Peru: Growth in a Time of Recession

BY News Desk  March 16, 2010 at 2:25 PM EST

Ray Suarez preparing for interview at Lima port
Old Peru: bloated state sector, runaway borrowing, hyperinflation, presided over by President Alan Garcia.

New Peru: trimmed-down state sector, privatization, solid currency, presided over by President Alan Garcia.

Peru was once a stereotypical victim of multiple Latin American diseases. Poorly performing state industries ran up huge losses, driving the state to over-borrow and further weaken an already shaky currency. What economic vigor there was spread wealth among a small share of the population, leaving more than half the country mired in poverty. The more rural your community, and the darker your skin, the more likely you were to be poor. The country suffered from constant low-grade civil unrest and birthed occasionally-murderous revolutionary movements.

In just 20 years the country has turned its back on the past, and its tendency to lurch from left-wing to right-wing macroeconomic policies based on the party in power. The guerilla movements have been suppressed. The poverty rate is falling. The currency is stable, inflation low, and investment is pouring in from new industrial giants like China and Brazil.

Remarkably, the country has experienced eight straight years of growth, continuing its strong performance even during the global meltdown of 2007-2009. Massive cranes at the port of Callao unload thousands of containers of imports, and send out cargo ships groaning under the weight of healthy exports: fishmeal, agricultural products, textiles, copper and molybdenum.

One fly in the ointment is the distribution of all that new wealth. It is heavily captured by the top fifth of the country’s wage earners. Even as the economy grows smartly, and wages improve steadily among the poorest Peruvians, the top grows faster. Inequality has increased to the point where the top 10 percent is 30 times wealthier than the bottom 10 percent.

Still, poverty is well down over the last ten years. Francisco Sagasti, an engineer and think-tank leader who has consulted with various Peruvian governments, said poverty is down to about 35 percent from 52 percent six years ago and looks like it will keep dropping.

“But what has happened is that the income of the most of the rich people has gone up even faster. So you have a problem of perception and reality that the fruits of economic progress are not being shared equally,” Sagasti said.

He points out that the people with the power and influence are the ones with the money. If they are forced to share, there could be problems like capital flight, and tax fraud. Finding a way to share the benefits of growth with the people doing a lot of the work in Peru is complicated, Sagasti says, but failure to find a solution could force an explosion of social unrest.

With a chiseled face crowned by a mop of black hair, Alejandro Toledo, Peru’s former president and first indigenous Peruvian to hold the office, knows he has lived an unlikely life.

> “I’m part of the margin of error. To come from extreme, extreme poverty, to have gone to the University of San Francisco, to Stanford, to teach at Harvard, to be part of the World Bank and the United Nations and be a president. Let me tell you, I’m the result of a statistical error. But I have millions of people who come from my own roots, millions of Amazonians, Afro-Peruvians, who don’t have the chance to have access to potable water and sanitation, to quality health care, and sanitation. No access to energy. And that’s a population that’s very discontented, and today getting together. We need to construct a society that is much more inclusive.”

He is not a European-style social democrat. Far from it. He is a market-oriented politician who continued to globalize Peru’s economy and is rumored to be getting ready for another run for president. Toledo says bluntly that unless the poorest in the country are better educated, better paid, housed, and fed, the Peruvian economic miracle will stall.

In the swanky new office towers of Lima, European-descended Peruvians in suit and tie come and go as indigenous people sweep the cigarette butts from the streets. Smiling Europeans look out from billboards across the vast city hawking everything from cell phones, to soft drinks to lingerie, while Amerindians do all the heavy lifting. Unlike Mexico, where a pigmentocracy reigns even as official and cultural homage is paid to a glorious Indian past, even Peru’s banknotes feature a parade of pensive looking whites.

Carlos Monge has an answer. His office in Lima, funded by a George Soros-founded NGO, monitors the governance and economies of the Andean region. Cutting taxes to the bone, shrinking the state, defending the currency, and throttling inflation, were all necessary steps for rebuilding a badly damaged economy. Now, Monge insists, the time has come to let the state sector grow a little bit, in order to provide opportunity for the poorest Peruvians and maintain social peace. The profitable mining sector pays too little in tax, he says. Domestic and foreign corporations chip in a tiny portion of their healthy profits by Latin American –and even worldwide –standards.

Monge says that extra money should not be used to build a bloated state sector that tries to do too many things, the government had tried in the past. He pointed to one example, education, and noted that Peru has the second lowest education spending as a percentage of GDP in the hemisphere. In last place? Haiti. More spending on education, health care, and public transportation could help Peru push up its lagging social indicators like literacy, and infant mortality, and ease the gridlocked traffic congestion in its sprawling capital.

“It’s not that we need a bigger state,” says Monge, “I think we need a stronger state, a muscular one, not a fat one … the temptation is when you talk about a stronger state is a state that invades everything and pretends to do everything. So I’m saying, let’s not do that again. But yes, let’s have a stronger state.”

When the NewsHour recently headed to the Ministry of Finance in Lima, it was fascinating to see officers from a private security firm guarding the building. By contrast, visitors to the Treasury Department in Washington would never find employees of a private contractor doing security duty.

At nine million people, almost a third of the population of the country, Lima has to be one of the biggest cities in the world without a public transportation system. Instead, private bus lines offer a bewildering array of routes and levels of service ply the traffic-choked streets.

For years, countries have zealously guarded their monopoly over transactions inside the country, requiring that business be done in one currency only: their own. Peru’s free-market minded don’t prevent prices denominated in dollars, and don’t chase money-changing into the black market. Instead, men carrying enormous wads of cash and wearing vests with big gold dollar-signs on the back ply their trade openly on the streets, negotiating rates and changing money with any and all comers. The state sees no need to force people to do business only in the Peruvian sol. But these days the sol is so stable strict currency controls are no longer necessary.

Like many other countries in Latin America, Peru looked to the United States for inward investment and a security umbrella. Uncle Sam praised governments that followed capitalist orthodoxy and frowned on any moves toward socialism during the long decades of the Cold War. Peru’s giant neighbor to the east, Brazil, was a boom-bust underperformer cut off from western South America and the Pacific Ocean by the dense Amazon rain forest and the north-south spine of the continent, the Andes Mountains.

Soon the Trans-Oceanic Highway will link western Brazil to Lima and Pacific commerce. Peruvian agricultural products and manufactured goods will head east to the Brazilian interior, while Brazil’s massive soybean crop will no longer face a trip through the Panama Canal or around Cape Horn thousands of miles to the south to head to Pacific Rim markets.

Several of the people I interviewed during my reporting trip extolled the virtues of the new multi-polar world for Peru. Francisco Sagasti pointed out that at 30 million people, Peru was neither too small to matter nor so big it was going to be a power in its own right. Midsized states, Sagasti said, could benefit from a world where it was no longer mandatory to pick a big-power patron.

With expanding ports loading up boats to China on one side, and a new superhighway to Brazil on the other, along with a free trade agreement with the United States in its hip pocket, Peru seems well-positioned to prosper in the coming years. But former President Toledo may not be hyperbolic when he worries the future stability of the state may depend on its willingness to distribute wealth more evenly.