THE ANDES: Maintaining order

In Europe it was called Il Sorpasso: the moment when Italy’s economy – for a brief moment in the late 1980s – surpassed that of the UK in terms of size. There isn’t the same jargon term in Latin America, but Colombia is set to edge out Argentina for third ranking among the economic powerhouses there.

Colombia and Peru will be among the top growth performers in South America this year.

For Peru, the numbers have never looked better. GDP expanded by 7.2% year-on-year in July and by 6.2% for the first seven months of the year. The central bank has increased its growth forecast for the year to 6%. Inflation remains on target for an annual rate of 3%; there was a $2.3 billion trade surplus through July; and international reserves topped $60 billion for the first time in September.

Economy and finance minister Luis Castilla tells Emerging Markets that the healthy numbers come despite the economic crisis in Europe, sagging growth in the US and China and a dip in international commodity prices. Peru’s macroeconomic fundamentals “are pretty strong”, according to Castilla. “There are two assumptions that underlie our growth perspective,” he says. “Commodity prices on the one hand, and the growth rates of our main trading partners on the other. In this regard, we have downside risks if commodity prices were to plummet. The growth of our trading partners is in line with estimates from the IMF and projections from independent analysts.” More than 60% of Peru’s exports come from raw materials, primarily copper and gold.

Colombia is in a similar situation: GDP growth was 4.7% year-on-year in the second quarter and could be close to 5% this year; inflation is on target to hit 3%; and exports, while slightly down in July, were $23.3 billion, up 9.3% compared to the same seven month period the previous year.

The government said in late August that Colombia was now the third-largest economy in South America, edging out Argentina. While the calculations have been disputed, there is general agreement that if current conditions remain the same, the forecast will be true before too long.

Colombia’s central bank governor José Darío Uribe tells Emerging Markets the country’s sound macroeconomic framework, which has allowed for low inflation, bulging investment and a public debt now dominated by pesos instead of foreign currencies, has created conditions insulating it from external shocks and setting it for growth. “Public debt as a percentage of GDP has fallen significantly, and halfway through the past decade the composition of the debt had changed,” Uribe says. “In 2003, for example, 70% of the public debt was in foreign currency and 30% in national currency; today it is exactly the opposite, with 70% in local currency and 30% in foreign currency. The fiscal deficit has been dropping at a rate faster than what had been programmed in recent years. Colombia has a solid fiscal position.”

Alberto Ramos, managing director and co-head of Latin American Economics for Goldman Sachs, says that “these economies are gradually integrating into the global economy through trade and financial flows. Growth should continue to exceed that of the developed economies.”

FUTURE CHALLENGES 

There are, nonetheless, a series of issues facing both countries that even the most bullish analysts say needs to be addressed if economic growth is to be sustained. Poverty, which ECLAC (the Economic Commission for Latin America and the Caribbean) estimates at one-quarter of the population in each country, can be reduced and wealth distributed more equitably.

The most visible, and perhaps easiest, issue to address is the gap in infrastructure development. Both governments recognize that failure to improve infrastructure will hamper future development and have announced aggressive plans to invest public funds and attract private capital.

Colombian president Juan Manuel Santos’ administration is looking at $100 billion in infrastructure investment through the end of the decade, while Peruvian president Ollanta Humala’s administration admits that the country requires a minimum of $40 billion in infrastructure in the coming four years simply to remain competitive.

In its recently released 2012-2013 Global competitiveness report, the World Economic Council ranks inadequate infrastructure as one of the top five problems in both countries for doing business.

Analysts agree. Gonzalo Prialé, who heads an association in Peru of private companies that operate public services (AFIN), says Peru “has an enormous infrastructure deficit that is not being addressed properly”, and that the Humala administration needs to refocus its efforts on privatization, including public-private partnerships. The investment promotion agency Pronversión has a plan to offer $10 billion in concession in 2012–13, but so far has postponed every major initiative more than once.

Alberto Bernal, head of research at Bulltick, says the lack of infrastructure is one of the biggest bottlenecks to Colombia’s economy. He says the government wants to put its foot on the accelerator, but “the problem is between what is planned and implementation. There are risks that the adminis- tration needs to address to make projects attractive to the private sector. It is doable, but will take some time.”

more difficult

Much harder for the Colombia and Peruvian governments will be addressing structural problems reflected in their abysmal results for education and healthcare. Moreover, there is the issue of the overall presence of the state in large economic areas of the two countries – as well as dealing with their overwhelming reliance on natural resource extraction as the fuel for growth.

In the case of Peru, it also means building a political system capable of accompanying the country’s changing economy.

Juan Pedro Chang, a Peruvian union leader and adjunct secretary for the region-wide Coordinating Committee of Andean Labour Unions, says Peru and Colombia are becoming increasingly dependent on resource extraction. “The focus is attracting large-scale investment in extractive industries without concern for environmental, labour and social issues. This is not the path for long-term economic development,” he says.

Carlos Monge, who heads the regional division of Revenue Watch, says “economic organization has moved nearly exclusively around income from extractive industries.”

The concentration has led, he says, to increasing conflict in the region and a loss of competitiveness that could eventually create the conditions for ‘Dutch Disease’ – sometimes known as the resource curse – when the discovery of an abundance of raw materials has a negative effect on the wider economy.

Addressing dependence on extractive industries, improving access to basic services and vastly expanding state presence were campaign planks that helped Peru’s Humala get elected in June 2011, and have helped keep his popularity relatively high 15 months into office. 

LABOUR ISSUES

Humala has changed his stance on extractive industry and this, according to critics, is the source of social conflicts in the country. There were nearly 250 conflicts in Peru in August, according to the monthly monitoring report by the state ombudsman’s office. The majority of conflicts, more than 60%, were due to disputes between communities and extractive industries over the use of natural resources.

Nearly 20 people have died in protests since Humala took office, and conflicts have slowed close to $20 billion in investment, including an indefinite suspension of the $5 billion Minas Conga project spearheaded by Denver-based Newmont Mining.

Humala said in early September that social conflicts have increased, but the root cause is inequality.

 One of the newest of such conflicts was a strike called in September by the national teachers’ union (SUTEP) to demand higher wages. The government has pledged $270 million in the 2013 budget for wage hikes and has presented legislation to Congress to overhaul the general education law, but the union maintains the process will be too slow to address problems.

Critics claim that the salaries should only be increased if education improves, and many blame SUTEP. Peru scored in the bottom five among 65 countries included in an international examination of maths and language sponsored by the OECD.

Its lowest mark in the World Economic Forum competitiveness report is in education (132nd out of 144 countries).

The report also calls on Colombia to improve the same areas, but it is nearly 50 places ahead of Peru in terms of quality of education (77th) and research and innovation capacity (70th).

Colombia is also looking at an uptick in social conflicts as the country pushes to open up vast areas for mining and increase oil/gas exploration. There are also looming problems with plans to begin dealing with land issues created by displacement and other fallouts from nearly five decades of internal conflict between the state and rebel groups, principally the Revolutionary Armed Forces of Colombia (FARC) guerrillas.

President Santos recently made the surprise move to restart talks with the FARC. It will be the fourth major attempt at dialogue since the 1980s. The last effort, led by former president Andres Pastrana, ended 10 years ago. Santos’ biggest critic is his former boss, ex-president Álvaro Uribe (2002–10), who has attacked this at every turn.

A destabilizing factor in both countries is the illicit drug business, primarily cultivation of coca for cocaine. The US State Department reported this year that Peru is now the world’s top cocaine producer, displacing Colombia. Colombia and Peru are basically in the same spot in terms of land used for coca cultivation, according to the annual survey by the UN Office on Drugs and Crime.

Peru is also dealing with a communist insurgency – somewhat unexpected given that the leaders of the Maoist Shining Path guerrillas have been in jail now for two decades.

A breakaway faction of the Shining Path has killed 20 soldiers and police officers this year – in addition to 14 soldiers in 2011 – and a pro-Shining Path party collected more than 350,000 signatures to register as a legal party.

The Movement for Amnesty and Fundamental Rights (MOVADEF) withdrew its application, but it continues to be active.

One of the reasons that MOVADEF has been able to organize and grow has to do with the country’s political system that has effectively been partyless since the late 1980s, depending more on individual candidates than political structures.

Former president Alberto Fujimori (1990–2000) created three different parties for his three campaigns (and a fourth for local elections in the late 1990s); Alejandro Toledo (2001–06) created Peru Posible to run; Alan García (2006–11) has turned the APRA party into his personal electoral vehicle; and current president Humala created Gana Peru to run.

Toledo and Garcia oversaw the country’s decade of spectacular growth and transformation, yet neither Toledo’s party in 2006 nor Garcia’s party in 2011 were capable of – or interested in – fielding candidates from their parties for elections when their terms ended. Besides Nadine Heredia, the first lady, who is not allowed to run in 2016, Humala’s party has no visible leaders at this point to stand in the next four years.

In the 2011 elections, three of the top four finishers, including Humala, used their initials as their party symbol.

“Political parties are virtually non-existent in Peru. They revolve around the personal power structures of individuals. In the long run, it is impossible to create lasting social policies that can address poverty, inequality and marginalization without a political system,” says Jo-Marie Burt, author of Political violence and the authoritarian state in Peru, and an associate professor of government and politics at George Mason University in Virginia.

She says Colombia could be moving in the same direction as Peru. The country has had a long-standing system of two strong parties – recently three – but that changed with Uribe, who had the constitution modified to run for a second consecutive term.

He tried for a third term but was stopped by the country’s courts. Santos also ran and won on a coalition, bypassing the traditional parties.