PERU Economic Wonders, Political Ills

...And as a part of Garcia's strategy to quell the increasing violence of the 1980s, the bulk of the measures were geared toward Peru's massively poor population...

...In fact, as the economic team sets about tackling the tax collection problem, cleaning up the state companies and waits for "investments to mature," ever more heterodox measures have hatched in the back rooms of the finance ministry and the national planning institute...

...Most private sector analysts insist that Garcia has basically shot himself in the foot by impulsively nationalizing the banks...

...Besides, from the start, the Peruvian program has borne the extra political baggage of offering "one last chance" to reverse the daily violence in which the country has become ensconced...

...Garcia's more market-oriented adversaries accuse him of burning the economy with high state spending that has artificially stepped up consumer demand...

...Although the Inti Plan provided what seemed to be Peru's first coherent development approach in years and a springboard for APRA's widespread victories in last November's municipal elections, there are signs that the prevailing heterodox logic has worn thin...

...Barrantes' friendship with Garcia and support for many of his policies finally put him at odds with the IU's more radical constituency...

...The measure gives foreign economic forecasters something more concrete to be gloomy about this year, as the payment capacity currently being discussed amounts to 15 times less than what has been paid out under the 10% plan...

...In other words, local entrepreneurs have so far responded enthusiastically to the initial reactivation measures...

...4, July/August 1985...

...My guess," says Iguiniz, is that rather than risking new investments, "industrialists will continue to squeeze industrial capacity to the maximum...

...Even some of Garcia's closest advisers admit that new investment projects probably are not likely to surpass $150 million this year...

...And even before the bank takeovers, the government controlled 80% of all credit...

...Tax revenues are at their lowest point in a decade, mainly due to export losses and sporadic collections, and Garcia's "supply-side" tax cuts did not generate the expected new revenues, as many firms fled into the "informal sector...

...The government has also tended to inject some of its more outmoded political tenets, ideas developed over 50 years ago by APRA founder Victor Radl Haya de la Torre, into the heterodox program...

...Originally a take-off on Argentina's Austral Plan,** Peru's anti-inflation shock treatment has come to include all but the kitchen sink...

...The APRA policy of setting highly unfavorable exchange rates and low investment priorities in mining, for instance, appears more linked to its condemnation of this sector as the locus of "enclave dependent development" than to an acknowledgement of minAPRA founder Hava de la Torre W cc 19 *Unlike orthodox economic programs, heterodox ones incorporate a variety of theory and approaches, including state intervention in the economy...

...Despite pessimistic projections by foreign economic observers, Garcia's series of sweepingly state-interventionist reforms helped bring about an 8.5% rate of growth last year-a high Peru has not seen since the post-Korean War boom of the 1950s...

...Government statistics register around 9,000 casualties and roughly 10,000 "terrorist" incidents since Sendero came above ground in 1980--one third of the latter in 1986 alone...

...liance (APRA) took office in July 1985, the state of the economy was so sorry that there was nowhere to go but up...

...Yet industry grew an astounding 15-20% last year, nurtured by newly applied government subsidies and tax breaks...

...Then, in a somewhat unexpected move, Garcia nationalized the banking system in late July...

...On top of labor's walkout, APRA's base of support became even more precarious with the resignation of Alfonso BarrantesLima's former Marxist mayor (19831986)--as leader of the six-party United Left (IU) coalition...

...Accordingly, policy debate has gradually shifted toward long-range talk of shaping a "modern and decentralized capitalist state" that can grow and assert its economic independence by linking agricultural development with new export-oriented industries...

...Barrantes' departure represents the loss of an important buffer between APRA and more extreme factions of the radical Left...

...but to throw its weight behind the investment program, or to pack it up entirely...

...The threat of further wage erosion and what labor leader Pablo Checa, assistant secretary of the General Confederation of Peruvian workers (CGTP),* points to as the government's "divisive maneuvers" and loss of political will to negotiate touched off a 24-hour full-scale national strike in May...

...Such fears were confirmed when last year's most profitable companies were required to purchase special treasury bonds for up to 30% of their 1986 profits...

...It thus appears that Sendero has recouped after last June's chilling mass execution of 270 militants by the armed forces in three Lima prisons, and is going after the Garcia regime with a vengeance...

...SeeArgentine Debt: Playing by the Rules, by Alfred J. Watkins, in Report on the Americas, Vol XIX, no...

...Meanwhile, executions continue as Sendero has reached into the middle and upper ranks of the APRA party and the armed forces, as well as the international banking community, for its victims...

...On top of bickering with the private sector over the bank nationalizations, APRA's economic team forged hastily ahead without completing its intended overhaul of Peru's antiquated tax system and poorly managed public enterprises...

...The combination of APRA's historically anti-imperialist stance and the drying up of foreign aid, loans and investment for Peru has also set a distinctly "inward-looking" tone to much of the current development debate, best expressed by APRA's favorite slogan, "learn to live with your own...

...This unsettling mix of rising inflation, revenue shortfalls, heavy state spending and over-heated consumer demand has Garcia's political opponents wondering out loud if this might end up like Brazil's Cruzado Plan,* which skidded out in less than a year after the Brazilian economy showed similar symptoms...

...Trying To Please All this, of course, hinges on the private sector, and whether it makes new productive investments by 19881989, when treasury reserves are expected to give out...

...For all the headaches and early signs of fragility of this "socially oriented" approach, Garcia and his inner circle insist that it is the only option left for dealing with these difficult political contingencies...

...Garcia's principal economic adviser, Daniel Carbonetto, admits that the most recent stages of the program are primarily political...

...Since Peru's plan made no pretenses about completely controlling prices, eliminating inflation or remaining current on foreign debt payments, the comparison does not hold up well...

...Carbonetto remains optimistic, arguing that it was the private sector, despite all the political and economic uncertainties, which rang up a 24% increase in investments over 1985 levels...

...While as of March 1986 the country's international reserves stood at a peak $1.5 billion, the reactivation has since taken on a life of its own beyond a mere pumping up of the economy with borrowed money...

...The plan did reduce inflation from 158% in 1985 to 63% last year, and this largely explains the private sector's recent enthusiasm...

...The Kitchen Sink Business confidence was also prodded along by APRA's heterodox* economic program-nicknamed the "Inti Plan" in the Lima financial press-in effect since Garcia took office...

...While at first the plan combined price controls, frozen exchange rates to clamp down on inflation with tax cuts and credit incentives to spur growth, the latest phase announced in early April encompasses everything from barter debt repayment schemes to a guarantee on production credits to farmers "for the next 20 years...

...This hunch is based on mounting insecurities about Peru's political stability and fears on the part of business that the government might still decide on more price controls and fewer tax breaks...

...The finance gap is even more probable since Peruvian businessmen have seldom been known for bouyant domestic investment without the backing of foreign capital...

...When Garcia and his center-Left American Popular Revolutionary AlCarol Wise is a visiting researcher at the Institute for Peruvian Studies in Lima and a frequent contributor to Report on the Americas...

...One of the off those local private investors whose participation is essential for sustaining the recovery...

...APRA's younger progressive wing and a few select economic advisers recognize that, in order to succeed, the economic program must move into a medium-term strategy which transcends the easy initial consumer-led growth to generate higher domestic savings and productive investments...

...Peruvian President Alan Garcia P6rez surprised everyone this year, including his own advisers, by making more than good on campaign promises to get the economy moving again in a "socially oriented" direction...

...It all adds up to a 1987 public budget deficit approaching 12% of gross domestic product, and a $583 million drop in net hard currency reMAY/JUNE 1987 7 0 0 0. 0 z 'C country's leading business executives and National Society of Industries director Juan Antonio Aguirre Roca recently told The Peru Report, an economic monthly, that the letters of intent are "dead," mainly because "businessmen are concluding that the route taken by the economic team so far is running up against its...

...Sendero documents uncovered by police intelligence sources over the past year express a deepened commitment to "mass work" and infiltration of "reactionary organizations," which in this case could mean labor unions, community and government groups, or just about anybody but themselves...

...Left-leaning critics have accused Garcifa of trying to please too many diverse groups at once, and organized labor complains that the government has forgotten its own...

...Yet, Catholic University professor and chief opposition economist for the United Left coalition, Javier Iguiniz, insists that a letter of intent is a far cry from having the money in hand...

...And, on principle, most of the private sector is unenthusiastic about the bank nationalizations and further state encroachment in the economy...

...And, international banking foes argue that it was limiting foreign debt payments to "10% of export earnings" over the past two years which made the boom possible by raising the country's financial reserves to record highs...

...limits...

...Exporters of cotton garments, for example, are presently paid a 60% bonus over the official exchange rate...

...Living With One's Own But, as Peru found out the hard way under the "radical" military regime of Gen...

...I think there are a lot of illusions around concerning the private sector's commitment to invest...

...Having bottomed out with a - 17% growth rate in 1983, previously idle factories are now running at 70% capacity, with some sectors registering their full potential for the first time in years...

...According to Peruvian Planning Minister Javier Tantale6n, this unprecedented level of concertaci6n, or negotiation, resulted in the signing of Alan uarcla: trying to please letters of intent with the private sector for "investments in industry, agriculture, and agroindustry which total about $400 million...

...Background research for this article was supported by the John D. and Catherine T. MacArthur Fellowship in Conflict, Peace and Security...

...REPORT ON THE AMERICAS 6ing's importance as a major source of national income...

...He said he sought to "democratize credit" and free up working capital for small and medium entrepreneurs...

...Garcia's seemingly irrational economic behavior could be seen as an effort to smooth these tensions, as the United Left has long been calling for nationalized banking...

...Nearly one-fifth of this year's revenue was projected to come from the sale of the less desirable state companies, which has been held up by quarrels over pricing and shady accounting practices...

...This assessment is substantiated by this year's capital flight figures, estimated somewhere between $600 million and $1 billion...

...The government's attempt to move to a less restrictive regimen of "price administration" has already shot annual inflation back up to around 100...

...A 28% jump in the Lima cost-of-living index, and the state's attempts to renege on its promise to set salary guidelines "at least 6% above the movement of prices," have added to these tensions...

...The combination of direct wage increases and indirect subsidies boosted traditionally depressed farm incomes by 30...

...In order to foster such stability, Carbonetto insists that, at a minimum, real wages must outpace inflation and the economy must grow at 6% annually...

...Growing Disenchantment While APRA's force-fed attempts at political accommodation have brought on growing disenchantment among grassroots groups, they have only further heightened the wrath of *Peru's largest labor union confederation...

...Although no specific mention is made of political assassinations, the documents do confirm the continued use of violence against "revisionists, opportunists and renegades" in targeted organizations...

...Although these sectors have registered the highest concentration of foreign capital, as recently as 1984 they have also accounted for 64% of all export earnings...

...Recognizing this, Garcia called together the country's business and industrial elite late last year to form a National Private Investment Board..Garcia's message was that, for the state to continue offering generous tax and credit incentives, the private sector would have to give in return...

...Urban workers, likewise, found themselves on the average 20% better off in real terms than they were in 1985...

...But price controls, which lasted much longer than planned, have led to stockpiling and scarcities...

...The most audacious measure concerns a new debt policy designed to free up more funds for attending to basic needs...

...XXI, no...

...Sendero...

...All this concern with courting entrepreneurs has done little to endear APRA to the base groups with which it claims to have the strongest ties...

...Indeed, the core dilemma for Garcia and his economic team is one which has plagued Peru for the last two decades: as necessary as a heterodox state-led approach has been for prompting economic reactivation, this model inevitably works to "scare7 MAY/JUNE 1987serves since last year's peak...

...Carbonetto maintains that the stakes have changed substantially in Peru during the 1980s, and that with "Sendero Luminoso on the outskirts of town," the business sector has begun to realize that it now has little choice *See Brazil: Stabilization Shock, by Helen Shapiro and Gesner Oliveira in Report on the Americas, Vol...

...2, March/ April 1987...

...As Pierre Vigier, a key economic adviser on loan from the European Economic Community points out, "heterodoxy has been successful in the short run, but it's now that it really has to prove its worth...

...Labor leaders were particularly miffed at receiving their invitations to participate in "tripartite negotiations" on the National Private Investment Board after the business-government investment deals had already been signed behind closed doors...

...This is most evident in APRA's identification of Peru's mining and petroleum sectors as "bastions of economic imperialism...

...Indeed, as of mid-1987, there is plenty for business to be scared about...

...There, producers have launched their own dramatic reactivation using cheap government controlled inputs, while evading price controls and taxes on their own output...

...Juan Velasco (1968-1975), making do with one's own requires that domestic entrepreneurs meet the state half-way with the necessary investments...

...A Classic Squeeze These crucial oversights, combined with a 20% drop in export earnings related to the slump in international oil prices, have set the stage for what former Central Reserve Bank President Richard Webb predicts will be a "classic liquidity squeeze...

...Toward this goal, the government has financed around two-thirds of agricultural production over the past year and set up a system of staggered exchange rates to promote priority export products...

...The goal is "to create the stable political environment necessary for development when you have kidnappings, an active Sendero Luminoso guerrilla problem and a government party representing not the business community but the middle and poor sectors of society...

...The strategy would uphold the 10% ceiling on debt service payments for Peru's $14.3 billion dollar debt, while further limiting them according to the nation's "capacity to pay" after domestic growth targets have been met...