Monday, May 5, 2008

Peru: A Comparison of President Garcia’s Two Terms in Office

By Nicole M. Ferrand.*

When Peru’s Alan Garcia was elected President for a second time in 2006, I was perplexed. How could this happen I kept asking myself. His first term in office between 1985 and 1990 was catastrophic. He was voted the worst President of Latin America. While visiting Peru in February 2008 I wanted to find out the reasons behind his 2006 victory and how his current regime is progressing.

Garcia’s first term in office
Let’s recap Alan García’s first term in office between 1985 and 1990 to fully understand the magnitude of the Peruvian transformation. At 36 years of age García became the youngest civilian president in Peru’s history. His first regime was marked by bouts of hyperinflation which reached 7,649% in 1990, profoundly destabilizing the Peruvian economy.

Due to such chronic inflation, the Peruvian currency, the sol, was replaced by the Inti in mid-1985, which itself was replaced by the nuevo sol (“new sun”), at which time the new sol had a cumulative value of one billion (1,000,000,000) old soles. By the end of his term in 1990, national reserves were a negative $900 million dollars. García also made an attempt to nationalize the banking and insurance industries. He incurred the wrath of the International Monetary Fund and the financial community by unilaterally declaring a limit on debt repayment equal to 10% of the Gross National Product, isolating Peru from international financial markets. According to studies of the National Institute of Statistics and Informatics and the United Nations Development Program[1], around the start of his presidency, 41.6% of Peruvians lived in poverty. During his presidency, this percentage increased by 13% (to 55%) in 1991.

Alan Garcia.

This economic turbulence exacerbated social tensions in Peru and contributed in part to the escalation in violence of the terrorist groups: Shining Path (Sendero Luminoso) and Movimiento Revolucionario Tupac Amaru (MRTA). These groups controlled about a third of the country and were responsible for the deaths of thousands of innocent civilians, and army and police personnel. (Read “The Americas Report” from October 11 and 18 - Fujimori: the other side of the story - Part I and Part II by Nicole M. Ferrand).

The SL and MRTA began attacking electric towers, causing almost daily blackouts all over the country. The García administration sought a military solution to the growing problem, but was unsuccessful. The MRTA used kidnapping and extortion as well as drug trafficking to finance their activities. In addition, the country was being ravaged by corruption, by drug problems, and by terrorist warfare. Most universities were inaccessible since they were dominated by these violent groups.

In general, everyday life was harsh. There were food, water and electricity shortages, car bombs exploded almost daily, killing and severely injuring thousands of people as well as members of the military and police. Soon, the attacks were also felt in the capital city of Lima and people lived in constant fear. There were limits on the amount of food each family could buy, and supermarkets were meagerly stocked as prices changed by the hour. By the end of García’s presidency Peru was suffering from hyperinflation, was isolated from the international financial community, had negative reserves of US$900 million, and was dealing with continuous subversive activities by the Shining Path and MRTA. There was also a great increase in poverty levels. I remember these days clearly since my siblings and I were sent daily to various supermarkets to buy what we could find.

In 1992, García went into self- exile and lived in Colombia and later in France. The Fujimori regime re-opened charges against him for allegedly taking millions of dollars in bribes. He denied the charges, and in 2001 Peru’s Supreme Court ruled that the statute of limitations had run out. García decided to ran for president in the new elections called by the temporary president, Valentin Paniagua, but lost against Alejandro Toledo.

Why did Alan Garcia win the 2006 Presidential elections: the “Humala”/Chavez factor
García officially started his campaign for the April, 2006 presidential election on February 18, 2005. Voting for Alan Garcia was considered by over 40% of the voters as “voting for the lesser of two evils”. Many citizens had a very negative impression of García after his first presidency but were scared by rumors that Humala would create a government based on Fidel Castro’s Cuba and would turn Hugo Chavez, President of Venezuela, into the virtual ruler of Peru, due to his patronage and financial support of Humala’s party. Humala denied these accusations, but his conflicting statements about his government’s vision and Chavez’s strong campaigning for him created enough suspicions among voters to cost him the election. President Chavez openly declared his support for Humala, and referred to García as a “robber”, and a “bandit.” García, in response, stated that Chávez was “not acting as a statesman” and challenged Chávez to a public debate. García also brought this issue to the Organization of American States. In the end, the Venezuelan leader cost Humala the election and García was inaugurated as President of Peru on July 28, 2006.

With thirty-six seats, Garcia’s Party, APRA, has the second largest bloc in the 120-seat unicameral Congress which was sworn in a couple of days before the President. With forty-five seats, Humala’s “Union por el Peru” Party has the largest bloc, although it has been divided into three factions.[2]

García’s victory was praised by democratic nations. It prevented Hugo Chávez’s left-leaning “socialist revolution” from spreading throughout the continent.

What Alan Garcia inherited from previous governments
The Government of Peru under former President Alberto Fujimori took the necessary steps to bring the problems created by the Garcia regime under control. Democratic institutions, however, and especially the judiciary, remained weak. Between 1992 and 2001, Peru attracted almost $17 billion in foreign direct investment, after negligible investment during the 1980s, mainly from Spain (32.35%), the United States (17.51%), Switzerland (6.99%), Chile (6.63%), and Mexico (5.53%).[3]
The Peruvian economy underwent considerable free market reforms since 1992, from legalizing parts of the informal sector to significant privatization in the mining, electricity and telecommunications industries. The economic stabilization and liberalization program lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign investment. Thanks to strong foreign investment and the cooperation between the Fujimori government and the IMF and World Bank, growth was strong from 1994 to 1997 and inflation was brought under control. Peru now has one of the most open investment regimes in the world.

Alejandro Toledo’s presidency (2001-2006) was characterized by extremely low approval ratings but high economic growth rates; 5.9% in 2005 and 8% in 2006 due to the policies of the Fujimori regime. Toledo was able to push through several reforms, including tax reform and a pending free trade agreement with the United States. Despite the economic improvements, Toledo’s presidency was plagued with allegations of corruption and frequent popular protests.

Garcia’s current term in office
I was impressed by what I found during my recent visit to Peru. The Jorge Chavez Airport has been modernized and the security systems are impeccable. The roads are in extremely good condition and there is construction everywhere which shows the confidence many Peruvians and international corporations have in Peru. Consumption has grown tremendously and there are small businesses, elegant restaurants and new shopping malls full of people. Tourism has reached levels never seen before and hotels are fully booked throughout the year.

It is a pleasure to go south using the highways and the country overall seems more secure and organized. Big exporting farms and packing plants in the south have incorporated and employed people from surrounding communities and social programs are present everywhere. Entrepreneurs provide social services as hospitals and schools are built. Many previously marginalized groups are now active participants in this new found economic expansion. Police officers in modern cars are present throughout and big trucks full of merchandise come and go, showing the growing commercial capacity in the countryside.

To the surprise of many, Mr. Garcia recruited a respected and competent cabinet, including an economic team of technocrats which increased the confidence of national and international investors and financial communities. He has continued the orthodox economic and fiscal policies carried out by the previous two Peruvian governments. These policies have contributed, along with the international commodities boom to Peru’s growth rate of more than 8% annually; expanding reserves while containing inflation. Construction and retail opportunities are spreading from Lima to several regions. Peru’s export sector, particularly specialty vegetables and fruits, is growing at an impressive rate, as well as mining investments. Garcia has since avoided abrupt policy shifts and has retained the political initiative and defused opposition to his government. When strikes and protests occurred, Garcia has tried to turn these to his political advantage, asserting national authority against the retrograde ultra-left members of some Unions who are not widely popular.

During the first few months of his administration, Garcia boosted his approval rating into the high sixties, mainly by demonstrating that he was a force for stability, unlike Humala, and also for austerity, unlike his predecessor, Alejandro Toledo, who was given to extravagant personal spending and outright frivolousness. Garcia also promised a major expansion of investment, greater decentralization of public expenditures, big infrastructure projects, a campaign against malnutrition and a crackdown on crime, including application of the death penalty for pedophiles.

According to estimates from analysts as well as local and foreign banks, Peru will register the lowest inflation rate in Latin America during this year and 2009. The president of the Central Reserve Bank of Peru (BCR), Julio Velarde, pointed out that the inflation rate in Peru would be within a range from one to three percent over the second half of this year. In addition, Julio Velarde forecasted that Peru’s economy would increase 7% this year - stimulated by both the public and private sectors.[4]

The Peru-United States Free Trade Agreement (FTA), also known as the United States-Peru Trade Promotion Agreement (TPA), was signed on April 12, 2006 by President George W. Bush, and won Congressional approval on December 4, 2007. This accord is already benefiting producers in both countries with greater market access and consumers with less expensive products. From a security standpoint, this ratification consolidates a partnership with the South American country which is critical in a region where free markets and U.S. influence is being attacked by populist and nationalist governments in Venezuela, Ecuador and Bolivia.

The following data show the benefits of the trade agreement: U.S. imports from Peru will increase by $439 million, or 8% and U.S. exports to Peru will increase by $1.1 billion, or 25%. The largest value increases in U.S. exports will be in machinery and electrical equipment, chemicals, rubber, plastics, wheat, rice, pork, and poultry. Trade facilitation provisions, such as the definition of custom procedures, administration, and dispute, will lead to a more stable and reliable trading environment, further buttressing U.S.-Peru trade and investment. The protection of intellectual property in Peru, through new rules Peru commits to under the agreement, will be significantly improved.[5]

FTA, Security and Humala
After Chile and Colombia, Peru is an important democratic ally in South America’s Andean region. It trades nearly $6 billion in goods and services annually with the United States and cooperates in combating illegal drug trafficking but poverty still afflicts about half the population. Peru needs a more skilled workforce, a stronger rule of law, a reduction in burdensome regulations, and a commercial code that promotes entrepreneurship. Having FTA will help to advance these objectives.

So far, Alan Garcia has taken the correct steps and Peru is still a growing economy. In addition, some groups which previously didn’t have access to private property are now enjoying the benefits of having their own houses and small businesses. Some even say that Peru has already reached a point of no return and a socialist appeal will hardly find much support. But let’s keep in mind that Chavez’s ally, Ollanta Humala, remains a threat to democracy and a free market economy since he is still popular in some provinces due to his socialist and nationalistic rhetoric. Some people remain convinced that he continues to receive financial support from Chavez and that he is quietly campaigning in many provinces. This is of concern to many locals and regional leaders. In fact the recent violent clashes between some groups of farmers and the police are believed to have been promoted by Humala who has organized “The People’s Social Summit”, which is to take place from May 13 - 15, the dates on which world leaders will come to Lima for the European Union-Latin America and Caribbean (EU-LAC) Summit, and financed by Chavez since both do not want economic prosperity in Peru and want to destabilize the country for their socialist plan. Economic growth could block their nationalistic plans in the region and they are taking advantage of the Summit which Peru is hosting to halt progress and gain international publicity. Peru and Colombia now constitute a headache for Chavez’s socialist revolution as they are examples of functioning democracies, with strong economic growth.

In this regard, successful economic policies and the ratification of the FTA are providing incentives for Peru to become more competitive and less likely to succumb to authoritarianism and closed markets. For the United States and its allies in the region, this is critical. It is hoped that the Peruvian example will provide an incentive to many Democrats in Congress who are still refusing to ratify the FTA with Colombia and Panama. Trade is important but the region’s security must be a priority. Latin America is still at risk and the trade accord and the continuous funding of Plan Colombia will help placate those who want to destabilize the region.

*Nicole M. Ferrand is a research analyst and editor of “The Americas Report” of the Menges Hemispheric Security Project at the Center for Security Policy in Washington DC. ( She is a graduate of Columbia University in Economics and Political Science with a background in Law from Peruvian University, UNIFE and in Corporate Finance from Georgetown University.

[1] Peru will register lowest inflation in Latin America in 2008 and 2009. 11 February, 2008. Living in Peru.
[2] Congress Should Advance U.S.-Peruvian Free Trade Ties. July 12, 2006. The Heritage Foundation.
[3] Exit Poll Results: Alan Garcia in First Place University of British Columbia — Peru Elections 2006, June 4, 2006.
[4] Alan García in Dispute with Hugo Chávez, University of British Columbia — Peru Elections 2006, April 28, 2006
[5] Alan García reta a Chávez a polemizar por CNN, El Universal, 28 April 2006.

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