The Perils of Orthodoxy: Peru's Political Economy
Wise, Carol
IN PERU, AS IN MUCH OF LATIN AMERICA, economic crises tend to be cyclical, with each new crisis strongly resembling those that went before. In 1968, the cumulative failures and redistributive...
...In the throes of the Great Depression, other Latin American countries began turning to Keynesian solutions, and to the state as the chief means of fueling the growth of local import-substitution industries...
...In retrospect, the first military regime seems to have been foolhardy in assuming that its bold domestic reforms would be acceptable-let alone attractive-to private capital...
...Now, APRA is again talking about policies to favor small and medium entrepreneurs in the regions...
...help, but the Nixon Administration declined, complaining that settlements had yet to be reached on U.S...
...The result of import liberalization in Peru over the past ten years has been to exacerbate, rather than eliminate, distortions in the local economy...
...This particular sanction may, however, be a blessing in disguise, given the Reagan Administration's request for an eightfold increase in military aid to Peru in 1986-ostensibly to fight the "Soviet-Cuban threat" posed by Sendero Luminoso...
...Cesar Herrera, "Inflaci6n, politica devaluatoria y apertura externa en el Peruni: 1978-1984," Documentos de Trabajo (Lima: Instituto de Estudios Peruanos, December 1985), p.12...
...To realize its goal of fueling private sector activity by channelling state funds into infrastructural development, the equipo dynamo was able to borrow almost 40% more than Peru's total 1980 debt...
...With JUNE...
...Within just two years, Peru was back in the lap of the International Monetary Fund (IMF), and externally imposed austerity plans set the tone for the remainder of the Belatinde government...
...By the end of the first Belatinde government in 1968, Peru's public external debt had already jumped to almost $1 billion...
...Though Garcia's victory surprised many people, it was only the first step on a path that culminated in his election as president of Peru in April 1985...
...Author's interview, Office of Project Investments, Central Reserve Bank, March 1986...
...Central Bank figures for 1977, for example, showed that estimates of income from fishmeal, sugar, copper and petroleum exports were off by as much as 800%.23 T HE MORE COMMON STORY IS OF OUTright incompetence and scandalous cost overruns...
...Rosemary Thorp and Geoffrey Bertram, Peru, 1890-1977: Growth and Policy in an Open Economy (New York: Columbia University Press, 1978...
...But COFIDE has long been in charge of monitoring the capital needs and resources of the state firms: this "solution" may well be part of the same problem...
...Banks: Privatization of Financial Relations," in Richard P. Fagen, ed., Latin America and United States Foreign Policy (Stanford, CA: Stanford University Press, 1979...
...11,000 workers in the state enterprise sector earn more than 50 times the amount earmarked for the Development Corporation of Ayacucho-the chronically poor region where the Sendero Luminoso insurgency is centered...
...Interest on existing loans far exceeds the value of expected new lending, and Peru will come nowhere near the 4%-plus average annual growth rates that the IMF optimistically forecasts for the developing countries for 1985-1990...
...Such leeway as it does enjoy derives mainly from Belatinde's ad hoc "no pay" policy over the previous two years on Peru's $14.3 billion external debt...
...However, Garcia has gained enormous political working capital from his defiant stand on the Latin debt and the IMF as new forms of economic imperialism...
...resource depletion in key areas such as anchovy fishing, coupled with a failure to maintain an adequate rhythm of exploration and development in certain crucial sectors-mining, agriculture and petroleum-was disastrous...
...Instead, it has spawned an overextended patchwork of ministries and projects, plagued with chronic fiscal crisis and mounting corruption...
...Tax and exchange rate policies, as well as other investment criteria, are still up in the air...
...Beladinde also revived an old dream by announcing a drive to colonize the jungle, convinced that the Amazon basin, despite its shortage of arable land and ecological vulnerability, was Peru's new frontier...
...A recent series of peasant land invasions on the coast-unconnected to the guerrilla insurgency-indicate that Peru's "traditional" sector is less patient and more politicized today than when Gen...
...By this time, the most buoyant sectors of private enterprise were currency speculation and the "shadow" economy-mainly the cocaine trade, but also all the street vendors peddling contraband...
...While formal economic plans are still in the making, Garcia has barely let a week pass without announcing another major measure in his self-designed program...
...FBIS-LAM, July 29, 1985...
...A FULL 30% OF THE PERUVIAN DEBT IS ACcounted for by military expenditures, the Achilles' heel of the last three governments and a taboo subject until Garcia raised it publicly...
...Velasco then made decentralization a cornerstone of the early years of radical military rule, introducing two laws to encourage priority industries to move into the interior and the highlands...
...The Charcani hydroelectric project, for instance, in the southern department of Arequipa, carried an original price tag of $141 million...
...Right up to Belatinde's last days in office, there was serious talk of building a $1 billion naval base at the natural harbor in Chimbote, on the grounds that the crowding of the fleet at the main base of Callao was a strategic weakness...
...military sales and development aid...
...The Swedish consortium which manages it goes on collecting exorbitant fees and interest payments...
...Measures like this may have some salutary effect on the balance of payments crisis and the large amount of violence for which the military is responsible...
...A debtor's greatest fear is probably the freezing of assets or the suspension of trade finance, as most trade is conducted on a credit basis...
...Peru estimates REPORT ON THE AMERICAScompany assets at just $138 million-one hint of how far apart the two sides are at the bargaining table...
...But after APRA's defeat, he kept a prudent distance from internal party disputes and quietly set to work on a strategy for winning the APRA presidential nomination in 1985...
...That is his greatest PR triumph...
...Latin America Regional Report: Andean Group, April 5, 1985...
...At the time, however, the country found itself locked in a vicious political battle between the reformminded Belatinde faction and a congressional alliance of convenience between Peru's powerful landed interests and the conservative wing of APRA.' 6 Beladnde's own reticence to confront his largely middle-class constituency with a tax reform, and the determination of the conservative coalition to sabotage any attempts at reform, meant that the expansion of the state had to be paid for by foreign borrowing-an early pattern which has since proven almost intractable...
...Most disturbing of all, orthodox remedies ignore issues such as the outrageous military budgets and the autonomy of special interest groups which underlie many of the failures of the last decade...
...In his first congressional message as Minister of Economy and Finance, Luis Alva Castro spoke of the "political moralization" of the country, and outlined 13 strategies for tackling everything from the external debt to the military budget...
...Velasco imposed his "revolution from above" 18 years ago...
...In spite of all the confrontational rhetoric, the military was no more anxious than its civilian predecessor to tax the middle class...
...Ironically, the few success stories, such as the Cerro Verde mine or the Trans-Andean pipeline, came in areas where international prices were most volatile...
...After generous nationalization settlements, the pendulum swung the other way, and the private sector proved it could find a secure place within the massive state investment program...
...28 APRA's longer term remedy is to hand over responsibility to existing institutions such as the state development finance agency (COFIDE...
...In response, Washington temporarily froze AID funds in October 1985 under the rarely invoked Brooke-Alexander Amendment...
...Belatinde used this offer of multilateral aid to raise hopes of reactivating the economy "without recession...
...2 7 Today, 500 PETROPERU workers earn as much as 100,000 teachers...
...Garcia will continue to face tremendous rural pressure...
...But his promises were sabotaged by chaos in the ministries and by the tight monetary policy in effect, which made it impossible to raise the necessary counterpart funds...
...And the Right has accused Garcia of playing the wrong trump card, complaining that the Belco row has prompted the only other major oil company now operating in Peru-the Royal Dutch Shell subsidiary-to talk of cutting back on further commitments...
...Close associates of the APRA leader recall a 1982 statement, often repeated privately, that summed up his attitude...
...7 9 - 8 5 . 51...
...let the Left enter the fight behind our leadership...
...State Department went even further...
...An article in the magazine Quehacer, written in 1982, maintained, "His strategy comprises a number of steps, including even the handling of his personal appearance: Turkish baths to keep the extra pounds off, practising new poses, new ways of behaving in public, even new smiles, in front of the mirror...
...The Velasco regime committed itself on paper to redressing the skewed balance of land tenure between the large coastal plantations and the traditional farms of the sierra, and promised to promote cooperatives and protect the small-scale farmers who comprised some 50% of Peru's economically active population...
...Latin America Regional Report: Andean Group, May 17, 1985...
...Dominated by four giants-PETROPERU (petroleum, gas and petrochemicals), CENTROMINPERU and MINEROPERU (mining and refining) and ELECTROPERU (electricity), the state corporations by 1981 controlled nearly 60% of all public outlays...
...4 Once in office, APRA acted immediately on several campaign promises...
...24chased this year, and has made it known to the military that their extravagant budgets cannot continue...
...avoid joining creditor banks and the International Monetary Fund efforts to force Peru to pay its $13.5 billion debt without considering the political and long-term economic repercussions...
...Though this attracted some investment away from Metropolitan Lima to other coastal cities, the relocation incentives proved insufficient to reverse market trends...
...Project spending in agriculture has often proved disastrous...
...T HE NEWLY ELECTED GOVERNMENT OF the American Popular Revolutionary Alliance (APRA) has only a meager inheritance from the outgoing Belatinde Administration...
...Salinas and Wise, "Regional Implications...
...And, with the private banks gradually realizing that they will have to take whatever they can get from Peru, a few New York banks have expressed interest in establishing their own barter payback agreements...
...More than half a century after the distinguished socialist writer Jos6 Carlos Maridtegui wrote of Peru's regional problem, it has come back to haunt coastal bureaucrats more than ever...
...While its criticisms of the Belatinde government continued unabated, APRA responded to its opponents' insults by turning the other cheek...
...They also assumed-under pressure from the IMF and the World Bank-that Peruvian industry would become leaner and more efficient if thrown open to market forces...
...In 1971, some 31% of Peruvians lived in absolute poverty, with around half the population dependent on informal piecemeal employment...
...But they do not constitute a full-fledged development policy...
...Under the present rules of the game, rescheduling Peru's debt would require highly improbable levels of new lending just to catch up on old interest payments...
...FBIS-LAM, July 29, 1985...
...The liberalization of trade, begun under Economy Minister Silva Ruete, reduced the average tariff from 66% in 1978 to 32% in 1981.8" The equipo dynamo escalated the trend by rapidly pulling state investments out of the manufacturing sector, and the flood of foreign imports was so hard on local manufacturers that Belatinde eventually felt compelled to back off...
...And Garcia's left-wing opponents, who hold 25% of the seats in Congress, are questioning just where the "social democratic" program may be heading...
...But the hastiness of the move, and APRA's subsequent reluctance to disclose the full terms of the Occidental contract, have left the government vulnerable to criticism from all sides...
...State workers received a 15% salary hike and teachers 22...
...Felipe Portocarrero, "The Peruvian Public Investment Programme, 1968-1978," Journal of Latin American Studies (London), Vol.14, no.2 (1982), p. 4 3 6 . 19...
...Oil projects in the eastern jungle areas accounted for close to half the state's petroleum investments, and a Trans-Andean pipeline represented one of the decade's heaviest commitments...
...4 Peru has been financing the shortfall with earnings that would otherwise have gone to service the debt, and by placing stringent new controls on imports...
...But the civilians proved unable to cope with the sweeping socioeconomic changes that had taken place during the 12-year "Revolutionary Government of the Armed Forces," or to read important warning signals in the international economy...
...The Right is our main enemy...
...There were two secrets behind Alan Garcia's election victory...
...on the other, a radical rhetoric which is inhibited, however, by the need to sound different from Sendero...
...And the stringent penalties for payment disruptions on large state-funded projects mean that drastic reductions in public investment are now applied across the board in all projects...
...3 9 Inflationary budget deficits, negligent tax collection, recession and a new set of banking regulations favoring finance capital all contributed to the havoc which ensued from 1983-1985...
...While the Air Force generally controls all helicopter operations, the Army has purchased five U.S...
...Yet work on the project goes ahead, even under the new APRA government, which promised to set aside illconceived public works projects in favor of funding for small irrigation, marketing and agricultural credits...
...3 4 PRIVATE INVESTMENT REMAINS THE MISSing link...
...Rather, it is a less politically painful way of keeping the lid on until a more viable solution can be found...
...Latin America Economic Report, October 31, 1985...
...The Andean Report, February and June 1983...
...But far from clearing up bottlenecks and providing food for town dwellers and raw materials for industry, the new projects have become bottlenecks in their own right...
...At his inauguration, Garcia announced that he would limit interest payments on the medium- and long-term public external debt to 10% of export earnings...
...These pressure groups develop close links with the corresponding segment of the local bureaucracy...
...Peru asked first for U.S...
...4. In the absence of a formal economic plan, APRA's general program can be pieced together from the following sources: "President Garcia Delivers Inaugural Speech...
...The Andean Report, November 1985...
...The quick victory over Occidental, and the hard line against Belco, briefly boosted APRA's popularity at home...
...4 7 Belatinde, who courted the IMF in international financial circles, but badmouthed its austerity plans to Peruvian audiences, became best known in Washington for breaking a 1984 IMF agreement even before it was signed...
...new bonds of cooperation between the state and productive sectors, capital as well as labor, have to be forged...
...Apparently oblivious to Peru's past difficulties and the now exorbitant cost of external finance, Beladnde borrowed as if there were no tomorrow...
...The Left has attacked APRA for ducking an overdue national debate on oil policy-even more pressing in view of the recent collapse in the price of raw crude...
...There is widespread agreement that the severely polarized distribution of income and resources between the coast and the regions, coupled with twenty years of false promises of Agrarian reform: Many promises, few results decentralization and redistribution, are the largest single cause of the present guerrilla violence...
...Ibid...
...2 2 In a balance of payments crisis such as the one that hit Peru in the late 1970s, it was not unusual for the entire investment program to grind to a halt...
...Nowhere is the struggle to eke out a minimal level of subsistence more starkly visible than in Peru's recent infant mortality figures, which range from 120 to 230 deaths per thousand live births according to region...
...Beladnde's economic team, many of its members drawn from the ranks of Peru's international business class, imagined that offering foreign investors carte blanche would bring them flocking as it had before...
...Peru's trade lines, which were $800 million in 1983, today stand at some $250 million-roughly equivalent to two months' worth of imports...
...holdings without "prompt and adequate" compensation...
...In 1977, under IMF pressure to slash public expenditure, the military government made heavy cuts in exploration and development by the state oil company (PETROPERU) and froze funds for a number of planned mining projects...
...Writing in the most recent report of the Inter-American Development Bank (IDB) on Economic and Social Progress in Latin America, Albert Fishlow summarizes this "neo-structuralist" approach: The mood of the region is not in favor of development strategies which preclude a state role, but leans rather toward reconstruction of an effective developmental state...
...Astute as well as elusive, Garcia offered his supporters a sense of purpose rather than a program, a state of mind rather than a project, inspiration rather than analysis...
...The Andean Report, November 1985...
...Reid, Paths to Poverty, p.81...
...The World Bank, not surprisingly, has pointed out that temporary interventions such as price controls or emergency employment projects may "circumscribe the government's ability to raise Peru's long-term efficiency and growth...
...In each case, the benefits fell to the governments that took their place...
...Like everyone else, he is simply trying to keep his country afloat...
...3 2 By 1984, Peru's total debt stood at about 85% of GDP, compared to the Latin American average of 54...
...Julio Cotler, "A Structural-Historical Approach to the Breakdown of Democratic Institutions: Peru," in Juan J. Linz and Alfred Stepan, eds., The Breakdown of Democratic Regimes: Latin America (Baltimore: Johns Hopkins University Press, 1978...
...Given that earlier attempts to break the mold only ended up strengthening it, by resorting to costly foreign borrowing which in turn led to IMF stabilization plans, Garcia's determination to chart a new course is clearly one of APRA's greatest challenges.GARCIA'S PERU GARCIA'S PERU In regional terms, Peru stands with a number of newly democratizing countries in its search for stateled remedies to the severe economic problems facing Latin America in the 1980s...
...Some local critics have suggested that the clampdown is every bit as recessionary as the strategies recommended by the IMF, if not more so...
...What occupied most of his time, though, was the task of changing APRA's public image as a closed and intolergroups it had never reached: businessmen, skilled workers and intellectuals, and "the broad sectors of society who belong to institutions which the political parties must reach out to and win over . . the hundreds of clubs in the provinces, and in Lima itself, as well as religious, economic and local groups...
...The financially demanding irrigation schemes, which remain in APRA's capital budget, are another cloud on the horizon, threatening to drain resources from small and medium producers...
...And with the political will to enforce traditional solutions all but absent, the strictly economic arguments for orthodoxy have also become less convincing...
...The flipside of this optimistic prediction, however, can be found in the latest World Bank report on Peru...
...ABOVE ALL, THIS MEANS OVERCOMING Peru's age-old curse of centralismo, the abandonment of the jungle interior and the traditional agricultural sierra in favor of the more highly developed coastal economy...
...Everyone simply calls him Alan...
...In his first months in office, Garcia has offered a loose amalgam of redistributional and nationalist measures...
...AID survey revealed that only three Third World countries-all of them in the Middle East-devoted a higher percentage of their gross national product and central government expenditures to defense...
...Garcia also understood that this meant seizing the political middle ground, both inside and outside the party...
...And APRA's social democratic approach-for which there are few historical precedents in Peru, and even less of a fiscal base--could rapidly boil down to living with past mistakes...
...Peru followed these large purchases of aircraft and ground equipment with smaller acquisitions from West Germany and Italy...
...APRA opened its doors to new members who would lend prestige to the party, and set out to win the backing of the masses of ordinary voters to whom the precise content and coherence of a political program is of little interest...
...Oscar Ugarteche, Teoria y prdctica de la deuda externa peruana (Lima: Instituto de Estudios Peruanos, 1980), p.28...
...The more respected Lima pollsters estimate that he currently commands a 90% vote of confidence, with his stirring message to the people that they are "modem heroes...
...Garcia's vehement rejection of IMF orthodoxy, which earned him a formal rebuke from Secretary of State George Shultz at the 40th anniversary celebrations of the United Nations, is merely the latest chapter in a long-running saga of Peru-IMF clashes...
...3 5 These figures suggest a naivete in how Peru has set about attracting private capital...
...2 ' It is the public enterprises which provide the backdrop for much of this wheeling and dealing...
...The man who reaches Government Palace may be president: the path to power is often carpeted with gold and rifles...
...Although the first military government did radically alter the traditional control of the oligarchy, Peru is still dependent on private capital-both domestic and foreign-for oil exploration and production and the development of local industry...
...SOLUTIONS WILL NOT COME RAPIDLY...
...HE INTENTION BEHIND GARCIA'S 10% ceiling on debt payments is to enable Peru to honor its obligations to foreign governments and major multilateral lenders, such as the World Bank and the IDB, and to keep up on food import debts and regional trade agreements...
...During the 1970s, approximately 50% of loans were sunk into public investment projects and 30% into defense, while 18% went toward refinancing and the remainder was spent on imports of food and petroleum...
...2 On the other, his economic team of free marketeers-the "equipo dynamo"-vowed to rationalize the economy by reducing inefficient state intervention and making the most of Peru's comparative advantages on international commodity markets...
...Having seen the writing on the wall, the Central Reserve Bank withdrew Peru's assets from U.S...
...After failing to reach an agreement with Belco, Garcia arbitrarily transferred the company's $400 million in Peruvian assets to PETROPERU...
...The combined impact of these policy miscalculations and volatile world prices brought a slump in copper exports from $752 million in 1980 to $440 million in 1984...
...creditors...
...29 T HIS TIME AROUND, THE MAIN DIFFERence is that international private finance will no longer be waiting in the wings, as it was when Beladnde returned to power in 1980...
...4 3 At the time of the ruling, Peru's overdue and pending debt payments were estimated at 170% of export revenues, while Central Reserve Bank net currency reserves were some $1.3 billion...
...It is also an effort to revive the nationalist and reformist themes of the Velasco years (1968-1975), which faltered for want of a cohesive base of political support and a comprehensive economic strategy...
...IT IS HARD TO IMAGINE THAT PERUVIANS could actually be poorer, or income distribution more unequal, than when the military took power...
...Despite the growing scarcity of external financing in the 1980s, international lenders clearly found Belatinde and his market-oriented team more palatable than their "revolutionary" predecessors...
...At this point, however, it is entirely possible that Peru has passed the point of no return in taking the painful orthodox cure...
...Whereas most credits fell due in five to ten years, the average gestation period for the major projects ranged from nine to 30 years...
...In 1983, manufacturing was down by nearly a fifth, and by the end of Belauinde's term, local industry was operating at just 40% capacity...
...An annual population growth rate of 2.5% continues to put pressure on a shrinking labor market, while health and education programs consistently take a back seat to mammoth capital-intensive ventures...
...Reid, Paths to Poverty, pp.100-102...
...She acknowledges the many helpful comments and suggestions from Julio Cotler, Philippe Faucher, Robert Roth, Oscar Ugarteche and the NACLA staff on earlier versions of this article...
...At present, APRA is constructing a new protectionist framework to promote local industry and non-traditional exports, and attempting again to strike fresh terms with foreign capital...
...Faced with rising food imports and an extreme scarcity of fertile land, successive governments of the last 15 years have seen large-scale irrigation schemes REPORT ON THE AMERICAS 18E No cushion for falling wages as the basis for a new economic "takeoff...
...Beneath this advice, of course, lies the conviction that Peru, plagued by Maoist guerrillas, could be the next domino to fall...
...Beset by economic chaos and policy errors, Belatinde was a lame duck by early 1984-more than a year before the next presidential elections...
...If Garcia's defiance has done little to endear him to the Reagan Administration, it has ironically captured the sympathy of the influential ultraconservative Heritage Foundation...
...This strategy is coupled with a new micro-regional development fund, establishing special councils to address a range of social problems...
...The Andean Report, November 1985...
...By the late 1970s, the military conservatives found REPORT ON THE AMERICAS 14)UNE 1986 15 JUNE 1986 15 themselves similarly discredited, largely as a result of the harsh impact of their economic liberalization on the working population...
...Such was their political autonomy that, until the borrowing crunch of 1983-1984, they had been quite free to seek their own short-term loans on international capital markets to help finance internal deficits and lagging public works projects...
...Before long, the populist elements of the Popular Action program, and all attempts to redistribute wealth, were in rapid decline...
...House of Representatives, Committee on Foreign Affairs, December 1980, pp...
...The additional room for maneuver which the new rulers inherited, however, tended to lead only to renewed delusions of development grandeur on the part of both govemrnment borrowers and international lenders-that is, until the next balance of payments crisis came around...
...From the banks' viewpoint, the move shifted Peru out of the lightweight status of "tacit" non-payment, and into the much more serious category of semirepudiation or default...
...and May 17, 1985...
...By 1983, however, after at least six years of policies aimed mainly at courting the private sector, the figure had slumped again to $38 million...
...and APRA, "Aprendamos a vivir con lo nuestro" (Lima: CONAPLAN, 1985...
...He has also attempted to rein in the high degree of autonomy which the armed forces enjoy, particularly in the southern Andean Emergency Zone, by sacking officers accused of human rights abuses and shaking up the top levels of the military command...
...Measures such as the liberalization of foreign exchange and import controls, drastic reductions in domestic demand and kinder terms for foreign investors have all succeeded in clearing up liquidity and balance of payments crises in the short term...
...Gradually, however, the reformist elements of the military program were eclipsed by more conservative sectors of the armed forces, who favored a return to free market economic policies...
...head, and provoked a reformist faction within the military to overthrow then-President Fernando Belatinde Terry...
...Today, Peru finds itself in a paradoxical position: perhaps the region's greatest abuser of military spending, it is also the strongest advocate of regional disarmament...
...Besides the historical imperative to turn to market solutions in Peru, this is, of course, the main cure prescribed by the IMF and the World Bank for countries experiencing severe economic adjustment problems...
...T HE APRA GOVERNMENT SPEAKS OF charting an alternative path to economic recovery, without IMF intervention...
...Against the backcloth of a bleak debt-ridden future and an economic crisis which many say has surpassed the Great Depression of the 1930s, Garcia's abstract promises of a "democracy of bread and freedom" have taken him a long way...
...At the top of their agenda was reversing the agrarian reform laws and withdrawing state supports in pricing and marketing...
...But Peru's last three major doses of austerity (in 1967-1968, 1977-1978 and 1983-1984) have all meant the kiss of death for the regimes that implemented them...
...At the same time, however, Occidental did commit itself to a $267 million oil exploration program and agreed to pay Peru an additional $90 million in taxes...
...So far, the decision to honor multilateral and official commitments while applying a selective moratorium on interest payments to the banks has fended off threatened sanctions...
...1 8 2 - 1 8 3 . 27...
...Juan Velasco and the more radical elements within the military, public investment and state expansion became the primary means of pursuing the regime's goals...
...The ruling was accompanied by the customary threats of trade and aid sanctions, though in fact only 18% of Peru's total $14.3 billion debt is due to U.S...
...Reid, Paths to Poverty, pp.84-88...
...Beladinde plunged ahead with yet another series of massive ventures, concentrating state investments in huge hydroelectric plants and reviving his wistful 1960s dream of driving a highway C E uranolose projects, extravagant price tags through the jungle to connect the country from north to south along the eastern slopes of the Andes...
...His Agricultural Promotion and Development Law of 1980 made no mention of the 4,000 campesino communities scratching out an existence in the sierra...
...Alva Castro, "El futuro comienza hoy," p.57...
...Finally, the steady hardening of international market prices for Peru's primary mineral exports has brought a renewed desire to break out of the dependent, exportled model once and for all...
...198625 I IL JUNE 1986 25ReCt4 op...
...2 4 As initial financing ran out in the first year, the project has muddled along at about 30% of construction capacity, constantly in search of new credits...
...The grandiose Majes irrigation project on Peru's southern coast is one of Latin America's classic white elephants...
...Luis Alva Castro, "El futuro comienza hoy" (Lima: Cambio y Desarrollo, 1985...
...APRA's first ten months in office have brought the rather uncertain "10% solution" to the debt, as well as a set of "social democratic" measures with broad popular appeal-cutbacks on arms spending, development aid to the flagging agricultural sector and emergency relief to the most impoverished...
...Yet a recent World Bank memorandum on Peru concludes that "the overwhelming majority of Peruvians are markedly worse off than in 1970...
...IF major multinational firms were reluctant to invest in Peru under the favorable terms offered by Beladtnde, they are hardly likely to come running in today's more confrontational atmosphere...
...William Bollinger, "Peru Today: The Roots of Labor Militancy," Report on the Americas, Vol.XIV, no.6 (NovemberDecember 1980), p.31...
...In the 1960s, the first Belatdnde government introduced a mild agrarian reform and a skimpy rural aid program entitled Cooperaci6n Popular...
...IDB, External Debt and Economic Development in Latin America (Washington, D.C.: IDB, 1984), pp...
...9 In the 1960s, there had been only a handful of state corporations...
...T HIS LATTER HOPE SEEMS REMOTE...
...Sendero Luminoso has split the Left: you can see the result in the way the Left talks: on one hand, a reformist, social democratic language close to what we preach in APRA...
...Carol Wise, "Peru: Financiamiento externo, sector pdblico y formaci6n de capital, 1970-1980," Socialismo y Participacidn (Lima), no.28 (December 1984), p. 7 0 . 22...
...In the absence of a more explicit and coherent strategy that addresses the major components of the political economy-interest and exchange rates, public and private investment, trade and fiscal policyAlan Garcia's current search for an unorthodox solution to Peru's problems might well turn out to be a false start...
...To many observers, his rise to power since 1980 has seemed a fairytale...
...In short, nobody comes out ahead...
...holdings nationalized earlier...
...December 14, 1984...
...So too, it appears, is the strategy for easing out of the freeze without setting off another round of hyper-inflation...
...6 But as the rhetorical dust begins to settle, Garcia's attempt to forge a new model for Peru's political economy can be located in its proper context...
...With a steady decline in world mineral prices after 1979, not even the most inviting terms could entice substantial investments...
...Felipe Portocarrero, Inversidn pfiblica y gestidn econdmica (Lima: Fundaci6n Friedrich Ebert, November 1983...
...The impact of the agrarian reform was also confined largely to the coast...
...The resulting fiscal crisis of 1967-1968 and the austerity measures that accompanied it were a major factor in Beladinde's downfall...
...Rosemary Thorp, "The Evolution of Peru's Economy," in McClintock and Lowenthal, eds., The Peruvian Experiment, p. 5 0 . 24...
...Aid: Priorities and the Competition for Resources," Report Submitted to the U.S...
...For the moment, these remedial measures appear to be the main thrust of Peru's much talked about economic reactivation...
...But Alan Garcia was convinced he could be president at the age of 36...
...Beladinde's major venture, the Tintaya copper mine near Cusco, ended up being financed largely by the state...
...Most of the IDB money was never disbursed...
...We must distance ourselves from the Left," Garcia said, "and appeal to the large numbers of people who support it...
...So far, the bulk of new measures have been aimed at reviving production in the stagnating agricultural sector, which APRA has targeted as the key to Peru's economic recovery...
...However, someone who can win people's hearts and reach Government Palace, as Alan has done, is well on the way to combining power with real authority...
...To claim that this means the "reconstruction of an effective developmental state" lends the APRA program a coherence that is simply not there-and may not be in the near future, given the context of economic crisis and Garcia's slender room for maneuver...
...Latin America Economic Report, October 31, 1985...
...His election put an end to a bitter leadership struggle that had raged be- tween the party's left and right wings since the death in August 1979 of Victor Ratil Haya de la Torre, the man who had founded APRA more than fifty years earlier...
...Yet even before Sendero gained momentum, the outgoing regime of the armed forces had reached a tacit understanding with Belatinde over conditions for a transition to civilian rule...
...7. Albert Fishlow, "The State of Latin American Economics," in Inter-American Development Bank (IDB), Economic and Social Progress in Latin America (Washington, D.C.: IDB, 1985), p. 1 4 5 . 8. Alva Castro, "El futuro comienza hoy...
...As a further precaution, Peru recently called back from abroad some $500 million in gold and $200 million in silver, which are now housed in the vaults of the country's Central Reserve Bank...
...Under conditions of severe retrenchment, Peru made matters worse by choosing to maintain the large, foreign-funded projects and sacrifice important long-term development goals...
...Garcia's idea, however, is to buy time to formulate more flexible long-term approaches to a socially oriented mixed economy...
...Several studies have concluded that it is not cost-effective...
...Quehacer (Lima), no.37 (October-November 1985...
...However, the other key to breaking the insidious cycle of military escalation and human rights abuses will be to devise policies that finally address the source of the violence that engulfs Peru-poverty...
...2 6 Though Belalinde's equipo dynamo vowed to sell off state firms to the private sector, their number actually grew between 1980-1985...
...The poorest 25% of the population 16REPORT ON THE AMERICAS have seen their incomes fall twice as much as those of the richest 10...
...Though both projects were on stream in time to cash in on the brief price boom of 1979, a huge gap remained between projected earnings and actual foreign exchange receipts...
...New bounds of state presence have to be defined...
...t4 AErica*s GARCIA'S PERU traditional agriculture starved of capital, and pricing policies clearly favoring urban consumers over rural producers, sierra farmers actually ended up worse off than before.'" THOUGH REGIONAL DISCONTENT MOUNTED, culminating in a 1977 general strike, Belalinde and his equipo dynamo quickly dropped the decentralist rhetoric and declared their intention to throw the regional problem back to market forces...
...Garcia is now demanding that all three companies return the funds by way of new exploration contracts...
...Neither the fat commissions and lucrative deals, nor the projects themselves, will be so readily available...
...5. Business Week, September 30, 1985...
...But the highland cooperatives never came into their own, because state agricultural activity was mainly devoted to grandiose irrigation schemes...
...in the 1980 election, Garcia had been a prominent backer of the party's leftist candidate Armando Villanueva...
...3 3 Twenty years of debt-led expansion have produced neither the finely tuned state capitalist model sought by the Velasco regime, nor an effective developmentalist state geared to promoting private investment and Peru's relative advantages on foreign markets...
...NNUAL ARMS SPENDING OVER THE LAST five years has averaged from $300-500 millionnot counting a controversial deal to buy 26 Mirage jet fighters from France at a cost of $30 million apiece...
...In a recent working paper, the think tank cautioned "that the U.S...
...When Beladnde ceased payments on Peru's debt in 1984, as a result of the severe fiscal crisis in the state sector, debt servicing approached 90% of export earnings...
...On Peruvian arms spending, see Latin America Regional Report: Andean Group, October 5, 1984...
...The Left is not the problem...
...There is no doubt that military spending contributed heavily to the budget crises of 1977-1978 and 19831985...
...Peru's rural Andean poor are still among the worst off of all Latin Americans...
...In 1968, the cumulative failures and redistributive injustices of the country's development model came to a Carol Wise is a doctoral candidate in political science at Columbia University and is currently a visiting researcher at the Instituto de Estudios Peruanos in Lima...
...Yet sluggish growth and rampant inflation, which approached 250% in 1985, have not affected all groups equally...
...As early as 1977, Le Monde questioned whether Peru might have become "the IMF's Vietnam...
...Instead, the Army, Navy and Air Force appear locked in a contest to outspend each other...
...To provide state support for export development and an incipient local manufacturing industry, as well as to respond to mounting demands for the government to deliver on some of the reforms it had promised, the Peruvian public sector entered a period of rapid expansion...
...12 Others are more skeptical, noting that Garcia has not yet fulfilled his campaign promise to carry out a fullscale tax reform that taxes the rich in favor of the poor...
...The Velasco period was the high point of Peru's "no strings" spell of external financing, and it is possible to trace the flow of just about every dollar borrowed into the public sector...
...This time around, it is highly unlikely that populist rhetoric alone will be enough to keep the countryside on hold...
...Why this apparent irrationality...
...Absurdly, only a fraction of these sums have been used to buy counterinsurgency equipment...
...One offered incentives to regional investors, while the other provided financial support to regional banks...
...Neither captured a large enough share of state funds to have a noticeable impact...
...Peru's decline, it asserts, is "mostly as a result of economically damaging reforms, and unsatisfactory economic management.' In all fairness, Peru's recent troubles probably have both domestic and external roots...
...Former aprista Enrique Chirinos Soto, now a respected conservative, put Garcia's success in a nutshell: "Nobody talks about Alan Garcia," he noted...
...2 In 1980 arms purchases accounted for about a third of public sector disbursements...
...also The Andean Report, June 1983...
...aid and advice for Peru should aim at economic growth, not austerity...
...we are going to suffer many difficulties, but I will be beside you as another soldier, another worker, another street vendor...
...Chirinos also points out, "There is a difference between being in power and exercising real authority...
...In just four years, Belalinde ran through four economy ministers and left behind a public sector budget deficit of around 8% of GDP...
...Widespread nationalizations and anticapitalist rhetoric helped produce a negative balance of $79 million in private direct investment by 1970...
...And while Peru is commonly perceived as belonging to the "Southern Cone neoliberal" camp under Belainde, public sector spending in real terms reached a new peak by 1982...
...0 The return of civilians to power did nothing to halt the trend...
...2. Julio Cotler, "Democracy and National Integration in Peru," in Cynthia McClintock and Abraham F. Lowenthal, eds., The Peruvian Experiment Reconsidered (Princeton: Princeton University Press, 1983), p. 3 7 . 3. "President Garcia Delivers Inaugural Address," Foreign Broadcast Information Service (FBIS-LAM), July 29, 1985...
...In terms of APRA's own history, his emerging program clearly reflects the more progressive populist and anti-imperialist tenets on which the party was founded in 1924...
...Over the same period, oil earnings declined from $792 million to $589 million-a tendency which recent price drops can only worsen.37 Industry did no better...
...The U.S...
...Besides shifting trade toward a cash basis, Peru has entered a number of debt-servicing barter agreements with foreign government lenders, including the Soviet Union...
...Investment in agriculture was dominated by four huge irrigation schemes, located mainly on the coast...
...Belatinde eagerly fulfilled his side of the bargain...
...This dynamic, based on heavy foreign borrowing, seriously faltered by 1977...
...As a result, there is some confusion over whether assessments of APRA's repayment strategy should take into account subsequent in-kind barter arrangements and private debt payments...
...Rejecting Peru's traditional laissez faire model, with its heavy orientation toward exports, the military at first experimented somewhat unsuccessfully with less conventional approaches to development, such as agrarian reform, workers' participation schemes and massive state intervention in the economy...
...5 4 Instead, Beladinde simply repackaged his old Cooperaci6n Popular program, allocating about 1.5% of annual public investments to rural development aid...
...APRA figured-correctly, as it turned out-that it was their votes which in the end determined the outcome of an election...
...Already, after declaring that "the era of huge projects is over," APRA's proposed 1986 public investment budget is running at 9% to 10% of gross domestic product (GDP)-up from 8.6% in 1984, the last full year of the Belaiinde government...
...Latinamerica Press (Lima), December 20, 1984...
...The response of other local and foreign investors will depend largely on the final outcome of the oil negotiations and the results of the price freeze, which has lasted longer than Garcia at first intended...
...It was this widespread disenchantment which fostered the return to civilian rule in 1980...
...And though the IMF and the banks both threatened to withhold loans when they discovered "hidden" outlays on defense, the end result was little more than a slap on the wrist...
...For one thing, the political fallout of the most recent round of austerity measures was such that the Belatinde team felt obliged to doctor the figures before an IMF monitoring team arrived in Peru...
...Robert Devlin, "Transnational Banks, External Debt and Peru," CEPAL Review (Santiago), August 1981, p. 1 5 6 . 18...
...1 Between 1968-1978, just 23 projects consumed over half the public budget...
...The exception came when Peru fell behind on loan payments for U.S...
...FitzGerald, The Political Economy of Peru, 1956-78: Economic Development and the Restructuring of Capital (Cambridge: Cambridge University Press, 1979...
...Average real incomes have been pushed 19% below their 1971 level by a combination of erratic growth, inflationary budget deficits, a highly regressive tax structure and heavy state investments in massive public works projects that have failed to generate sufficient employment or income...
...Difficult as [the] shortterm economic situation might appear," says the Bank, "Peru's longer-term problems--deep ethnic, social and economic divisions, rapidly rising population, poor growth and severe structural weaknesses-are far more serious and intractable...
...Given this dismal and irrational outlook, Garcia's 10% plan is one of the few rational responses...
...Oscar Ugarteche, El estado deudor: Las nuevasformas de dominacidn internacional, Peru y Bolivia, 1968-1984 (Lima: Instituto de Estudios Peruanos, forthcoming), chapter III...
...as a consequence, once a large project has reached the feasibility stage, it is almost impossible to avoid implementing it...
...In the words of one local economic analyst, Felipe Portocarrero, Such groups typically comprise international financial sources, the consulting and contracting firms and their local associated groups, as well as their national and international suppliers...
...APRA designed its strategy on this basis, standing aloof from ideological debate and calling on Peruvians to unite in a crusade of national salvation...
...His book, too, The Different Future, is part of the strategy...
...To his credit, Garcia has stood up to the Air Force by reducing the number of Mirages to be purREPORT ON THE AMERICAS *Garcia's initial stated intention was to limit the 10% plan to payment of the medium- and long-term public debt...
...Though local estimates of actual repayments vary widely, and are politically charged, recent Central Bank figures show that from August to October 1985, long-term public debt payments consumed about 20% of export earnings, and JUNE 198623 JUNE 1986 23GARCIA'S PERU private debt a further 10%.* By December, there were strong allegations that the combined total had jumped to more than 50% of export earnings.46 What does seem clear is that Garcia is far from the "maverick" of international finance depicted by Business Week...
...Garcia has moved quickly on campaign promises to restore land reform and price supports for small farmers...
...by 1980, the number of firms had skyrocketed to 175.20 T HE STATE'S WEAK ADMINISTRATIVE structures and lack of entrepreneurial experience, coupled with the need to generate foreign exchange by stepping up the pace of development in complicated ventures in petroleum and mining, meant that gigantic projects in the productive sector rapidly swamped the public investment program...
...To make matters worse, Peru has yet to arrive at the more sophisticated income-indexing formulae which have served as a cushion for the poor in other inflation-plagued countries such as Argentina and Brazil.'" How is Peru going to take care of its own...
...Massive currency devaluations can work only if there are prospects of enhancing the volume of exports-which is not the case in Peru...
...The rule of thumb is that trade credit lines should be sufficient to cover at least three months' worth of imports...
...April 5, 1985...
...3 Yet the price boom vanished as quickly as it had come, leaving behind the same badly organized ministries and the same feeble planning apparatus to deal with the same cyclical economic problems...
...In the words of one associate, he dedicated himself "to study every day, to try and understand Peru and the tendencies of its different social classes, to balance his personal desires with reality and the opportunities that were open to him...
...Business Week, September 30, 1985...
...For two decades, then, the pattern has been to venture away from the past-whether through Belatinde's moderate dose of Keynesian intervention in the 1980s or the military's more radical reforms of the 1970s-only to turn back to the market when the alternative fails...
...5 Not surprisingly, the report concurs with the IMF that the cure-unpleasant but necessary-is a significant currency devaluation, increased import liberalization, debt rescheduling and large cutbacks in the public investment program...
...Already, the Agrarian Bank is channelling credits to peasant communities in deprived areas, and agricultural production is expected to pick up considerably over the next year...
...Inter-Agency Committee of bank regulatory authorities duly handed down its official "valueimpaired" ruling on Peru's debt in November, obliging U.S...
...Both assumptions proved disastrous...
...As time will surely tell, the "10% solution" is hardly the basis for reactivating the economy...
...M. Vellinga and D. Kruijt, "The State, Regional Development and Regional Bourgeoisie in Latin America: Case Studies of Peru and Colombia," Inter-American Economic Affairs, Vol.37, no.3 (Winter 1983...
...With hindsight, the bankers' willingness to lend so much to Belaiinde is one of the more telling blindspots in their recent behavior...
...United States Agency for International Development, "Economic Development Versus Military Expenditures in Countries Receiving U.S...
...3 The oil companies did return-if not en masse-but exploration failed to locate the fresh reserves on which Peru had pinned so many hopes...
...Anatole Kaletsky, The Costs of Default (New York: Priority Press Publications, A Twentieth Century Fund Paper, 1985...
...Even as Garcia speaks of welcoming foreign capital and industrial technology, the oil industry is pointing to Peru's unresolved dispute with the New York-based Belco petroleum company, and invoking the potentially damaging effects of the Hickenlooper and Gonzales amendments, which mandate economic retaliation against governments which confiscate U.S...
...In his inaugural address on July 28, 1985, President Alan Garcia P6rez told the Peruvian Congress, We must bear in mind that it is later than we think, that the crisis is more serious than we think, and this compels us all to take the daring path of revolution to seek independence, development and social justice.' Garcia claims that his "revolution" is modeled on Felipe Gonzdlez' social democratic Administration in Spain...
...see also, Banco Central de Reserva del Peru, El proceso de renegociacidn de la deuda externa: 1978-1983 (Lima, 1984), anexo 7. 20...
...one was that the military should have full control over its own budget...
...F OR ALL THE TALK OF STATE-LED RECOVery, it is Peru's public sector which presents one of the most formidable obstacles to reform...
...With the ascent to power of Gen...
...9. "Special Supplement-Peru: Latest World Bank Report," The Andean Report, October 1985...
...Author's interview, Office of Project Investments, Central Reserve Bank of Peru, June 1984...
...The Cerro Verde copper mine captured the bulk of state investments in mining, while industrial investment was concentrated in steelworks expansion, the construction of newsprint and cement factories, and a continued high level of imported inputs to spur the growth of new industry...
...By the end of the military period Peru looked less like a new model of economic and sectoral integration than a textbook case of dependent development...
...By 1980, when military rule ended in Peru, a U.S...
...The Andean Report, October 1985...
...Garcia's first step of all, announced at his inauguration, was to limit interest payments on the external debt to 10% of export earnings and to reject the IMF as the formal mediator between Peru and its consortium of private lenders-an announcement that led Business Week to nickname Garcia the "maverick" of international finance.' In its first official statement on the new regime, the U.S...
...6. The Andean Report (Lima), November 1985...
...The Heritage Foundation, "Peru's Fledgling Democracy Needs U.S...
...The New York Times, September 3, 1985...
...By 1975, private direct investment had risen to $316 million...
...The Andean Report, June 1984...
...There is a major flaw, however, in Garcia's debt strategy: even to honor repayments on those debts that will guarantee continued access to foreign exchange and development aid will cost Peru more than 10% of its annual export earnings...
...Peru, however, chose to go on thriving on its diverse raw material export base, which enjoyed a comparative advantage on interna16 REPORT ON THE AMERICASI ant party, a sect of fanatics, and opening it up to social A LAN GARCIA BECAME SECRETARY general of APRA in October 1982...
...The dispute escalated in late December...
...Peru's Ministry of Economy and Finance and its Congressional Budget Committee, however, seem to have lost sight of this: their proposed public investment budget is right on par with the most maniacal phase of spending under Belatinde in the early 1980s...
...Bank and suppliers' credits, the bulk of them accumulated after 1980, today account for 60% of public indebtedness...
...Garcfa's response to the gravy train in the state sector is "no more official credit cards...
...In the mid-1970s, first Velasco and then Morales Bermtidez claimed that Peru needed to modernize its outdated ground and air forces and respond to the security threat posed by Chile, which was busily rearming after the 1973 Pinochet coup...
...The first was an excellent publicity campaign which projected the image of a youthful and intelligent politician, an eloquent and honest reformer who tirelessly upbraided the government for its errors, a man who spoke out for social change but at the same time was independent of the Left...
...But effective leadership is a different matter: for that, you need to win the hearts of the people...
...8 To understand the thrust of the APRA program, and its potential for realizing its "social democratic" goals, means looking back to the cumulative legacy of Garcia's predecessors-the Bela6inde government of 1980-1985 and the two military regimes of 1968-1980...
...The Peruvian military then turned to Moscow, which obliged with more than half a billion dollars' worth of materiel on quite favorable terms...
...Garcia left no stone unturned...
...Peru's creditors charged high interest rates and demanded repayment periods that bore no relation to the timeline of the projects they financed...
...Perhaps nothing demonstrated the incapacity of the Peruvian state more sharply than REPORT ON THE AMERICAS 20its response to the offer of $500 million in development aid from the IDB in 1983 in the wake of a devastating year of floods in the north and drought in the south...
...As a result of its 1978 agreement with the IMF, and the international price boom that followed, the military regime did technically bequeath Belatinde what he needed to obtain the banks' "seal of approval"--reduced inflation, a balanced budget and a healthy level of international reserves...
...Majes is five years behind schedule...
...House of Representatives, Arms Trade in the Western Hemisphere, Hearings before the Subcommittee on InterAmerican Affairs of the Committee on International Relations, 95th Congress, 2d session, June-August 1978, p. 1 9 . 50...
...Given the bleak alternatives-semipermanent depression on the merry-go-round of debt servicing or becoming an international pariah through default-Peru has joined a number of smaller and poorer Latin American debtors seeking another way out...
...Peru's largest private bank, the Banco de Crddito, owned by the powerful Romero-Raffo business empire, cashed in quickly on tax breaks, low inPeru's black economy is mushrooming The Andean region is long neglected terest rates and high inflation, and in 1981 alone increased its net profits by an incredible 78%.40 Estimates of Peru's annual export earnings from coca paste production range from $400-800 million...
...Latin America Economic Report, October 31, 1985...
...Only in early 1985 did the Army start purchasing large numbers of rifles and night-vision equipment for the anti-guerrilla operations which supposedly prompted the astronomical spending...
...Banco Central de Reserva del Perd, Notas Semanales, nos.39 and 45 (1985) and no.3 (1986...
...Patricia Salinas and Carol Wise, "The Regional Implications of Public Investment in Peru, 1968-1983," Latin America Research Review (forthcoming...
...The official rationale was that the external security threat of the 1970s had now given way to the internal menace posed by Sendero Luminoso...
...While more sympathetic to the APRA program than the more orthodox World Bank, they have suggested that Garcia should embark on a comprehensive development plan that seriously addresses the nation's ills...
...See also E.V.K...
...For a good analysis of this period, particularly Peru's problems with the banks and the IMF, see Barbara Stallings, "Peru and the U.S...
...Help," Backgrounder, no.446, July 23, 1985, p. 2 . 49...
...Garcia has so far fended off U.S...
...in 1982 and 1983 about a quarter...
...17GARCIA'S PERU tional markets.'" By the 1960s, however, this approach proved shortsighted...
...It is not an easy task to reconcile the diverse objectives and claims that a newly enfranchised civil society is vocalizing in many parts of the region...
...Garcia's first move toward sorting out this mess was a massive freeze of prices and cash accounts, modeled after the anti-inflation shock program adopted by Argentina in June 1985...
...Banco Central del Peri, Memoria, 1983...
...banks to set aside about 15% of their outstanding loans to Peru in mandatory reserves...
...Portocarrero, "Public Investment Programme," pp.449450...
...4 2 Last August, Peru froze Belco's local operations, along with those of the Oxy-Bridas consortium and Armand Hammer's Occidental Petroleum Company, on the grounds that over $600 million granted in tax breaks for oil exploration had gone instead on production...
...Although the waste and lack of budgetary accountability within them have been a target of criticism and reform since the more conservative second military phase under Morales Bermtdez, they continue to flourish...
...RaWil Gonzdlez JUNE 1986 80 o, D o d WHO IS ALAN GARCIA...
...This second major change of regime was both an indictment of the prevailing economic orthodoxy and testimony to the difficulty of establishing any viable alternative in the long run.' The re-election of Belainde and his center-right Popular Action party in 1980 was a short-lived political masterstroke, with Belatinde playing up the potential for combining Keynesian and monetarist solutions to Peru's economic problems...
...banks before Garcia's inauguration and placed them in the Bank for International Settlements...
...While successive governments of the last 15 years have spoken of channelling at least a quarter of the fiscal budget toward social welfare projects, the figure has yet to exceed 15...
...Latin America Economic Report, October 31, 1985...
...The explanation lies, of course, in the array of special interest groups, both public and private, which sprang up in the turmoil of the late 1960s as fast as Peru's traditional oligarchy broke down...
...Nor does the World Bank share the current tendency to blame all dire indicators on the sharp regional downturn since 1982...
...In testimony to a congressional committee in November 1985, Assistant Secretary of State for InterAmerican Affairs Elliott Abrams described Peru's stance as "confrontational," and complained that "the rhetoric coming from Peru has been excessive...
...The second was Garcia's ability to create multiclass support, never favoring one sector over another, but appealing to his audience to work together to find common solutions to Peru's problems...
...On one hand, he promised to create "a million new jobs" by means of an expansive government construction program...
...Black Hawks in the last two years, at a cost of $6-7 million each...
...with two-thirds of the job completed, the new estimate is almost twice that amount...
...As in the military period, project spending took on a life of its own...
...sanctions by insisting that Belco was acting outside the law and depicting his December move not as an expropriation but a "transfer," for which Belco will be compensated once terms are agreed...
...The Andean Report, October 1985...
...Outgoing Economy Minister Silva Ruete went so far as to boast in 1980, "All the principal problems have been solved . . . by increasing our revenues rather than making cuts in expenditures...
...While all recent regimes have tried to achieve a mixed economy, Peru has yet to strike a balance between the presence of state, local and private capital...
...Michael Reid, Peru: Paths to Poverty (London: Latin America Bureau, 1985), p. 9 7 . 12...
...As late as 1984, Peru's Central Bank admitted it was unJUNE 1986 19GARCIA'S PERU certain just how much the state enterprises had borrowed...
...Peru-A Survey," Euromoney (London), June 1980...
...La Reptiblica (Lima), December 8, 1985...
...The Central Bank's dependence on these black market dollars became apparent in 1983, when Congress scrapped a previous regulation that all dollar deposits be declared locally for tax purposes...
...The state's share of new investment shot up from 29% in 1968 to over 50% in 1974.'8 By 1975, state ownership had virtually replaced foreign and domestic private capital in mining, oil, fisheries, electricity, most of the banking system and the entire marketing of exports...
...Cited in Rosemary Thorp, "The Stabilization Crisis in Peru, 1975-8," in Thorp and Whitehead, eds., Inflation and Stabilization, p.110...
...commercial bank credits were financing about 60% of public sector expansion...
...The Perils of Orthodoxy 1. One of the more interesting analyses of this dilemma can be found in Rosemary Thorp and Laurence Whitehead, eds., Infla- tion and Stabilization in Latin America (New York: Holmes and Meier, 1979...
...The danger here is that earlier efforts along these lines--such as Belatinde's Cooperacidn Popular and the regional development corporations set up by the military-promised more than they delivered...
...Alva Castro, "El futuro comienza hoy," p.135...
...The private banks have also cut back on trade credits, though this trend began two years ago when Beladnde fell behind on debt payments...
...The orthodox cure, as applied in the Peruvian case, has invariably planted the seeds of its own destruction...
...And for all its concern over episodes such as the Belco dispute, the Reagan Administration is likely to share enough of these fears to refrain from squeezing Peru any harder...
Vol. 20 • June 1986 • No. 3
