Peru's Predicament By William Steif William Steif is a freelance writer based in the U.S. Virgin Islands. LIMA, Peru--Dr. Alejandro Toledo Manrique, like many in this Pacific Coast nation three times the size of California, is clearly worried. "The future is grim--we're in one of the most severe crises of the last 55 years," says Toledo, director of the Institute of Economic Development within Peru's prestigious Graduate School of Business Administration. "Our critical objectives have been delayed, postponed. The government [of President Alan Garcia Perez] is trapped in a fireman's role." The latest manifestation of this fireman's role, a desperate move born of the failure to achieve adequate new internal investment, was Garcia's nationalization of Peru's 10 privately- owned banks, 17 insurance companies and six, bank-owned finance companies in mid-October. The nationalization, which Garcia originally announced in a July 28 speech, was accompanied by police strongarm "invasions" of the bank premises, demonstrations in the streets of Lima, and much rhetoric, pro and con, including denunciations by the largely bank-owned media. The nationalizations signalled that Garcia's honeymoon with the private sector was over. Since the populist Garcia's inaugural in July, 1985, as the first-ever elected president from the American Popular Revolutionary Alliance (APRA), Garcia had been carefully cultivating business, which tends to be organized in Peru in consortia of family empires. Two of the private banks' chiefs were among a small group of business leaders, commonly known here as "the 12 apostles," through whom Garcia had originally tried to concentrate major new investment ventures. Garcia's "heterodox" economic strategy, succeeding the orthodox strategy of the more conservative President Fernando Belaunde Terry of the Popular Action Party (AP), seemed to work for a while. One of the 38-year-old Garcia's first acts, on assuming office, was to announce that Peru would limit foreign debt service to no more than 10 percent of the value of yearly exports, a pledge which troubled the World Bank, Inter-American Development Fund, International Monetary Fund (IMF) and bilateral lenders and which was not kept because of foreign pressures. Debt payments in 1985 equalled 35 percent of exports of goods and services, according to the central bank, and 29 percent in 1986, though the figure is now dropping, precipitating clashes with the lenders and a shutoff of funds. The "heterodox model" was based on wage and price controls, cost stabilization, a freeze on the dollar exchange rate, low interest rates, a "de-dollarization" of the economy, stimulation of demand with wage increases and emphasis on the use of idle capacity. Initially these bold moves worked. In 1986, the gross national product (GNP), sum of the value of all goods and services produced, rose 8.5 percent, inflation was held to around 63 percent for the year, real wages were up 8 percent, open unemployment dropped from 12 to 10 percent and under- employment decreased from 46 to 42 percent in a workforce of about 6.5 million. "Even reserves increased considerably," says Toledo, "[I]n the short run this was impressive. But more critical is this recovery's durability. In 1986 businessmen made a lot of money. The government expected reinvestment, but this didn't happen." When APRA won both houses of the Peruvian Congress in 1986 elections, Garcia's government enacted legislation forcing businesses to make a 25 percent investment of profits in "obligatory" bonds. Toledo says the businessmen had been getting "misleading signals" and they said "Hold it!" The economist says "Peru needs to invest $4.2 billion" internally in the next few years in order to maintain a five percent annual growth rate through 1995. He asks: "Where's the money going to come from?" The internal level of savings is low, about 8 percent of GNP. National and private foreign investors and the World Bank have not been anxious to invest in Peru. The economic indicators for 1987 fall far short of those for 1986: inflation ran at a rate of between 110 to 115 percent, the budget deficit remained at about 7 to 9 percent, excluding interest on foreign debt, and the foreign debt was around $15.2 billion, with reserves of only $450 to $500 million, down almost $1 billion from a year earlier. Meanwhile, capital flight took $560 million out of the country, and the country's exports of a little over $2.7 billion worth of goods just about equalled the country's imports. "In summary," Toledo says, "we'll show four to six percent growth in 1987, but my concern is for 1988, 1989 and ahead. This government needs a strong dose of pragmatism. We need internal savings, export capacity and the government, with its social sensitivity, has to find a way for lasting redistribution of wealth. There's no point in redistributing poverty. We have to reduce the extreme discrepancy between the haves and have-nots." In a nation of 20.5 million people, the GNP this year hovers between $19 billion and $20 billion, for a per capita income of about $900. But the discrepancies are enormous and historical in a society whose roots go back to pre-Inca times. Racism is a fact of life here, at least on the economic and social fronts. That racism, which tends to be upheld by the country's Spanish-mestizo economic oligarchy, ties in directly with two further Peruvian problems: terrorism and drugs. Terrorism means the 7-year-old insurgency of the Maoist-line Sendero Luminoso (Shining Path) Marxist guerrillas, founded in 1970 in the old colonial city of Ayacucho by Abimael Guzman, then a 40-year-old philosophy professor at Ayacucho's San Cristobal de Huamanga University. Guzman and his cadres indoctrinated a half-generation of students and teachers at the university with an indigenous Maoism. They went underground in the late 1970s and in 1980 decided to begin armed action in the belief that the conditions for revolution existed and that the road to Peruvian communism lay through "prolonged popular war." In the poverty-stricken high countryside and Andean cities the Sendero had--and has--a certain appeal to the Indian campesinos, whose average annual income is just above $200 per person. In 1980-82 Sendero staged hundreds of dynamite attacks in the Ayacucho area and in other parts of the highlands and in Lima. The targets invariably were the "corporate state" and "imperialist technology." Larger land owners and rural traders were executed after "popular trials" and their lands and possessions were split up among poorer campesinos according to family size. Belaunde's government initially ignored the threat, but changed its attitude in October, 1981, with the first Senderista attack on a police post. The government's counter-insurgency forces swung into action and proved to be effective recruiters for Sendero. Trained by U.S., Israeli and Argentine "advisers," the heavily armed government forces stole, raped and killed indiscriminately. By early 1984 the Ayacucho district attorney's office had received 1,500 complaints of "disappearances." And several massacres alleged to be the work of Senderistas appeared, on investigation, to have been the work of the counter-insurgency forces. The best estimates are that about 10,000 people have died in this ongoing "dirty war" of the 1980s. With Garcia's inaugural in mid-1985, the military has been somewhat more disciplined and restrained. The government regained control of Ayacucho City and some parts of that Andean province and neighboring provinces. But Sendero has still spread throughout the country. The demographics of Lima tell the story, at least in part. As late as 1981, Lima was a city of 4.2 million, nearly double what its population had been a dozen years earlier. Today metro Lima certainly has six million residents and probably close to seven million. In a Catholic nation with a natural population increase of 2.6 to 2.7 percent yearly, hundreds of thousands are coming out of the mountains to try to find better lives in the cities, which means Lima, primarily. Almost two-thirds of Peru's population is now urban. All around Lima is desert, and these people bring their poverty to sandy shantytowns of 300,000 or 400,000. The Sendero comes with them and suffers further provocations such as the military-police massacre of 267 prisoners in the three prisons outside Lima in June, 1986. Many of those killed were Senderistas, who had organized within the prisons and resisted discipline with homemade bows and arrows, seizing six police and five guards as hostages. The Senderistas have not only seeped into Lima and the other coastal cities, but also have moved into the eastern jungle, where they levy "taxes" in the cocaine belt. Since Peru provides about half of all the coca that eventually is turned into cocaine and merchandised in the U.S. and Western Europe, the Senderistas have a natural clientele among what one expert dubs the "mom-and-pop campesinos" of the Upper Amazon Basin. While Garcia's anti-drug police are battling cocaine traffickers and Senderistas in the Upper Huallaga Valley (the chief coca area, where the police killed 31 people in a day-long clash in mid October), the central bank admits it is encouraging cocaine traffickers to open non-taxable dollar accounts in Peru. The traffickers, taking advantage of the tax break, reportedly are depositing nearly $3 million daily in these accounts. Daniel Carbinetto, the Argentine engineer who is Garcia's main economic advisor, says this "parallel market dollar supply of about $1 billion a year from the cocaine trade" is necessary for the Peruvian economy. It was the lack of control over capital that spurred Garcia to nationalize the banks, a move which Carbinetto says was "justified" by "dollar speculation and the control of banks by a few families." He adds: "We don't have a surfeit of entrepreneurs. They should be totally concentrated in productive activity....We only ask one thing of businesses: That the surplus generated here be invested here, in assets." With the government in control, he says: "State investment will be pushed, but very selectively. . .to sectors where the modern state needs it--to generate foreign exchange, for example." But he cautions: "Businessmen have been standing back passively when the life of the country is at stake--if this heterodox model fails, the country will move toward civil war." But it is the debt that is more a daily worry than revolution. "We got indebted in a frivolous manner in the 1970s through irresponsible spending and irresponsible creditors who played along with us in the economic shock after the 1974 oil crisis," says Toledo. "We weren't concerned that this money go into productive investment--only 29 percent was dedicated to productive investment, only 0.6 percent to health, only 0.4 percent to education, but a substantial proportion went to armaments, and a not insignificant proportion to the private accounts of those who had the responsibility of governing this country"--the military from 1968 to 1980. With the 1980s, he says, the IMF "told us to put our house in order--we took the medicine and the patient got worse. We didn't recover on our balance of payments or economic problems, we increased social inequalities and nourished Sendero Luminoso." By 1985 Peru was "bitter and the government couldn't understand it." Garcia stepped in at this crucial time, but his job has been difficult. The APRA, the president's own political party, has often stood in the way, even though it's left of Belaunde's worn-out party. To the left of APRA is Izquierda Unita (United Left or IU), a coalition of a half-dozen leftist parties pushing for quasi-Marxist economic solutions, and pushing hard. To the right of APRA is Libertad (Liberty), a new movement opposing nationalization of almost anything and led by Peru's best-known living writer, Mario Vargas Llosa. Despite Peru's size, agricultural production and productivity are low, with the chief crops grown along the coast and limited by water availability. The big haciendas have long since been nationalized, usually into co-ops, but these are now disappearing, too, as the land is split into small plots, then re-sold to entrepreneurs. Rice has replaced the more expensive beans as the country's basic food, with rice increasingly imported and subsidized. Peru is known as the home of the potato, but last year 10,000 tons were imported; similarly, 40 percent of Peru's corn was imported last year, 90 percent of its wheat, some beef and lamb and a fifth of its non-fat dried milk. Several hundred thousand tons of sugar were imported even though Peru exported its 1987 U.S. quota of 33,000 tons of sugar--at 21 cents a pound. The country is self-sufficient in poultry and fish, but this year got $20 million worth of U.S. Public Law 480 food (wheat and corn), a give-away, at the same time it was subsidizing rice to the tune of nearly $80 million. Garcia's government jacks up some food prices--corn, for example, is three to four times the world price--and uses its profit at the state purchasing agency to try to reactivate the agricultural sector through low-interest loans. That's helped a bit, but doesn't seem to have slowed the migration to Lima. Copper, largely from the old multinational Cerro de Pasco complex in the Andes, was the single leading Peruvian export in 1986, garnering $436 million from the nationalized mines. Zinc mined in the same area was worth $238 million the same year, followed by oil and oil products ($236 million) and fishmeal ($205 million). The 1986 plunge in oil prices hit Peru hard, cutting its oil export earnings almost two thirds. The country's oil reserves have fallen to 500 million barrels, enough for less than eight years' supply at present production rates. That doesn't, however, mean there's no more oil offshore and, more particularly, in the eastern jungle, as both neighboring Ecuador and neighboring Colombia are proving with wide-open exploration by a dozen or more multinational oil companies. The problem is that Peru will have to change its laws before the petroleum heavyweights will sink big capital into the country. Under present law the national oil company, Petroperu, is the owner of oil resources. Occidental, Armand Hammer's company, is a small producer (8,000 barrels a day) in a small north coast joint venture with an Argentine firm, but it's the only international oil company actually producing in Peru. Petroperu took over an offshore field from Enron of Texas at the end of 1985 after failing to agree on new contract terms. Enron is a creditor, as well as a Japanese company that financed a $400 million jungle exploration and construction of the north Peruvian Pipeline in the 1970s. Conoco has been ready for 18 months to start Peruvian exploration if the law is changed, and Mobil is also interested- -if the terms are more agreeable. Early in 1987 Royal Dutch Shell, looking for oil in Peru's southern jungle, discovered an enormous new gas field, equivalent in energy to more than a billion barrels of oil. The new field makes Peru's gas reserves third in South America, behind only Venezuela and Argentina. The natural gas could revolutionize the country's energy supply system, now dependent on oil and hydro power. But developing the gas field will take more than $1.2 billion, including a 375-mile pipeline over the Andes. Shell's willing, but it wants a better deal from the Peruvian government, and that may not be in the cards politically. Enrique Cornejo, 35-year-old economist who previously headed Garcia's secretariat, became president of the new Peruvian foreign trade institute in 1986. His mission is to expand his nation's exports, and one way he's doing it is to barter with the Soviet Union (an unused Peruvian shipyard is building fishing boats for the Soviets) and to push debt-for-products programs, such as a recent deal in which Britain's Midland Bank agreed to accept copper, iron and other raw materials as part payment on the $160 million Peru owes the bank But Cornejo also points out 70 percent of Peru's exports are still in only 10 products, five minerals, oil, fishmeal, cotton, sugar and coffee--the latter represented the second biggest export, at $262 million, in 1986. Cornejo wants to jack up prices on these 10 items slowly and diversify Peruvian exports into such goods as flowers, mangoes, bananas, asparagus and other high-priced vegetables, and he is aiming at the Latin American market, though most of Peru's trade is now with the North. Toledo is not wholly pessimistic. He notes that Peru's foreign debt is "peanuts, only 4.8 percent of the overall Latin American debt." He says the country is not ready "to go back to the IMF," but at the same time acknowledges "we can't ignore or evade our debt...What we can do is argue why we're not in a position to pay." "We need to push exports aggressively and a key element is to regain trust"--not only from the world community, but from Peruvians, too.