Fujimori and the Business Class: A Prickly Partnership
Ochoa, Manuel Castillo
Peru's business community has been a key pillar of support for Fujimori's neoliberal economic program. In recent months, however, some Peruvian industrialists have begun to grumble about high...
...Instead of developing the country, they say, this process is further impoverishing it and making it more underdeveloped...
...Growing out of this rebirth of a business culture that extolled private initiative, the business sector-not only domestic firms, but transnational corporations too-was held in greater esteem...
...The financial sector has fared the best under Fujimori, with the construction industry in second place...
...The final result appeared promising: Peru's reinsertion into the international economy, renewed foreign investment, and the production of goods for export made by restructured and newly competitive national companies...
...Not all the business "voices" are as cantankerous as those of industrialists like Farah...
...7 (1995), published by DESCO...
...These exporters, grouped in associations such as the National Society of Exporters (SNE), encourage the government to focus on Peru's "comparative advantages" and to maintain a weak currency...
...stock market...
...the Chilean consortium Errazuris and Lusick have bought other national banks...
...These policy changes have reinvigorated the national financial system...
...Either way, there is little relief in sight for Peru's poor majorities...
...The trade deficit remained enormous...
...In 1989, the economy contracted by 11.7% while the following year, inflation peaked at 7,649...
...16 (April, 1996) published by the Central Reserve Bank of Peru...
...Then, there are the economic program's enormous social costs: alarming levels of unemployment, informal-sector work, and poverty...
...Carlos Bolofia, an economist who as Fujimori's minister of economics in 1991 and 1992 was one of the architects of Peru's stabilization and structural-adjustment program, named his recent book A Change of Course...
...In recent months, however, some Peruvian industrialists have begun to grumble about high interest rates, the weak domestic market, and dumping by big foreign companies...
...today, to the chagrin of the Peruvian private sector, they account for 12%.5 The Fujimori administration promised that state reform would usher in new institutions that would eliminate tax exemptions and special business supports...
...For example, the Chinese VOL XXX, No 1 JULY/AUG 1996 27REPORT ON PERU government bought Hierro-Perd for $120 million, and Telef6nica de Espafia bought the Compafiia Nacional de Tel6fonos for $2.1 billion...
...In making its decision, the government will take into account the concerns and interests of the Peruvian business sector, one of its key constituencies...
...With the IMF breathing down its neck, the government seems to be leaning towards the former option...
...The banks are lending money at high interest rates to attract foreign capital and to clamp down on inflation...
...For most Peruvians, Shining Path represented a political radicalism taken to its furthest extreme...
...The Fujimori regime carried out financial reform in an equally drastic fashion...
...Taking 1990 as a base rate of 100%, Peru's employment index dropped to 74.9% by the end of 1995...
...The second antecedent was the escalating violence wrought by the guerrilla insurgency which affected the entire population...
...In 1990, business taxes were 4.2% of GDP...
...Now, Murquez says, businesses must restructure their operations and become more disciplined...
...Finally, companies have laid off personnel in an effort to reduce operating costs...
...For example, the administration prohibited the unrestricted import of used cars, a policy shift which was condemned by orthodox economists...
...According to Mdrquez, Peruvian business people had grown used to the government giving them credits, tax exemptions, and investment incentives while shielding them from outside competition...
...The administration hoped to reduce the state's role in social and economic life and to eliminate the public deficit...
...It is estimated that of eve 10 Peruvians, one has stable work, sev are under-employed, and two are unemployed...
...While the number of people living in extreme poverty has dropped since 1990, poverty levels are still higher than they were in the "pre-crisis" years of the early 1980s...
...23 (February, 1996), published by the Consortium of Economic Research in Lima...
...erished population, and the strong currency that attracts imports...
...These two elements paved the way for the growing hegemony of proposals advocating large-scale business investment and neoliberal economic restructuring...
...Flight capital is notoriously fickle...
...2 In such an economy, any fluctuation in the exchange rate affects things like debt payments, making it preferable to leave the rate alone...
...partners...
...VOL XXX, NO 1 JULY/AUG 1996 25REPORT ON PERU state pervades national life to one in which the market and private investment have preeminence...
...it promISE The government believes it has two alternatives: reduce state spending state spen even more, or offset the trade deficit furt by restricting imports and devaluing the currency (at the risk of reigniting inflation...
...Only the oil companies, a big mining company and the ports remain in government hands...
...Over the last three years, international finance capital and Peruvian flight capital have been reentering the country...
...1993 was a particularly auspicious year as many foreign investors, turned off by the relatively low interest rates in the United States, parked their dollars in Peru...
...For example, the Banco de Cr6dito has set up a partnership with Morgan Guaranty Trust of New York, while the Weisse consortium has launched a campaign to introduce its shares on Wall Street under the auspices of its U.S...
...Others like Ricardo Mirquez, the country's vice-president and a prominent businessman in the textile industry, don't have much sympathy for the naysayers in the business community...
...The new trade policy has had three principal effects...
...Deregulation of controls on foreign investment was another component of the government's concerted effort to attract foreign capital...
...They favor higher tariffs in some cases, the promotion of industrial in which exports through lower taxes, and a weaker currency...
...The government didn't have to wait long for business to express its support...
...The principal axes of his administration's economic program m the Fabrica Moraveco in Lima hold a protest...
...While the government has had no qualms about firing thousands of state employees, it has been less diligent about cutting public spending...
...Meanwhile, the largest privatelyowned Peruvian banks have A woman in a Lima superma sought strong partners in the have flooded the country aft U.S...
...The absence of new public institutions and Fujimori's authoritarian style of governance reflect the shallowness and vulnerability of Peruvian-style democracy...
...His plan was to transform Peru's closed and protected economy into an open, free-market economy with few controls and regulations...
...Privatization-and the external opening in general-have led to the denationalization of both the banking sector and large companies...
...These industrialists, represented in associations such as the SNI and the the wall, Association of Exporters (ADEX), argue that high interest rates, weak rnment domestic markets, and dumping by big "foreign companies make wholesale w "letter restructuring of their operations imposwith the sible...
...Nevertheless, support for the government remains unwavering among business associations that represent banking, insurance and broadcasting since these sectors have benefited handsomely from the reforms...
...The Fujimori administration privatized state-run companies as another way to inject fresh capital into the economy...
...Finally, the Peruvian government is not able to generate savings either because, although it is collecting more money in taxes than before, this new revenue is siphoned off by infrastructure expenditures and payment of the foreign debt...
...These business people argue that since the government began to implement its structuraladjustment program in 1991, Peru has been undergoing a process of deindustrialization that will ultimately lead to long-term recession...
...Yet that sector is sending contradictory signals...
...The application of the neoliberal economic program, however, has not rooted out favoritism and co-optation...
...But, as analysts point out, the rate would have to reach 22% in 1996 in order for the country to sustain the same level of economic growth as in previous years...
...He spoke of a shift from a state that bestowed favors on particular business interests to a state that would make decisions about public policy in an impartial manner...
...At the same time, they have led to widespread speculation with active interest rates that has spiraled out of control...
...On the turn of a dime, it can go air-borne, throwing the government's current accounts into serious disarray...
...The title alludes to what has happened to the Peruvian economy, and consequently Peruvian business people, over the last six years...
...First, Peruvians vividly remember the calamitous results of state populism under the previous administration of Alan Garcifa (1985-90...
...5. PerU en numeros 1994, Anuario Estadistico (Lima: CUANTO, 1995...
...Of the 183 state-run companies that existed in 1990 when Fujimori took office, around 173 have been privatized...
...If the government is afraid to tamper with the exchange rate, it forfeits a key instrument for dealing with a trade deficit or an economic recession...
...The simultaneous opening of the commercial and financial markets--together with the narcodollars that have entered the economy--has led to the over-valuation of the Peruvian sol...
...Stock-market earnings, for example, were declared to be tax-free until the year 2000...
...The Spanishowned Bilbao de Espafia bought the Continental national bank for $255 million...
...A revitalized private sector was now considered a founding element in the country's national development...
...Deregulation has also set off a process of dollarization of the Peruvian economy-around 60% of bank deposits and investments are now in dollars...
...eru finds itself today in a phase of "post-stabilization...
...It is proving more sticky than expected, however, given that Peru's nationalist tradition considers "hot money...
...During the 1993-4 period leading up to the national elections, for example, the administration did not skimp on public spending, above all on infrastructure projects that the president personally inaugurated on the campaign trail...
...After sizing up the situation, the business class as a whole-beyond individual discordant opinions-backed the new program...
...cereals, one of the numerous imports that er controls were lifted...
...on the other hand, however, it acts in exclusionary, antidemocratic ways when things don't go as desired...
...In contrast to Mexico and Argentina, where national economic groups bought state companies, in Peru-because of the scarce resources of national groups-foreigners purchased the majority of state enterprises...
...The Chambers of d to slash Commerce generally advocate the same policies...
...These changes created an unprecedented opening for imported goods of all sorts...
...On the other hand, the business sector likes balanced public budgets...
...Exporters in the fishing and mining sectors-which have grown dramatically under Fujimori-are also clearly supportive of the government...
...Peruvian industrialists-who have had a rough ride on the neoliberal wave-have been less unequivocal in their support...
...The financial reforms have come down hard on the Peruvian industrial sector, which needs access to credit to survive in an economy that is more competitive because of the opening to imports...
...Those characteristics have been reversed, and the government has achieved economic and Oil and the Opposition T he government's attempt to derail opposition to the proposed privatization of Petro-PerO is a pal- pable demonstration of the contradiction in which: the government finds itself enmeshed...
...BY MANUEL CASTILLO OCHOA I've come here to save you," business leader "JEduardo Farah told an audience of students from a private university in Lima in March...
...First of all, an estimated 20% of Peruvian industrial enterprises have shut down, and the rest are operating with an idle capacity of 40...
...The influx of foreign capital has a downside, however...
...In one way or another, Peruvian society as a whole is tolerating the change, despite all its problems, shortcomings and contradictions...
...Later on, the President issued a decree that permitted limitless repatriation of flight capital...
...Obviously, its economic problems persist...
...In 1990, there were 470,000 public employees...
...3 While foreign capital has a much stronger presence in the Peruvian economy thanks to the neoliberal reforms, the inadequacy of domestic savings continues to be a problem...
...While employment in the trade and service sectors has recently begun to edge up, industrial employment remains stagnant.' It is estimated that of every 10 Peruvians, one has stable work, seven are under-employed, and two are unemployed...
...In the hort to medium erm, the country as to confront its Luge trade deficit nd the over-valution of the cur"ency...
...by 1995, it had climbed to 17.5...
...Before the reform, the average tariff on foreign goods was 66...
...This has fed -ry imports since Peruvians can buy foreign products ?n at relatively cheap prices...
...In May of this year, its back to the wall, the government signed a new "letter of intent" with the IMF in which it promised to follow the first alternative...
...Over the long haul, this process will lead to a selective concentration of national wealth and the transnationalization of the Peruvian economy...
...Other sorts of import controls such as quotas were also eliminated...
...Contrary to conventional wisdom, this growth spurt was due less to private investment or the reinvestment of profits than to public spending at a level similar to that of past populist governments...
...Secondly, families are not able to save money because stable employment is still extremely hard to come by...
...Some business people are urging the government to deepen the reforms that it has already taken, while others want those same reforms to be modified or scaled back...
...became commercial and financial opening, deregulation, privatization, and state reform...
...Private enterprise, entrepreneurship, and market competitiveness became quickly interwoven with notions such as business retooling, out-sourcing, and flexible specialization...
...In 1991, the Fujimori administration eliminated controls on foreign currency...
...The privatization process has had strong repercussions on the banking sector in particular, after new rules allowed foreign groups to buy national banks...
...According to the economic reform program monitored by the International Monetary Fund (IMF) through biannual consultations and "letters of intent," the Peruvian gov28 N8CLA REPORT ON THE AMERICAS 5 4 4m 4REPORT ON PERU ernment is not supposed to run budget deficits...
...For example, the Ministry of Industry, which had 2,200 employees in 1990, today has fewer than 200...
...I've come to prevent professionals like you from turning into taxi drivers...
...In that limited sense, it has been successful...
...In the above cases, Peruvian groups have entered into joint ventures with the foreign groups...
...For example, a group from the Peruvian city of Arequipa bought the national cement company, Cementos Yura, for $96 million, while the Peruvianowned Wong Group has invested massively in the import business...
...In 1993, Peru's domestic savings rate equaled 14.5% of the GDP...
...These measures, however, did not have the desired effect...
...Meanwhile, Peru's foreign debt has grown from 16% of the GDP in 1990 to 22% today...
...On the one hand, the government talks up the neoliberal discourse of a new open institutional model...
...Far from neutralizing possible opposition, however, this strategy has in fact further alienated those who have not been rewarded with government posts...
...Policies in favor of state intervention and control, even in their most moderately populist forms, lost popular support...
...3. See Manuel Castillo Ochoa and Andres Quispe, "Los grupos de poder con Fujimori: cambios macroeconbmicos y reconversi6n," in Pretextos, No...
...Since 1990, in accordance with global trends in international finance capital, the process of disinvestment in Peru has been arrested...
...The business sector is of two minds where public spending is concerned...
...This import bonanza, in turn, has resulted in a huge trade deficit...
...2. Central Reserve Bank of Peru, Memoria 1994, p. 64...
...At some point, the Peruvian people's tolerance for the "change of course" is ort...
...Last year, Peru exported over $5 billion worth of goods, but imported $7.2 billion...
...and even a bank linked to the Ecuadorian military, Banco Pichincha de Ecuador, has gotten into the act...
...The dollarzation of the leruvian economy nd its depen[ence on finance apital and repatrited flight capital leave Peru vulnerble to sudden utflows of this Its back to the gove signed a ne of intent" IMF in May bound to wear thin...
...The agreement calls for the drastic reduction of public spending (by the end of the year, there should be a bud- get surplus of 1 or 2%), the completion of the privatization process, operative autonomy for the organizations in charge of tax collection, further lay-offs among the civil service, and cutbacks in the buy-out packages to laid-off public employees and in pension payments to retirees...
...But during election campaigns, the government routinely ignores this stricture...
...While Peruvian exports have been growing since 1990, they have not kept pace with imports...
...First, Peruvian businesses are not saving money because their profits are down due to the recession, the lower demand for goods from an impovrket examines U.S...
...26 NMZTA REPORT ON THE AMERCA5 NCIA REPORT ON THE AMERICAS 26REPORT ON PERU Trade reform wreaked havoc on employment...
...selves these days...
...Business people seemed to forget that Fujimori's program was a rehashed version of the economic program that the second administration of Fernando Belatinde (1980-85) had wanted to implement and that they themselves had rejected at the time...
...The mayhem encouraged the majority of the population to eschew ideas of social change and systemic alternatives...
...4 Three sources generally account for the low level of domestic savings...
...Other industrial firms, in order to avert bankruptcy, have transformed themselves from manufacturers into importers of foreign merchandise...
...The term "post-stabilization" is meant to reflect how the country has overcome-always a relative term in a place like Peru-the most serious problems that it suffered in the 1980s: hyperinflation, significant macroeconomic imbalances, chronic contraction of the GDP, and disinvestment...
...Yet at the same ime, the economc program is hobled by major roblems...
...People were now defined not according to social class, but as winners and losers in the marketplace...
...In other words, the new "letter of intent" will unleash a larger recession within the recession...
...Farah was alluding to the thorny situation in which Peruvian industrialists find them- A bird's eye view of downtown Lima...
...A handful of regional economic groups have used the privatization process to become bigger players on the national scene...
...Why does the government fundamentally punish industrialists while, for example, it gives miners tax exemptions...
...This has left domestic businesses high and dry...
...today, there are about 210,000...
...asked the SNI's Eduardo Farah in a typical complaint...
...While it is true that the privatization process has polished Peru's external image in capital markets, its domestic impact has been less favorable...
...Bolofia's great "change of course" concerns an economic and social transition whose goal is to move from a society in which a strong VOL XXX, No 1 JuwlAuo 1996 25 5 4 4 Manuel Castillo Ochoa is a researcher at the Center for the Study and Promotion of Development (DESCO) in Lima...
...Yet exports suffer if the currency becomes over-valued...
...today, it is 15.7...
...The words of Farah, the current president of the National Society of Industries (SNI), Peru's largest association of industrialists, illustrate the current sentiments of one sector of the Peruvian business class toward the government of Alberto Fujimori...
...State reform fell most heavily on public employees...
...The government hopes to collect about $3.8 billion with the sale of Petro-Perl-nearly the same amount as all the other privatizations to date...
...Between 1980 and 1995, 35,000 people Workers fired fro lost their lives, and economic losses that were directly the result of the war reached $25 billion...
...The government's appointments of several prominent business leaders to high posts in the administration indicates its selective co-optation of business...
...In a recent interview, he argued that in order to be competitive in the marketplace, Peruvian businesses must reduce their costs and upgrade the skill level of their workforce...
...The proposed privatization of the oil industry has recently provoked a strong popular backlash [see "Oil and the Opposition," p. 29...
...Ten years later, they saw in Fujimori a new politician-untainted by the errors of the past-who promised the commercial paradise of Southeast Asia on Peruvian soil...
...While they back the government's longterm strategy of restructuring the economy toward exports, they disagree with the way the government is pursuing that goal...
...The economic disarray made Peruvians from all social classes turn away from the state and look to the market as the engine of economic growth...
...4. Boletin de Opini6n, No...
...The: government sees the privatization of the national oil company as a way to increase its coffers, enhance foreign investment, and remain on good terms with- the IMF...
...This sudden governmental largesse resulted in spectacular growth in the GDP, which reached 12.9% in 1994...
...At the same time, these processes are reshaping Peru's big business sector...
...A new banking law and other mechanisms were implemented in 1992 to further attract finance capital...
...Translated from the Spanish by NACLA...
...Of the seven who are under-employed, four eke out a living in the informal sector of the economy...
...As a consequence, Peru was saddled with a trade deficit of $2.2 billion (equivalent to 6.9% of the GDP...
...In the fourth quarter of 1995, the government opted for the latter course, by trying to implement a "pragmatic" partial reinstatement of import controls...
...He is co-author of De poder a poder: Grupos de poder, gremios empresariales y politica macroecon6mica (DESCO, 1994...
...Two antecedents help explain this response...
...ling even The government stands at a crossler...
...The divergence of opinion among business people about Fujimori's economic program reflects the contradictions inherent in that transition...
...roads-torn between either forging further down the path of neoliberalism or opting for a neo-populist form of governance where money is used to cultivate support and to buy off potential opposition...
...After initially stabilizing the economy, the government turned to a massive reform of the commercial sector...
...On the one hand, spending cuts can set off an economic recession just as injecting government money into the economy can give business a much-needed boost...
...The business community is wary of generous public spending because it contends that the government often tries to close budget gaps by raising taxes on business...
...nother important prong of Fujimori's neoliberal economic agenda was state reform...
...Fujimori and the Business Class: A Prickly Partnership 1. Nota Semanal, No...
...As government spending slowed down, growth dropped in 1995 to 6.9...
...In this new ideological climate, Fujimori proposed establishing "new relations" between the state and the business sector...
...Petro-Perni is sure to be purchased by foreign capital as well since the sale price is well beyond the means of the Peruvian business sector...
Vol. 30 • July 1996 • No. 1
