Along with the intention of resolving internal class conflict, the Velasco government determined to lessen Peru's dependency on the outside world. The two most important components of the strategy were a drive to promote rapid industrialization and an attack on the role of foreign firms. In contrast to the industrialization strategies of most other Latin American countries, the intention of the Velasco regime was to industrialize without welcoming foreign investment.
The preceding Belaúnde administration had started Peru on the path of protection to promote industry, and in this respect the Velasco government reinforced rather than reversed the existing strategy. Beyond the usual recourse to high tariffs, Velasco's government adopted the Industrial Community Law of 1970 that gave any industrialist on the register of manufacturers the right to demand prohibition of any imports competing with his products. No questions of exceptionally high costs of production, poor product quality, or monopolistic positions fostered by excluding import competition were allowed to get in the way. Before the succeeding government of General Francisco Morales Bermúdez Cerrutti (1975- 80) began to clean up the battery of protective exclusions in 1978, the average tariff rate reached 66 percent, accompanied by quantitative restrictions on 2,890 specific tariff positions.
In addition to the protective measures, the Velasco government promoted industrial investment by granting major tax exemptions, as well as tariff exemptions on imports used by manufacturers in production. The fiscal benefits given industrialists through these measures equaled 92 percent of total internal financing of industrial investment in the years 1971 through 1975.
Investment rose strongly in response to these measures, as well as to the concurrent rise in aggregate demand. But the tax exemptions also contributed to a rising public-sector deficit and thereby to the beginning of serious inflationary pressure. In addition, the exemptions from tariffs given to industrialists on their own imports of equipment and supplies led to a strong rise in the ratio of imports to production for the industrial sector.
Data as of September 1992