I'm in the position of a physician who walks into a house to look at a sick girl," explains Nobel Laureate and economist Milton Friedman. "You wouldn't say I wasn't competent to care for the child because I didn't know her name."
Nonetheless, as the high priest of libertarian economics made his first visit to this country this month, his stiff prescription of free trade and fiscal retrenchment touched off fierce debate among Peruvians of all political persuasions. Lima's Marxist daily excerpted some of Friedman's writings under the heading, "Return to the Law of the Jungle."
Peruvian economist and industrialist Miguel Vega complained that "free trade may work in an industrialized country like England or the United States, but we are a small, developing country." Manuel Moreyra, ex-president of Peru's Central Reserve Bank, branded Friedman "a Ricardian anarchist" and hinted that Friedman's recommendations were the result more of ideology than of economic analysis.
For his part, Friedman freely admits his lack of knowledge of even the basic characteristics of the Peruvian economic and political situation. But he maintains that "an economist doesn't have to know anything about a country to diagnose inflation and prescribe for it."
The visit by the founder of the monetarist "Chicago School" came as Peru faces a host of critical choices. The 15-month-old democratic government of President Fernando Belaunde Terry is presiding over a controversial program of economic liberalization. Its crew of economic technicians--many of them with U.S. academic credentials--has raised interest rates, lowered trade barriers and made plans to spin off some of the state-owned companies accumulated by Belaunde's military predecessors. And after a 12-year stint of nationalistic military government, Peru is looking anew to foreign capital to develop its promising natural resources.
Although no one claims Peru's economic situation threatens a crisis, just about everyone agrees that things could be better. On the external side, international reserves have fallen from almost $1.3 billion at the beginning of the year to around $600 million. While government economists argue that half the drawdown resulted from Peru's decision to repay ahead of schedule almost $400 million in obligations last April, much also stems from below-target exports and foreign investment. In September, foreign debt service gobbled up 56 percent of export revenues. Central Bank president Richard Webb recently told businessmen that the balance of payment situation was "delicate," although he added "there's no reason to panic."
Internally, inflation and unemployment both stand at towering levels. Government estimates put inflation for all of 1981 at around 70 percent, and most private sector financiers discount government projections that 1982 inflation will be held to 45 percent. They point mainly to the huge public sector deficits--about 7.6 percent of gross domestic product (GDP) this year--which is higher than at any time since Peru's economic crisis of 1975 and 1976. GDP in real terms is expected to grow by about 4 percent during 1981, but since Belaunde's policies have shunted more of the gains to investors, real wages may actually decline for the year.
Most sources agree that underemployment remains a serious problem. One estimate by Juan Wicht, a Peruvian economist working at Boston University, puts underemployment at more than half the work force.
On the other hand, Peru's long-term prospects for export growth give reason for optimism. One main reason is a fresh burst of oil exploration that is expected to pay off in higher petroleum production after 1982.
The principal impetus behind the search for oil is a law pushed through last December by Mines and Energy Minister Pedro Pablo Kuczynski that offers foreign producers hefty tax credits for reinvestment of profits. The companies, for their part, must turn over half of any oil production to Petroperu, the state oil company, as well as pay their own customs duties and a 68.5 percent income tax.
Still, in the short term the external picture looks bleak. Oil reserves of about 800 million barrels are unlikely to increase much until new programs of seismic study and exploratory drilling are completed. The fishing industry, which powered an export boom in the 1960s, is still suffering from excess capacity and the lingering effects of over-fishing. And mineral prices are depressed due to poor economic performance in the industrialized countries that are the main metals customers. In particular, Peruvians argue that U.S. government sales of silver from its strategic stockpile are depressing world prices and robbing Peru of millions of dollars in export income.
Friedman's latest globe-trotting adventure came at the behest of the Peruvian Institute of Liberty and Democracy, a politically moderate group headed by businessman and United Nations economist Hernando de Soto. Friedman's presence made the institute's three-day symposium into one of the year's most fractious political events.
Not that anyone was surprised by Friedman's recommendations for Peruvian economic policy. More than merely dropping tariffs from an average level of about 100 percent during the military government to about 60 percent now, free-trader Friedman said they should be abolished. Instead of selling off about 50 of the 178 government-owned enterprises--as the Belaunde government plans to do--Friedman said, "You should sell every last one." But Friedman was most vehement in his criticism of the huge deficit.
Friedman met with little argument when he pointed out that a government deficit of this size carries enormous inflationary pressure. "There is only one source of the increase in the supply of money," he said, "and that source is the government."
Friedman's advocacy of a massive rapid return to a balanced budget was not accepted so easily. He warned the Belaunde government to be stiff in its adherence to any anti-inflationary program. "When you start on a cure," said Friedman, "the bad effects start first and the good effects come later. There is no instant, famous cure for inflation." Based on the experience of Chile and other countries that have cracked down on inflation, said Friedman, real-income growth may not pick up until "five or six years" after the start of an anti-inflationary fiscal policy.
Central Bank president Webb questioned whether Friedman's prescriptions can be fitted to Peru's unique circumstances. "I think Friedman's monetarist theory has serious technical limitations in its application," he said. For one thing, even measuring a basic parameter like the money supply is a tough task in a developing economy like Peru's. For another, he asked, "What is the cost in a recession caused by application of monetarist principles, in terms of production and employment?" Peruvian economist Guido Pennano pointed to the Chilean example by way of answer. There, he claims, "the monetarist model exhausts itself, showing negative effects on employment, production and industrial development."
But Friedman received support from the other foreign economists attending the institute's symposium. They included Larry Sjastaad, a University of Chicago economist as is Friedman; Jan Tumlir, director of economic investigations for the General Agreements on Tariffs and Trade (GATT), and Charles Robinson, undersecretary of commerce under President Ford and former president of Marcona Mining Co., an iron firm that was nationalized by the Peruvian military government in 1975. And the newspaper El Comercio, voice of Peru's dominant business interests, editorialized a ringing endorsement of Friedman's anti-inflation stance