Peru after Fujimori

Cleaning up corruption, salvaging the economy and restoring trust in democracy are just a few of the chores facing the next president.

Cleaning up corruption, salvaging the economy and restoring trust in democracy are just a few of the chores facing the next president.

By Lucy Conger
March 2001
Institutional Investor Magazine

Cleaning up corruption, salvaging the economy and restoring trust in democracy are just a few of the chores facing the next president.

For most of last year, Lima’s Plaza de Armas, the main square, flanked by the presidential palace, the town hall and the imposing colonial-era cathedral, was the setting of an unusual ritual. Every Friday, after organizers had set up washtubs around the central fountain, Peruvians from all walks of life - jumpsuit-clad day laborers, young executives in business suits and domestic workers in aprons - would scrub red-and-white pennants resembling the Peruvian flag with soap and water and then hang them up to dry.

The “Wash the Flag” protests against government corruption intensified after the April 8, 2000, election that awarded a third term as president to Alberto Fujimori through glaring vote fraud. As revelations of the extraordinary extent of corruption within his regime surfaced, protests spread across the country. In Lima on Fridays, hundreds of flags would flap in the breeze in front of the presidential palace, each a plea for clean government.

A besieged Fujimori resigned in November from Japan, where he had fled, making way for an interim government. Now, this coming April 9, Peruvians will again go to the polls to elect a president. Whoever prevails among the five candidates - Alejandro Toledo, who was defrauded of victory in last year’s election, leads in the polls, but is almost sure to face a runoff - will have plenty of real cleaning up to do to restore faith in Peru’s political system and revive its battered economy.

The charges of corruption and of ties to drug trafficking that ultimately forced out Fujimori and his intelligence chief, Vladimiro Montesinos, have deeply shaken Peruvians. More than 200 people - generals, former cabinet officials, Supreme Court justices and political leaders - are under investigation by the Ministry of Justice for corruption, influence-peddling or rigging the election. Revelations of misdeeds from thousands of videos secretly taped by Montesinos of meetings between himself and government and public figures have riveted the attention of increasingly cynical voters. “We ought to put Blockbuster Video on the national seal,” comments one political observer.

Since November the country has been run by a transition government headed by Valentín Paniagua, the former speaker of the Congress who became interim president, and his prime minister, Javier Pérez de Cuéllar, formerly secretary general of the United Nations. Together they have bought time for the beleaguered Andean nation. Along with helping to put in place the mechanisms for assuring a clean election, they have negotiated a standby agreement with the International Monetary Fund to release 128 million special drawing rights ($164 million) in return for Lima’s imposing spending discipline, notably holding its fiscal deficit to 1.5 percent this year. The IMF agreement in turn frees up $1.5 billion from the World Bank and other multilateral agencies to permit Peru to service its foreign debt and to prop up the economy.

Remarkably, Peru has maintained a precarious stability. “In the middle of this chaos, there has been no devaluation, interest rates are normal, the military has not come back into power, and the constitution has held up,” notes Raimundo Morales, general manager of Banco de Crédito del Perú.

But the yearlong political crisis has come at a severe cost. Vital foreign investment flows have stagnated. Although GDP growth was 3.6 percent for the whole of 2000, it averaged -0.3 percent for fourth quarter, slumping to -1.8 percent in December. The stock market lost 29 percent of its value last year, and gross fixed investment has fallen during the past two years. Analysts foresee stagnation until the outcome of the election is known. “Political instability affected expectations of investment and consumption,” says Marisol Vidal, macroeconomic analyst at Banco de Crédito del Perú.

The country’s problems are stark. Peru is hobbled by entrenched poverty. A fast-growing population needs jobs, but the economy is concentrated in capital-intensive sectors like mining that cannot come close to supplying those jobs.

Fujimori won office in 1990 by appealing to Peruvians as an outsider who rose through education and hard work, running on the straightforward slogan pledging “honesty, technology and work.” And he made strides in stabilizing the economy after the disastrous tenure of his predecessor, Alan García. During Fujimori’s two terms, growth averaged 4.15 percent; inflation fell to 3 percent, from 7,000 percent; and the foreign exchange rate held steady at above three soles to the dollar. But the Asian crisis of 1997 and flooding caused by El Niño triggered a searing recession that rendered idle half of the nation’s industrial capacity, weakened the banks, caused sharp stock market losses and sent consumer spending plunging. Thousands of Peruvians lost their jobs, worsening the country’s already endemic poverty. For all of Fujimori’s market reforms, most Peruvians are worse off today than they were two decades ago: Real wages have declined, and the poverty rate is as high as ever.

What will it take to get the economy moving again? Businessmen and investors not surprisingly counsel continued market reforms. “The economy can only be reactivated with more reforms, a greater commitment to export development and more private investment that will lead to sustainable growth,” says Peruvian-born Alfredo Thorne, Latin America economist for J.P. Morgan Chase & Co. in Mexico City.

With the exception of García, who stunned the country by returning from exile in Colombia to campaign for president, and who is running third in recent polls, the leading candidates have taken up the prescription. All say they favor a market-based economy and publicly converge on a policy package that features a limited role for government, continued macroeconomic stability, international economic integration, renewal of privatizations and keeping the door open to foreign investment.

But like politicians everywhere, they have had to bend and stretch as they seek a middle ground that appeals to the restless mass of voters but reassures big business. Toledo, who campaigned against Fujimori last year in casual dress, has taken to wearing suits and ties and mixing with businesspeople. He has even named a leading businessman, Raúl Diez Canseco, as his vice presidential candidate. But Toledo, an Indian, finds his strongest support in the countryside.

His goals, he told Institutional Investor in an interview, are “to make production grow, generate jobs and income, raise internal demand and grease the wheels of production.” He stresses that responsible economic policies can be compatible with taking care of the country’s social needs.

Though many businessmen remain skeptical, others are warming to the front-runner. “Even Toledo, who has shown himself to be a little populist, can, we believe, play a good role if he wins,” says Oscar González Rocha, president of Southern Peru Copper Corp.

Toledo’s leading opponent is Lourdes Flores Nano, a member of Congress from the right-wing Partido Popular Cristiano, who kicked off her campaign by dancing in a squatter settlement wearing a bowler, a hat worn by Peru’s Indian women. A free marketer who supported Fujimori’s reforms while in Congress, Flores Nano is polling a strong second thanks to powerful urban support. In a classic marriage of political convenience, she chose as her vice presidential candidate José Luis Risco, a leftist union leader and former communist.

“Our priority is to generate employment and combat poverty in the coming years,” she says. This would be done, she says, “without losing common sense or the Washington consensus,” which for Flores Nano means holding down inflation, achieving fiscal balance and maintaining an open economy. She would stimulate private investment and promote sectors, such as small business, that generate employment.

The notable exception to the generally market-friendly policy consensus is García, who attempted to nationalize the banks and presided over runaway inflation, multiple exchange rates and widespread petty corruption. He also failed to quash the violent Sendero Luminoso guerrilla movement. In 1985 García declared that Peru’s foreign debt service would not exceed 10 percent of exports; the country became a pariah in the international financial markets and was deemed ineligible for IMF support. When he left office in 1990, recalls Banco de Crédito’s Morales, the devastation was palpable. “Peru was more than the third world: The country was impoverished, there was trash in the streets, bombs.”

Despite widespread disapproval - in a poll conducted by Apoyo, an economic and public opinion research center, 65 percent of voters said they would not vote for him - García remains a wild card. A charismatic speaker whose party commands a loyal following, García is polling about 15 percent of the vote. He claims that he has learned the lesson of fiscal responsibility and monetary stability, but many Peruvians remain doubtful. However, one fifth of the voters are too young to remember the devastation of the García regime, so he could yet pull ahead.

The fourth-place candidate is Fernando Olivera, a longtime anticorruption campaigner who released the videotape that brought down the Fujimori government. The tape showed former intelligence chief Montesinos apparently bribing an opposition congressman to come over to the government side. Olivera is drawing just 10 percent.

Most analysts think that Toledo, who consistently polls more than 30 percent, won’t be able to grab the 50 percent needed to win the presidency outright in April. Flores Nano, who is polling in the high 20s, seems most likely to be his opponent in a second round of voting, which would probably take place in May. But it’s not easy to predict the country’s elections, because half of eligible voters say they are undecided, and about a third of Peruvians usually make up their minds in the final week.

Peru’s next president will almost certainly face one immediate and formidable challenge: a sharply divided Congress. The legislature is also up for election in April, and Apoyo’s polls show that no party has the support of more than 20 percent of the voters, meaning that the new president will have to fashion a coalition to push through any political and economic agenda.

“Whoever wins will have a totally atomized Congress, so it will be very difficult to advance structural-reform processes,” says Luis Carranza, an economist for BBV Banco Continental in Lima.

The last time Congress was so deeply divided was in 1990, when Fujimori held just 30 percent of the seats. His solution was to disband the legislature and dismiss the judiciary in the second year of his first term, which inevitably undermined the legitimacy of his economic reforms and exacerbated social tensions.

Ten years later many in Peru find themselves torn between hope and despair. “Morale is better,” because corruption is being rooted out, says Luz Japa, 35. But, adds the former nurse who switched to selling newspapers to support her four children, “the economy is still in the balance.”

For years Peru’s economic programs lurched between raw populism and mainstream neoliberalism. The switches left Peruvians baffled and investors wary.

“Economic policy has been on a roller coaster for the past 30 years,” says Alfredo Barnechea, author of a provocative economic and social history of the country and founder of a fledgling centrist political movement. In 1968 a leftist military coup ousted the moderate government of then-president Fernando Belaúnde Terry, and the new regime nationalized the oil and mining industries and the banks. A moderate military government followed, and then, after the restoration of democracy in 1980, a right-wing civilian administration.

Under García, who was elected president in 1985, the government nationalized more industries and expanded the bureaucracy. Peru snapped back under Fujimori, who instituted a policy of neoliberalism, which whipped inflation, stabilized the currency, trimmed back the bureaucracy and privatized some state companies.

In Peru ideology shifts but poverty persists. In 1968, 55 percent of the population was poor; in 2000 the figure stood at 53 percent. “Nothing changes,” says Barnechea. “This is a country of poor people. That is the fundamental problem.”

The wild fluctuations in policy have cost the country dearly. Fritz Dubois, manager of the Instituto Peruano de Economía think tank, estimates that the state monopolies operating the electricity, oil, maritime transport and steel industries racked up cumulative losses of $12 billion from 1970 to 1990.

The relentless policy changes make political risk a permanent issue in Peru. “We need a certain stability and political continuity regarding what should be the model, and we should not be questioning the model every six months,” says Banco de Crédito’s Morales.

With its dependency on extractive industries and foreign investment, Peru’s economy remains vulnerable to shock. Its exports are primarily commodities: 49 percent of annual export revenues of $7 billion come from minerals, including gold, copper and zinc; 10 percent from fish meal; 5 percent from agriculture; and 4 percent from petroleum products. Roughly one third of exports consist of such goods as textiles and processed foods. The economy, with a GDP of $61 billion (the sixth-largest in South America), would require growth of 6 or 7 percent annually to accommodate some 220,000 new workers every year.

In the aftermath of the Russian debt default in 1998, bad bank loans nearly tripled and loan defaults rose 40 percent. The economy is heavily dollarized, with about 80 percent of bank deposits and 85 percent of debt held in dollars. This level of de facto dollarization reduces flexibility: Slippages in the exchange rate, thought to be somewhat overvalued at the moment, would cause inflation, yet the prevalence of dollarization fuels unemployment, analysts say. “Peru is basically a dollar economy without the advantages - nobody wants to own soles and everybody wants to owe soles,” says Pedro Pablo Kuczynski, CEO of the Latin America Enterprise Fund, who has joined the Toledo campaign as chief economic adviser.

In the midst of these economic problems and the surreal yearlong political scandal, the presidential campaign took off officially in January. Within the first week of declaring their candidacies, all the leading players began stumping for votes in one squatter settlement or another. No wonder: With half of Peru’s 28 million citizens earning less than $1.50 a day, and purchasing power frozen for the past 20 years, populism remains a potent political force.

Roughly 70 percent of the gross national product is produced by informal sector workers who are self-employed, achieve low rates of productivity and are utterly lacking in labor protection. In this setting, the siren song of populism has been a powerful temptation for the presidential hopefuls and voters alike.

Front-runner Toledo trumpets his free-market, business-friendly policies but recognizes the need to respond to social needs. “Populism means investments by the state in health, education and labor-intensive public works,” he says, quickly adding that he will not spend more than federal revenues. Rival Flores Nano emphasizes increased private investment and government promotion of sectors to generate employment. “The people urgently need authenticity,” she says. “They have lived through a moral crisis. Giving away money is not the road to take, but rather getting investment is.”

A powerful orator, the 52-year-old García is out on the hustings, campaigning frenetically to make up for time lost in exile and his late entry into the race. He claims to have adopted a new world view, embracing globalization and international financial conventions, during his eight-year exile. At the same time, he has met with telephone executives to demand lower rates, his campaign rhetoric pledges to establish credit for poor farmers and he routinely savages the neoliberal policies of the Fujimori regime.

Even Carlos Boloña, 50, Fujimori’s former finance minister and a well-known advocate of conventional neoliberal policies, feels the need to adopt populism. The logo of his Solución Popular party is a faucet with running water. Several times during the campaign he has spent the night in rustic homes with dirt floors in squatter settlements, where he had to wash his face with water dipped out of a barrel with a plastic bowl - the daily routine for the millions who lack running water. He trails badly in the polls.

Toledo, 54, who took on Fujimori in last year’s election, has held the lead from the start. A highland Indian who started out shining shoes and went on to earn a doctorate in economics at Stanford University, Toledo worked at a number of international agencies, including the World Bank and the Organization for Economic Cooperation and Development. His life is an inspiration for many cholos, indigenous Peruvians of mixed blood who are traditionally excluded from society. “100 percent Peruano” says the slogan on a wall in a Lima slum, neatly summarizing the attraction of Toledo in a country often ruled by the white elite.

Blamed for convening a massive protest march in July to block the inauguration of Fujimori, in which a fire in a bank building left six dead, Toledo has suffered a decline in his approval ratings recently. Although recent disclosures show that the fire was a government-arranged provocation, Toledo still must shake off a perceived connection to violence. To help stake out his place in the political center, Toledo has rounded up a high-profile group of entrepreneurs to back his campaign and won the endorsements of novelist Mario Vargas Llosa, who ran for the presidency a decade ago on a staunchly neoliberal platform, and former president Belaúnde Terry. Appointing as his chief economic adviser Pedro Pablo Kuczynski, a former energy minister and First Boston Corp. investment banker who now works as a fund manager, seems calculated to appeal to both businessmen and investors.

Toledo’s ambitious economic agenda for Peru aims to double annual exports to $15 billion within five years through such initiatives as privatizing ports, establishing duty- and tax-free zones, renewing oil exploration and reforming agricultural property laws to stimulate investment. He also proposes to cut taxes, including the 18 percent value-added tax on investments; creating 400,000 to 450,000 new jobs between 2001 and 2005; reviving privatizations; and attracting more foreign direct investment (the target is $2 billion a year, versus the current $1.6 billion). Toledo’s goal is to achieve 6 percent GDP growth a year by 2002, well up from last year’s 3.6 percent and this year’s projected 2 percent.

But along with his market-oriented measures, Toledo has also made it clear that he expects public spending to be more focused on social needs. “Public works have to be revived,” says adviser Kuczynski. Infrastructure projects, including road building and government-supported financing for house construction, would jump-start growth, he argues. Toledo himself insists: “In the national budget, priorities can be reassigned.” He stresses that arms purchases by the military could be reduced by 25 or 30 percent, and spending for the ministry of the presidency could also be cut, with the excess channeled to states to begin a process of decentralization.

Toledo’s desire to lure in more foreign investment must reckon, of course, with Peru’s considerable country risk. He says he would reduce it by strengthening democratic institutions, raising productivity and redefining the role of the armed forces as well as addressing the military budget. He pledges “clear rules” for foreign investors, while pointing out that Overseas Private Investment Corp. insurance is available to them.

Flores Nano, 41, the only female candidate, is a vigorous debater and lively campaigner. A lawyer with a doctorate from the Universidad Complutense in Madrid, she has served on Lima’s city council and was twice elected to Congress in the 1990s from the right-wing Partido Popular Cristiano.

To broaden her base of support, she formed the Unidad Nacional, an alliance of two small parties, and signed on two respected economists, Drago Kisic and Julio Velarde, as advisers. She pledges market-friendly policies. “We are partisans of a social market economy - we think the market is the first assigner of resources. Peru has to be open to the world, and the state must play the role of promoter,” she tells II.

Like Toledo, Flores Nano envisions GDP growth of 6 percent sparked by an export surge and expects to generate 300,000 new jobs a year. She aims to eliminate the fiscal deficit and boost annual foreign investment to $4 billion. Her government would promote sectors, such as agriculture, tourism and small business, that can create lots of jobs. “Our priority is to generate employment and combat poverty,” she says. She would remove taxes on capital goods imports and reduce taxes on reinvested profits.

Although she is sometimes linked with Fujimori because she supported his economic reforms, Flores Nano is considered to be clear of the corruption scandals. “The image of woman is that of the possibility for renovation and change,” she says.

The García economic program projects growth of 3 percent in 2001 and 2002, rising to 5 percent in 2003 through 2006 and creation of “no less than 500,000 jobs” annually through promotion of agriculture, manufacturing, construction, tourism and small and medium business, says his economy adviser, Eduardo Cornejo. Foreign direct investment would increase to about $2 billion per year, and privatizations would be slowed. The state-held water company and Talara oil refinery would not be privatized.

Toledo’s strategy is to win in the first round, but he almost certainly won’t. “It is almost sure he will reach the second round,” says Felipe Ortiz de Zevallos, president of Apoyo. All other outcomes remain up for grabs. If Toledo makes a strong showing in the first round, and if the other contenders split the vote widely, a contender winning as little as 15 percent might make it into the second round. If no one wins 50 percent, the top two finishers proceed to the second round.

In any event, voters will go to the polls in the midst of a downturn that follows two decades in which ordinary Peruvians saw no real economic gains. Yet even in such a climate, voters may well opt for a leader who promises not radical change but steady progress toward market reforms. “We’re at a dangerous time where people feel the market model has not given them anything in their pockets,” contends Isabel Guerrero, the Lima-based World Bank director for Bolivia, Ecuador and Peru. “It will be a test, but I think the people will vote for somebody who’s going to give them stability.” Whether such a course can be sustained, and whether it will do anything to ease the plight of Peru’s poor, remains to be seen.

Behind populism’s appeal: severe poverty

About 30 minutes east of Lima in the dusty slopes of the Andean foothills, Simón López, 36, stands beside his “moto-taxi,” a motorcycle rigged like a rickshaw. He and his colleagues ferry passengers to and from the market in the growing squatter community of Huaycán. Settled in the 1980s by peasants fleeing the Sendero Luminoso, or Shining Path, guerrilla army, Huaycán has few paved streets, and recent settlers, perched on the hillsides, lack water and sewage facilities.

López started driving his taxi after losing his job a year ago. “There are no jobs; there is no stability at the workplace,” says the father of two, who earns $3 or $4 a day and cannot afford to replace the straw roof on his house. “I earn only enough to survive and no more, to get food and clothing.”

Poverty is endemic to Peru. Millions - 60 percent of the labor force by some estimates - toil like López for next to nothing in the country’s informal economy. Rather than making progress - and gaining a measure of hope - they are falling back. Salary levels in 1997 were actually below those of 1984, according to Jaime Saavedra, executive director of Grupo de Análisis para el Desarollo in Lima, which researches development issues.

“The best way to reduce poverty is by making microbusinesses grow and small and medium business develop,” argues Fernando Lucano, director of the Lima-based Latin America Challenge Investment Fund, which invests in microfinance institutions that lend to small entrepreneurs. Adds Peruvian-born Alfredo Thorne, Latin America economist for J.P. Morgan Chase & Co. in Mexico City, “We have the wrong economic model: Our model is unable to take advantage of our competitive advantage, which is a cheap labor force.”

Around the corner from the improvised taxi stand, some 20 women take turns cooking in a shared kitchen, one of the 14,000 comedores populares, or soup kitchens, that provide 560,000 families with a hot meal for about 50 cents per person. One of the cooks, María Ramos Sánchez, a mother of four, sees the government-subsidized comedores as a help but not a solution to the poor’s plight. “We want for there to be jobs rather than support,” she says. “If there were jobs, it wouldn’t be necessary to be in this kitchen.”

Poverty is so pervasive and so desperate in Peru that measuring it is a matter of contention. It is officially defined by the government as an income of 7.89 soles (about $2.20) per day in Lima and 3.90 soles per day in rural areas. The 15 percent of the population estimated by the World Bank to be living in extreme poverty have an income of 3.40 soles or less per day. A May 2000 survey conducted by independent research institute Cuánto shows that nearly 13.9 million Peruvians - 54.1 percent of the people - live in poverty, and of that, 3.8 million live in extreme poverty. Government aid received by some 11 million Peruvians is widely credited with containing the spread of extreme poverty - and of having given the Fujimori administration, which increased spending on the poor, a calculated boost at the polls. The government currently spends about $1 billion annually on poverty programs, and none of the presidential candidates has suggested this allotment be reduced.

Indeed, the poor are being assiduously courted by all the presidential candidates. Polls suggest that in a close election, especially one that leads to a second round of balloting, they could tip the scales.