President García pulls Peru out of recession with broad reforms including price and exchange controls to stem inflation. He promotes agricultural growth and decentralization of economic activity. With renewed emphasis on exports and off of import substitution, Peru enjoys two years of economic revival. Agricultural production and manufacturing output increase. The GDP reaches 7.7 percent in 1987.
Peru's economic situation unravels as the Central Bank feels the consequences of several years of overextending its credit to the agricultural sector and state enterprises. With the external current account in deficit, dwindling financial resources, and little private-sector cooperation, manufacturing production falls and the economy contracts.
To eliminate import substitution and return Peru to full participation in world markets, Fujimori enacts a "Fujishock" program more extreme than the IMF's recommendation. He deregulates labor and financial markets, reduces tariffs, courts foreign investment, and launches a privatization program. Economist Hernando de Soto urges that the informal economy be incorporated into the mainstream economy.
Peru experiences robust economic growth driven by foreign direct investment (FDI). Almost 40 percent of FDI is a result of the privatization program that includes telecommunications services, the fisheries industry, and electricity generation, transmission, and distribution. By 1997, however, the poor fiscal management of the 1980s begins to erode economic success.
Peru's economy suffers a triple blow with President Fujimori's political collapse, financial turmoil in Asia, Russia, and Brazil, and severe damage caused by the El Niño weather phenomenon. Local and foreign investors are scared off, the privatization program stalls, and fishmeal and agricultural exports decline sharply.
Favorable weather conditions bring an expansion in the fishing industry and agriculture, enabling a slow but definite economic recovery. President Toledo's incoming administration promises to reduce taxes and tariffs as a way of stimulating the economy. Rail and airport privatizations succeed, but water and electricity company sales cause a massive popular backlash and weaken Toledo's position.
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