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The Peruvian Miracle

Jaime Daremblum

In late November and early December, Peruvian business leaders gathered in the industrial city of Arequipa for the 50th Annual Conference of Executives (CADE). When the polling firm Ipsos Apoyo asked CADE attendees whether they approved of the job performance of Peruvian president Ollanta Humala, a remarkable 75 percent said yes.

In other words, a former Hugo Chávez acolyte—who led a failed military coup in 2000, who reportedly received money from Chávez during his 2006 presidential campaign, and whose wife once earned $4,000 per month in “consulting” fees from a pro-Chávez newspaper based in Caracas—now enjoys overwhelming support from the Peruvian business community.

It is a turn of events that few would have predicted seven years ago, when Humala first ran for president. Back in 2006, he literally wore red shirts to highlight his far-left economic views; he vowed to nationalize certain industries; he proposed rewriting the Peruvian constitution; he criticized the American “empire” for alleged violations of international law; and he attacked free-market globalization. “We need to defend our country from being totally globalized,” Humala told the Independent of London in April 2006. “They’re breaking into our sovereignty, weakening our national industries, and most importantly the application of the neo-liberal model hasn’t benefited normal Peruvian families.”

The Humala of 2006 was understandably perceived to be a Chávez-style radical who would transform Peru along the lines of Venezuelan socialism, which is why his first-place finish in the initial round of voting was so alarming to Peruvian investors. Humala ultimately lost in the second round to a centrist, pro-market candidate named Alan García; the final vote was for 52.6 percent for García and 47.4 percent for Humala.

During the García years, Peru became “an extraordinary success story,” as President Obama said at June 2010 Oval Office press conference. With China, now its largest trade partner, gobbling up Peru’s minerals and raw materials (such as copper, iron ore, and zinc), it experienced Chinese-level growth rates. Indeed, over the last decade, Peru expanded more than any other Latin American or Caribbean economy, and it saw wages rise at an annual pace of 6 to 7 percent. Meanwhile, between 2002 and 2011, the national poverty rate was virtually cut in half, dropping from 54.7 percent to 27.8 percent.

Many Peruvians were afraid that this progress would be endangered by a Humala victory in the 2011 election. While Humala’s campaign message in 2011 was more conciliatory than his message in 2006, he lacked credibility and was widely distrusted. Yet the former army officer insisted that his views had evolved along with his country. “Peru has changed and so have I,” he said.

Once again, Humala finished ahead of all other candidates in the first round of voting. In the runoff, he faced the daughter of ex-dictator Alberto Fujimori, who ruled Peru from 1990 to 2000 and now sits in prison for human-rights abuses. The unpalatable choice prompted world-famous Peruvian author Mario Vargas Llosa to say it was “like choosing between cancer and AIDS.” Vargas Llosa ultimately endorsed Humalaelecting Keiko Fujimori, he argued, would be tantamount to “legitimating the worst dictatorship we’ve suffered during our history as a republic“and Humala went on to beat Fujimori by 3 percentage points (51.5 percent to 48.5 percent).

Shortly before taking office in July 2011, he named his economic teamand Peruvian businessmen breathed a major sigh of relief. Humala tapped President García’s deputy finance minister, Luis Miguel Castilla, a former World Bank consultant with a doctorate from Johns Hopkins, to be his economy minister. And he announced that Julio Velarde would be given another five-year term as president of the central bank. (Velarde was first appointed in 2006, by García.)

Since then, Humala and his team have preserved economic stability, attracted foreign investment, and maintained rapid growth. In a recent interview with the online media company Terra, Vargas Llosa praised Humala for keeping the promises he made during the second round of the 2011 campaign. “He has respected democratic institutions, freedom of press, freedom of criticism in a flawless manner, and has also respected the market economy,” observed the Nobel laureate. “Peru continues to grow and the middle classes continue to grow.”

Not only does Peru continue to grow, it is growing faster than any other economy in South America. In 2012, total merger-and-acquisition activity in Latin America declined by 3.6 percent, but M&A activity in Peru grew by double digits, according to a Latinvex analysis. “For the first time in four years,” Bloomberg News reported on November 21, “the cost of insuring against a default by Peru is falling faster than for any Latin American nation.”

Much of Peru’s growth can be credited to its mineral wealth. (About a year ago, PricewaterhouseCoopers declared that “Peru has become the third preferred destination for mining exploration investment in the world and the leading destination in Latin America.”) And it’s true that the Peruvian economy needs to diversify away from its current overreliance on commodity exports.

Yet the story of Peru’s economic miracle is not simply a story of natural resources. It is also a story of free-market policies that have been strengthened and expanded under three consecutive democratic presidents: Alejandro Toledo (200106), García (200611), and now Humala.

According to the World Bank, Peru has better investor protections than rich countries such as Japan, Norway, Denmark, and Sweden, as well as every nation in Latin America or the Caribbean except Colombia. And in the bank’s 2013 Ease of Doing Business Index, Peru ranks ahead of every independent Latin American or Caribbean country except Chile. (It is also just behind the U.S. territory of Puerto Rico.) Meanwhile, apart from a few tiny Caribbean island nations (Saint Lucia, the Bahamas, and Barbados) with a combined population of roughly 800,000, Peru ranks ahead of all but three Latin American countries (Chile, Uruguay, and Colombia) in the Heritage Foundation’s 2013 Index of Economic Freedom.

Finally, between 2011 and 2012, it moved up six spots (from 67th to 61st) in the World Economic Forum’s Global Competitiveness Index. The WEF praises Peru for its macroeconomic stability and for “high levels of efficiency” in its good markets, labor markets, and financial markets, while also noting that weak public institutions, poor infrastructure, and low educational quality remain serious problems. Over the long term, if Peru wants to become a rich country with an innovation-driven economy, it must improve its innovative capacity through better schools and greater R&D spending.

A more immediate challenge for President Humala is to quell the social unrest that has accompanied Peru’s recent growth. Alonso Segura, chief economist at the country’s largest bank, has said that “the feeling of unrest is, without a doubt, Peru’s biggest risk domestically.” (Remember: Peru experienced two decades of bloody civil war from the 1980s to the 2000s.) In particular, rural indigenous communities have been protesting against the environmental impact of various mining projects.

The most prominent dispute involves the Conga mine, a $4.8 billion project spearheaded by the U.S.-based multinational Newmont Mining. The protests over Conga have led to riots and deadly violence. Back in August, Peruvian prime minister Juan Jiménez announced that “the project has entered a new phase of suspension that the company already decided on and the government of course asked for.” More specifically, Conga is stalled while Newmont works to address concerns over how it will affect local water supplies. Nevertheless, Humala’s minister of energy and mines, Jorge Merino, sounds confident that the project will eventually move ahead. “Conga must go forward,” he told Reuters last month. “We don’t have the luxury to lose an investment that big.”

Mining ventures such as Conga have come to epitomize the 21st-century Peruvian economic miracle, but they also epitomize the new social tensions that have been created by growth and investment. Humala faces difficult challenges in resolving these tensions. But his job performance thus far has been very encouraging.

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