THE END OF THE PERUVIAN REVOLUTION:

A CLASS ANALYSIS

DENNIS GILBERT
Hamilton College

etween 1968 and 1975, the Peruvian government, under General

B Juan Velasco Alvarado, appeared to be dismantling the nation's Old
Regime. "We are," proclaimed Velasco, after a year in power, "living
a revolution . . . . [designed to] alter the established order, fundamen-
tally, in all its essential aspects" (Velasco, 1973:55). The broad objec-
tive of the revolution, as described in a subsequent speech, was to
overcome the dual burden of "underdevelopment and imperialism."
The first, Velasco defined in terms of the gross inequalities "in the
distribution of all forms of material and non-material wealth among the
members of a society", the latter, as "the dominion exercised by
foreign capital and technology" over an underdeveloped society (Vel-
asco, 1973:129).
As recently as 1974, the regime appeared to be succeeding. It had
carried out a massive agrarian reform, inaugurated a program of worker
participation in management for industry, broken the power of the
traditional oligarchy, substantially reduced and rationalized direct
foreign investment in the economy, and created a powerful devel-
opmentalist state out of the laissez faire weakling which had preceeded
it. It was achieving all this while maintaining a reasonable rate of
economic growthI and a relatively low level of political repression--at
least by contemporary Latin American stardards (Chaplin, 1976; Low-
enthal, 1975a; Jaquette, 1973). Two years later, Velasco was out of
office and government policy was shifting to the right. The revolution
was, by most thoughtful accounts, dead (Moncloa 1977; Bejar 1976;
Werlich 1977; Viorst, 1978; Fitzgerald, 1976).Why?
It is generally understood that the explanation lies in a steadily
degenerating economic situation after 1974. The impact of a series of
short-range economic factors contributing to this trend can only be
understood in terms of the contradictions inherent in the development
model adopted by the Velasco government. In brief, the model favored
already privileged urban classes over urban and rural masses by pro-
moting a pattern of industrialization which was import intensive and
16 Studies in Comparative International Development / Spring 1980

oriented toward middle class consumers. Concurrently, it sought to

reduce and rationalize the role of foreign capital in the economy. The
class orientation of this model actually intensified external economic
dependence, while policy toward foreign capital evoked hostility from
centers of international capitalist power. The net result was severe
vulnerability to balance of payment problems which, in turn, forced
political capitulation.
When the Peruvian experience is approached in this manner, the
often-noted anomaly of a Latin American revolution run by a military
junta is less impressive than the broad parallel between Velasco's
regime and populist governments in neighboring countries during the
1940s and 1950s. Velasco and his collaborators, like their populist
predecessors, opted for a development strategy flawed by its class
character and orientation toward the international economic system.

ECONOMIC CRISIS AND POLITICAL CHANGE

In June 1978, the Peruvian finance minister publically estimated the

nation's foreign debt at $8.2 billion (LAER, 23 June 1978), a figure
which represents over 60 percent of the Gross National Product. Meet-
ing the required interest and amortization payments would consume at
least 55 percent of anticipated foreign exchange earnings in 1978--70
percent in 1980. According to the Wall Street Journal, "anything over
20 percent is considered bad" (24 April 1978). The burden imposed on
the economy by this colossal debt and the corrective measures intro-
duced by the government is evident in falling real incomes, rising
unemployment, and a negative GNP growth rate. Peru's finance minis-
ter placed average incomes in 1978 at 60 percent of 1973 levels and
admitted that less than half of the work force had "adequate employ-
ment." Estimates of the rate of decline in GNP ran from 2 to 5 percent
annually (LAER, 23 June 1978).
With net international reserves of minus $1.3 billion (LAER, 24 April
1978) and an economy heavily dependent on imports, Peru could not be
expected to meet its current external obligations. In mid- 1978, Peru was
on the verge of defaulting on its international payments. To avoid this, it
engaged in arduous negotiations with the International Monetary Fund
and a consortium of major international banks. 2
The economic situation grossly compromised the regime's domestic
and foreign policies. Domestic policy moved to the right (a tendency
that was evident even before Velasco was replaced by the more conser-
The End of the Peruvian Revolution 17

vative General Francisco Morales Bermtldez) in an effort to gain inves-

tor confidence and satisfy Peru's foreign creditors. Many of the revolu-
tion's important reform programs were gutted (LAER, 30 July 1976; 7
Jan. 1977; 11 Feb. 1977; 21 April 1978; Gilbert, 1977b), and the regime
announced its intention to carry out "denationalizations" of companies
which had been taken over by the government (LAER, 30 July 1976). In
order to carry out these changes, leftists were flushed out of the govern-
ment and the Lima press (Wedich, 1977; DESCO, 1974:IV). Finally the
regime also felt compelled to shut down the National Peasant Confeder-
ation (CNA), which was threatening to become an effective political
representative of the Sierra peasantry (LAER, 9 June 1978).
Without doubt, the most tragic domestic impact of the economic crisis
has been on nutrition policy. Food prices were raised repeatedly while
the government staunchly resisted wage demands. Subsequently, nutri-
tion surveys undertaken in metropolitan Lima indicated that the average
daily intake of the poorest 50 percent of the population fell from 2,063
calories and 36.7 grams of protein (already below minimum health
standards) in July, 1975, to 1,662 calories and 32.8 grams in December,
1976 (Malpica, 1978). This decline came before the substantial price
increases of January and May, 1978.
Such policies are not easily imposed. For instance, on the eve of the
May, 1978 price increases for basic food commodities, fuels, and public
transportation, the regime was forced to mobilize riot police and troops
throughout the country and to suspend university and school classes. A
general strike followed--the third in a year--which took eight lives and
produced " scores" of injuries (WashingtonPost, 30 May 1978; LAER,
19 May 1978).
In the international sphere, the economic situation intensified the very
external dependency which the 1968 revolution had hoped to transcend.
A case in point is that of the American-owned Marcona Mining com-
pany, nationalized in 1975. The government initially announced that it
would allow no compensation on the grounds that, in order to avoid
taxes, the company had transferred profits to its subsidiaries outside of
Peru (Thorp & Bertram, 1978:214-9; LAER 25 Nov. 1977; Linqvist,
1972:240-253). After a year of immense pressure from the United States
government and the international banks with which Peru was negotiat-
ing balance-of-payment loans, the Peruvians concluded a $61.4 million
agreement with Marcona--the sum was actually in excess of the com-
pany's original demand. (LAER, 27 Aug. 1976, 22 Oct. 1976, 25 Nov.
1977; New York Times 1 May 1976). Peru's attitude toward foreign
18 Studies in Comparative International Development / Spring 1980

capital was described, in 1977, by Business Latin America as "basically

favorable, highly receptive in mining, petroleum, and high technology
areas." In contrast BLA's characterization in 1974 was "highly restric-
t i v e . . , experimenting with ways to reduce the role of capitalism" (23
Nov. 1977).
More telling than this forced reorientation toward foreign capital was
the manner in which externa/power centers increasingly influenced
domestic policy. The IMF and private banks attached stringent condi-
tions to the concession of new credits. These conditions included a
drastic currency devaluation, significant increases in the prices of food
and petroleum, new taxes, the imposition of restrictive credit policies,
return of many state enterprises to the private sector, a substantial
reduction of the budget deficit--requiring wholesale dismissals in the
public sector, strict control of wage increases, the elimination of import
controls, and a drastic reduction of the rate of inflation (LAER, 22 April
1977; Business Latin America, 30 Nov. 1977; Facts on File, 15 Oct.
1977).
These requirements whose implementation is evident in the policies
discussed above, are quite typical of IMF monetary stabilization agree-
ments (Payer, 1975: 32-40). They attack balance of payment problems
with orthodox deflationary measures designed to reduce foreign ex-
change requirements by cutting aggregate demand in the economy. The
classic alternatives, which conserve exchange by direct means, such as
multiple exchange rates, import controls, and rationing of basic com-
modities, are unacceptable to the IMF. Payer (1975) argues that the
character of IMF stablization programs is dictated by the institution's
bias toward the maintenance of an international free trade system, one
which largely benefits the developed capitalist nations. Whatever its
roots, the IMF approach carries with it heavy social costs which,
through market mechanisms, are shifted downward in the class order.
The results in Peru are high unemployment rates, sinking real wages,
and the spread of malnutrition among lower income groups.

SHORT-RANGE ECONOMIC PROBLEMS

There is a significant sense in which Peru's current economic difficulties

are transitory, almost accidental. A number of considerations point in
this direction:

I. Export gap in mining. The volume of Peruvian exports declined steadily under
Velasco, after stagnatingin the 1960s.The principalfactorin thistrend was mineral
The End of the Peruvian Revolution 19

production, which could only be significantly expanded through enormous capital

investment in new copper mines. Some fifteen years of export development were
thus lost, as the Belaunde and Velasco governments struggled to come to terms with
foreign investors for the financing of such projects. During the 1960s, the multina-
tional mining companies controlled the major local deposits. In pursuing other
world-wide investment strategies, they had little incentive to accelerate development
in Peru (Thorp and Bertram, 1978: 218-9, 307-8). After 1968, a second inhibiting
faclor was added: the expropriation of the International Petroleum Oil Company (an
Exxon subsidiary) and other American-owned enterprises by the Velasco govern-
ment. This provoked a virtual freeze on large-scale development credits to Peru.
Consequently, financing for the enormous Cuajone open-pit copper mine could not
be completed until Peru had negotiated the 1974 "'Greene Agreement"--which
settled all outstanding claims arising from the expropriation of American corporate
assets (LAER, 1 March 1974). It was not until 1977 that the Cuajone and the smaller
Cerro Verde mine came into production. That year production leapt 83 percent over
output in 1976. This increment represented a substantial contribution to Peru's
balance of trade (LAER, 14 April 1978).
2. Fishmealproduction. Much of the export income in the 1960s was based on fishmeal
production. Relatively insignificant in the early 1950s, fishmeal became Peru's
leading export by 1965. However, in the early 1970s, a natural ecological distur-
bance, exacerbated by over-fishing, caused a precipitous decline in the anchovy
catch. Current production remains at a fraction of earlier levels (Thorp and Bertram,
1978: 242-247; Idyll, 1973; LAER, 14 April 1978).
3. Petroleum. Like many Third World countries, Peru was hurt by the sudden rise in
world oil prices in 1974. However, the discovery of very substantial reserves in
Ecuadorian territory, adjacent to the Peruvian Amazon, led Peruvians and foreign
petroleum experts to expect similar finds in Peru. In anticipation, Peru invested
nearly $1 billion in a trans-Andean pipeline~ It now appears that the initial expecta-
tions were extravagant. The capacity of the pipeline, which also contributed enor-
mously to Peru's foreign debt burden, is well in excess of production levels.
Nonetheless, by 1978, Peruvian oil production from jungle and non-jungle sites was
in excess of domestic needs (120,000 barrels per day). Unfortunately, the exportable
surplus (70,000 bpd) is insufficient to cover payments on the pipeline under current
arrangements (LAER 27 Nov. 1978, 9 Feb. 1979; Oil & Gas Journal, 28 Feb. 1977;
12 Sept. 1977).
4. Commodity prices. In a 1977 interview, Morales Bermudez blamed Peru's payments
difficulties on the inflated world prices of capital goods and food and declining prices
for Peru's major exports (Financial Times, 31 Aug. 1977). There is some evidence to
support his position. Copper, Peru's most important export, fell from $1.40 to 50r
per pound in 1974. That same year, wheat futures rose to three times the early 1973
levels, and the price ofoil quadrupled. (Commodity Research Bureau 1977). Recent
trends in Peru's terms of trade are given in Table 1. This table, and subsequently-
released ECLA statistics, suggest some improvement in 1976 and 1977. ECLA
found a 1 percent gain in Peru's terms of trade and a 16 percent advance in the
purchasing power of exports in the course of 1977 (ECLA, 1977).
5. Arms purchases. These account for a significant proportion of Peru's foreign debt. In
1976 alone, Peru spent $1 bilhon on arms purchases from the Soviet Union (New
20 Studies in Comparative International Development / Spring 1980

Table 1 Terms of Trade Index

1970 i00.0

1971 87.6

1972 83.0

1973 127.8

1974 113.6

1975 86.8

1976 (est.) 90.0

Source: Unpublished IMF

estimates based on BCR data.

York Times, 18 December 1977). Peruvian leaders have given private assurances that
they have no intention of making further purchases of this magmtude. At the same
time, the Soviets have agreed to defer 80 percent of the 1978-1980 arms payments
due them from the Peruvians until 1981-1988 (LAER, 14 April 1978).
6. Debt Structure. Peru's payments problem relates as much to the structure of ~ts
foreign debt as to the size of the debt. In the 1970s, Peru contracted a high proportion
of short-term, high-interest, cred,s with private internatmnal banks. (The most
important are the American banks such as Citibank, Bank of America, Manufactur-
ers Hanover Trust, and Chase Manhattan.) According to unpublished World Bank
estimates, 68 percent of Peru's external public indebtedness in 1976 was owed to
private creditors. Such debt is not easily deferred as bilateral and multilateral loans
might be. There are two reasons why Peru's obligations have taken this form. One is
that during much of the period after 1968, Peru's access to "softer" development
credits was limited by its confrontations with the United States. The second factor
was the flooding of mternatlonal credit markets with the "petro-dollars" accumu-
lated by od-exporting natmns in the mid-1970s. International bankers carried on an
aggressive campaign to recycle this money through Third World nations (Weinert,
1978). Peru was an especially attractive target because of its anticipated revenues
from jungle oil exports. (Wall Street Journal. 1 Sept. 1977; Washington Post, 14
March 1978; Viorst 1978: 19). "The foreign bankers," recalls a Lima financier
"wanted to give us money before we asked for it" (Wall Street Journal, I Sept.
1977). According to the World Bank, Peru's public debt with foreign private
creditors grew from $901.6 milhon in 1973 to $2,285.6 million in 1976.

T a k e n t o g e t h e r , t h e s e s h o r t r a n g e f a c t o r s s u g g e s t that P e r u ' s p a y -
m e n t s p r o b l e m s are the p r o d u c t o f p e c u l i a r h i s t o r i c a l c i r c u m s t a n c e s ,
u n l i k e l y to be r e p e a t e d . H o w e v e r , t h e r e w e r e s o m e b a s i c c o n t r a d i c t i o n s
in the d e v e l o p m e n t m o d e l a d o p t e d b y the P e r u v i a n r e v o l u t i o n w h i c h
c o u l d not be r e s o l v e d b y a f e w y e a r s o f p r u d e n t d e b t m a n a g e m e n t o r by a
rise in the p r i c e o f c o p p e r . T h i s is not to s u g g e s t that r e v o l u t i o n s c a n
a f f o r d to b e i n d i f f e r e n t to i n t e r n a t i o n a l a c c o u n t i n g o r w o r l d c o m m o d i t y
The End of the Peruvian Revolution 21

prices, but rather that some development models are exceedingly vul-
nerable to balance of payments problems. Once such problems are
encountered, there is little hope of maintaining domestic reform pro-
grams or attacking external dependency.

THE CLASS O R I E N T A T I O N OF THE D E V E L O P M E N T M O D E L

The development model which emerged under Velasco cannot be asses-

sed through the statements of the regime's own spokesmen. As others
have noted, the government never presented a coherent account of its
own program (Malloy, 1974; Lowenthal, 1975b; McClintock, 1978
Thorp and Bertram, 1978: 302-3). There was a tendency to describe the
revolution by a process of elimination epitomized in the frequently
repeated phrase, "Neither capitalist nor communist." This stance
seems to have resulted from a desire to avoid alienating potential
support, a pragmatic "whatever-works" attitude and a degree of
ideological diversity within the military cabinet. Yet, a definable politi-
cal and economic model did emerge. In what follows, that model is
described and analyzed in terms of the varied orientations of the regime
toward domestic classes and its treatment of foreign capital. The inten-
tion is to demonstrate that the failure of the Peruvian Revolution can be
explained in these terms.
It should be noted that this approach to the problem of dependency
emphasizes the intimate relationship between the character of internal
class relationships and the nature of a country' s ties to the international
economic system) Major development decisions are bound to influence
both and are, for that reason, foci of intense social conflict. When the
state is engaged in restructuring external dependency relations, it is
inevitably transforming its own class character, since policy shifts will
affect social classes differentially. All such attempts are therefore con-
strained by the class orientation of the regime. Here it is argued that the
development model adopted by the Peruvian Revolution was shaped,
and probably undermined, by policies which favored certain, already
privileged urban classes.
In assuming this orientation (and not, for instance, one involving the
mobilization of the rural and urban poor), the military seems to have
been influenced by its own middle-class and urban (though often pro-
vincial)origins (Petras, 1970; Astiz, 1969: 143-4). This is not to suggest
that the military were direct representatives of any class or even that they
had a clear base of class support. Most observers have been struck by the
regime' s inability to attract support from any major social sector (Low-
22 Studies in Comparative International Development / Spring 1980

enthal, 1975b; Kendall, 1974; Philip, 1976; Cotler, 1975). The Velasco
government did, however, demonstrate greater sensitivity to the inter-
ests and opinions of some sectors than others. As the following discus-
sion will show, the class orientation of the revolution can be inferred
from the differential impact of its development policies.
A first indication of the class orientation of the revolution can be
gained from income studies. A comprehensive analysis by Webb (1977)
concludes that government policy hardly affected the gross inequalities
in income distribution which made Peru outstanding even among Third
World countries. The limited redistribution that did occur favored the
strata which were relatively affluent before the 1968 revolution. Webb
employs technological criteria to distinguish among "urban-modern"
(including the sugar industry), "urban-traditional," and "rural-
traditional" sectors. He concludes, "the largest transfers have gone to
urban and, particularly, to modern sector employees, most of whom
belong in the upper two or three deciles of the income distribution. Even
within the modern sector, the cumulative impact of wage and profit-
sharing measures had an unequal incidence, heavily favoring workers in
capital-intensive firms. The rural sector has gained much less, and again
the distribution of benefits has favored the better-off wage earners
within the sector" (Webb, 1977: 88).
The narrow advances of rural classes would seem surprising in view
of the sweeping nature of the 1969 agrarian reform, which destroyed the
Sierra landholding class and separated the metropolitan oligarchy from
its plantations on the coast. However, as Caballero (1977) argues, the
reform was more collectivist than redistributionist. The existing size-
distribution of rural resources was maintained. Large haciendas were
transferred intact to those who had worked them full-time, to be ad-
ministered as cooperative enterprises under state supervision. Although
legislation provided in some cases for the distribution of a small share of
hacienda income to adjoining peasant communities, most of the peasan-
try received no significant benefit. According to official statistics, 62
percent of the peasantry was untouched by the agrarian reform. Cabal-
lero ( 1977: 149) places 55 percent of the poorest sector of the rural labor
force (those with little or no land) in this category.
However, the main reason that the rural poor received such meagre
benefits is that the agrarian reform program did virtually nothing to
attack the most significant source of inequity in the existing Peruvian
system: the terribly-skewed distribution of productive resources favor-
ing the modern urban sector to the disadvantage of the traditional rural
The End of the Peruvian Revolution 23

sector (Webb, 1977: 60-76). Given this, the potential redistribution of

national income which can be achieved within the rural sector is rela-
tively slight. Figueroa (1973: 73) estimates the redistribution potential
of the agrarian reform legislation at 1 percent of national income, which
if equally distributed among the peasants who form the country's
poorest income quartile would raise incomes 0.5 percent.
Other elements of national policy have tended to reinforce the prerev-
olutionary status of the rural population. A 1972-73 government study
concluded that only 5 percent of planned public investment would add
directly to traditional sector capital, while 95 percent was aimed at the
modern sector (Webb, 1977: 233). The government did little to provide
the agricultural extension services and credit which would promote
expanded output. The agrarian reform legislation itself appears to pro-
vide for a net transfer of capital out of the rural sector. Beneficiaries of
the reform were given twenty years to pay off their land, for which the
former owners received agrarian bonds; the bonds could be discounted
immediately for the purposes of industrial investments (Webb, 1977:
84-87; Thorp and Bertram, 1978: 306-7).
Moreover, the government has maintained an intersectoral pricing
policy which has held down the prices of agricultural commodities
relative to goods produced in the urban sector (Webb, 1977: 78-9). The
result was virtual stagnation of agricultural production levels and in-
creased dependence on imported foodstuffs (Weeks, 1977: 141-2).
Food imports became a substantial drain on vital foreign exchange
holdings, amounting to $286 million in 1975 according to unpublished
IMF statistics. Thus, an implicit indifference to rural welfare contrib-
uted to the weakness of the entire development model.
Lower-class urban dwellers employed in the traditional sector gained
little more from the 1968 revolution than their rural counterparts. They
benefitted from the superior public services (especially education and
health) available in the cities and from low-priced foodstuffs, but they
suffered from a rather regressive tax policy. Little was invested in
lower-class housing or related infrastructure. In fact, the most costly
municipal investment of recent years was the completion of an express-
way connecting the affluent suburbs of Miraflores and San lsidro with
central Lima and the beaches to the south (Webb, 1977: 81-84).
In contrast to urban workers in the traditional sector, the upper-
stratum and the modern-sector working class made significant relative
gains under the military government. Real wages in the modern sector
were allowed to rise fairly rapidly. This policy was made possible by the
24 Studies in Comparative International Development / Spring 1980

capital-intensive character of industry, and by policies which held food

prices down while allowing extravagant protectionist profit levels in
industry (Abusada, 1977; Webb, 1977: 75-81; Weeks, 1977: 140-1).
This same class benefited from the Labor Stability Law promulgated in
1970. The Law made it extremely difficult to dismiss a worker in the
modem sector. Since labor militants could not easily be removed,
unions were strengthened. Entrepreneurs became reluctant to hire new
workers, preferring to substitute capital for labor. This trend was ad-
vantageous only to labor already employed. (Abusada, 1977: 14).
The major reform in the urban sector, paralleling the agrarian reform,
was the "Industrial Community (IC)." The IC provided for the trans-
fer of 15 percent of an industrial finn' s profits, in the form of stock, to a
collectivity of the company's employees. This stock would be repre-
sented by an IC director on the finn's board (Whyte, 1977). Related
legislation established a profit-sharing mechanism for workers in indus-
try, mining, and fishing. The IC and profit-sharing laws applied only to
the modem sector firms. The net effect of these laws was a significant
gain in income for the 8 percent of the labor force employed in such
firms--an already well-remunerated population drawn from the most
affluent income quartile. Even within this category of workers, the
legislation tends to be quite regressive (Figueroa, 1973: 73-4; Webb,
1977: 80-1).
The effect of the Peruvian revolution on the middle class (however
defined) is not amenable to any summary statement, though certain
aspects of the topic deserve comment. One is the growth of white-collar
employment opportunities provided by the rapid expansion of the public
sector under Velasco. In particular, the period after 1968 saw the
emergence of a new class of well educated and well paid technocrats
who are strongly identified with an expanded, developmentalist state
(Fitzgerald 1976; Lowenthal, 1975b: 33-4; Viorst, 1978). Hector Bejar,
a guerilla leader of the 1960s, commented not long after the military
took power: "What we are seeing is a so-called revolution of the middle
class on the make, an alliance between military and civilian technicians
of the middle class, mainly interested in jobs for themselves" (Gall
1971: 289).
The middle class also benefited from the same policies that favored
the privileged sectors of the working class. Members of the middle class
were included in the Industrial Community and profit-sharing legisla-
tion. They were also covered by the Labor Stability Law. Like other
urban classes, they enjoyed low food prices. Even the price of beef,
The End of the Peruvian Revolution 25

consumed largely by the middle class, has been held down through low
priced imports (Webb, 1977: 84). Of equal importance to the middle
class is what the regime failed to do: to reform the tax system by raising
effective tax rates and improving the efficiency of collection. Closing
off the numerous exemptions in the tax code--which, for example,
exclude much of the income of public officials--would inevitably have
hurt the middle class (Thorp and Bertram, 1978: 492; Lowenthal, 1975b:
17, Webb, 1977: 54-9). The potential for more effective tax-gathering
can be gauged from the fact that there are 310,000private automobiles and
140,000 individuals who regularly travel abroad in a country with 88,000
taxpayers (LAER 22 December 1978).
The most important aspect of the middle class relationship to the
development model of the Peruvian Revolution would have been obvi-
ous to anyone who visited Lima under Velasco: the continuing devel-
opment of a culture of consumerism. In the early 1970s, Lima's stores
were full of appliances, the avenues were choked with new automobiles,
TV antennas sprung up on roof-tops, shopping centers blossomed in the
midst of the new suburbs, and luxury apartment houses filled the
landscape. It was, moreover, clear in all the mass media (as in the listing
for "J. Waiter Thompson Peruana" in the phonebook) that an imported
technology of sophisticated selling was at work. These were the signs of
the expanding middle-class market which was being served by import-
substitution industrialization.
Economic data for the period confirm a visitor's impressions. Con-
struction, for instance, was one of the most dynamic sectors in the
economy during these years (Fitzgerald, 1976b: 17, 22-3). The impor-
tation of construction materials grew gradually from $12.0 million in
1969 to $21.7 million in 1973, then leapt to $86.6 million in 1974, the
last year for which data are available (Banco Central, 1976: 44). Most of
this money seems to have been invested in middle- and upper-class
housing and office building construction, which represented an expan-
sion of middle-class employment opportunities. Production of electrical
devices (largely refrigerators and other domestic appliances) expanded
at an average rate of 13.5 percent per year in the period 1970-1975
(Mercado, 1977: 86). An annual average of 15,600 passenger cars,
assembled from imported parts, were produced in Peru from 1969 to
1974, more than twice the output level of the preceding four years
(United Nations, 1976:631).4 These three sectors were typical of much
of the modem economy in that they served a largely middle-class market
and absorbed vast sums of foreign exchange. In 1974, imports of capital
26 Studies in Comparative International Development / Spring 1980

Table 2 RelativePositionsof Oligarchs and IndustrialistsAmongTop 1000Taxpayers

Percent Number Percent
FamAlies Indivzduals Medium Familxes Individuals Medlum
Family ~]pe Represented Listed Rank Represented Listed Rank
OLI~C
(n=26) 81 78 270 88 68 462
~USTRIAL
(n=27) 59 53 476 85 67 300

Source: E1 QQmercio, April 25-26, 1972;

E1 Peruano, March 9, 1977.

goods and intermediate products destined for industry (excluding fuels)

were valued at $1.6 billion, 78 percent of total customs (Banco Central,
1976: 44).

FROM OLIGARCHS TO INDUSTRIALISTS

Towering over the middle class in pre-1968 Peru was the metropolitan
oligarchy, the dominant class of the old regime (Bourricaud, 1966,
1970; Gilbert, 1977a) and one of the principal targets of the revolution.
Velasco (1973: 65), in an early speech, described the oligarchs as "the
irreducible adversaries of our movement." His government moved
decisively against the principal bases of oligarchic power: land, banks,
and newspapers (Gilbert 1977a). The sugar and cotton plantations of the
North Coast were the first holdings seized by the agrarian reform.
Shortly thereafter, several commercial banks were taken over by the
government; more generally, the regime tightened its control over the
entire financial sector with new legislation. The major daily newspa-
pers, an important legitimating mechanism and tactical political weapon
under the old regime, were taken over in 1974 (Gilbert, 1977b).
The effect of these measures on the economic position of the tradi-
tional oligarchic families is evident in Table 2, which is based on the
rank-ordered lists of top taxpayers issued annually by the finance minis-
try. Position on these lists can be taken as a rough index of personal
income. 5 Data assembled for this table on the tax-paying members of
twenty-seven key families 6 indicate that their relative standing among
the top income earners declined appreciably under Velasco. The fact
that most of the families were still represented among the nation's top
one-thousand taxpayers suggests, however, thatthe oligarchy had sig-
nificant sources of income which were not seized by the regime. In fact,
the objective of the revolution never was the elimination of private
wealthper se. This would have implied the eradication of capitalism in
The End of the Peruvian Revolution 27

Peru, a goal never espoused in government rhetoric. Instead, the gov-

ernment directed its attack at specific instruments of economic and
political power.
This approach was intimately linked to the revolution's attitude to-
ward Peru's incipient industrial bourgeoisie. The political and economic
weakness of native industrialists as a class was widely recognized under
the old regime (Mariategui, 1943; Haya de la Torre, 1936; Bourricaud,
1966; Cotler, 1975; Quijano, 1971). However, the military had been
influenced by the view---common among critics of Peruvian society by
the 1960s--that explained this weakness in terms of the stifling power of
the oligarchy and foreign capital. The export-oriented oligarchs had
maintained a strong hold on national economic policy and had been little
inclined to favor industrial development. Foreign investors had been
rapidly moving into Peruvian manufacturing. Both foreign capital and
the oligarchy were well established in the financial sector which, under a
laissez faire state, gave them considerable power over the entire econ-
omy.
The implicit, if not always explicit, conclusion of these analyses was
that if the power of the oligarchy could be eliminated and the conditions
of foreign participation in the economy regulated by the state, the latent
dynamism of the national bourgeoise would be released (Fitzgerald,
1976b; Thorp and Bertram, 1978: 303-4; Colter, 1970). Numerous
aspects of the regime's development program suggested faith in this
assumption about the potential of those whom Velasco labeled "the
authentic national entrepreneurs" (1974: 56). The agrarian reform, for
instance, was conceived as a step toward expanding the domestic market
for industrial products: peasants would become modern consumers.
Landowners, as was noted earlier, were given the opportunity to dis-
count the bonds with which they were compensated, for industrial
investment purposes. Velasco stressed both of these points in his speech
announcing the reform (DESCO, 1974: I, 94). ~
The military government's determination to encourage native indus-
trialists is evident in the extravagance of the economic incentives it
offered them. Local industry was protected with extremely high tariffs.
An overvalued sol and special duty exemptions made imported inputs
cheap, while an almost total tax exemption was allowed for reinvested
profits. Generous credit incentives were also available (Abusada,
1977). In addition, the industrialists had an indirect subsidy in the form
of cheap foodstuffs for their workers.
The reordering of power over the economy and the specific incentives
28 Studies in Comparative International Development / Spring 1980

Table 3 Productlon Shares in the Corporate Sector

1968 1975

The State 18% 42%

Foreign Enterprise 34% 13%

D Q m e s ~ c Capltal 48% 35%

Cooperatives, etc. -- 10%

Source: Fitzgerald, 1976.

offered to industrial investment created lucrative conditions for the

industrial bourgeoisie. This conclusion is supported by data on twenty-
seven industrial families reported in Table II. This sample of families
was drawn from a study of major industrial investment groups based on
1968 data) The median rank of members of these families among the top
taxpayers rose significantly under Velasco, as did the number of
families and individual family members represented. Especially impres-
sive, in view of government development policies, is the reversal of
relative positions between the oligarchic group and the industrialists.
Ironically, high profits did not persuade Peruvian industrialists to
cooperate with the development program of the new regime. Between
1968 and 1975, the production share of private domestic capital in the
corporate sector declined sharply (see Table 3), (Fitzgerald, 1976:
62-3). The reasons for this reaction from industrialists are not difficult to
find. After passage of the Industrial Community legislation (which
appeared to threaten loss of control of enterprises through stock transfers
to the workers) and the Labor Stability Law (which significantly reduced
the entrepreneur's control over labor), the national bourgeoise grew
skeptical about the future of capitalism in Peru. Members were encour-
aged in this attitude by the promulgation of a "Social Property Law"
(1974), which laid the basis for a government-financed sector of
worker-managed enterprises. Even the agrarian reform and the attack on
foreign capital, which were intended to encourage the development of
national industry, left the Peruvian bourgeoisie uneasy. Such policies
were read as an ominous violation of the rights of private property
(Abusada, 1977; Fitzgerald, 1976a; Philip, 1976; Whyte, 1977;
DESCO, 1974: I, 192; II, 548, 664).
The forebodings of the Peruvian capitalists proved to be self-fulfilling
prophecies: the failure of private investment only forced the expansion
of the state sector. The regime had little choice, given its determination
to promote industrialization while limiting foreign investment industry.
The End of the Peruvian Revolution 29

By 1975, public investment constituted a 42 percent production share

(Table 3) and state enterprises accounted for nearly half the employment
in the corporate sector (Fitzgerald 1976a:64).
To the degree that Peruvian industrialists did invest during this
period, they tended toward a pattern of entrepreneurial behavior which
introduced serious distortions into the economy (Abusada, 1977). Given
his lack of confidence in the long range possibilities of the system, the
industrial capitalist attempted to reap very high profits in the short run by
taking maximum advantage of the tax benefits and heavy tariff protec-
tion available to him. The colossal incentives to importation of capital
goods and intermediate products not only contributed to balance-of-
payment problems, they also created considerable excess industrial
capacity and decreased the rate of labor absorption from the traditional
sector. Easy access to undervalued foreign exchange encouraged the
practice of over-invoicing capital imports in order to move funds out of
the country (Anaya, n,d.: 64; Thorp, 1977: 183). The resulting impetus
toward capital-intensive growth was reinforced by the Labor Stability
Law, which made the industrialist reluctant to take on new employees,
even in the face of short-term improvements in the market and unutilized
productive capacity. Under this industrial regime, some firms operated
so inefficiently that the value of their imported inputs (i.e., all foreign
exchange costs including royalties) exceeded the value of their out-
put--if both are calculated at then-current international prices. That is,
closing these firms down and replacing their production with imports
would actually have improved the balance of payments (Abusada. 1977:
17).

RELATIONS WITH FOREIGN CAPITAL

Republican Peru has traditionally been extremely receptive to foreign

investment (Yepes, 1972; Bollinger. 1971; Carey, 1964; Hunt, 1975).
In the nineteenth century, British capital dominated the modern sector of
the Peruvian economy; in the twentieth century American capital has
been preeminent. This traditional receptiveness to foreign investment
was reaffirmed in the 1950s--during the presidency of General Manuel
Odria, when a new wave of direct foreign investment, largely concen-
trated in mining, entered Peru under exceptionally generous conditions.
A Peruvian businessman later commented, "~Odria flung back the doors
so wide that the hinges fell off" (Ballantyne, 1976: 21).
In the 1960s foreign investment, which had been largely concentrated
in primary product exports, began to move into the manufacturing and
30 Studies in Comparative International Development / Spring 1980

financial sectors (Quijano, 1968; Hunt, 1975). During this same period,
the role of foreign investment in Peruvian development came increas-
ingly under critical scrutiny from middle-class civilians and military
men concerned with modernization (Cotler, 1970; Jaquette, 1971). For
the officers particularly, economic dependency raised questions of na-
tional security and national honor (Villanueva, 1972; 1973; Einaudi,
1973).
One of the first acts of the new military government was the expropri-
ation, in 1968, of the American-owned International Petroleum Com-
pany, whose dubious claims to subsoil rights had been a matter of
strident public controversy in the late 1960s (Goodwin, 1969). This
move inaugurated a series of nationalizations, on quite variable terms
(compensation ranged from nothing to several-times book value), which
drastically reduced foreign participation in the export, utility, and finan-
cial sectors. 9 By 1975, the foreign share of corporate sector production
in Peru had been reduced to less than half of 1968 levels (see Table 3).
The military government's goal was to bring foreign investment into
congruence with national development objectives. In an early speech,
Velasco declared:

9 the necessaryforeign investmentin our countries should be rationalized. Foreign

investment, althoughit creates foci of economicmodernization,serves, under present
circumstances, as a suction mechanism, drawing off the wealth of Latin American
nations. Parodoxically,despiteour status of developingnations, we are actuallyexport-
ers of capital and financiers of the spectaculargrowth of the highly industrialized
countries (Velasco, 1973: 27).

The key objective here was to claim for Peru a greater proportion of
the returns on investment. In addition, the government made clear its
intention to channel foreign investment into areas where it was particu-
larly needed, and to restrict its deployment elsewhere (e.g., out of
utilities, but into petroleum exploitation). Velasco played a leading role
in establishing the "fade out" provision in the rules of the Andean
common market. In his words, foreign and mixed enterprises would
"revert to the state once their total investment and an acceptable return
had been covered by profits" (DESCO, 1974: I, 158; Hunt, 1975:310).
However, in spite of reiterated attacks on "imperialism", Velasco
and other government spokesmen left no doubt about the regime's
intention to keep Peru within the capitalist orbit. "Latin American
growth" Velasco asserted, "requires foreign capital" (Velasco, 1973:
27). Foreign investment must be in accordance with the laws and
The End of the Peruvian Revolution 31

development needs of the country: "But once these requirements are

met, the state should guarantee the legitimate rights of investors to profit
on their investment..." (DESCO: I, 158). In justifying his position,
Velasco wamed the West that Peru's restructuring of the role of foreign
capital, "represents the best solution to the problem of increasingly
widespread poverty which could result in a turn to the virtually inevita-
ble alternative of other forms of political, economic and social organi-
zation which we do not want" (Velasco, 1973: 28).
The goal of the revolution, then, was to renogotiate the terms of
Peru's relationship to Western capitalism. In important respects Peru
remained a dependent country. Even after a substantial reduction in
direct foreign investment, three crucial areas of dependency remained:
dependence on international commodity markets, dependence on im-
ported technology, and dependence on foreign financing for major
growth projects.
The disastrous economic consequences of recent fluctuations in the
international prices of Peru's major exports were mentioned above. The
military discovered that Peru, in I975, was just as vulnerable as it was at
the time of similar crises in 1948 and 1967. Thorp and Bertram (1978)
argue persuasively in their recent book that Peruvian economic policy in
the 1970s remains bound to the export-led growth model which has
dominated Peruvian economic history since the mid-nineteenth century.
It is, of course, precisely this economic dependence on international
markets which has, in recent months, subjected domestic policy to
dictates from abroad.
Judged by the expenditure of foreign exchange on royalty payments,
the technological dependency of Peru actually increased under the
military government. Annual payments averaged $4.5 million between
1964 and 1968, and $11.4 million from 1969 to 1972 (calculated from
Anaya, n.d.: 62). Two facts stand out about these expenditures. One is
that the amounts underestimate the foreign-exchange costs of imported
technology. Use of such technology typically implies the importation of
related capital goods and intermediate products. In a study of 103
technology contracts in effect in 1973, Anaya (n.d.: 66) found that 28
percent contained explicit import requirements. He also noted that 41
percent restricted the foreign markets to which production could be
exported. A second point worth noting is that most of these payments are
not for the type of sophisticated technology which Peru might need,
e.g., to process copper ore. Sixty percent of royalty remittances in 1972
were for non-durable consumer goods, ranging from cigarettes, shoes,
32 Studies in Comparative International Development / Spring 1980

perfume, and records to pharmaceutical products (Anaya, n.d.: 63).

This situation demonstrates the costs of orienting the industrialization
process to Western standards of middle-class consumption, and it indi-
cates a key weakness of Velasco's development model.
The reduction of direct foreign investment in the Peruvian economy
did not eliminate the need for some external financing of development.
In particular, major capital investments, such as the $550 million needed
to bring the Cuajone open pit copper mine into production (Hunt, 1975:
326), require support from abroad. Moreover, when the state was forced
to displace the reluctant national bourgeoisie as the main domestic
entrepreneur, Peru's external financing requirements increased. The
government was unable to meet the capital needs of the public sector in
local markets, and it was unwilling to risk alienating the middle class or
further discouraging local investors by increasing taxes or improving the
efficiency with which taxes are collected. The state was, thus, forced to
meet fully one-half of its capital requirements from abroad (Thorp and
Bertram, 1978: 309-14; Fitzgerald, 1976a:65).
There can be little doubt that the need for external financing, now
exacerbated by short-run balance of payments difficulties, is Peru's
most significant remaining dependency link with the advanced capitalist
countries. As discussed earlier in this paper, this need has been ably
exploited, since 1968, in stifling Peruvian intransigence. From the IPC
takeover in 1968 until the 1974 "Greene Agreement" (which settled all
outstanding U.S. claims), and again after the nationalization of the
Marcona Mining Company in mid-1975 until a settlement was achieved
with the company a year later, U.S. power limited Peru's access to
development financing. During these periods, the United States gov-
ernment virtually halted the flow of credits from its own agencies--such
as the Export-Import Bank and AID.--and from multilateral institutions
under American influence--most notably the World Bank and the
Inter-American Development Bank.
The pressure on the Peruvians in both instances was intensified by the
lending policies of the leading international banks. Only in 1973, as
Peru moved toward an agreement with the United States, were private
lines of credit from abroad extended beyond the relatively modest limits
maintained since 1968. TM A $200 million financing package for
Cuajone, assembled by Chase Manhattan in 1973, was made conditional
on the participation of the Export-Import Bank, which implied nothing
less than a settlement of outstanding issues with the United States (Hunt,
1975: 329-330). As noted, the banks (again led by Chase) made a
compensation agreement with Marcona Mining a prerequisite to a
The End of the Peruvian Revolution 33

balance-of-payments loan (New York Times, 2 May 1976; LAER, 22

Oct. 1976). Recent negotiations have followed an analogous pattern.
The banks have refused to extend balance-of-payments financing until
Peru reaches an accord with the IMF (LAER, 21 April 1978; Business
Latin America, 30 Nov. 1977).

CONCLUSION

The irony and the tragedy of the last decade of Peruvian history lies in its
neat replication of the failures of the Latin American populist regimes of
the 1940s and 1950s. Velasco's revolution was anticipated by Perrn in
Argentina, Vargas in Brazil, and the Popular Front and its Radica~
successors in Chile. All of these regimes opted for (or perhaps simply
blundered into) a development model characterized by: a class orienta-
tion strongly favoring certain urban strata, indifference or hostility
toward traditional export elites, strong incentives to capital-intensive,
import-substitution industrialization, neglect of rural development,
nationalist policies regulating foreign investment, and severe vulnera-
bility to balance-of-payments problems. Each left a more conservative
regime in its wake. The demise of these populist regimes is the product
of a series of contradictions---outlined below--inherent in the develop-
ment model itself, While these concluding remarks represent a synthesis
of the preceding discussion of the recent Peruvian case, they apply,
except in details, to earlier attempts at populist development. ~1
The difficulties inherent in the Peruvian Revolution's orientation
toward domestic social classes can be summarized as follows:

1. The regime's orientationtoward urban classes produced a pricing policy unfavorable

to agriculture. Low pnces tended to depress food production as did the failure to
provide credit and technical support for the rural sector. The result was increased
dependence on imported food.
2~ The privileges ceded the modern-sector working class, such as the Industrial Com-
munity and the Labor Stability Law, alienated the national bourgeoisie and thus
contributed to the failure of the entire program.
3. The orientation of industriahzation toward the urban middle-classconsumers inten-
sified the dependenceon importedtechnologiesand the related imports of capital and
intermediate goods,
4. The incipient national industrial bourgeoisie did not prove willing to assume the
historic role which the regime had reserved for it. The transformatmn of the social
and economic system, which was intended, in pan, to encourage this class, only
frightened it. Private investment declined rapidly. The bourgeoisie responded to
incentives held out to it with a pattern of entrepreneurial behavior which led only to
greater dissipation of foreign exchange.
34 Studies in Comparative International Development / Spring 1980

5. The failure of the national bourgeoisie to support the process required the state to
expand its own role. Unable to raise sufficient capital in local markets, unwilling to
increase taxation of the middle classes which it was attempting to encourage, the state
was forced to seek financing abroad.
6. Thus, the class orientation of the development model leads to heavy dependence on
imported food, capital goods, and intermediate goods, while it increases the need for
external financing. The net result is an increased vulnerability to fluctuations in
export earnings and to the prices of imported commodities, a result which is patent in
the current economic crisis.

In its treatment of foreign capital, the development model assumed a

renegotiated dependency which would reserve for Peru a greater portion
of the income from export enterprises and foreign enterprises operating
in the country. It was believed, moreover, that limiting the role of
foreign capital would encourage the development of the national
bourgeoisie. Direct foreign investment was substantially reduced and
rationalized to fit development needs. However, dependency on the
international capitalist system remained strong in three significant areas:
commodity markets, technology transfer, and the financing of growth in
the face of periodic balance-of-payments difficulties. The preceding
discussion underscores how closely these elements of dependency are
related to the class character of the development model. It is its class
character which, in large part, produces addiction to foreign technology
and makes the economy import-intensive. These tendencies, in turn,
produce hypersensitivity to external commodity markets. Finally, the
financial instability of such a system subjects it to the worst sort of
manipulation from without.
NOTES

This paper has benefited from comments on earlier drafts by A. Gail Bier, Tom E. Davis, Barry
Edmonston, Joseph Kahl, William LeoGrande, Cynthia McClintock, Chandler Morse, and John
Sheahan.

1. GNP growth for the period 1969-1973 is estimated at 6.0 percentper annum (Thorp and
Bertram, 1978: 395).

2. An agreement rescheduling Peru's foreign debt was finally negotiated in November, 1978. It
reduces Peru's required payments through 1980 to manageable levels, subject to maintenance of a
stem austerity program prescribed by the IMF.

3. The best presentation of this point of view is by Cardoso and Falleto (1969).

4 The statistic for 1973 was absent from this series. Average production is based on 1969-1972
and 1974.

5. This assumpuon seems justified by virtue of consistency between knownoligarchic property

holdings (Gilbert, 1977h: 339-64; tax-list rankmgs in 1970).
The End of the Peruvian Revolution 35

6. These families were selected as part of an historical study of the ohgarchy by a panel of seven
Peruvian "judges." The judges included: two key national politicmns, two highly regarded Lima
journalists, an upper-class businessman, a well connected lawyer, and a scholar with extenswe
upper-class ties. For further details on this method and the famdies themselves see Gilbert (1977b).
Three families were eliminated from the original hst (Gilbert, 1977b: 343-44) because their
economic interests were primarily industrial. They are included among the industrial famdies in
Table II.

7. For a revealing direct appeal to Peruvian industrialists see Velasco (1973: 127-50)

8. These twenty-seven families were associated with the investor groups outhned by Espraoza
Uriarte (197x:41-54). For present purposes, three foreign-controlled groups and six ohgarchic
families whose interests lie primarily outside the industrial sector (e g., the Prado banking family)
were not included. The latter were listed by Gilbert (1977b) and are included among the ollgareh,c
families in Table II. See note 7.

9. For a case-by-case study of nationalization, see Hunt (1975).

10. This is based on unpublished World Bank staustics. The same data suggest that suppliers'
credits were relatively unaffected by these shifts.

11. Of course, the "details" which differentiate the Peruvian Revolution from earlier populist
regimes (e.g., the agrarian reform, worker management) are far from unimportant But th~s does
not modify the flawed logic of the populist development model

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POLITICS
COMPROMISE
Coalition Government in Colombia
edited by R. Albert Berry, Ronald G. Hellman & Mauricio Soladn
This volume, sponsored by the Center for Inter-American Relatiuns,
assesses the political, social and economic implications of Colombia's
National Front system of coalition government for the 16-year period
1958-74. during which Liberals and Conservatives equally shared political,
legislative, and high administrative positions. It surveys the objectives of
the coalition regime, the changes brought about by its political institutiuns
and its transitional nature
Pohtics of Compromise begins by analyzing and interpreting the key
historical problems that contributed to the formation of this coalition
system of government, whereby the civil unrest resulting from competition
between the two dominant parties was neutralized by the formation of a
constitutional bipartisan power-sharing system.
Further essays describe and assess events during the National Front
period itself, taking into account both national and international influ-
ences. These chapters focus on electoral participation, the role of pohtical
inshtutions, and the nature of the opposition that evolved during a time
when competitive party polihcs was restricted. The book also analyzes
Colombia's economic progress m the same period, noting that while eco-
nomic policy made little headway towards narrowing the gap between the
rich and poor, substantial gains were made in the form of rapid growth,
diversificahon of exports and increasing income per capita.
The volume ends with an interpretation of the coalition experiment and a
projection of its implications for Colombia's future
Order ftorr~ your bookstore Or prep,310 from
Ttaflsaclmfl Books
Box 9;'8, Edison. N.J 08817

II