Amidst great expectations, Alejandro Toledo became President of Peru in June 2001. His arrival in power put an end to 10 years of Alberto Fujimori’s authoritarian government and marked the beginning of a new democratic era. Yet a mere two years after Toledo assumed the presidency, his popularity has hit rock bottom. The latest polls reveal that only 10% of Peruvians approve of his administration. “The political situation has been very tense and the popularity of the president has nose-dived,” states Mario Vargas Llosa, the prestigious writer who was a Peruvian presidential candidate in 1990.


Paradoxically, he adds, despite the political crisis, “Peru’s economic situation within the Latin American context is not bad. It is one of the best economies of the region. It is growing in macroeconomic terms but, unfortunately, that is still not showing up in job creation or in a rise in the standard of living. Although the economy is moving in a very positive direction, the problem is fundamentally political; there is a great deal of rancor, and the opposition is severe.”


In 2002, the Peruvian economy grew by 5.2% compared to Latin America’s negative growth rate of 1.2%. Nevertheless, social tensions have continued to rise, leading to the moment last May when Toledo was forced to declare a state of emergency for 30 consecutive days as a result of serious popular protests. That is one of the reasons why Kay Stefani, an analyst at Dresdner Bank, has revised growth predictions for this year down from 4.5% to 4%. “The main problem is that the government doesn’t have a consistent plan, even it knows very well what it has to do.”


The main risk economically, according to Stefani, is that because of all this social unrest, “investors – both Peruvian and international – will not invest.” Ramón Casilda Béjar, professor at the University of Alcalá de Madrid, agrees. “Peru can present a balanced macroeconomic picture but if there is growing social instability – as well as the reappearance of the Shining Path (the paramilitary group that operates in the country) – then foreign direct investment [will stay away] because legal security is never going to exist. And if legal security does not exist, no investor is going to want to take any positions there.”


Despite the current situation, Stefani is optimistic about the future of the Peruvian economy in the medium term, thanks to the “sustained growth in internal demand and the launch of the Camisea project, a gas pipeline that will transport gas from the jungle to the ocean.” But in the long term, the analyst doubts that Peru can maintain its current growth level, especially if one takes into account the upcoming presidential elections in 2006. These concerns, suggests Stefani, could lead the government to adopt populist stances.


While it is not likely that democracy will disappear, Vargas Llosa calls attention to the fact that “we have had a very difficult experience for 10 years, with a very corrupt dictatorship (Fujimori’s) that impoverished the country and [committed] frequent violations of human rights. The rebuilding of democracy has cost a great deal of effort, and it would be tragic if we failed once again in our experiment with it.”


Why has Toledo worn out his authority so quickly? What has he done to recover his lost leadership?


A Meteoric Political Career

Alejandro Toledo, nicknamed “El Cholo” [the Half-Breed] because of his indigenous roots, is a self-made man or, as he noted on one occasion, “a statistical mistake.” Toledo came into the world in a family of peasants with 16 children and went from being a young bootblack and itinerary salesman to earning a doctorate in economics at Stanford University in the U.S. Knowledgeable about international financial institutions – he worked for the World Bank – he began his political career in the elections of 1994. On that occasion, he was a Peruvian presidential candidate, obtaining barely 3.2% of the vote. Barely six years later, he managed to wind up getting elected president, after which he launched a new and hopeful democratic era for the country.


How did Toledo achieve this sudden political ascent? He played a key role in the opposition to Fujimori that culminated in the departure of the ex-president from the country in September 2000. Fujimori, nicknamed El Chino [the Chinese person] because he had Asian roots, decided to go into exile in Japan when it became public knowledge that one of his co-workers, Vladimiro Montesinos, had bribed a politician who opposed Toledo in the presidential election.  After Fujimori’s departure, a provisional government took over the country.


In June 2001, only 13 months after he faced Fujimori in the elections, Toledo once again competed against a former Peruvian president. In this case, it was against Alan García, the social democrat who ruled Peru from 1985 to 1990. The popularity that Toledo acquired as an opponent of Fujimori helped Toledo dodge the complexities of this electoral campaign, during which thorny details of Toledo’s personal life became more of an issue, including the existence of an unacknowledged daughter and a supposed fling in a hotel. Toledo’s popularity also allowed him to defeat García.


Toledo was sworn in on July 28, 2001, with the support of 54% of the electorate and with a speech that focused on combating poverty, unemployment, corruption and drug trafficking, and promoting tourism.


The Erosion of Power

The key reason why Toledo took power was that “he knew very well how to capture the public’s discontent against Fujimori and his co-worker Vladimiro Montesinos,” says Diego Barceló, a researcher at the Center for Latin American Enterprise (CELA) of the IESE. Nevertheless, his leadership is being questioned because “after the common enemy disappeared, Toledo couldn’t find an element for bringing people together.”


Moreover, “exaggerated expectations were created and this caused severe discontent among the population,” adds Barceló. In fact, Peruvians’ disappointment at the government’s inability to function has degenerated into serious social conflict. During his administration, Toledo has been forced to declare a state of emergency on two occasions. The first time was last June, when he tried to privatize two companies in the Arequipa region – Egasa and Egesur. The second time took place last May, when teachers and other social sectors came out onto the streets to demand a salary increase. The protests wound up leading to road blocks and confrontations with the military that led Toledo to declare a 30-day state of emergency.


Another factor that contributed to the destruction of Toledo’s image was the publicity over the salaries of the President and his First Lady, an anthropologist of Belgian origin named Eliane Karp. It came as a shock to the population that the monthly salary of the president was $18,000 and that Karp earned $10,000 dollars a month for her work as an advisor to a financial institution. In theory their main activity was to serve their country. The minimum [monthly] salary in Peru doesn’t exceed $130 dollars and more than half the population lives in poverty.


It didn’t take long for a reaction. The President’s wife had to resign her job and the President was forced to lower his salary as his popularity dropped and social tensions rose. The president now earns 13,230 soles a month, or $3,830.


“Public opinion believes that Toledo’s wife has excessive influence on the president,” notes Barceló, adding that the poor opinion Peruvians have of the First Lady is due to the fact that she is a foreigner. Something similar happened with Fujimori, who was accused of having doctored his birth certificate to show that he was Peruvian rather than Japanese.


In any case, it is clear that the influence of the First Lady and some of the advisors has not been well received in Perú Posible (PP), the political party of the government. Notes Barceló: “It is a new political party that is not institutionally strong” and now finds itself divided.


At the moment, the only organization that can benefit from the weakness of the government is APRA, the main opposition party, which has leftist tendencies. Nevertheless, it suffers from the same public opinion problem as the PP, since its leader, ex-president Alan García, “also [inspires] a high level of rejection among the population.”


Another factor that has contributed to the government’s decline is the reappearance of the paramilitary group “The Shining Path,” after a long period of inactivity. The president has announced that one of his priorities is combating terrorism. As a result, he has increased the budget of the armed forces. According to Barceló, the Peruvian government could do away with terrorism in the course of the next six months, “especially if the army manages a success similar to the recent liberation of the workers of an Argentine company who were kidnapped by guerrillas.” Moreover, he notes that “in contrast to the FARC – the Colombian terrorist group that can count on a force of about 18,000 – the membership of Shining Path is now apparently less than 100.”


But the main reproach against Toledo is his lack of determination. “The president doesn’t have a majority in the Congress [to enable him] to manage each piece of legislation with [sufficient] support,” says Barceló. Since things are not going well, it is getting harder and harder for that support to be found.


According to Barceló, “The political problem reached a climax when they sent two legislative proposals to Congress that were about tax reform, and they were rejected. Since these changes did not go forward, the government decided to raise the IGV – the General Sales Tax (which is similar to a Value-Added Tax, or VAT.)”  Using this measure, as well as the cut in public spending through the reallocation of budgetary items, the government hopes to finance the salary increase of teachers and other public employees who demonstrated in May. The rise in the IGV has led to clear discontent in the general population and among the opposition.


The New Cabinet: A Turning Point

Toledo recently changed his cabinet of ministers, appointing an outstanding economist as his new prime minister – Beatriz Merino, former director of SUNAT, the Peruvian tax agency. According to Barceló, it is “the most efficient public entity for Peruvians.” With this appointment, “Toledo has given signals that he will continue with an orthodox policy. The message that he is sending to international organizations is that we are going to continue as we have until now.” Moreover, the appointment [of Merino] marks a turning point in the term of the president.  “He is closing out the first stage, in which the president has learned from his mistakes,” and he has begun a new era in which “the government still has three years to correct those mistakes,” Barceló adds.


“It’s true that the government made many mistakes,” admits Vargas Llosa, who publicly supported the candidacy of Toledo in 2001. “That’s what has brought us to this crisis, but the new cabinet has been very well received and I have the impression that there is quite an unambiguous majority in favor of the ministerial changes.”


In fact, insofar as political instability is concerned, the country “can begin to make a comeback,” notes Barceló. “Lately, the popularity of the president has improved slightly and in some polls, it has reached 12% or 13%.” Moreover, Peru’s “Country Risk, which rose [to 520 points] in mid July, dropped when Merino was named prime minister … The government is moving in the right general direction. Where doubt exists, it’s about whether the government is going to have enough strength to implement its plans.”


Recently, another change in the cabinet has taken place. Jaime Quijandría has taken over for Javier Silva Ruete as head of the ministry of the economy. Ruete will go on to preside over the Central Bank. “Quijandría, finance minister during the seventies, lacks the reputation that Ruete acquired during his term as finance minister in the interim government of President Paniagua, and as [President] Toledo’s replacement for Pablo Kuczynski as minister of the economy.  Nevertheless, Quijandría can count on the experience of [two] vice-ministers — (Fernando) Zavala and (Kurt) Burneo,” affirms Stefani.  In any case, “it seems that the main function of the minister of the economy is more political than technical. It is going to consist, above all, in getting [support from] a majority in the Congress, and the support of the members of government.”


On the other hand, the president announced in his speech of last July 28, on the occasion of patriotic celebrations, a reform of the tax system during the next ninety days. “Tax reform is a way of supplanting the IGV tax, which is so controversial,” affirms Barceló.  Stefani interprets this measure more as a sign of the president’s lack of consistency. “Now Toledo is once again opposing the IGV… In our opinion, the drop in the president’s popularity can be traced, to a considerable extent, to this type of indecision [on his part].”


Stefani agrees with Barceló that the new cabinet is not going to make many changes in Peru’s political economy. Stefani adds that the main obstacles for economic development of the country are, from the political point of view, the lack of executive consistency and the fact that the institutions are not accepted by the citizenry. “The current political problems are very much linked to the former government [of Fujimori], which was autocratic; the population lost faith in governmental and judicial institutions. The recovery of confidence will take four or five years, if the current government does its job properly.”


From the structural point of view, the challenges are “to resolve the political problems in order to be able to attract international investors and to improve the infrastructure – including educational policy – as well as manage to broaden the base of [economic] growth,” says Stefani.


In any case, Peruvians will need to arm themselves with patience if they are to start feeling the benefits of the country’s macroeconomic progress. Stefani talks about a recent trip to Ayacucho that verified the construction of a new road that didn’t exist on his visit six years ago. “Signs such as this are a big step,” he says. “You have to take small steps in order to advance. But for the people, it’s not enough.”


Moreover, today’s tense environment is encouraged on various fronts by those with an interest in the collapse of the current government. One such example is ex-president García, who is now in the opposition and is setting his sights on returning to power when the Toledo regime is over – or even before then. Another point of instability is Fujimori. Currently outside the country and threatened with an extradition order, “he is someone very interested in seeing that the democratic experiment fails,” says Vargas Llosa. “Although anything can happen in Peruvian or Latin American politics, the idea that Fujimori is going to return [to politics] in the near future appears far-fetched to me.”


One person who is not thinking about running again in a general election is Vargas Llosa. “My passage through politics has been just that, a passage. I am not going to run again; I am an intellectual who writes and has opinions.” From that vantage point, Vargas Llosa issues a call for good sense. “Let us hope that the crisis is fleeting and, above all, that the democracy itself does not confront a crisis – because it would be truly tragic if another Latin American country had a rupture in its constitutional order and in the rule of law.”