WALTER T. MOLANO writes in Latinvex that cobbling together a coalition to push through political reforms will be difficult.
Peru is the fourth largest country in Latin America, with the fifth-largest population and the sixth-largest GDP. Often dismissed by some regional neighbors, it is a well-managed and diversified economy.
However, this was not always the case. Peru was one of the countries that suffered the most during the 1980s. The abrupt change in U.S. monetary policy in 1982, when the Federal Reserve jacked up rates to more than 16% immediately cut off capital flows to the emerging markets. This was a sudden reversal from the enormous liquidity of the 1970’s, when large money center banks needed to lend the petrodollars that were being deposited by major oil producing nations.
Overnight the situation changed for emerging market countries, which not only saw their access to capital cut off, but also witnessed massive outflows. Unable to stem the bleeding, the countries quickly entered into default. Many governments tried to ameliorate the situation by running large fiscal deficits and monetary expansion, but this only undermined their currencies and pushed up the inflation rates. A rash of hyperinflation began to spread, and Peru was no exception.
THE FUJIMORI YEARS
The economic collapse soon led to social and political problems, and the leftist guerilla movement known as Shining Path began to add to the turmoil. It was within this chaos that Alberto Fujimori, an obscure academic, emerged to lead the country out of ruin. Upon election, he immediately introduced measures to fortify the government’s finances, restructure the debt and stabilize the economy. In 1993, a new constitution helped modernize the country’s institutional framework, including establishing the independence of the central bank and mandating it to maintain price stability. Since then, the central bank has had five presidents. This is in contrast to Argentina’s central bank, which has had 14 presidents during the same time period. The lack of consistency in monetary leadership signals to the population a lack of direction in monetary policy. As a result, the institution loses credibility and it results in higher inflation and a weaker currency.
Since the Fujimori reforms of the early 1990’s, the Peruvian sol has been one of the most stable currencies in Latin America. Peru has also been one of the countries with the lowest inflation rates. For the past decade, Peru’s inflation rate has averaged close to 3.5%. However, it has been moving below 2%, making it one of the lowest inflation rates in the region. Not surprisingly, the country’s central bank has been named the best in the region during annual reviews. Price and exchange rate stability has created the environment needed to emerge as one of the fastest growing economies in Latin America. However, not everything is rosy.
BLAMED FOR TODAY’S CHAOS
While President Fujimori made great strides in stabilizing the economy after the chaos of the 1980s and early 1990s, he was not as successful on the political side. Indeed, many Peruvians blame his authoritarian style for much of the dysfunctionality that reigns today. Peru’s society is highly fragmented, with a significant indigenous population that has not been completed assimilated. Large swaths of the population do not even speak Spanish, communicating in Pre-Columbian languages, such as Quechua and Aymara. The country is also a large landmass, about the size of California, but with a vast diversity of terrain. Part of the country is in the Amazon jungle, it is bisected by the rugged Andes, and its shores consist mainly of desolate deserts. Combine this with poor infrastructure, and it results in a population that is poorly connected. This is one of the reasons why the country has failed to build common political movements or parties that represent the interests of the population. The semi-exception was the formation of APRA during the 1920’s that represented the interests of the middle class, which was mainly centered in Lima. However, the party was primarily a political vehicle for populist leaders, such as Alan Garcia. As a result, the political landscape consisted of many small factions, which complicated the government’s ability to generate consensus. The only major options were political instability or the emergence of an authoritarian figure.
Therefore, it is not surprising that last week’s elections provided another fragmented legislature. In contrast to most of the other regional congresses, Peru has only one chamber of representatives. President Martin Vizcarra dissolved the congress late last year, after the deliberative body had been gripped by the unending corruption scandal perpetrated by the Brazilian construction company, Odebrecht, as well as the machinations of President Alberto Fujimori’s children, Keiko and Kenji. The elections for an interim congress resulted in a kaleidoscope of factions, from religious movements to the far left and the far right. Cobbling together a coalition to push through political reforms will be difficult. At least, much of the economic stewardship will be out of their control.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.