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Investor’s Business Daily, USA, June 6, 2011

Peru: A Shooting Star Turns Red  

Elections: For years, Peru has been Latin America's top-performing economy, leading the pack on GDP, inflation, poverty eradication, free trade and markets. So why did Peru's voters suddenly elect a communist?

Markets plummeted in Peru on Monday after leftist Ollanta Humala won Peru's presidency with nearly 51% of the vote. Stocks on the Lima exchange fell 13% at last glance, their biggest one-day drop since records began in 1990. Bonds and the currency were down, too.

It was painful because Peru had been the brightest light among Latin America's economies. Embracing markets over two decades had paid off handsomely for Peru. Last year, the Andean state posted 7% GDP growth, the highest in its region; and 2.7% inflation, the lowest. Per capita GDP had risen to $9,330, and the poverty rate had dropped to 30%.

Peru didn't just have "Asian-tigerlike numbers," as Latin Business Chronicle Executive Editor Joachim Bamrud told IBD, it also outperformed its Latin American rivals like an industry leader. During the 2009 economic crisis, when investment fell 40% across the region, Peru's foreign investment rose 28% to $6.2 billion. At a time when average GDP in the region fell 1.8%, Peru's grew 0.9%.

So what made voters in such an enviably growing country want to elect someone like Humala?

In a word, resentment. Unfortunately, economies that grow fast do not always spread benefits at an equal pace. Peru's Humala voters, known as the resentidos, resented the success of others even as the benefits spread across the country. And that's a tragedy.

For those who have just tuned in, Humala is a former Peruvian army colonel with a history of violence, coup attempts and anti-Americanism.

He lost Peru's election in 2006 after his open embrace of Venezuela dictator Hugo Chavez. This year he got shrewder, hiring an experienced election team from Brazil, which distanced him from Chavez and repackaged him as Chavez's benign leftist ally, Brazil's recent President Luiz Inacio Lula da Silva.

That meant the harsh threats he originally promised suddenly got toned down — even as his Huey Long-style promises remained.

Early in his campaign, Humala vowed to expropriate businesses, confiscate private pensions and shut off free trade, tapping into a deep vein of resentment among Peru's lower classes.

He backtracked from most of those threats as it turned off most voters, but kept his promise to redistribute wealth by targeting Peru's big mining companies.

So even though he vowed not to expropriate businesses or pensions, the economy-killing taxes he wants on mining companies will amount to the same thing.

It's a potential killer of Peru's silver-and-copper goose, which has driven Peru's economic growth and will have terrible effects now, across the board.

The irony is that as Humala claims he's going to make Peru like Brazil, he forgets that Peru's economy actually has outperformed Brazil's. His promise, which sounds so attractive, amounts to replacing Peru's star economy with Brazil's inferior state-directed economy.

And that's the best-case scenario. With a long history of imitating Chavez, it could get much worse. Markets clearly know this. It's tragic that Peruvians do not.




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