The Pandemic Depression
The Global Economy Will Never Be the Same
The inauguration of 36-year-old Alan García Pérez as president of Peru on July 28 opened a new and uncertain chapter in that country’s tortured modern history. The youngest chief executive in South America, García has quickly reversed the image of a do-nothing presidency, replacing it with that of an energetic, driven national political leader. The dynamic young president is personally directing the government’s attack against the progressive deterioration of the economy. He has challenged the fast-growing illicit drug trade. Since his inauguration, García has restructured the military leadership and purged the police, declared a war against corruption, promised to decentralize the national government, and cut the once sacrosanct military budget. He is actively seeking policies to undermine the messianic guerrilla group, Sendero Luminoso (Shining Path). To reestablish a link between the government and the governed, the president announces decisions and discusses new initiatives with the people from a second-story balcony of the presidential palace in downtown Lima.
At the international level, he has threatened to abandon the International Monetary Fund (IMF) if that institution insists on further domestic austerity as the price for its approval of an economic recovery plan. Further, the president has stated flatly that his government will dedicate no more than ten percent of its annual foreign exchange earnings to service the outstanding debt of $14 billion owed to private commercial banks, about $2.5 billion of it owed to U.S. banks. By mounting his own public campaign on the debt issue, García has effectively taken on Fidel Castro, who is attempting to polarize the debate on debt in Latin America. Moreover, García’s declarations on debt have helped to redefine that issue as political and not merely financial.
In less than three months, García has thrown down the gauntlet at home and abroad. If successful, his efforts could reverse a pattern of decline almost two decades old and prevent a further unraveling of his country’s fragile social fabric. Failure appears to leave few alternatives other than a sharp shift to the Marxist left or a new military government whose goals would be unclear. García’s commitment to democracy and his concern to restore the vitality of Peruvian society are a challenge of the greatest magnitude. In the context of a beleaguered Latin America, his stance may well be the most dramatic experiment now under way to demonstrate that social and economic reforms are compatible with democratic institutions.
Recent history has not been kind to Peru. A period of rapid economic transformation in the 1950s and 1960s exacerbated glaring social inequalities in a society that was generally viewed as among the most traditional and hierarchical in Latin America. A well-meaning but ineffective civilian government in the 1960s failed to deal with the increasing tensions generated by uneven growth; a military regime seized power in 1968 and set out to revolutionize the country. The government of General Juan Velasco Alvarado (1968-1975) launched a costly series of reforms that sought to integrate Peru’s forgotten indigenous population into national life. Agrarian reform was implemented and workers were included in cooperative management schemes in the industrial sector. The state’s involvement in the economy expanded, but most of the new enterprises proved to be uneconomical.
Because of the radical thrust of the Velasco government, there was a net outflow of capital. Low internal levels of savings led to increased dependence on foreign borrowing. The government resorted to deficit spending for capital projects. The admirable social goals of the 1968 revolution resulted in failure due to poor planning, fuzzy ideology, a lack of investor confidence and the authoritarian nature of the generals’ political model. While they talked a great deal about participation and equality, these were to be bestowed upon the Peruvian people by the government as gifts. The tutelary nature of the revolutionary regime soon generated opposition and animosity. These forces, combined with the failed economic model, proved irresistible; the generals turned on Velasco and replaced him with General Francisco Morales Bermúdez in 1975.
The government of Morales Bermúdez could do little to reverse the calamitous decisions of its predecessor. Institutions destroyed are not easily replaced. Harsh reality dictated retrenchment, so an austerity program was instituted. The government devalued the national currency, restricted imports, removed price supports and resorted to stand-by credit from the IMF. As a result, the country was hit by a series of workers’ strikes and popular demonstrations. The military government prepared to abandon its tattered revolution and opened political negotiations with civilian political parties. A constituent assembly was elected in 1978 to write a new constitution, which was approved in 1979.
Presidential elections in 1980 returned to office Fernando Belaúnde Terry, who had been ousted by the armed forces in 1968. Well intentioned, as always, the aging president appeared unable to comprehend his task. The government gave the impression of exhaustion even as it took office. Unable to follow through on its own initiatives, the administration spent five years in equivocation and flights of fancy.
Meanwhile, the economy further deteriorated due to poor management, the impact of adverse climatic factors and the downturn in the world economy. The Peruvian economy is a dependent economy. Its chief exports, petroleum and copper, are regulated by world market prices which have continued to deteriorate in recent years. Other exports, such as textiles, face protectionist pressures in the industrial countries. The worsening of the terms of trade has been accompanied by high fiscal and current account deficits. While it is true that the deficits were accumulated primarily during the 1970s, the Belaúnde government did little to correct the situation. The economic outlook became even more bleak in 1983 when drought and flooding badly damaged agricultural output. The gross domestic product fell by 12 percent that year alone.
In reaction to this economic decline and the drift of the national government, a coalition of the Marxist left captured the key post of mayor of Lima in 1983 for the first time. More ominously, in the hinterland of Ayacucho province a rural guerrilla group appeared, the Sendero Luminoso, determined to uproot and destroy contemporary Peruvian society and rebuild it along classless lines.
The Belaúnde administration’s efforts to quell the Sendero menace led to increasing violence in rural areas on both sides. Accusations of human rights violations by both the armed forces and the Sendero escalated. The government resorted to governing through states of emergency. The Sendero’s tactics began to have an impact on Lima itself, through frequent bombings and costly attacks against the city’s electric power network. Buffeted by urgency and despair, the Peruvian people searched desperately for new leadership. By 1984, Alan García had attracted national attention and quickly became the man to beat in the 1985 presidential elections.
The striking features of Alan García’s election are not only his youth and relative inexperience in national politics, but also the fact that he is the first president of Peru from the American Popular Revolutionary Alliance. In the past, APRA has been denied access to that office by the military, although it is Peru’s oldest and best-organized political party. Understanding APRA is essential to understanding Alan García and his approach to governing Peru.
APRA was founded in 1924 in Mexico by Víctor Raúl Haya de la Torre, García’s political mentor. Haya, as he was called, organized a pan-American political movement that sought to fight imperialism, internationalize the Panama Canal, foster the political unity of Latin America, nationalize foreign-owned property and industry, and express solidarity with the oppressed peoples of the world.
Of middle-class origins, Haya was born in the coastal agricultural city of Trujillo. While studying at San Marcos University in Lima, he championed the concept of popular universities as a means of establishing a common bond between workers and students. He actively backed the demands of Peru’s working class for a greater share in society. Haya and other student intellectuals also championed Peru’s Indian majority and called for a return to communal work patterns which had characterized the region prior to colonial domination. As a result of their agitation for change, the government exiled Haya and a number of other student leaders in 1923. Haya then founded APRA, which offered a new political alternative for the lower and lower-middle classes entering national political life for the first time.
Haya spent seven years in exile. During that time he visited the Soviet Union and determined that the revolutionary model supported by Moscow was inappropriate for Latin America and especially for Peru. APRA’s efforts to play a hemispheric role faltered but the party became a key actor in Peruvian politics for the next half-century. The party’s electoral strength was based primarily in the modern agricultural and mining areas of the country.
Returning home in 1930, Haya challenged the dominant oligarchy in Peru. Declaring that "only APRA can save Peru," the party confronted the country’s established interests, military and civilian, both in elections and through armed violence. In a series of bloody confrontations in the 1930s and 1940s, APRA attempted to seize the government by force. Party members were responsible for the assassination of leading conservative figures, including the president of the republic in 1933 and the editor of the leading conservative newspaper in 1935. APRA had earned the enmity of the armed forces in 1932 in an uprising in the city of Trujillo, an APRA stronghold, in which a number of officers and soldiers were killed. Haya de la Torre attempted to stand for election three times (1931, 1962 and 1963), but each time the military vetoed his candidacy or annulled the election results.
APRA’s bold commitment to transform Peruvian society was revolutionary in its early days; however, it was neither Marxist nor communist but, rather, nationalist in inspiration. In fact, APRA has proved to be an effective counterweight to communism in national political life. With time, APRA and Haya moderated their radical stance. But it was not until the late 1940s that the country’s political elite felt comfortable sharing power with the party—and then only in the legislature. But even so, as late as the 1950s, Haya was forced to take refuge in the Colombian embassy in Lima to escape imprisonment or worse.
In the presidential elections of 1962, Haya stood as a candidate. His opponents were Fernando Belaúnde Terry and General Manuel Odría, a military populist who had ruled Peru from 1948 to 1956 and who had persecuted him in the 1950s. It is generally believed that Haya won the 1962 balloting, but the military cancelled the results, installed a military government and called for new elections the next year. The candidates were the same in 1963, but with the backing of the armed forces, Belaúnde Terry gained the presidency. His term of office was made difficult by an alliance of convenience in the national legislature between Haya’s Apristas and the followers of Odría, who together blocked the government’s efforts at instituting reform measures. APRA’s unwillingness to cooperate with Belaúnde encouraged the military to overthrow what thus appeared to be an ineffective and isolated Belaúnde administration in 1968. The specter of a 1969 presidential candidacy by Haya also served to justify the coup d’état. With the military intervention, political party activity came to a halt.
Enter Alan García. The son of APRA militants, García has been an APRA activist since his childhood, joining the party at age 11. His father was in prison during the first five years of García’s life because of his militancy in APRA. After university training in Lima, García departed in 1973 for Madrid and Paris for postgraduate study in the social sciences. He returned to Peru in 1977 as the armed forces moved to yield power. In the constituent assembly in 1978-79, over which Haya presided, García served as his chief aide. With Haya’s sudden death in 1979, a struggle for power erupted between factions of the party. After the overwhelming defeat of the APRA presidential candidate by Belaúnde Terry in 1980, García joined a faction that sought to renovate the party’s image.
Selected as party secretary-general in 1982, García quickly became the dominant figure in the party and captured the presidential nomination in 1984. He had served only one term of office in Congress, and his entire previous political experience had been as an APRA militant. He struck a number of responsive themes in the presidential campaign—integration of the Indian population, an emphasis on agricultural development, decentralization of the size and scope of the national government, and an offer of hope for the country’s poor. The campaign promises were part and parcel of APRA’s program since the 1920s. With the 1985 election results, Haya de la Torre’s belief that "only APRA can save Peru" is finally to be tested.
García took office committed to action and to change. He found a Peru in which 50 percent of a population of 18.7 million were unemployed or underemployed. Because of the combined factors of economic decline, austerity and inflation, the purchasing power of the average wage earner is 40 percent less than it was a decade ago. It is estimated that per capita income has fallen to 1965 levels. In spite of efforts at reform and redistribution by successive governments, two percent of the country’s population own 60 percent of the wealth, while the poorest 38 percent survive on two percent of the nation’s annual gross domestic product.
A few days following his inauguration, García instituted an austerity program—without urging from either the IMF or the commercial banks. The government froze the price of basic goods, tightened exchange controls, raised gasoline prices, devalued the national currency and slashed interest rates. Soon thereafter, the president successfully pressured privately owned companies to lower their prices on critical items such as prescription drugs and food staples. To demonstrate that he meant business about reducing the size of the state bureaucracy, he fired two of every three managers of the bloated state corporations and set a ceiling on government salaries. As a signal to the military that the armed forces budget would not be spared, García reduced Peru’s order of 26 Mirage jet fighters. The program is generally acknowledged as a tough response to the terrible state of the economy and indicates the APRA government’s awareness of the need to institute adjustment measures at home.
García announced a "second phase" of his economic austerity program in October 1985. Interest rates were cut for the third time since he took office. Real wages moved up slightly; a long list of imports were banned; the official exchange rate against the dollar was frozen until the end of 1985, and there was a selective relaxation of price controls. Holding down inflation remains a key goal; the monthly rate fell from more than ten percent at García’s inauguration to less than 3.5 percent at the end of the year. While experimental, the recovery program appears both to address real economic issues and to convey to the Peruvian people the impression that the government is at work—and knows what it is doing. Moreover, the program has gained increasing support from the private sector in Peru and grudging respect from external observers. There is no guarantee that the program will ultimately succeed—but very few who know the Peruvian economy believe that García had many alternatives.
Next, García confronted the drug trade. In the last decade or so, coca paste and the finished product, cocaine, have become Peru’s largest exports, valued at approximately $500 million a year, shipped primarily to the United States. Previous governments either ignored or were implicated in the drug trade. García has chosen to confront an issue which, as he stated in his 1985 address to the General Assembly of the United Nations, "corrupts institutions and degrades man." In that New York speech, the president announced a series of punitive measures such as raids on drug traders and coca crop eradication. It is estimated that this government’s efforts resulted in the destruction of more than 80 tons of cocaine in its first two months in office, which has a street value in the United States of $5.6 billion.
García has promised to continue to press his campaign. The drug cultivation question is a delicate one for the Peruvian chief of state. In many parts of the interior, coca cultivation provides the only cash income for Indian families. When enforcement, eradication and crop substitution programs financed by the United States began in 1982, the local economy suffered. Soon, the Sendero guerrillas moved into the area to exploit native discontent. The anti-drug program came to a halt when the armed forces moved into the region and said that they would fight subversion—the Sendero—but not narcotics. The cultivation resumed and grew. The García administration faces the political necessity of finding a substitute livelihood for the local population. That is a key reason for the APRA emphasis on development programs for the interior of Peru.
In the past few years, the struggle against the Sendero has become the top priority of the Peruvian armed forces. Increasingly, the army has been accused of military atrocities against the Sendero forces and civilians whom it suspects of collaboration, often with little or no evidence. García, to dramatize his commitment to seek a new solution to the guerrilla problem, fired the chairman of the Joint Chiefs of Staff of the armed forces in September when it became known that he had not revealed in full the complicity of the military in recent civilian executions. The president has appointed a commission to investigate human rights abuses and to review the cases of 1,500 suspected terrorists who await trial. Army officers will stand trial for the death of civilians who have been killed by the military. In response to popular discontent with the three police forces in Peru, he has purged the leadership and sought new commanders untainted by long-standing accusations of corruption, incompetence and brutality.
In an effort to deal with the growing guerrilla threat posed by the Sendero and two smaller splinter groups, García has indicated his support for a dialogue and future negotiation by appointing a six-man peace commission. This has increased his popularity with the left, even though it is unlikely to bear fruit. Other efforts in Latin America, notably in Colombia, have failed to reconcile revolutionary guerrilla groups with civilian government. But García hopes at least to communicate his concern to the people of Peru by a gesture of negotiation. His principal emphasis will be to eradicate the base of support of the movement in the countryside through rural development. As García stated at the United Nations:
We will fight subversion with resolute firmness but with respect for the law and for human rights. We acknowledge that a subversive action has been possible not only because of a lack of foresight and the absence of a well planned social and economic policy but because subversion has been nourished on the exasperating poverty in which millions of neglected compatriots are living.
All of these energetic—and largely symbolic—gestures to date seek to create a mood of hope among the people of Peru. García is everywhere—talking, cajoling and overseeing government action. He believes that he must be seen and heard, whether holding cabinet meetings in small cities of the interior or visiting Indian communities to distribute small amounts of money for local development projects. A key to understanding his energetic style of governance is the delicate internal political balance in Peru and the foreign debt.
In the 1985 national elections, the moderate/conservative political forces that had dominated the government for decades were badly weakened and may never recover. Many Peruvians feel that these forces had their chance and failed. The combined forces of the former majority, Belaúnde’s Popular Action Party and the conservative Popular Christian Party, drew less than 20 percent of the national vote. APRA received 47 percent and the Marxist United Left won 23 percent. Thus, the viable national political spectrum now comprises APRA and the left. To guard his domestic political position, García must act to steal the thunder of the opposition—which he has done to date with success. And though his party has a working majority in both houses of Congress, there are members of APRA in both houses with greater political affinity on social issues with the left than with García’s moderate socialism. The president needs to consolidate his majority by demonstrating that he is both concerned and competent.
The external debt, the private commercial banks and the IMF are anathema to the left in Peru. It has called for an outright repudiation of the debt. García’s strong language and confrontational style on the debt question are basically for internal political consumption. He knows that he and APRA cannot afford to lose the initiative on championing the country’s sovereignty and autonomy. The government must also take the lead in stating, and repeating, its unwillingness to sacrifice Peru for the debt. García also made that point clearly at the United Nations:
The debt has become a conflict between the poor South of our American continent and the industrial, imperialist, and financial North. . . . My responsibility as Head of State is to the Peruvian people, that is for me the first creditor and that the Peruvian Government has been elected by the people, and not by some financial cartel to satisfy its appetites. . . . We are faced with a dramatic choice: it is either debt or democracy.
García’s statement in his July 28 inaugural address, repeated frequently since then, that he would only apply ten percent of Peru’s export earnings each year to service the debt, is for internal consumption as much as it is an international bargaining position. Peru’s exports in 1985 are estimated at $3.3 billion. Interest payments due this year total $1.7 billion, with a further $2.4 billion accumulated from 1984. It has been pointed out that a ten-percent payment will exceed the amount of debt servicing by the Belaúnde government last year, although that appears to draw little sympathy from Peru’s creditors. García’s threat to abandon the IMF if it insists on strict austerity measures is meant to be heard primarily at home. Although the government’s position with regard to the IMF is appropriate for domestic political purposes, it has drawn little support from other Latin American governments. And it has created an image of intransigence among the industrial countries and the international financial institutions.
The vulnerability of Peru’s position has been made clear by two incidents. The first took place at the meeting of the World Bank and the IMF in Seoul, South Korea, in October. In announcing a new U.S. initiative on the debt crisis, Treasury Secretary James Baker clearly and publicly disapproved of Peru’s position on financing its debt payments. Then, federal banking regulators decided to force U.S. banks to set aside special reserves on their loans to Peru. That decision will make it very difficult for the Peruvian government to secure new loans until the ruling is reversed. It was the first time that the U.S. regulators have taken such a step with a significant Latin American debtor country. Unless Peru is able to convince its creditors of the need for its radical position, it may well be on a collision course with them.
García has clearly linked the debt burden with the economic and social malaise of his society and the increasing wave of guerrilla activity and rural violence. He understands that his political position at home will reflect his capacity to protect Peru’s interests—and no one else’s. Part of an APRA-inspired shock treatment, his stance is meant to maintain popular support, the basis of García’s legitimacy as president. And it reflects a decades-old commitment of APRA to transform Peru, to be wary of external influence and to protect the nation’s sovereignty while identifying with the oppressed peoples of all the Third World. In Alan García, theory and practice come together in an eclectic and not necessarily orderly way. But no one should doubt the depth of those convictions and his determination to succeed. He truly believes that if anyone can save Peru, it will be Alan García.
If García has seized the imagination of the people of Peru, it is fair to say that he has quickly captured international attention as well. His July inaugural address, while dominated by his announcement of his debt-servicing policy, staked out a broad activist position for Peru in international affairs. He called for greater Latin American unity in dealing with the United States, which he termed "the richest and most imperialist nation on earth." He offered Peru’s support for the efforts of the Contadora group, which is seeking a negotiated settlement to the conflict in Central America. Significantly, in a country where more than one fourth of the budget goes to the military, García also called for an end to the regional arms race.
García has joined Argentina, Brazil and Uruguay in forming a "support group" for the Contadora negotiations. He has urged his fellow hemispheric leaders to seek Latin policy responses to the international debt crisis. In a bizarre twist, García found himself pitted against Fidel Castro of Cuba who also seeks a regional leadership role. Castro’s cheeky message to García stated that Peru was a country exhibiting the greatest "social inequality and misery of all kinds" in Latin America. The communiqué continued by saying that:
If you decide to fight seriously, firmly and consistently against this Dantesque panorama of social calamities and to liberate your country as you have promised from the domination of and dependence on imperialism, which is the only cause of this tragedy, you can count on Cuba’s support.
García’s public response was restrained, but he has lost no opportunity to note that while Castro urges Latin America to abandon its debt burden, Cuba faithfully and punctually services its outstanding debt. García argues that Peru and other Latin American nations will repay the debt—if and when they can afford to do so without the imposition of further intolerable sacrifices on their people.
García has taken the lead in his short time in office to seek to establish an ongoing dialogue among Latin American political leaders. True to APRA’s historical commitment to hemispheric integration, García has made it clear that his goal is to reinforce the region’s autonomy—not to take sides in the East-West struggle or to identify the United States as a scapegoat for Latin America’s current problems.
In this regard, a note of caution for Peru’s leadership is appropriate. While the United States and its allies need to understand President García’s rhetoric in Peru’s domestic political context, Peru must also evaluate the external impact of that rhetoric with great care. While the United States is the richest nation and may indeed be "imperialist," its role in defining Peru’s—and Latin America’s—economic future is significant. The necessity to consolidate internal political support should not blind the new government to the need to communicate its goals effectively, if quietly, both to Latin American leaders and to the governments of the industrial countries.
Indeed, the United States and Peru have a common agenda on which cooperation is essential. Both countries want to control and eradicate the nefarious coca that Peru produces and the United States consumes. Also, U.S. security interests in the region are served by any reduction in a regional arms race. A stable, democratic Peru, willing and able to undertake internal social and economic reforms, offers the prospect of future political stability in a key country in the Andean region. U.S. business interests in Peru are extensive and the country will need continued support from the private sector as it seeks to resume economic growth.
Recent events are cause for concern. An apparent lack of communication between the United States and Peruvian delegations in Seoul at the World Bank-IMF meetings indicates the need for forceful diplomacy by the García administration. The recent decision by the U.S. bank regulators to reclassify Peruvian loans reduces the space for maneuver between García and his country’s creditors. Peru’s decision in August to rescind the operating contracts of three foreign oil companies over tax credit provisions has sent a signal to the private sector that threatens needed future investment. While there are recent signs of flexibility with regard to the oil contracts, the negative impact remains strong.
The key to collaboration is U.S. understanding of the severe social and political constraints under which García must maneuver. With the exception of Bolivia, the situation in Peru is the most desperate on the South American continent. Years of either revolution or neglect, combined with natural calamities, have created an intolerable social and economic situation for Peru’s population. But the Peruvian chief executive needs to know that perceptions in Washington often fashion policy. To the degree that Peru is perceived as an antagonist or an unreliable partner, the less interest there will be in the policy-making community in providing assistance and support.
Strident posturing that attempts to shock the international community accomplishes little of value. Peru has nothing to gain from isolating itself from the industrial countries, particularly the United States. As Alan García understands, politics is the art of the possible, and it needs to be applied both at home and abroad.