Peru: Which Path Will Humala Follow?

LBC SPECIAL
Knowledge@Wharton  

Few periods in Peru's recent history have been as prosperous as the current one. Over the past five years, the country's gross domestic product (GDP) grew by an annual average of 6.3 percent. One of the most dynamic economies in Latin America, Peru's GDP grew by 8.8 percent in 2010. This prolonged period of prosperity can be explained, to a great extent, by the arrival of "foreign investments in the natural resource and energy industries," according to Mauro Guillén, a Wharton management professor and director of the school's Lauder Institute of Management and International Studies. Today, Peru is the world's largest producer of silver, the third-largest of copper and zinc, and the sixth-largest of gold.

But few time periods also have been as decisive from the political point of view. After the second round of presidential elections on June 5, Peruvians -- and the country's business sector in particular -- are wondering whether President-elect Ollanta Humala, a leftist nationalist who takes office on July 28 -- will be able to maintain the same level of economic success, or if he will wind up spoiling everything.

The doubts are cropping up, first of all, because many Peruvians feel they were forced to choose the lesser of two evils in the second round of elections: Either the 48-year-old Humala, a retired army officer who described himself as an admirer of Venezuelan president Hugo Chávez, or his rival, populist Keiko Fujimori, daughter of ex-president Alberto Fujimori, who was condemned to a 25-year prison sentence for corruption and crimes against humanity during his term in office (1990-2000).

The first round of the elections in early April, in which no candidate received more than half of all valid votes, produced a "hara-kiri, or suicide, of the forces that we could describe as close to the democratic model; those with an independent orientation," notes Carlos Malamud, chief researcher for the Latin American region at Real Institute Elcano in Madrid. "The fragmentation of the votes among the three most centrist candidates -- Luis Castañeda Lossio, Pedro Pablo Kuczynski and Alejandro Toledo -- meant that the two candidates who went on to the second round were those two who generated the most repudiation in the electorate."

This development left Peruvian society in a very difficult situation, according to Ana María Choquehuanca, one of the best-known names in the world of Peruvian small businesses because of her role as president of Misur, a non-profit organization that represents small companies. "There were good alternatives [during the first round] for the choice of the next president of Peru, but only two candidates were left in the race [in the second round], and the political parties that sponsored them both have a past tied to corruption [in the case of Fujimori] and to disastrous governments such as the [Chávez] regime in Venezuela [in the case of Humala]. We were forced to calmly consider who was the lesser evil for Peru."

Indeed, Margio Vargas Llosa, the Peruvian Nobel Prize laureate, has described the situation as being forced to choose between cancer and AIDS. However, he and other intellectuals later asked voters to cast their ballots for Humala because, in their opinion, Humala represents democracy rather than the dictatorship that was embodied by the daughter of Fujimori. Her father, Alberto Fujimori, carried out a coup d'etat in 1992. "Humala was better at getting out the vote, although it is true that he needed to scrape together fewer votes from the center because he had more [votes] during the first round than Fujimori had [30 percent of the total versus 23 percent]," Malamud says. "That is what enabled Humala to win in the second round."

FALLING STOCKS, FLAGGING CONFIDENCE

There are fears that Humala's victory could mean a change in the economic model, and wind up putting an end to Peru's period of prosperity. Some of the financial media have described Humala as a "former ally of Venezuelan Hugo Chávez," and emphasized fears that the new president will follow an interventionist path like Chávez and other leftist populists in the region.

The support of Venezuelan leader Chávez led to Humala's narrow defeat by Alan Garcia in the 2006 presidential elections. In the most recent election, Humala tried to avoid the mistakes of the past by distancing himself from Chávez and getting closer to Brazilian ex-president Luiz Inacio Lula da Silva, a much admired and more moderate figure. Juan Carlos Martínez Lázaro, a professor of economics at the IE Business School, notes that it is from that point on that "Humala's apparent moderation emerged. He no longer sells the radical rhetoric of Chávez. He downplays his identification with Chávez mainly because of Venezuela's bad economic situation in comparison with the countries that surround it; [this is the case] despite the fact that [Venezuela] is one of the biggest exporters of crude oil, and [global oil] prices are sky high."

One proof of this distancing process is that during the campaign, Humala relied on the support of Lula. The former Brazilian president tried to act as a sort of paternal protector, according to Malamud, even sending Humala "advisors about the image of the PT, the Workers' Party, which Lula belongs to; and also probably providing support for financing his campaign."

Although this strategy helped him win the elections, Humala did not necessarily convince either the financial markets or the business community that he has good intentions. The Peruvian stock market reacted to Humala's victory with its largest drop in two years, amid notes of declining confidence from economists and analysts. This anxiety swept into foreign exchange and derivatives markets, where the price of Peruvian credit default swaps (CDS) rose by 20 basis points to 168. The Peruvian sol (the country's currency) continued its decline from the days before the elections, dropping another 0.9 percent relative to the U.S. dollar.

Good news came the day after the post-election Black Monday, however, with a 7 percent rebound on the Peruvian stock market. Experts point out that this kind of situation is not unusual; something similar occurred in Brazil after the first electoral victory of Lula in 2002. On that occasion, the Brazilian stock market fell by 4 percent on the day after the elections but it recovered when it later became apparent that the Lula would only carry out moderate economic policies. Martínez Lázaro notes that as soon as the polls began to show that Lula was the clear victor, "the Brazil real also plummeted because of fears about what could happen. Over time, however, those fears turned into admiration [for Lula]."

That's why Guillén says that "Humala could surprise people by moderating his positions once he is in power. This has happened with other elected presidents in Latin America." Malamud agrees with Guillén to a certain extent. However, he also recalls that "when Chávez made his first election campaign, he promised that he would not change the [Venezuelan] Constitution, and that he would respect democratic regulations. The same thing happened with Correa [in Ecuador]. And in both those cases, those presidents have trampled all over the institutional systems of their countries. We'll have to wait to see if Humala is sincere about the promises and declarations he made during his campaign, or whether, on the contrary, he is talking out of both sides of his mouth."

In Malamud's view, if Humala were to identify his choice for minister of economics, it would help to restore tranquility to the markets. "But it wouldn't be enough simply to identify the new minister," he adds. "In reality, it would be important if he also introduced a large part of his cabinet because it would help the country's democratic institutions and governance if we knew what road he was really going to follow."

Some of these signals have already become obvious. Three days after the elections, the president-elect tried to bring confidence back to his country by giving interviews to several international media outlets. In an interview with ABC, the Spanish newspaper, Humala guaranteed that the new government was not going to "do any sort of expropriation or anything like that with regard to Telefónica [the Spanish telecom giant], or with any company, whether it is Spanish, foreign or Peruvian."

THE LULA MODEL

Choquehuanca, however, lacks confidence in Humala. "Peru's small and midsize companies are very worried because the situation is uncertain. What we want is to work in a favorable environment that enables us to be competitive and achieve the exports that we long for," she said prior to the second round of the election. For her, Humala "has a double personality and he talks out of two sides of his mouth. To sum up, he seems inconsistent."

She also criticized Humala's populist attitudes. "We are living at a time where there no longer exist any 'messiahs' -- those who fight for the poor but who live better than the middle class. Democracy is the key to achieving a developed country. We deserve more than exaggerated electoral promises that only wind up taking their toll on most of the population; not after we have fought and worked so hard for so many years," she says.

"What I recognize in this candidate [Humala] is that he uses his rhetorical skills to reach the poorest voters, and they follow him precisely because that is his response to the unjust [income] gap that exists in our country," she adds. "The inequality of the distribution of income in Peru is not the best, and that has to change."

Humala is aiming to fight poverty in his country -- he made that clear during the elections and in his speeches after declaring victory. The recent economic growth in Peru has led to a significant reduction in the country's poverty rate, from 48.7 percent of the total population in 2005 to only 30 percent in 2010. However, nearly one-third of the population has yet to be brought out of poverty.

In this sense, Martínez Lázaro says that Lula is the model to follow. He notes that Lula was the first leader in the region to show the old Latin American left (which includes Chávez) that they had been pursuing the wrong approach for sharing the wealth. The region's leftist leaders "had thought that [the economy] was like a cake, and you had to make the slices smaller and divide them up better. But the governments of Chile, Brazil and Uruguay have shown that you have to make that cake bigger so that people can get larger slices. That is to say, without growth there is no social inclusion."

Lula has managed to balance macroeconomic stability with social inclusion, enabling 20 million Brazilians to get out of poverty. Peru has not been able to carry out that approach, and now there is a part of the population that has said, "This cake is growing, and we want another piece," according to Martínez Lázaro. This has happened, in part, because growth in Peru has been associated with only one sector -- mining. That sector provides 61 percent of the country's exports, and growth has been very concentrated in the capital city of Lima, he adds.

Martínez Lázaro notes that Humala is at a crossroads. He hopes Humala will follow the path taken by Brazil, Chile and Uruguay, which have opened up their markets, and "try to combine economic growth with social inclusion. That is to say, they use a portion of the benefits derived from economic growth to develop the country, and to reduce the poverty indices with social programs of the sort that were put into place in Brazil; but while maintaining macroeconomic stability and without attacking foreign investment or resorting to enormous expenditures."

Finally, he adds, "Let's hope Peru is able to continue along that intelligent road, because it has everything in its favor, and it can become another success story."

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania