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Peru Nurtures Growth Amid Economic Uncertainty

In the first part of a series on Peru, Ray Suarez reports on a growing and business friendly environment in a country rebounding from economic instability and deep debt just twenty years ago.

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    Now: the first of three reports from Peru by our Global Health Unit. The South American nation has experienced a dramatic economic turnaround.

    Ray Suarez has the story.


    If you thought about Peru at all, what would you think of? The mighty Andes Mountains running through the country like a spine? Guided tours of the ruins of ancient Indian civilizations? Surfing on Pacific beaches strung out on the country's long, sun-drenched coastline? Or maybe the beautiful old colonial buildings of Lima, once one of the most important cities of the Spanish empire?

    It's unlikely you would think of it as one of Latin America's strongest performing economies, led by demand from China for its raw materials.

    Even when the world was in a serious economic downturn, it still wanted to buy what Peru had to sell, the output of an enormous fishing fleet, mines and farms. And, all during that time, a country that once suffered from enormous hyperinflation had a stable currency and a stable government.

    Peru's government predicts a growth rate of 6 percent, coupled with low inflation, for 2010. Ironically, Peru's current pro-business president, Alan Garcia, is the same president who was at the helm 20 years ago, when the country's economy bottomed out.

    Back then, Garcia was the left-wing politician called the Kennedy of Latin America. But his big-government programs were followed by increasing poverty and inflation measured in the thousands of percent. Voters reacted by choosing right-wing candidate Alberto Fujimori in the next election.

    Fujimori defeated Peru's growing leftist rebel movements and stabilized the economy, but he also suppressed human rights and was sent to prison for ordering death squads to deal with his enemies. But Fujimori's economic management and that of his successor, Alejandro Toledo, kept the country on the road to recovery.

    Once a debt-ridden basket case, today's Peru is open for business. The healthy economy has benefited Peruvians like Wilmer Gonzalo. He used to be a street vendor. Now he's a shopkeeper, optimistic, with a strong stake in his country's economic future.

  • WILMER GONZALO, shopkeeper (through translator):

    You can tell the difference between this government and the last. There is less hunger. Things nowadays are very different from what they were before. It was a radical change for the better.


    Francisco Sagasti studies the workings of the Peruvian economy and has long been an economic consultant to Peruvian governments.

    FRANCISCO SAGASTI, economic consultant: We paid some of our debts, and then we opened our doors to foreign investment, which led to a boom in foreign investment, to a lot of capital that helped us to modernize and change our productive system and make our economy more efficient.


    For Sagasti, the turnaround started in the '90s. After the first Garcia administration, Peru ended trade restrictions, stopped government borrowing and overspending. Voters chose leaders who stopped the lurching from left to right and back again.

    Mercedes Araoz is Peru's finance minister.

    MERCEDES ARAOZ, minister of economy and finance, Peru: In the '90s, we started a strong change in our macroeconomic policies, so we can avoid the overexpanding of the government. We used our fiscal — our resources with a lot care, given the priority of the right investment on infrastructure on one side and the right investment on our people.


    In celebrating the signing of a free trade agreement with the United States in 2006, Araoz reflects the thinking of Peru's elected leadership: small government, strong exports, and a stable currency.

    Peru's vast territorial waters support a large and profitable fishing industry. Productive farms and factories fill the marketplaces with food and consumer goods. A busy seaport brings imports and sends out exports from mines and manufacturers. Swanky office towers welcome international traders. And Lima shoppers, well, they look like middle-class shoppers anywhere.

    But the picture is not entirely rosy. Long years of fast growth hasn't lifted up millions of Peru's poor. Former President Alejandro Toledo was Peru's first leader of indigenous heritage. He governed from 2001 to 2006. Toledo sees the problems of Peru's poor throughout Latin America.

    ALEJANDRO TOLEDO, former Peruvian president: Despite considerable rates of economic growth for eight years, inequality in the region has not decreased. It has become more concentrated. That is, to put it in simple words, there are few people who are getting richer, and the majority are not seeing the benefits of economic growth.


    The former president, now at the Center for Strategic and International Studies in Washington, and weighing the possibility of running for president again, is adamant that trickle-down economics won't lift his poorest country men and women out of terrible poverty.

    For Toledo, a healthy economy and a healthy democracy feed on each other.


    It is profitable for business to contribute to poverty reduction and to social inclusion. And it's good for democracy, because, if you have social turmoil in the streets, that's uncertainty, instability. Country risk increases. Interest rate goes up. Consequently, the cost of production increases, and your — your profitability reduces.


    Case in point, the uprising in Bagua. Last year, indigenous people in the Amazon region fought back against government attempts to open up the region to more mining and development. Dozens of police and protesters died in armed clashes.

    And a long standoff challenging laws governing mining and logging continues. Even so, there is widespread agreement that throwing open the economy to the world has worked.

    GONZALO QUIJANDRIA, manager, Antamina: And globalization, has it gone to Peru? Yes, that's for sure.


    Gonzalo Quijandria is a manager for the Peruvian mining company Antamina. He says government policies, stable taxes, protection of private property, has encouraged the world's industry to look to Peru for copper, zinc, lead, gold, and silver.

    His company pays mining royalties to the capital, and to the local regions. But he still has to look outside Peru for educated, expert workers. The sudden gush of money into local governments hasn't translated into a ready work force.


    So, it's a learning process. We still have a long way to go to see if those $250 million they receive every year from the last two or three years are going to — are going to mean better schools, better education, or better health.


    But some say companies which reap huge profits from Peru's vast resources should pay more.

    Carlos Monge is the Latin America coordinator for Revenue Watch Institute.

    CARLOS MONGE, Latin America coordinator, Revenue Watch Institute: Without challenging the importance that these companies and investments have in the country, they could pay a little bit more taxes. And I'm not saying a humongous tax, like in Bolivia and Ecuador.

    I'm saying a 15 percent windfall profit tax, like in England, or like in the U.S. with Bush, President Bush, nothing very communist, very socialist, very leftist, no, things pretty conservative, but reasonable.


    Francisco Sagasti agrees. Government used to be too big, he says, and that was bad. Now the government revenue of 15 percent is too small to lift up the poor of Peru.


    Unless it gets up to 20 percent, you will not have enough public revenues to provide social services of minimum quality to everybody.

    So, we still have a long way. And this implies taxing more for those that earn more and have more money and are the richer. But those are the ones who have power. So, you really get a complicated equation. And the trick is how is it that you can solve a complicated equation without getting the country to explode in social unrest.


    The Garcia administration says Peru is on the right track without more taxes, investing in education and lowering poverty and moving ahead with projects like the new transoceanic highway from Brazil to Peru's Pacific coast, giving one of the world's biggest economies, Brazil, a way of shipping raw materials more quickly around the world.


    I would say that, these last five years, the integration between the two countries is growing quite a lot. We see Brazilian investment coming in. We are connecting more and offering new products. And now that we're investing in roads that connect the two seas — Interoceanica, that's the way we call it — we see the possibilities of really moving ahead.


    Open to the Atlantic, building bridges across the Pacific to fast-growing China, and growing closer to the U.S., Peru's taking full advantage of that flatter post-Cold War world, and doing it as a democracy.


    In his next report, Ray looks at Peru's efforts to reduce maternal deaths in childbirth.