From 50% on inauguration day July 28, popular backing for Alan
Garcia leapt to 64% in less than a month. Garcia, 57, is
accustomed to starting off well – it happened after
his first presidential inauguration in 1985. Programmes for the
poor, ambitious spending initiatives and a pledge to curb
payments on foreign debt made Garcia one of the
world’s most popular presidents, with approval
rankings above 70% in 1986 and 1987.
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
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.