Peru's Economic Policies: Orthodoxy vs. Heterodoxy
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Orthodoxy
Under pressure from the IMF, Belaúnde was forced to reduce the budget, increase public utility rates, and devalue the national currency, the sol. Thus, the currency was worth less, and more had to be spent to import a product. The IMF measures resulted in a severe recession (contraction of demand), which impacted the citizens' finances. The poorer citizen consumes less and, as they consume less, pays less tax. In 1984, the Belaúnde government fell into arrears with the payment of its external debt.
Heterodox Program
The payment of external debt was limited to 10% of Peruvian exports. A new currency, the inti, was introduced, replacing the devalued sol. Basic prices, wages, and the exchange rate on the dollar were frozen. By avoiding higher prices, consumers had more money to spend on other things and thereby contribute to economic recovery in other sectors.
Basis
To repay the debt, it would be necessary to reactivate the economy. In this line, reducing imports, as suggested by the IMF, would be counterproductive, as Peruvian industrial production depends largely on imported machinery and raw materials. The payment of external debt would also be counterproductive, since it involves the export of capital needed for economic recovery. While the IMF believed that inflation in Peru was due to excess demand stimulated by state spending above its means, Alan García and his economic team believed that there was enough potential in the Peruvian economy to increase supply significantly. In other words, the IMF believed that the State was trying to cover the fiscal deficit by issuing money beyond supply and generating inflation.
Heterodox Effects
Despite the economic recovery, the state hardly saw increased revenue. Investments were needed to install new capacity and continue with the revival of national industry. The trade balance was again negative at the end of 1986. Little public confidence in the economic model led to, by the end of 1986, many changing their intis for dollars.