ECONOMIC EFFECTS OF DEVALUATION: PERU 1975-1978

This dissertation seeks to examine the effects of devaluation on the Peruvian economy within the context of the economic stabilization policies that were applied in the period 1975-1978. It is an empirical effort to demonstrate that devaluation policies are likely to contract the growth of national output and redistribute income against the underprivileged. Conventional economic theory predicts that devaluation policies should help the economy restore equilibrium in the external sector and move it to the level of full employment of resources. This, however, ignores critical features of a less developed economy such as the nature of exports and imports, and also the income effects caused by devaluation that lead to a contraction in aggregate demand. Devaluation did contract the growth of national output in Peru and altered significantly an already uneven income distribution. These effects were more strongly felt in the period 1977-1978, when free forces in the foreign exchange market were left to establish the price of the exchange rate. The study also provides an alternative approach to deal with the theoretical rationale of devaluation policies, based on the concept of mode of accumulation.