On Peru’s independence day, July 28, Alan García appeared before his countrymen to deliver the inaugural speech for his second term in office, 21 years to the day after the first time he was elected president. This time around, however, it was a wiser, heftier and more somber García who spoke to the crowd. And instead of using the spotlight to unveil a radical reform plan — during his inaugural address in 1985 he announced his unilateral decision to limit Peru’s debt payments — García read a lengthy, dense speech laying out the framework of a modern government.
García did not stint on vision. His new administration, he said, would focus on promoting investment and exports, while streamlining bureaucracy and building better trade opportunities with Peru’s neighbors. And he pledged to improve education and other public services for “the 13 million Peruvians in poverty who are going to be the objective of our administration.”
But, in sharp contrast to those of his first term, García’s new objectives revealed far greater pragmatism and a much more prudent approach to fiscal policy, reaffirming steep reductions in government salaries, a civil-service hiring freeze and other austerity measures he had promised Peruvians leading up to his June 2006 election victory. And he named the specific projects that will be funded with the savings, a list that included new hospitals, irrigation canals in need of refurbishment, and schools in southern Peru that are due for upgrading. After outlining what his government hopes to achieve — strong economic growth, which will spur significant job creation, and greater economic equality across Peru’s deep regional, racial and class divides — García also announced plans to implement a tough fiscal responsibility law that will sanction ministerial-level bureaucrats who flaunt the restrictions on government spending.
And García has been on a charm offensive for months in the markets, courting prominent businessmen. Shortly after the election, he met with Ray Hunt, chairman of Hunt Consolidated, the Dallas-based energy firm, and a leading participant in a consortium that is building a $2 billion gas liquification plant south of Lima. An appreciative Hunt tells Institutional Investor he is “encouraged that the President is committed to preserving and expanding a business environment that will be attractive for foreign investment.”
But is the reborn Alan García to be trusted? Not every Peruvian is so sure. A lifelong politician, García is an intelligent and powerful orator, quick with rhetorical flourishes and able to win over even the most skeptical audience. More than a few Peruvians who suffered through his disastrous first administration fear being fooled again.
With good reason: By the end of his 1985–1990 term, Peru was reeling from 7,000 percent annual inflation, a 20 percent drop in per capita income, a $900 million shortfall in international reserves and a raging homegrown “Shining Path” Maoist terrorist movement. Elected at age 35, the country’s youngest-ever president, García had boldly — and rashly — implemented price controls and multiple exchange-rate policies, choked off foreign investment, demolished purchasing power and destroyed business confidence. The resulting economic crisis brought on food shortages in the country and made Peru a pariah in the international financial community. Many Peruvians still remember having to endure long queues for just a small portion of bread or a fistful of rice.
That García has been given a second chance at all surprised many observers. Many believe he won the June runoff with a 4-point margin for his social democrat Alianza Popular Revolucionaria Americana (APRA) party largely because he was seen as the lesser of two evils. García’s opponent, radical nationalist Ollanta Humala, is a former army captain who led a short-lived army uprising in 2000, allegedly to protest corruption in the regime of then-president Alberto Fujimori. Many saw the attempted coup as a publicity stunt. Humala is a friend of the Venezuelan President Hugo Chávez, whose open support of the upstart politician scared off middle-class voters who feared that Chávez-style populism would take hold in Peru. Campaigning for president, García deftly exploited those concerns.
But will García stay true to his newfound beliefs? He was, points out Gianfranco Bertozzi, Andean analyst for Lehman Brothers in New York, “a populist 20 years ago and probably still has populist blood coursing through his veins. The real test will come when global conditions change and he has to make tougher choices.”
For now, García’s Peru is well-positioned to attract investment and strengthen its democracy. GDP is growing at 5 percent, and is expected to remain at 5 percent and 5.5 percent respectively for the next two years, the finance ministry reports. The export sector, fueled by a demand for the country’s abundant minerals and an expansion in agribusiness sales, is growing briskly. The budget is in balance, and public debt is just below 38 percent of GDP. Most government spending is prefinanced through 2007.
For these auspicious circumstances, García can thank the international boom in commodities prices — and the controls put in place by the country’s leaders after he left office in 1990. Fujimori, García’s successor, moved quickly to get a grip on the economic chaos he inherited. He put in place rigorous neoliberal economic policies that eliminated all subsidies, set a single exchange rate, lifted interest rate controls, reduced tariffs, reinforced central bank autonomy and relaunched negotiations with international creditors. In its ten years in power, the Fujimori regime also managed to jail Shining Path leaders and dismantle the terrorist movement, but later disbanded congress and turned authoritarian itself. Fujimori left the country in disgrace and resigned office following revelations of corruption and domestic spying.
He was followed by Alejandro Toledo (2001–’06), who pursued macroeconomic stability, upheld strict autonomy of the central bank and brought public accounts into balance while reducing Peru’s debt load and holding inflation and interest rates down. Though the economy grew consistently after Toledo’s second year in office, his popularity ratings hovered in the single-digit range through most of his term, as not enough jobs materialized for out-of-work or underemployed citizens.
Enter García, “a political animal” who is now “convinced that his policy failed in the ‘80s,” says José Valderrama, a Lima-based economist with LatinSource, a network of independent, Latin America–based analysts advising multinational corporations and financial institutions. “García sees the advantages of macroeconomic stability,” he says. “He is creating the image that those issues are being left to the experts.”
Indeed, García selected a free market fiscal disciplinarian as his Finance minister: Luis Carranza, 39, head of research at Banco Bilbao Vizcaya Argentaria (BBVA) in Madrid and former deputy finance minister, under Toledo. He’s known for holding the fiscal reins tightly: Carranza resigned from his finance post in 2005, reportedly over his refusal to accept public spending demands that would have exceeded the planned target of 1 percent of GDP for the government’s yearly deficit. Early in his career, Carranza was on the board of directors of Peru’s central bank; he also worked at the International Monetary Fund and the Federal Reserve Bank of Minneapolis.
Carranza is convinced that García has turned over a new leaf. The president promises, Carranza says, to “respect fiscal responsibility, and for that reason I’m sitting here.” (See box.)
García has also pledged to transfer more powers to the prime minister, his longtime associate, Jorge Del Castillo. A former congressman and ex-mayor of Lima, del Castillo is a skilled political operator respected by the private sector. He recently mediated a conflict between the Arequipa-based mining company Cerro Verde and its surrounding communities, securing contributions of roughly $60 million from the firm to fund municipal budgets and construct water and sewage treatment plants.
Carranza took the unusual step of appointing the prime minister as head of the government’s investment promotion agency, Proinversión. “He is excellent at getting people together; he is a hinge between public and private interests,” says Carranza.
But social pressures and the threat of unrest remain potent in Peru, where grinding poverty remains the norm: 50 percent of the population earns $2 a day per person, or less. In rural districts especially, García will be working to win the trust of Peruvians like artisan weaver Elsa Quispe, 34, of Chincheros, a village set high above Cuzco in the heart of Humala’s strongholds. “Our products have little market and a low price,” she says, pointing at the ponchos and finely knitted hats she is trying to sell at a Lima fair. “We have to sell our animals to buy fertilizer. The government should promote more tourism.”
For the millions of Peruvians like her, García pledged in his inaugural address to develop a Fund for Equality, a $1.5 billion five-year program to install water systems in rural communities and urban slums and to maintain an already-active milk handout scheme in elementary schools. It will also be used to issue 100,000 urban land titles, double the loan capital of the agrarian bank and increase credit for microenterprise.
The centerpiece of García’s five-year campaign to reduce poverty is the “Sierra Exportadora” program, which aims to diversify or shift poor farmers of potatoes and corn into value-added, exportable crops like artichokes and paprika. The program would create 300,000 jobs, García claims, in cultivation, processing and packing. The government would also issue concessions for private investors to build 28 farm-to-market roads linking remote highland areas with coastal markets and ports.
To create a master plan that will draw even small-scale farmers into the export economy, García appointed renowned economist Hernando de Soto as his special representative on free trade. De Soto will be lobbying in Washington to secure approval in congress for the U.S.–Peru free trade agreement. De Soto also has a mandate to dismantle a myriad red tape snarls and create a business-friendly environment for Peru’s millions of independent, unregistered businesses.
The timing could be just right. With a strong economy and a balanced budget, “it’s an opportune time to do something about income inequality,” says Daniel Hewitt, Peru analyst with AllianceBernstein Fixed Income in New York. The Inter-American Development Bank (IDB) in June pledged $250 million for Sierra Exportadora.
To have a more immediate impact, Carranza announced in mid-August an “investment shock,” plan, in which the government is to spend $625 million (about 4 percent of the annual budget) by December, in poor urban and rural communities. The Ministry of Finance will provide funds for over 227 water and sewage systems, repair and equip over 1,000 schools, improve irrigation canals, build bridges and provide more electricity to small towns.
“These will be very small public works. They will be viable programs approved by the government’s investment review system,” Carranza says. The wave of investments is also meant to produce a swell of support for García’s APRA party’s candidates in the November nationwide municipal and regional elections. García needs the backing to counter the Humala appeal in many poor, highland regions. If social pressures mount, the temptation to resort to populism might become compelling.
For now, García is sending the right signals to the market. Before taking office, he backed off his campaign pledge to create a windfall-profits tax for the country’s mining firms, which have been riding an international commodities boom. “You cannot sign the free trade agreement and squeeze the mining companies,” says Mirko Lauer, a political columnist with Lima’s La República newspaper.
Instead, Prime Minister Del Castillo, in talks with mining industry leaders, discussed ways the firms could help meet social needs in the desolate areas where they operate. On August 25 he announced that the leading mining companies had agreed to a voluntary contribution of about $800 million during García’s five-year term to fund small public works.
García is also hoping to draw investment and expand exports by broadening Peru’s trade relationships. The country’s trade is well diversified: 30 percent of trade is with the U.S., 30 percent with Latin America, and the remaining 40 percent is equally divided between Europe and Asia. Foreign minister José Antonio García Belaunde, who tells II he is bent on “deepening that diversification,” has trained his sights on Asia, where Peru hopes to expand cooperation and trade with China and India, and sign a free trade agreement with Singapore in coming months.
García starts with a strong mandate, with a popular approval rating of 63 percent in August. His party’s longstanding focus on workers and peasants, and its strong democratic tradition, position him well to maintain such support and bridge the gaps in society, says Gonzalo Zegarra, editor in chief of Semana Económica, a Lima business weekly. “García is considered the only figure who has the legitimacy to reconcile the country because he is identified neither with business nor with protesters in the streets.” García, he adds, “can bring modernity to places where it hasn’t arrived, and see that the excluded of Peru are included.” Should the president succeed, he will have proved he is truly a changed man.
