It is hard to believe that just twenty years ago, Peru was going through one of its worst crises in its history. After years of irresponsible economic policies and public spending, the nation was isolated, plagued by a soaring hyperinflation, widespread terrorism, insurmountable debt, high unemployment, falling wages and a sense of hopelessness that made looking into the future extremely dim. Peru ended the 1980s with one of the worst recessions in Latin America, including an inflation rate of 7,000 percent, one of the highest in the world. Access to credit, foreign or local, was unattainable and the country was in desperate need of order and change. But thanks to tough measures taken in the 90’s to correct the nation’s course, Peru today is a totally different country.
Upon arrival at Jorge Chavez’s International Airport, one can sense that the economy is thriving. The airport is extremely modern with high-end stores and duty-free businesses full of people actualy buying. Leaving the airport is just as easy and fast, with modern routes, national and international stores along the way that have replaced the tanks and military personnel which not too long ago guarded the city day and night.
In the streets of Lima, construction of modern and expensive residential buildings and offices is everywhere and local businesses are enjoying better wages and access to credit. For instance, it is practically impossible to go to eat in one of the city’s restaurant without a reservation. More shopping malls with internationally renowned stores are being built in several districts and international firms have opened their doors in Lima. Analysts already say that Peru has become one of the most open investment regimes in the world and, despite the current economic turmoil that has engulfed the globe, it is enjoying excellent economic growth.
The road to Recovery
It was only in 1990 that the foundations for the economic, security and social recovery were laid. Prior, Peru was often criticized for constantly changing its legal framework. To address this problem, the Fujimori administration established the current regime which allow investors to enter into so-called Stabilization Agreements. These ensure investors that the legal framework in place at the time they enter into a contract will continue to apply to their investments for a set period of time. Since Peru enacted these laws, the country has attracted numerous foreign investors and opened its markets.
Overall, the 90’s were generally a time of economic growth, and the neoliberal policies implemented at the time, ended price controls, protectionism, restrictions on investment and most state ownership of companies. Since 1993, reforms have provided the basis for economic growth and in 2007; the Peruvian economy experienced a growth rate of 9%, the largest in Latin America. This was repeated in 2008 with a 9.8% rate
Today, Peru’s economy is well managed with better tax collection which is increasing revenues while expenditures are keeping pace. Private investment is rising and becoming more broad-based. Peru obtained investment grade status in 2008. The García administration is pursuing decentralization initiatives, and is focused on bringing more small businesses into the formal economy. Peru weathered the 2008 global financial crisis well, and was one of the few Latin American countries that had a positive growth rate.
On the security front, strong measures were adopted to combat terrorism, which ran its operations on funding from the cocaine trade. The effort was extremely successful. Some remnants of the Shining Path and the MRTA are still active today but the country can be traveled safely. In this respect, tourism is flourishing and the hotel industry is also thriving in the capital and major cities of Peru such as Cusco, Arequipa, Puno, Ica and hubs in the Selva Region.
The routes of Peru have also undergone major improvements and the airports all over the country have adopted modern systems, which make traveling inside the Andean nation, a pleasure.
The transportation sector still needs to be improved inside the major cities. Public transportation in Lima is handled by buses and taxicabs but the “Metropolitano” will soon be unveiled to alleviate the heavy traffic problem. The Lima Metro or “Metropolitano” is an electric mass transit system, which currently consists of one 9.8 km line and seven stations in the southern area of the city. Six additional lines are planned. The system is three times faster than the previous service, and it is safer, thanks to its high technology level and computerized sensors. The work will be finished on July 5th, 2011. This electric train will integrate the Independent Corridor of Mass-Transit Buses and link the principal points of Lima and transport an estimated 120,000 daily. Also there will be stores and kiosks in the central station, a shopping mall, a movie theater, a large playground area, food court, and offices. This is all very exciting. Lima is finally taking the steps to modernize its public transportation system and the goal is to have an integrated public transportation system in Lima that is safe, on time and of utmost quality.
The Garcia Presidency
Even though President Alan Garcia’s first term was marked by bouts of hyperinflation, which reached 7,649% in 1990 and had a cumulative total of 2,200,200% over the five years, thereby profoundly destabilizing the Peruvian economy, Peruvians decided to give him a second chance and re-elected him in 2006.
During his election campaign, Garcia assured Peru’s business sector that he would not repeat the leftist populist policies of his 1985-1990 presidency – a promise he has kept. True to his word, Garcia has followed free market policies, signing free trade agreements with the United States, Canada and Singapore, and pursuing free trade deals with China, the European Union and Chile.
Peru’s economy has shown strong growth over the past 7 years, averaging 6.8% a year, helped by market-oriented economic reforms and privatizations in the 1990s, and measures taken since 2001 to promote trade and attract investment. Recent economic expansion has been driven by construction, mining, and private investment, exports, and domestic consumption. Inflation (annual average) jumped to 5.8% in 2008, due mostly to substantial global foods and oil prices increases, and the fiscal surplus (third year in a row) was 2.1% of GDP. Thanks to pre-payments, public external debt in 2008 dropped to $19.2 billion, and foreign reserves were a record $31.2 billion.
In fact, Peru, South America’s sixth largest economy, is rebounding faster than its neighbors from the global recession. Bank of America said in a May report that Peru “is in a growth league of its own” after GDP expanded 8.8 percent in the 12 months to March, led by construction and manufacturing. The International Monetary Fund forecasts growth of 6.3 percent this year, the most in the Western Hemisphere.
But despite these achievements, Garcia’s popularity is low, standing at 26 percent, according to an Ipsos Apoyo Opinion y Mercado poll taken May 12-14 for Lima’s El Comercio newspaper. That’s down from 29% in March and a high of 58 percent two months after he took office.
Even though the economy has performed well under Garcia, poverty and corruption have kept discontent bubbling at dangerous levels. The economic benefits have yet to reach vast sectors of society. In addition, people associated with Garcia’s party have been involved in scandalous corruption cases. Also, the latest paroles of convicted terrorists such as US citizen, Lori Berenson, and revelations of financial reparations from the state done in secret during the Toledo regime have produced a backlash against the Garcia administration, with people blaming him for not stopping what they consider blatant injustices.
The problem with this scenario is that the hostility towards Alan Garcia and his administration increases the chance of Ollanta Humala, an ally of Venezuela’s Hugo Chavez, taking power in the April, 2011 presidential elections. Even though Humala is currently in third place with 13% popularity behind Keiko Fujimori (23%) and current Lima major Luis Castañeda (21%), he is ahead of former President Alejandro Toledo by 1 point, which many analysts consider alarming.
In order for a democratic centrist to win the next election, they may not only have to contend with Garcia’s inability to sufficiently bring down the poverty rate and reduce corruption but with the interference of Venezuela’s president, Hugo Chavez. Prior to the last elections, it was reported that Chavez was supporting Humala to the tune of hundreds of thousands of dollars per month. It is likely that some of that support is continuing along with Chavez’s Houses of Alba that are political indoctrination fronts providing free services to the poor. Peru is a big prize and Chavez would like nothing more than to bring it into his orbit further increasing his power and enlarging his Bolivarian Revolution.
So there is a great danger that the people that are not satisfied with the results democracy brings will likely vote for a populist candidate in 2011 like Ollanta Humala.
More so, Garcia’s failure to win popular backing may jeopardize economic stability and foreign investment by boosting the expected candidacy of Humala whom Garcia defeated by 52.5% to 47.5% in a 2006 runoff. Even if Humala is not elected, populist candidates may secure victories in regional elections in southern Peru which could discourage foreign investment putting a damper on Peru’s growing economy.
THE AMERICAS REPORT
NANCY MENGES and
LUIS FLEISCHMAN, Editors
The Americas Report is the featured product of the Center for Security Policy‘s Menges Hemispheric Security Project. It features in-depth, original articles on subjects not regularly covered by the American press.
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