In 1980 the Belaúnde government, elected with a 43-percent plurality of the popular vote, embarked on the path of an unfettered ‘free market economy’—adopting an orthodox developmental strategy tied to the influx of foreign investment, the promotion of primary goods exports and the dismantling of state-owned enterprises.footnote1 The new administration banished the populist rhetoric that characterized Belaúnde’s earlier tenure of power (1964–1968); in Peru today there is no longer any discussion of agrarian reform, income redistribution or national industrialization.footnote2 Yet unlike the Southern Cone dictatorships, where Friedmanite laissez-faire economics was installed following military coups against parliamentary regimes, Peru is novel in combining neo-liberal economic retrenchment with the re-emergence of a parliamentary regime. This anomaly is the result of the deepening economic crisis which affected the nationalist-statist regimes that ruled during the previous twelve years (1968–1980).

Originally the Velasco government (1968–1975) had tried to stimulate indigenous industrialization through a broad programme encompassing agrarian reform, the nationalization of 175 large firms and banks, and the promotion of publicly owned enterprises.footnote3 The Achilles heel of this ambitious attempt to modernize Peruvian capitalism was that it took place from above. The military commanded the process while the supposed beneficiaries—workers and peasants—were the objects of policy. Equally important, the development programme was heavily dependent on outside funding and quickly accumulated large-scale debts. The investments which might have allowed the regime to meet its obligations either failed to materialize (petroleum was not discovered, the anchovies for fishmeal exports disappeared), or were inadequate (export prices of minerals declined), or were poorly managed (public sector enterprises). As a result Velasco was overthrown by General Morales Bermudez, who began a gradual process of dismantling reformist institutions and restraining the state’s dirigiste role.footnote4

As a transitional regime between a nationalist-reformist and a neo-liberal (free market) strategy, Bermudez’s government (1975–1980) followed a cautious step-by-step approach.footnote5 When he took power in 1975, the political climate in the country, both among the masses and within the military, was not particularly suited for the immediate and massive introduction of free enterprise capitalism. In his first year, Bermudez maintained the fiction that his regime was the second phase of the Velasco-inspired revolution—a phase in which certain excesses would be rectified but essentially similar goals pursued. But while promulgating the military revolutionary doctrine, Bermudez proceeded to replace policymakers and members of the military apparatus who were sympathetic to Velasco. This recomposition of the state personnel allowed Bermudez to change direction in 1976 as he implemented imf demands leading to massive cutbacks in public services and a precipitous decline in the standard of living. These measures, accompanied by repression of the popular resistance to them, assured the backing of the banks for Bermudez. But they closed the book on the support of popular layers, among whom militarism and statism were now equated with repression and worsening economic conditions. By 1977 the popular sectors were no longer willing to tolerate non-participatory government and increasing repression. Three successful general strikes demonstrated to the military that either Morales Bermudez’s policies would have to be changed, or governmental power would have to be returned to a civilian leadership. The integrity of the military institution was always a prime concern for the Peruvian generals, who had been able to avoid the mass killings and disappearances prevalent in Brazil, Argentina and Chile and who felt that, if they stepped down soon, they could maintain a strong position in the country. At the same time, major disagreements had emerged over political-economic policy between branches of the military and within the army itself, particularly between the Velascistas and the more conservative sectors. Thus in 1977 Morales Bermudez announced the steps to be taken to return Peru to parliamentary rule.

In the last phase of Bermudez’s tenure, several important enterprises were designated for privatization and the government simultaneously opened new channels for political activity, favouring parties representing conservative property interests over the popular-based leftist movements. As presidential elections neared in the final months of the regime, the public sector was rapidly deteriorating, collective forms of agricultural organization were being run down, food production was lagging far behind population growth, and foreign financial institutions had established hegemony over the development agenda. It was in the context of this organic crisis that Belaúnde was able to ride a popular wave of anti-militarism and anti-statism, combining ‘democratic’ electoral policies and neo-liberal economics.footnote6 Greatly assisted by the disunity of the Left, Belaúnde’s coalition was ultimately able to attract both workers and industrialists, landowners and peasants, bankers and squatters. His electoral programme offered something to each layer of Peruvian society: for the masses, the promise of one million jobs, an end to military repression of unions, and an increase in the standard of living; for the property-owners, privatization of the economy and whole-hearted support for free enterprise. This cornucopia of promises was effective in providing Belaúnde with the margin of victory, but immediately after the election his coalition began to unravel into its contradictory social components.

Belaúnde’s economic team, led by Manuel Ulloa (Prime Minister/Minister of Economy and Finances), Pedro Pablo Kuczynski (Minister of Mines and Energy) and Richard Webb, head of the Central Bank, were all staunch promoters of free enterprise, resolute opponents of state-owned enterprises and ardent supporters of the multinationals. However, a basic contradiction developed between the political democracy that had allowed Belaúnde to take office and an economic policy favouring a small minority of the population. Even as the regime took its first steps in liberalizing the economy, it began to encounter opposition not only from the left but from its own populist wing in Congress. Before Belaúnde’s party had completed six months in office, it suffered a stinging reduction in its vote, from 43 to 33 per cent, in the municipal elections.footnote7 Faced with populist opposition in Congress and grassroots discontent in the municipalities, Belaúnde staged an ‘institutional coup’, using his party majority to delegate emergency powers to the executive branch, which then ruled through decree in a fashion as peremptory as any military dictatorship.footnote8 Although decentralization, regional development and municipal autonomy had been central planks of his election campaign, Belaúnde now dictated legislation which starved municipal government of resources and effectively stripped it of any independent attributes. However, the crucial issue for Belaúnde and his team was the power to restructure the economy in order to promote a new model of accumulation.