          Klaus Schmidt-Hebbel
WPS311 Macroeconomic Per ormance          Leonardo Leiderman      November 1989   R. Luz
Before and After Disinflation in  Nissan Liviatan                        61588
Israel
WPS312  Improving Public Enterprise       Mary M. Shirley         October 1989     R. Malcolm
Performance: Lessons frcom                                               61708
South Korea
WPS313 The Evolution of Paradigms of      Michael E. Colby        November 1989   C. Evangelista
Environmental Management in                                              32645
Development
WPS314  Primary Commodity Prices and      Theodosios Palaskas     November 1989   D. Gustafson
Macroeconomic Variables: A Long- Panos Varangis                          33714
run Relationship
WPS315  Notes on Patents, Distortions,    Julio Nogu6s
and Development
WPS316 The Macroeconomics of Populism    Rudiger Dornbusch        December 1989   R Luz
in Latin America                Sebastian Edwards                        61588
WPS317 Price and Quality Competitiveness   Zdenek Drabek
of Socialist Countries' Exports  Andrzej Olechowski
WPS318 Debt Buybacks Can Indicate         Sankarshan Acharya
Sovereign Countries' Willingness   Ishac Diwan
to Raise Investment and Repay
Debt When Partial Debt Relief is
Offered: Theory and Tests
WPS319 Trends in South-South Trade and   Refik Erzan
the Potential in Non-Discriminatory
Liberalization of Barriers