Peru’s president Alan Garcia faces unexpected challenges from two sudden jolts, which will demand the best of his political instincts and negotiating skills, and could weaken support for his agenda of investment-friendly policies.
The earthquake on August 15 that devastated several cities in southern Peru will test the government’s ability to rebuild on a massive scale, while the September 22 extradition of former president Alberto Fujimori from Chile, to face charges of corruption and human rights abuses, unleashes political tremors that could crack a voting coalition in Congress that supports Garcia’s liberal economic programme.
Garcia responded skilfully to the earthquake, taking an active role in his frequent visits to the region to mobilize public and private aid for the homeless. In a matter of weeks, the president gained more than 10 points in popularity, polling agencies showed.
Managing fallout from the high-profile Fujimori trial will be tougher. Fujimori’s party commands an 11-seat voting bloc in Congress, and Fujimori legislators and supporters are pressing demands on Garcia for a proper trial, fair treatment and safety for their former leader. “Garcia has an informal but very real agreement with [those] forces; he needs the Fujimori bloc,” says Luis Benavente, director of the survey institute at the University of Lima.
The presence of Fujimori in Peru after a seven-year absence could rekindle support for the former president, who insists that he is innocent. He continues to nurture ambitions, and polls show that 35% of the public see a political future for him. Political commentator Gustavo Gorriti, who was detained by Fujimori security forces, believes, however, that backing for Fujimori will dwindle as the judicial process advances.
More difficult
Pressures from the natural and political earthquakes will complicate progress on the monumental social agenda and sweeping economic goals set out by Garcia in July, when he celebrated one year in office. The president pledges to reduce the number of Peruvians living in poverty to 30% from 50% today by the end of his term in 2011, and also to improve income distribution, decrease chronic malnutrition, upgrade education and eliminate illiteracy.
His economic promises are equally ambitious: to generate $100 billion in private investment during his term, allocate $30 billion in public investments, boost international reserves and GDP and generate 1.5 million new formal sector jobs.
Combating poverty is essential for maintaining political stability in Peru. The poor are concentrated in the Andean highland region, and in 2006 they voted predominantly for the leftist candidate Ollanta Humala, widely considered a populist inspired by Venezuelan president Hugo Chavez. Garcia won a narrow, four-point victory, with mostly middle-class votes in the capital of Lima and other coastal cities.
Social conflicts flared in recent months, many centred on extractive industries, condemning environmental damage in neighbouring communities and unfair treatment of workers. In a referendum last month, three neighbouring communities rejected the Monterrico Metals copper mining project in the northern Andes, and called for a dialogue with the government. That recalled other incidents in Peru where communities have blocked similar investments or suspended production at oilfields.
“There is a risk, especially in the mining sector; issues like Majaz have to be very well managed,” says Fritz Du Bois, director of the Peruvian Institute of Economics (IPE) policy research centre in Lima. Potential investments in mining could reach $10 billion over the next few years, he says.
Some analysts do not see a great threat to investment from social conflicts, and are confident the protests will be ably managed by Garcia’s team. “Social and political conflicts will play themselves out within a kind of divorce between politics and economics,” says Benavente of the University of Lima.
Peru’s economy is enjoying its fifth consecutive year of buoyant growth, which will top 6%. Getting the robust economy to spill over and reach down to the pocketbooks of millions of struggling Peruvian citizen remains an imperative. Increased social spending reaches some of the poor, but the government has difficulty delivering improved public services. “The state apparatus is designed not to spend because it didn’t have resources” in the past, says Carlos Janada, Latin America analyst at the Institute of International Finance (IIF) in Washington, DC.
Hands across the sea
To boost investment, president Alan Garcia is also advancing a multi-pronged trade agenda. In late September, the US Senate finance committee voted overwhelmingly, 18-3, in favour of a free trade agreement with Peru, paving the way for congressional approval of the agreement.
The FTA would immediately boost confidence in Peru, reassuring investors, and will trigger a knock-on effect by attracting investment from neighboring Colombia, which will have to wait longer for an FTA. “Peru could become a hub in the Andean region; it is much more accessible than Chile,” says Du Bois of IPE.
Failure to win the FTA is not a concern. The full increase in economic growth from an FTA would be 0.5 to 1% of GDP, but only at the end of the 15-year transition period. Trade with the United States accounts for only 25% of Peru’s foreign trade, so exports could be redirected, and a collapse of the FTA “would not be calamitous”, says Janada.
Garcia is also moving to solidify trading partnershipswith Asia’s dynamic economies. A trade agreement with Singapore was finalized in August, and an agreement to negotiate with China was formalized in September.
Peru presides over the Asia-Pacific Economic Cooperation (Apec) for the next year, and Garcia took that opportunity to launch in September the “Pacific Arc”, a political-economic bloc consisting of Peru, Mexico, Canada, Panama and Chile that will coordinate these economies with Asia and develop common interests in attracting investment and deepening trade relations.
The incipient Arc alliance is meant to counterbalance the influence of Venezuela’s Hugo Chavez, who has created the Bolivarian Alternative for Latin America and the Caribbean (Alba) which comprises Bolivia, Cuba and Nicaragua alongside Venezuela.