The rise this time is largely thanks to a wide-ranging austerity plan, which includes steep reductions in his own salary, as well as for cabinet ministers and members of Congress, and a collection of social programmes aimed at the nearly 14 million Peruvians – half the population – living in poverty.
In early 1988, the bottom fell out of his government’s plans, and he was forced to change gear. Instead of the belt-tightening, or “orthodox” recipe used by other countries, Garcia opted for a “heterodox” model that sent gross domestic product spiralling downward and inflation upward – accumulated inflation in his five-year term was 2.1 million percent – and he limped to the end of the period in 1990 with single-digit popularity.
He is not going to let the same thing happen again, and in many ways has begun this new period doing exactly the opposite of what he did the last time.
Targeting the IMF
In one of his many pre-inaugural meetings, Garcia met with Anoop Singh, western hemisphere director at the IMF. He later announced that his government would enter into a stand-by agreement with the Fund, even though Peru no longer needs this type of assistance. Singh praised Garcia’s “prudent economic policy”, saying the IMF looked forward to working with Peru in the coming five years.
This was extremely important to Garcia, who made the IMF one of his principal targets in his first government, singling out the Washington-based lender when he announced a ceiling on debt servicing equivalent to no more than 10% of export earnings. In response, the IMF labelled his government “irresponsible” and cut off Peru, making it ineligible for foreign loans and worsening an already disastrous economy.
“The economic results from President Garcia’s first government were not positive, and there are still some doubts among some private investors. So the idea of an agreement with the IMF is to guarantee our reputation, so that investors perceive a very strong commitment on the part of the government to macroeconomic stability,” says economy and finance minister Luis Carranza.
Carranza says that Peru does not need fresh money from the IMF, and will use the standby agreement as a kind of external auditor that will evaluate the economy on a regular basis.
Instead of talking about conditioning debt payments as he did in the 1980s, the plan of the new Garcia government is to continue a process of renegotiating its debt, particularly with the Paris Club. Carranza successfully headed negotiations in 2004-05, when he was deputy finance minister, to renegotiate with the Paris Club, and he says there could be a new attempt at smoothing out another spike in repayments that will come due in the next four to five years.
Social programme funding
More important than his IMF relations, Garcia has gone to some lengths to ensure voters – and international observers – that he will not turn to deficit spending to fund his social programmes. Appointing Carranza as finance minister is one indication of this. Another is the constant promise that all the social programmes – those announced so far and those in the wings – will not be undertaken until funding is secured. All of the inaugural day announcements, for example, were followed immediately by a mention of the amount and where the money was coming from.
“In our polls, an overwhelming majority back the austerity measures and the initial programmes set forth by the administration,” says Luis Benavente, who heads the polling institute at the University of Lima.
Garcia is aware that he has taken office at an extremely advantageous moment, with Peru’s economy doing its best in many years and the international climate favouring the country, but he also knows that his administration could be seriously undermined by external forces that he cannot control.
One potential problem would come from a drop in international mineral prices. Much of Peru’s boom in the past five years is due to high prices for copper, gold and a handful of other minerals that have pulled along exports earnings and gross domestic product. There is no immediate danger of a crash in prices, but a downturn could lead to a drop in GDP growth or exports, which would send jitters through the country, bringing back memories – even if unfounded – of his previous term.
Free trade danger
A real danger exists with the free trade agreement, formally known as the Peru Trade Promotion Agreement (PTPA), signed with the US in April, but not yet ratified by them. Complicating matters, the Andean Trade Promotion and Drug Eradication Act (ATPDEA), which allows Peru to export more than 6,000 items tariff-free to the United States, expires at the end of this year. The US absorbs approximately 25% of Peru’s $20 billion in exports.
To address the problem, Garcia has named Hernando de Soto, Peru’s best-known economist, as his special envoy on trade issues. De Soto will be in charge of pushing the PTPA in Washington, as well as picking apart the treaty to see how it can best be used to stimulate growth among the country’s poorer classes.
Critics charge, however, that the PTPA could do more harm than good to the Peruvian economy in the long term. According to economist and daily columnist Humberto Campodonico, no one is talking about the long-term effect on Peru’s small-scale farmers, focusing attention only on the $100 million or so in subsidies that Peru will use to offset the immediate impact on corn, cotton and wheat farmers, and not on the impact of US farming subsidies.
“Peru is going to have to examine the timeline for the PTPA, because subsidies in the United States are not going to drop as was planned when the agreement was negotiated as a result of the breakdown of the Doha Round. The paradox here is that Peru, which does not subsidize its agriculture, will do so precisely when it is signing a free trade agreement,” says Campodonico.
Apart from the PTPA, the Garcia administration is involved in an aggressive and fast-paced effort to boost regional trade. The administration has signed an expanded Economic Complementation Agreement (ACE) with Chile, and accepted a Chilean invitation to join the Trans-Pacific Strategic Economic Partnership Agreement, dubbed the P4, which also involves Brunei Darussalam, New Zealand and Singapore.
Garcia also lobbied hard to get Chile to rejoin the Andean Community of Nations (CAN). Chile was a founding member of the CAN, but pulled out 30 years ago. Its return, announced in late August, as an associate member, is extremely important, given that Venezuela withdrew from the CAN in April, which was nearly a death blow for the region’s old trading bloc.
Campodonico sees more politics than economics in Garcia’s manoeuvres with Chile and other regional powers. “I think this is more a political move than a plan for economic integration,” he says.