Peru at a Turning Point: Populism or Pragmatism?

In early April, Ollanta Humala, a former lieutenant colonial known for his extreme nationalism, won about 31% of the votes in the first round of Peru’s presidential elections. The results provoked widespread fear in the local and international business communities. During the election campaign, Humala, who loves history books and sports and is an expert at chess, spared no opportunity to criticize the country’s traditional political class, including the political parties of the other candidates that will compete with him in the second round of voting in early May. Those candidates are ex-president Alan Garcia, standard bearer of the APRA social democrats and Lourdes Flores, who represents the center-right National Unity alliance. Flores wants to emulate Chile’s Michelle Bachelet and become the first female president of Peru. Garcia is burdened with the stigma of his disastrous turn at the helm of the government between 1985 and 1990.

 

The most worrisome thing about Humala is his rhetoric. Humala clearly wants to review the contracts signed by the multinationals that develop the country’s natural resources, and possibly enact a strategic nationalization of regulated sectors. Humala also supports revising Peru’s Free Trade Agreement (FTA) with the United States despite the fact that the agreement was signed only recently, on April 13. In addition, Humala backs a popular referendum on the FTA. Humala’s political party, The Union for Peru (UPP), has said that the FTA “does not defend Peruvian interests, and it does not guarantee that the country’s industries will become stronger.”

 

Nevertheless, on the day after the first round of voting, Humala tried to calm the business community by declaring, “A dirty war has been launched against me, and my rivals want me to look like a persecutor of investors.” In his government, he added, “private property will be respected. Don’t view me as a threat.” However, the Chamber of Commerce in Lima told the international press that some 2,500 companies have frozen their Peruvian investment plans because of fears that a possible Humala government will impose risks on their legal security in the country.

 

Whoever becomes the next president of Peru will be taking over a robust economy. Although his very controversial approach increased the average Peruvian’s distrust of their institutions, outgoing president Alejandro Toledo has achieved good macroeconomic results. According to a recent report by the Economic Commission for Latin America and the Caribbean (ECLAC), the Peruvian economy grew by 6% in 2005, its highest rate since 1997. According to the report, these results were achieved “because of extremely favorable external conditions and macroeconomic policies that strengthened the expectations of private companies in the domestic market.” In its analysis, ECLAC stressed “the remarkable growth” of Peruvian exports. This fact has led to an increase in the country’s trade surplus, and an unprecedented surplus in the current account of its balance of payments, to above 1% of the country’s GDP. Thanks to slower growth in its exports and in public spending, ECLAC now forecasts a slight slowdown of growth for 2006, to an annual rate of 5%.

 

Populist Rhetoric: A Mere Campaign Strategy?

 

The question that most experts are asking is if a Humala government would maintain the same rules of the game that have permitted this macroeconomic stability. Hugo Macías Cardona, who runs the CIECA research center at the University of Medellín in Colombia, says that Humala has not proposed any radical changes in the country’s economic policy that might lead to changes in its economic structure. “The relationships that are being made with international economic institutions will not permit him any greater excesses, and his negotiating skills will not lead him into an open battle against the allies he needs when governing.”

 

Unlike Venezuela, notes Macías Cardona, Peru does not have any temporary economic bonanza [from high energy prices] to fall back on so that it can challenge international institutions. “The economy would continue along a very similar road, especially because officials of the Central Bank have joined his [Humala’s] election campaign.” Macías Cardona is referring to Humala’s decision to offer the vice-presidency to Gonzalo García Nuñez, a member of the governing board of the Central Reserve Bank. “This is Humala’s link to international economic institutions, through which he is planning to get closer to American and European institutions, so investors don’t feel more insecure.” In addition, Humala, a former diplomat, has established important ties with Isaak Galski and Salomón Lerner Ghitis, two businessmen “who enjoy total credibility in local institutions.”

 

David Alvarez, a researcher at FLASCO, the Latin American social science research center, agrees that Humala is softening his rhetoric. Alvarez, who is also a political analyst at the Catholic University of Chile, says that Humala could follow a pragmatic approach if he reaches power, as has been the case on many occasions elsewhere. “It is almost an axiom in political science that someone says certain things to win an election and does other things after winning it.” Alvarez believes that if Humala reaches power, he should try to maintain [the country’s] current growth levels so that he can tackle “the great challenge of distributing [wealth] to his people in an appropriate way.” Nevertheless, Alvarez says that Humala should try to calm foreign investors, given the fact that “in some of his speeches, he has said that he will try to prevent, for example, access of Chilean capital to [Peruvian] ports that are in the process of being privatized. Humala will have to clarify every one of his points and show that he favors stability, so the country can continue to grow.”

 

The Venezuelan Factor

 

Ever since Humala arrived on the political scene in October 2005, the Peruvian press has noted that he has had contacts with Venezuelan president Hugo Chávez. There has even been talk that Chávez may have financed part of Humala’s campaign. Nevertheless, Humala and Chávez have denied that there has been any sort of economic assistance. The two leaders maintain that they are united only in their eagerness to support Latin American integration with a nationalistic spirit.

 

Mauro Guillén, a professor of international management at Wharton, says that a possible Humala government would not be as extreme as the government in Venezuela. “However, this clearly confirms the turn toward nationalism and populism in the region: Argentina, Ecuador, Venezuela, Bolivia and now potentially Peru.” Nevertheless, Guillén does not believe that any possible alliance between a Peru governed by Humala and a Venezuela governed by Chávez could stop investments from coming into the region. A special sort of shrinkage in the flow of capital would affect only Peru, he says. “Brazil, Mexico and Chile continue to be economies that are open to the world. And those three countries jointly add up to 65% of the region’s economy,” Guillén says.

 

At first glance, Humala’s military past seems similar to that of Chávez. However, there are major differences between them. Although Chávez also pursued a military career, Macías Cardona notes, “From an early age, he was involved in movements within his country’s democratic left. In contrast, Humala took a leading role in many military operations that defeated the Shining Path guerrillas. He has also been involved in some investigations of violations of human rights.”  According to Macías Cardona, Humala is neither a populist nor a militant from the democratic left. He is “essentially a nationalist, although he prefers to call himself a progressive.” Any probable Humala government, he adds, “would take an intermediate position between Cuba, Venezuela and Bolivia on the one hand, and Argentina, Brazil and even Chile on the other hand. Humala’s approaches to the leaders of all those countries could become the key piece that connects the position of South America; only Colombia, which is closer to the United States, would be left out.”

 

Macías Cardona emphasizes that Humala and Chávez are united in their criticism of traditional political parties, the neo-liberal model and agrarian reform policy. In their rhetoric, at least, both men also believe that “those people who have traditionally been excluded should feel represented by their leaders.”

 

The Causes of the Populist Trend

 

To understand the Peruvian situation, you have to start by examining the causes of the “untimely” expansion of the left during the past five years, says Gerald McDermott, a management professor at Wharton. Two phenomena are involved. The first is a “set of institutional limitations within some countries in the region, along with weak development of social and political organizations, including political parties and the power of the executive and legislative branches.” The second phenomenon “is the advent of populism, which leads us to question how healthy the party system is.”

 

McDermott believes that the big mistake in the initiatives taken during the 1990s in Latin America and Eastern Europe was a “lack of attention to the fact that politics are fundamental — even more important than economic reforms.” McDermott states that developing political institutions and institutions for social participation is “often more important” than making economic progress. “For example, we have the problem of incorporating the left and the have-nots into the political process, which they have addressed, but not in the best way. This has been demonstrated in the historic cases of Peronism in Argentina and the PRI in Mexico, which are clearly authoritarian in style.”

 

In other Latin American countries, notes McDermott, there is not any “great demand” for populism. For example, that is the case in Chile, “where the left is strong but the country has a very developed system of institutions. Thus [Chile’s President Michelle] Bachelet is a symbol of a modern, system of social democracy.” The same thing happens in Brazil, he adds, “above all because of the presence of President Lula da Silva, one of the leaders who have managed to reform the left.” Beyond the fact that Brazil’s network of institutions is much stronger than those in Peru, Venezuela or Bolivia, it is significant that Brazil and Lula “demonstrate that the left can be modern, progressive, responsible, and good for [a country’s] institutional consolidation and economic growth.”

 

And what about Peru? McDermott says that the country “was destroyed, institutionally speaking” over the past 20 years. “There is no modern State from the regulatory perspective, for example. There are no proper political parties, as such, and that fact has a very important impact on [Peru’s] stability.” Given those conditions, McDermott says that populism has a lot of room for maneuvering, “first of all, as a reaction to what happened with (ex-president) Alberto Fujimori (who was forced to leave the country because of political scandals) and because of the great expectations that outgoing president Alejandro Toledo created but was unable to fulfill.”

 

Choosing Between Garcia and Flores

 

Ex-president Alan Garcia ended his administration in 1990 by being exiled to Colombia because of accusations of corruption and because of his disastrous management record, which left a legacy of record–high inflation — almost 3,000%. However, during the election campaign, Garcia said he was the only candidate capable of stopping the “authoritarian danger,” which he attributed to Humala. Garcia has committed himself to correcting “the mistakes” of his earlier administration. He has also emphasized that he will battle against poverty. He has come out in favor of a more equitable distribution of wealth, job generation, and initiatives to boost agricultural exports and provide loans to small businesses.

 

Lourdes Flores, a 46-year old lawyer, is known as the “candidate of the rich.” Her strongest support comes from Lima, the capital city, and from Peruvians who live overseas. However, Flores holds little appeal in more remote regions in the interior of the country. Flores says that she is the candidate of free enterprise, and that she will support a government that regulates but does not intervene. She has promised to generate new 650,000 jobs a year, while improving both education and healthcare.

 

When it comes to forecasting the second round of voting, FLASCO’s Alvarez says that the problem for Garcia and Flores is that they are “mutually exclusive.” Flores “will not ask for votes from supporters of Garcia and vice versa, except at the level of party leadership. However, supporters of Garcia could back Flores if she reaches the second round, on the grounds that they could never support Humala.” Alvarez believes that votes against Humala will come from those voters who support Garcia and Flores. He adds that Flores does not have a strong party base. “Her support is more on a personal basis rather than one based on a party.”

 

Macías Cardona says that the latest election results seem to favor Garcia. If so, that would lead to a second round of voting between Garcia and Humala. However, he says that Flores’ followers have “an important role” in defining the next president. People on Wall Street have a positive view of Flores. They see her as an ally of financial interests; a candidate who is less worried about low-income people. “Apparently, she lost a lot of votes because of her close ties to the powerful Romero group and because of her advertising campaign, which was very close to the one used by the current president of Colombia (Alvaro Uribe) in the previous elections,” he adds.

 

Currently, continues Macias Cardona, what matters is finding out who could inherit the votes of Flores, a woman “who has a considerable presence on the political scene, and lots of sympathy from voters, in large measure because she has always opposed President Toledo.” Macias Cardona thinks that any significant sector of the coalition that supports Flores is more likely to support Humala than support Garcia, judging from past events. “In the 2001 elections, National Unity did not support any of the candidates who reached the second round (Toledo and Garcia). Meanwhile, in 1995, the Popular Christian Party — in which Flores was involved — abandoned Flores’ candidacy to support the candidate of the Union for Peru (UPP), which is the same party that today has Humala as its candidate.”

 

According to Macias Cardona, if Flores were elected it would generate confidence in several vital areas of the economy. However, the Peruvian economy would run a greater risk if Garcia were elected, he adds. “Peruvians view him [Garcia] as the person responsible for the most severe economic crisis in the country’s history. He [Garcia] set foreign exchange rate controls beyond levels that the market could tolerate. He raised inflation above the 1,000% market. And he severely restricted service on the debt, which made the IMF declare the country ‘ineligible’ in 1986.”

 

McDermott concludes that people who back Garcia and Flores will probably negotiate with each other in an effort to prevent Humala from winding up as the winner. “The right-center and the left-center could turn out to be modern and responsible; they could reach agreements to present themselves as a ‘national front.’ That’s because their adversary is not only Humala but also the support that Fujimori still stirs up – along with other pressure groups such as the military.” McDermott argues this is a great opportunity that could permit Peru to achieve governability, especially if this coalition is also formed in Congress, where nine different political groups are represented, to one degree or another. “This agreement could do a lot to help the country’s institutional development; if not, we are going to see a lot of volatility,” he warns.

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