Signs of progress in achieving both strong economic development and poverty reduction

Over the past four decades Peru’s political and social forces have been seeking a magic formula: an optimum combination of good governance, strong economic growth and poverty alleviation. As is the case in many Latin American countries, different policies have been pursued; there have been both hits and misses, and some U-turns along the way. But despite these swings of the policy pendulum, there are real signs of progress, particularly in the past 10 years.

Partly due to its diverse history, social structure, and economic and cultural traditions, Peru has uneven living standards and some enduring pockets of poverty and social exclusion. It is also true, however, that the country has enormous economic potential and is particularly rich in mineral resources.

The story of the past 40 years is, therefore, the story of attempts to put these problems and opportunities together so as to deliver sustainable, socially inclusive growth. Much remains to be done, but in the past decade Peru has been one of the fastest growing economies in Latin America, and has made major advances in raising living standards.

Difficult 1980s

The 1980s were a difficult decade for Peru. In 1980 President Fernando Belaúnde returned to office in democratic elections, 12 years after being deposed by a military coup. The military, initially led by General Velasco Alvarado, had introduced land reform and sharply expanded the public sector. Belaúnde, in contrast, sought to reorient the economy using IMF-backed austerity policies.

A staunch believer in infrastructure development throughout his political career, Belaúnde’s ambitious road-building programme was nevertheless hampered by a lack of funds. The economy performed poorly. Natural disasters and falling international commodity prices did not help. More seriously, Belaúnde’s presidency (1980-85) saw the emergence of the Shining Path, a militant Maoist guerrilla movement that gained strength and carried out a systematic programme of economic sabotage.

After the 1985 elections Alan García of the social-democratic American Popular Revolutionary Alliance (Alianza para la Revolución Americana, APRA), which had some sympathy for what the military had tried to do in the 1970s, changed the country’s course back again, switching to heterodox policies, including the imposition of price and exchange controls.

Despite some initial successes, a massive government deficit, increased foreign debt and a dispute with the country’s creditors, together with the rising economic and social costs of the guerrilla insurgency, pushed Peru into a hyperinflationary crisis. In 1989, García’s last full year in office, inflation reached 3398% and the economy contracted by 11.7%. The Peruvian electorate was ready for change.

Fujimorismo In The 1990s

Alberto Fujimori, the son of Japanese immigrants to Peru, was the surprise winner of the 1990 elections, leading a newly created party, Cambio 90, and defeating novelist Mario Vargas Llosa. A controversial figure in today’s Peru, where many see him as an authoritarian responsible for serious human rights violations, he initially enjoyed extremely high opinion poll ratings. One reason for this was that Fujimori was able to get the economy back on track. He introduced “shock measures”, including a massive privatisation programme and the wholesale removal of obstacles to foreign investment. It worked: the fiscal deficit and inflation were rapidly brought under control.

Today economists agree that 1990 was a true watershed moment. Between 1976 and 1990 GDP per capita had declined by an average of 2.2% every year. From 1991-97, by contrast, it grew by 3.9% per annum. A positive per capita growth rate has continued into the 21st century, supported by the commodities boom, which has seen serious investment in the mining and natural gas segments. Fujimori’s second achievement was to defeat the Shining Path and other guerrilla groups by pursuing a ruthless and effective, army-led counter-insurgency campaign.

While many Peruvians appeared ready to accept restrictions to their civil liberties in exchange for peace and economic recovery, the increasingly authoritarian nature of the regime eventually led to its downfall. After closing Congress in what was considered a self-made coup, Fujimori faced rising protests and in 2000 fled to Japan. Congress rejected his resignation, impeaching him instead.

Fujimori was arrested in Chile in 2005 and extradited to Peru, where he was convicted and sentenced on a range of charges, including responsibility for kidnappings and killings, for which he was given a 25-year sentence. He was also found guilty of making irregular payments to a notorious former intelligence chief, Vladimiro Montesinos, and of bribery. While he remains in prison, Fujimori retains a significant political following, represented by the Popular Force party, now led by his daughter, Keiko Fujimori.

Growth In The Noughties

In the post-Fujimori period a succession of presidents have maintained broadly market-friendly economic policies, benefitted from the commodities boom and achieved consistently strong growth rates, although they have struggled to satisfy rising social expectations. In fact, from 2000-13 Peru has had an average annual GDP growth rate of 5.6%, the highest in Latin America and the Caribbean. Alejandro Toledo, a politician from a poor background and Quechua indigenous heritage was elected president for the 2001-06 term at the head of another new party, Possible Peru.

Toledo’s achievements included signing a free trade agreement with the US, boosting tax collection and reducing the fiscal deficit. Alan García won a comeback second term for 2006-11: this time his APRA party pursued more market-friendly policies, achieving annual GDP growth of 7%, keeping inflation under 3% and increasing the country’s stock of foreign currency reserves. But as with Toledo before him, García was unable to translate these numbers into high opinion poll ratings. On the contrary, popular dissatisfaction remained high and the rapid pace of mining development caused increasing concern over negative social and environmental impacts.

2011 Elections

In the 2011 elections, therefore, it seemed that the pendulum was about to swing back to the left again. Ollanta Humala won the polls at the head of the Peru Wins party. Humala had led an unsuccessful rebellion against Fujimori in October 2000, and had later stood as a nationalist, anti-globalisation presidential candidate against García in 2006. But between 2006 and 2011 Ollanta changed his political outlook, moving from being an admirer of the radical nationalism of Hugo Chávez ( Venezuelan president from 1999-2013) to espousing the more moderate centre-left approach of Luis Inácio “Lula” da Silva (Brazilian president from 2003-11).

In his inaugural speech Humala pledged to continue free-market policies, but to narrow inequalities of income and eliminate the social exclusion of the indigenous population. A number of his original left-wing political allies abandoned his government in disappointment over his moderate policies. The administration has struggled to maintain support in Congress, but Humala has insisted that his goal continues to be to sharply reduce poverty in Peru.

Lower Poverty Rates

The reality is that the current government and its immediate predecessors have an impressive record on poverty reduction. According to data from the National Institute of Statistics and Information (Instituto Nacional de Estadí sticañ e Informática, INEI), the poverty rate rose in the 1990s, but began to fall around half-way through Toledo’s presidency. Although a change in statistical methods complicates the picture, by the end of the second García presidency in 2011, the poverty rate had fallen to 27.8% of the population. There have been further improvements under Humala, with the rate dropping to 23.9% in 2013.

This means that a quarter of Peruvians are now considered poor, compared to half of the population 20 years ago. Setbacks can happen, of course. According to Hugo Perrea, chief economist at BBVA Research, Peru’s annual GDP growth needs to stay above 5% to keep the poverty reduction process going. As the economy slowed in 2014, there was increased concern. According to the IMF, Peruvian GDP grew by 5.8% in 2013, but was expected to dip to 3.6% in 2014 before recovering to 5.1% in 2015.

There are also some “hard pockets” of poverty that are more difficult to eliminate, such as in the areas of Cajamarca and Ayacucho. The percentage of the population living in poverty in some mountain, jungle and rural areas is more than 60%. The INEI defines poverty as not being able to buy a basic basket of consumer necessities, which in 2013 was estimated to cost PEN292 ($104) per household member per month. While there has been progress, income inequalities remain pronounced. The top 20% of the population receives 52.6% of national income, while the bottom 20% gets only 3.9%.

Conflicts Over Mining

Mining is one of the engines of Peruvian growth, but the rapid development of the extractive industry has at times threatened to disrupt traditional communities, had adverse environmental effects and increased social conflict. President Humala’s mining policies have evolved since he took office. At the outset of his term in office he negotiated increased mining royalties that were expected to generate an additional $1bn per annum to fund social inclusion and infrastructure programmes. He also introduced a prior consultation law, requiring mining, energy and logging companies to consult with indigenous and rural communities before moving ahead with projects.

The aim was to reduce the number of social conflicts: in 2013, for example, Peru’s ombudsman for human rights reported that there were at least 229 active social conflicts around mining and other developments. One of the more serious conflicts is a long-running dispute at the $4.8bn Conga copper and gold mine, owned by Colorado-based mining company Newmont, over water contamination issues. Development of the mine has been on hold since 2011 pending government authorisation.

Activists argue that as the commodities boom has eased, the government has begun relaxing environmental and other restrictions on mining. One much criticised move was an attempt by the Ministry of Energy and Mines to exclude Quechuá and Aymaraspeaking communities from the benefits of the prior consultation law. The government also faces the challenge of trying to regulate the activities of an estimated 100,000 informal or non-registered gold miners, many concentrated in Madre de Dios.

Competitive Economy

Despite some obstacles to development, Peruvian economic policy is seen as favourable to economic growth and foreign investment. Peru was ranked 65th in the World Economic Forum’s 2014-15 “Global Competitiveness Report”, placing it seventh in Latin America (behind countries such as Chile, Panama, Brazil and Mexico). Compared to the Latin American average, Peru scored strongly for its macroeconomic environment, market size and financial market development. According to a survey of local businesses, the problem areas included inefficient government bureaucracy (mentioned by 21.8% of respondents), corruption (15.1%) and restrictive labour regulations (12.2%).

Efforts To Reduce Coca Cultivation

Peru is an important source of coca – the traditional plant whose leaves are widely and illegally refined into cocaine by various drug cartels and smuggled to the US, Europe and other centres of consumption. Only three countries control global coca supplies: Peru, Bolivia and Colombia. US authorities estimate that approximately 50,000 ha of coca were under cultivation in Peru in 2010/11. The two countries have collaborated on programmes to reduce cultivation and counter drug trafficking, but crop eradication programmes are controversial in Peru.

After initially supporting the substitution of coca for other agricultural crops, the government moved towards a harder-line eradication policy, but by mid-2014 it had switched back to favouring substitution. Eradication is controversial in Peru because it is opposed by traditional farming communities, and because it is feared that in some areas such as the Vraem (the acronym for the Valley of the Apurimac, Ene and the Mantaro Rivers) it may end up creating new recruits for the remnants of guerrilla movements believed to be still operating in the area.

In June 2014 the minister of internal affairs, Walter Albán, confirmed the president’s policy shift to favour “productive reconversion” based on a combination of crop substitution and social development programmes. Crop eradication will continue to be pursued, but there will be less emphasis on it in the Vraem. The influence of drug cartels remains a cause of concern, with widespread reports that many candidates in the October 2014 municipal elections received campaign funding from traffickers.

Security Issues

Like many Latin American countries, Peru has suffered comparatively high crime rates, and concern over crime and security issues is on the rise among Peruvian voters. It is, however, important to put this into context. According to the UN Office on Drugs and Crime (UNDOC), since the mid-1950s homicide rates in the Americas have been between five and eight times higher than those in Europe and Asia. While there have been sharp increases in homicide rates in Central America, in South America the average has remained fairly stable. In fact, Peru has typically been at the lower end of the regional ranking. For example, according to UNDOC data, in 2012 Peru was ranked as having the 16th highest homicide rate in Latin America and the Caribbean, with a rate of 9.6 murders per 100,000 members of the population. This put it well below countries like Honduras (with a homicide rate of 83.8 per 100,000), Venezuela (53.7) and Brazil (25.2).

Peru’s homicide rate had, in fact, dipped below 10 per 100,000 in 2010 (down from 10.3 in 2009 and 11.6 in 2008). The UN considers anything above 10 per 100,000 to be at epidemic levels. While there has been a comparative improvement in recent years for this particular indicator, public perception is also focused on other types of crime such as theft, and Peruvians maintain that more needs to be done.

Luis Caballero, general manager of Police Security, a private security company, told OBG, “Insecurity in the country is growing and the concern is real. This is why increasing security will be one of the main political points of all the candidates’ agendas for the 2016 national elections.”

Political Fragmentation

Since his election in 2011, President Humala has faced a number of political challenges. In the first round of elections Humala was the leading candidate with 31.7%, ahead of Keiko Fujimori on 23.6%, but falling short of an overall majority. A second round run-off was thus necessary and in it Humala won with 51.5% to Fujimori’s 48.6%. This was a narrow victory, and the new president faced a weak position in the unicameral Congress, where his Peru Wins party, itself an alliance of smaller parties, gained only 25.3% of the vote, giving it 47 out of the 130 seats – well short of a majority. Other important groups included the fujimoristas (then known as Fuerza 2011) with 37 seats, the Possible Peru alliance (loyal to Alejandro Toledo) with 21 seats and various other parties. Alan García’s APRA was reduced to only four seats.

With strong political personalities dominating relatively weak parties, the president has had to manage a sometimes-unstable coalition, mainly formed around Peru Wins and Possible Peru. In his first two years in office there was a high turnover of ministers. In mid-2014 the president lost his fifth prime minister, who resigned after being implicated in a political scandal. In August 2014, after another defection from Peru Wins, the coalition lost its working majority in Congress. In the following month, the longest-serving member of the Cabinet, the minister of economy and finance, Luis Miguel Castilla, resigned and was replaced by Alonso Segura Vasi.

The rough and tumble of Peruvian politics may overstate the real level of instability, and there has been a strong element of continuity in economic policy despite these changes. Coalitions have broken up, but new ones have also been rebuilt. There is no doubt, however, that political fragmentation has eroded the president’s popularity.

Humala’s approval ratings have been on something of a roller coaster, remaining broadly above 50% until mid-2012, but falling to 20-30% in early 2014. The July 2014 appointment of a controversial retired general, Daniel Urresti, as minister of internal affairs, who nevertheless seems to have embodied the electorate’s desire for a tougher line on crime, has helped the government recover some popularity.

Municipal Elections

The trend towards political fragmentation gathered pace in the municipal elections held on October 5, 2014. Luis Castañeda of the centre-right National Solidarity party comfortably won re-election to a third non-consecutive term as the mayor of Lima. Regional parties always do well in these elections, and in this case they were victorious in 16 of the country’s 25 regions. A number of left-wing candidates, opposed to big mining projects, were also successful in their election.

There were worries over the large number of candidates who had convictions for offences linked to drug trafficking and organised crime. In Cajamarca Gregorio Santos, an opponent of the Conga mining project who at the time of the elections was in prison on corruption charges, was re-elected as regional president. Peruvian law allows people serving prison sentences to stand for election, although they can take office only once they have completed their sentences or been released. Whether or not he will be able to take office in January 2015 will, therefore, depend on his legal status and prison sentence.

Economic Shift

After years of strong growth, Peru experienced something of a slowdown in 2014 as commodity prices eased back. While the GDP grew by 5.8% in 2013, the economy minister, Alonso Segura, admitted in November 2014 that the growth rate for that year could dip below 3%. To offset the slowdown, the government announced a number of counter-cyclical measures. Those introduced in November 2014 included greater end-of-year bonuses for public sector employees and pensioners, steps to streamline environmental approvals on big mining projects, and increased spending on education. Segura is predicting that growth will pick up to a 6% annual rate by the end of 2015.

Pacific Alliance

Under Humala, Peru has aligned itself with the more moderate Latin American countries across a range of issues. Relations with the US have been good. In particular, Peru has been an active member of the Pacific Alliance, a group of countries including Mexico, Colombia and Chile, which have promoted outward-looking economic development, free trade and pro-foreign investment policies. The government received a fillip in January 2014 when the International Court of Justice ruled on a six-yearlong conflict over the maritime limits between Chile and Peru. Humala described the ruling as giving Peru 70% of what it had demanded.

Outlook

National elections are due in 2016, which means that there is still some time for Peru’s fragmented political parties to realign themselves. There is no doubt that the Peru Wins coalition has suffered a degree of political weakening, and that lower growth this year may also work against it.

But it is also true that the opposition itself is deeply fragmented and has yet to deploy politicians capable of inspiring the voters on a national, rather than regional, level. Timing will be important and the expected recovery in Peru’s growth rate could have a positive impact on the government’s popularity. For the moment, the 2016 election race looks wide open.