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Peru’s Outlook

Alan Garcia has now taken over the reigns of Peru. Will he follow the previous government's pro-business line or return to his past? Three experts share their views.


Latin American Advisor

Alan Garcia returns to the presidency of Peru today [July 28], 16 years after his first, disastrous term in office ended. What is the outlook for a second Garcia presidency? Based on Garcia's economic policy signals to date, do you think Peru's economy will continue on its path of strong growth?

Michael Shifter, Vice President for Policy at the Inter-American Dialogue: Even if he tried, Alan Garcia couldn't possibly replicate the economic chaos and disorder that helped make his first term such a failure. As he likes to point out, circumstances— in Peru and globally—are quite unlike what they were two decades ago. Beyond the changed context, Garcia is acutely aware of his past mistakes, including the decision in 1987 to nationalize the banks. His support of the US-Peru free trade deal reflects a more moderate stance, as does his selection of Luis Carranza as his minister of economy and finance. Carranza is a competent economist with valuable experience in public administration and the private sector. Garcia surely intended to send a clear message that this APRA government will be characterized by fiscal discipline. Not surprisingly, that message was favorably received by Peruvian business groups and financial communities abroad. Predictably, labor unions were less enthusiastic about the choice. Garcia's principal challenge will be to maintain a positive macroeconomic outlook while pursuing effective social policies aimed at reducing poverty. The question is whether Garcia will be able to keep his appetite for costly public-sector programs in check, and instead focus on fundamental state reform in education, justice, and other key sectors. Although Garcia's admiration for Chile's success in social reform is encouraging, translating that preference into practice will be the tough part.

Luis Oganes, Co-head of Latin America Research at J.P. Morgan Chase & Co.: President Garcia's appointment of Luis Carranza—an independent technocrat—as finance minister provides a signal that he wants to leave macroeconomic management on 'auto pilot' while his government focuses on social and infrastructure programs. As such, Carranza's main challenge will be to strike a balance between fiscal prudence and the allocation of more resources to social spending. Moreover, Garcia has the incentive to increase outlays ahead of the regional elections of November in order to consolidate the power base of his APRA party by grabbing a larger number of regional governments— it currently controls just under half of the 25 regional seats. The good news is that fiscal accounts are very healthy and the new administration will inherit certain cushions that will enable it to hike spending without exceeding fiscal targets. Indeed, the nonfinancial public sector posted an overall surplus of 3.8 percent of GDP in the first quarter, which will probably be driven into a small deficit as spending accelerates in the remainder of the year. This fiscal stimulus will add to the already strong growth dynamics of Peru, which is being driven both by external and domestic demand. JPMorgan recently revised Peru's growth forecast for fullyear 2006 to 5.5 percent from the previous 5.0 percent.

Beatrice Rangel, President & CEO of AMLA Consulting: Alan Garcia might have failed in economics in the past, but he certainly has gotten As in politics. As a good politician, he perfectly understands that globalization is here to stay. After all, he is a beneficiary of globalization. A close look at the exit polls in Peru shows a clear tilt in his favor among the small entrepreneurs that have sprung up in Peru under the impact of free trade and deregulation. Thus, he will not govern against his newly acquired constituency. But he will certainly differ from other pro-modernity leaders in Latin America who have jumped onto the globalization wagon without a country vision. Like Oscar Arias in Costa Rica, who has a vision, Garcia will rule Peru with an eclectic mix of social democratic principles and pro-market public policies. This entails empowering social security services for those that cannot access private health and education, while keeping macroeconomic stability and promoting economic competition to let markets take care of affordability and growth. I have no doubt that his second mandate will resemble that of Felipe Gonzalez in Spain in the 1980s. The good news is that the return of populism elsewhere in the region has been so damaging to democracy and economic growth that social democracy has a fair chance of succeeding in forging modern capitalism in Latin America.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

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