Exchange Control vs. Peru

December 13, 1948

LIMA, PERU—Gen. Manuel A. Odria, the new President of Peru who took power by a military coup Oct. 29, is a short man. But he has dignity and poise and gives an impression of strength. In the course of an interview he granted me I was also struck by a quality one would hardly expect in a man who had just come to power by revolutionary means—caution. This was particularly evident in his reply to my question about his policy on exchange control.

There are two schools of thought in Peru, he answered. One is in favor of keeping controls and one is in favor of abolishing them. “The government,” he declared cryptically, “has chosen the path that is best for the economy.”

The new exchange decree of Dec. 4 is a half-hearted compromise between the Bustamante decree and free exchanges. It will allow the exporter to retain 55 instead of 35 percent of his dollar receipts in certificates that he can sell in the free market; but he must still turn over 45 (instead of the previous 65) percent of his dollar receipts to the government at the official rate of 6.50 soles. Whatever relief this brings will be more than offset by the new decree forcing employers to give workers a 30 percent share in profits.

Free prices, free interest rates, and free exchange rates are the traditional way of preserving or restoring the trade balance between nations. Exchange control with the overvalued Peruvian sol has reversed the normal price incentives. It has systematically discouraged exports and encouraged imports. To compel an exporter to surrender most of the dollars he earns for 6.50 soles apiece instead of allowing him to get the market rate of about 15 soles is a way of imposing a huge concealed tax on the exporter in addition to the very heavy open tax on exports from Peru.

In metal mines this huge double tax has prevented the working of marginal ores and halted exploration and development. It has been primarily responsible for a falling acreage and production of cotton, Peru’s greatest single source of dollars. On the other hand, when the market rate for the sol is about 15 to the dollar, a license to import at the 6.50 rate is a huge but disguised subsidy to the importer.

This totalitarian system gives the government life-and-death powers over individual concerns. When administered by modestly paid minor officials who have discretionary power to grant or withhold import licenses, or even to expedite or delay them, and when the decisions of such minor officials may make a difference of millions of soles to an individual business concern, the emergence of wholesale bribery and corruption becomes inevitable.

This corruption spreads through the business community. There has been a flourishing black market in import licenses. There has been a rapid growth in the practice of fraudulent or double invoicing.

Nor has exchange control in Peru helped the consumer. Only a totalitarian and completely effective system of price control straight up to the retail level could do this. As things are, with few exceptions the benefits of the 6.50 import rate go merely to increase the profit margin of the favored importer, wholesaler, or retailer—who bases his selling price not on the cost to him but on short local supply and inflated domestic monetary demand.

Not only in Peru but everywhere, exchange control with an overvalued currency is a concealed tax on exporters to pay a disguised subsidy to the importers. It rests on the assumption that the producer can with impunity be forced to subsidize the consumer; that the volume of exports is practically automatic regardless of the monetary incentives or discouragements to it, and that the amount of available foreign exchange is rigidly fixed regardless of government policies.

All these assumptions are false. Peruvian experience underlines their falsity. You cannot penalize the producer and exporter without drying up the very stream of foreign-exchange receipts upon which the importer and the consumer depend.