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Peru: Back From the Brink

June 09, 2006

Peru narrowly dodged a bullet on June 4 when centrist Alan Garcia defeated Ollanta Humala, a radical anti-U.S. demagogue, by an uncomfortably narrow margin. Humala was threatening to pull Peru back from the global economy, install a more authoritarian regime and ally himself with Venezuelan strongman Hugo Chavez.

With over 45 percent of the vote, Humala’s startling challenge is a wake-up call, not only to all Peruvians but also to the United States. Humala retains the largest single voting bloc in the Congress and following a page out of Bolivian President Evo Morales’ story, might seek to mobilize street demonstrations to keep Garcia off balance and challenge his ability to rule. The retired military officer and putsch adventurer remains well positioned to take another run at the presidency five years from now or even sooner if conditions deteriorate.

To bring democratic stability to Peru, the United States has a big stake in Garcia’s success and should mobilize all of our diplomatic instruments on behalf of his administration.

President in the 1980s, Garcia was a disaster, leaving his country with hyper- inflation and decaying public institutions. Indisputably intelligent and well-traveled, Garcia says he has learned his lessons, will avoid the impetuous populism of his past and will keep public spending in check and introduce integrity, transparency and civility into government.

The causes behind Humala’s dramatic surge are not hard to fathom. Roughly half of the population is indigenous – living in urban slums or rural poverty, still smarting in humiliation from the Spanish Conquest 500 years ago, alienated from the light- skinned elites that rule haughtily from Lima.

Garcia carried middle-class Lima but Humala won by wide margins in the heavily indigenous, poorer south. Indeed, the election can be read as a rebellion of the descendents of the Inca Empire with its historic capital in Cuzco against the residents of the newer, Spanish-built capital of Lima.

In fact, many Peruvians have enjoyed some social improvements in recent years. More Peruvians have access to education and infant mortality rates are lower. National economic growth in the last three years has created more jobs. But about half the population remains mired in poverty, and chronic malnutrition is still all too common in rural villages. The quality of social services remains poor: three-quarters of sixth graders in Lima failed a standardized comprehension test, and the failure rates were even higher in rural areas.

With widespread access to TV and radio and basic literacy, poor Peruvians are all too aware that their social progress lags behind the better-off classes in Lima, not to mention in the rest of the world.

To make a visible dent in his nation’s social deficit, Garcia must place Peru on an accelerated, sustainable growth rate, create more good jobs and improve the quality of social services. He must also strengthen democratic institutions, making them more accessible and accountable to the people.

Happily, Garcia inherits an economy benefiting from the global commodity boom and the responsible economic management of outgoing president Alejandro Toledo. Export earnings have jumped from $9 billion in 2003 to a projected $17 billion this year, the current account is in balance, international reserves at $14 billion are equal to a full year’s imports and the external debt profile is much improved. The public sector deficit is down to one percent of GDP and primary inflation is at a low 2.5 percent. GDP growth has been running in the 5 percent range per year.

To build on this recent progress and to place Peru on a sustained growth path, Garcia needs to raise savings and investment rates from 20 percent to 24 percent of GDP and enhance the efficiency of public-sector investment at all levels: national, regional and municipal.

Fundamentally, Garcia needs to raise the productivity of Peruvian workers – the only tried and true way to bolster wages and living standards over the long run. That means exposing Peruvian firms to international competition, opening foreign markets to Peruvian products, and raising the quality of Peruvian education.

To attack poverty directly, Garcia should fulfill his campaign pledges to augment the share of the national budget spent on health and education, and better target scarce resources to the most needy. He needs to cut leakage and corruption, and make fewer government appointments on the basis of party affiliation and more on the basis of merit and competence.

Garcia also needs to heed the loud message of the election: Lima neglects Cuzco at its peril. His government should reach out to the south, through symbolic measures such as appointments of top cabinet officers with southern roots, and through the transfer of real resources to southern departments and municipalities.

Here’s what the United States can do to increase the odds of Garcia’s success:

  • Complete the US-Peru Free Trade Agreement. Awaiting approval by both the US and Peruvian legislatures, this important market-opening trade accord will stimulate Peruvian firms to increase their competitiveness and productivity. Combined with other measures to improve the business climate, the comprehensive accord will draw more international investors to Peru. Moreover, once the US-Peruvian FTA is law, Peru will be ready to negotiate similar accords with other trading partners. Specifically, the US can assist Garcia to realize one of his more colorful campaign pledges: to market globally the varietals of indigenous potatoes grown in the Peruvian highlands, often by poor farmers.
  • Target US economic assistance at poverty alleviation. US aid should coordinate with other key donors, including the World Bank and Inter- American Development Bank, to meet Peru’s ambitious, officially-sanctioned Millennium Development Goals: for example, cutting poverty in half by 2015, and increasing the number of homes with access to safe water from 75 to 88 percent. Special attention should be focused on southern cities and rural pockets of poverty.
  • Urge US investors to work cooperatively with Garcia. With commodity prices booming, Garcia is likely to seek to increase Peru’s take from the sale and export of raw materials and energy. We should remind international investors that they, too, have a stake in Peru’s prosperity. The US national interest and the short-term profit-maximizing interests of multinational corporations may not be fully convergent and the US government should weigh carefully its posture if Peru seeks to renegotiate contracts, as Garcia has proposed. What’s important to the US government and Peru is that these windfall revenues be spent wisely on national development priorities.
  • Encourage Peruvian firms to pay taxes. If only Peruvian businesses would pay their taxes, the government would be better able to tackle pressing social problems without incurring new debts. The US can encourage tax compliance and collection measures as well as efficiency-enhancing tax reforms. Not all firms will listen, but it is not too soon to begin to try to alter civic culture in Peru: a wider embrace of the common welfare is a pre-requisite for a more stable business climate over the long run.
  • Support anti-corruption and transparency initiatives. World Bank president Paul Wolfowitz is correctly targeting good governance as a key to economic development. The US can work with other donors, as well as leading non- governmental organizations, to help clean up Peru’s public sector, including the notoriously compromised judiciary. This will not be easy, as Garcia’s APRA party has a well-deserved reputation for patronage and graft, but the incoming president says he recognizes that the success of his administration will hinge on its image of working on behalf of all Peruvians, including those who did not vote for APRA. Much can be borrowed from successful programs in other countries, notably in Mexico and Chile, which seek to increase government transparency in ways that build trust and foster communication between bureaucracies and the public.

In backing Garcia, the US will not be alone in Latin America. Social democratic governments such as those in Brazil and Chile also have a big stake in democratic stability and economic prosperity in their own neighborhood. So do the market- oriented modernizing governments in Colombia and Central America. Indeed, with his intellectual weight and oratorical skills, and with sufficient international backing, Garcia could become a leading example and advocate of democratic progress in the Western Hemisphere.

Richard Feinberg, professor at the Graduate School of International Relations and Pacific Studies, University of California, San Diego, served as the Senior Director for Inter-American Affairs on President Bill Clinton’s National Security Council.

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