Peru's business community has been a key pillar of support for Fujimori's neoliberal economic program. In recent months, however, some Peruvian industrialists have begun to grumble about high interest rates, the weak domestic market, and dumping by big foreign companies. BY MANUEL CASTILLO OCHOA I've come here to save you," business leader "JEduardo Farah told an audience of students from a pri- vate university in Lima in March. "I've come to prevent profession- als like you from turning into taxi drivers." The words of Farah, the current president of the National Society of Industries (SNI), Peru's largest association of industrialists, illustrate the cur- rent sentiments of one sector of the Peruvian business class toward the government of Alberto Fujimori. Farah was alluding to the thorny situation in which Peruvian industrialists find them- A bird's eye view of downtown Lima. selves these days. These business people argue that since the government began to implement its structural- adjustment program in 1991, Peru has been undergoing a process of deindustrialization that will ultimately lead to long-term recession. Instead of developing the coun- try, they say, this process is further impoverishing it and making it more underdeveloped. Not all the business "voices" are as cantankerous as those of indus- trialists like Farah. Others like Ricardo Mirquez, the country's vice-president and a prominent businessman in the textile indus- try, don't have much sympathy for the naysayers in the business community. In a recent interview, he argued that in order to be com- petitive in the marketplace, Peruvian businesses must reduce their costs and upgrade the skill level of their workforce. Accord- ing to Mdrquez, Peruvian busi- ness people had grown used to the government giving them credits, tax exemptions, and investment incentives while shielding them from outside competition. Now, Murquez says, busi- nesses must restructure their operations and become more disciplined. Carlos Bolofia, an economist who as Fujimori's min- ister of economics in 1991 and 1992 was one of the architects of Peru's stabilization and structural-adjust- ment program, named his recent book A Change of Course. The title alludes to what has happened to the Peruvian economy, and consequently Peruvian business people, over the last six years. Bolofia's great "change of course" concerns an economic and social transition whose goal is to move from a society in which a strong VOL XXX, No 1 JuwlAuo 1996 25 5 4 4 Manuel Castillo Ochoa is a researcher at the Center for the Study and Promotion of Development (DESCO) in Lima. He is co-author of De poder a poder: Grupos de poder, gremios empresariales y politica macroecon6mica (DESCO, 1994). Translated from the Spanish by NACLA. VOL XXX, NO 1 JULY/AUG 1996 25REPORT ON PERU state pervades national life to one in which the market and private investment have preeminence. The diver- gence of opinion among business people about Fujimori's economic program reflects the contradic- tions inherent in that transition. In one way or another, Peruvian society as a whole is tolerating the change, despite all its problems, short- comings and contradictions. Two antecedents help explain this response. First, Peruvians vividly remember the calamitous results of state populism under the previ- ous administration of Alan Garcifa (1985-90). In 1989, the economy contract- ed by 11.7% while the following year, infla- tion peaked at 7,649%. The economic disar- ray made Peruvians from all social classes turn away from the state and look to the market as the engine of economic growth. Policies in favor of state intervention and control, even in their most moderately pop- ulist forms, lost popu- lar support. The second ante- cedent was the escalat- ing violence wrought by the guerrilla insur- gency which affected the entire population. Between 1980 and 1995, 35,000 people Workers fired fro lost their lives, and economic losses that were directly the result of the war reached $25 billion. For most Peruvians, Shining Path represented a political radicalism taken to its furthest extreme. The mayhem encouraged the majority of the population to eschew ideas of social change and sys- temic alternatives. These two elements paved the way for the growing hegemony of proposals advocating large-scale business investment and neoliberal economic restructuring. Private enterprise, entrepreneurship, and market com- petitiveness became quickly interwoven with notions such as business retooling, out-sourcing, and flexible specialization. People were now defined not according to social class, but as winners and losers in the market- place. Growing out of this rebirth of a business culture that extolled private initiative, the business sector-not only domestic firms, but transnational corporations too-was held in greater esteem. A revitalized private sector was now considered a founding element in the country's national development. In this new ideological climate, Fujimori proposed establishing "new relations" between the state and the business sector. His plan was to transform Peru's closed and protected economy into an open, free-market economy with few controls and regulations. He spoke of a shift from a state that bestowed favors on particular business interests to a state that would make decisions about public policy in an impartial manner. The princi- pal axes of his administration's economic program m the Fabrica Moraveco in Lima hold a protest. became commercial and financial opening, deregula- tion, privatization, and state reform. The final result appeared promising: Peru's reinsertion into the inter- national economy, renewed foreign investment, and the production of goods for export made by restructured and newly competitive national companies. The government didn't have to wait long for business to express its support. After sizing up the situation, the business class as a whole-beyond individual discor- dant opinions-backed the new program. Business peo- ple seemed to forget that Fujimori's program was a rehashed version of the economic program that the sec- ond administration of Fernando Belatinde (1980-85) had wanted to implement and that they themselves had rejected at the time. Ten years later, they saw in Fujimori a new politician-untainted by the errors of the past-who promised the commercial paradise of Southeast Asia on Peruvian soil. 26 NMZTA REPORT ON THE AMERCA5 NCIA REPORT ON THE AMERICAS 26REPORT ON PERU Trade reform wreaked havoc on employment. It is estimated that of eve 10 Peruvians, one has stable work, sev are under-employed, and two are unemployed. After initially stabilizing the economy, the gov- ernment turned to a massive reform of the com- mercial sector. Before the reform, the average tariff on foreign goods was 66%; today, it is 15.7%. Other sorts of import controls such as quotas were also eliminated. These changes created an unprecedented opening for imported goods of all sorts. The new trade policy has had three principal effects. First of all, an estimated 20% of Peruvian industrial enterprises have shut down, and the rest are operating with an idle capacity of 40%. Other industrial firms, in order to avert bankruptcy, have transformed themselves from manufacturers into importers of foreign merchandise. Finally, companies have laid off personnel in an effort to reduce operating costs. Taking 1990 as a base rate of 100%, Peru's employment index dropped to 74.9% by the end of 1995. While employment in the trade and service sectors has recently begun to edge up, industri- al employment remains stagnant.' It is estimated that of every 10 Peruvians, one has stable work, seven are under-employed, and two are unemployed. Of the seven who are under-employed, four eke out a living in the informal sector of the economy. The Fujimori regime carried out financial reform in an equally drastic fashion. In 1991, the Fujimori admin- istration eliminated controls on foreign currency. Later on, the President issued a decree that permitted limit- less repatriation of flight capital. A new banking law and other mechanisms were implemented in 1992 to further attract finance capital. Stock-market earnings, for example, were declared to be tax-free until the year 2000. These policy changes have reinvigorated the nation- al financial system. At the same time, they have led to widespread speculation with active interest rates that has spiraled out of control. The financial reforms have come down hard on the Peruvian industrial sector, which needs access to credit to survive in an economy that is more competitive because of the opening to imports. The banks are lending money at high interest rates to attract foreign capital and to clamp down on inflation. This has left domestic businesses high and dry. The simultaneous opening of the commercial and financial markets--together with the narcodollars that have entered the economy--has led to the over-valuation of the Peruvian sol. This has fed -ry imports since Peruvians can buy foreign products ?n at relatively cheap prices. This import bonanza, in turn, has resulted in a huge trade deficit. While Peruvian exports have been growing since 1990, they have not kept pace with imports. Last year, Peru exported over $5 billion worth of goods, but imported $7.2 billion. As a consequence, Peru was saddled with a trade deficit of $2.2 billion (equiv- alent to 6.9% of the GDP). Deregulation of controls on foreign investment was another component of the government's concerted effort to attract foreign capital. In that limited sense, it has been successful. Since 1990, in accordance with global trends in international finance capital, the process of disinvestment in Peru has been arrested. Over the last three years, international finance capital and Peruvian flight capital have been reentering the country. 1993 was a particularly auspicious year as many foreign investors, turned off by the relatively low interest rates in the United States, parked their dollars in Peru. The influx of foreign capital has a downside, howev- er. Flight capital is notoriously fickle. On the turn of a dime, it can go air-borne, throwing the government's current accounts into serious disarray. Deregulation has also set off a process of dollarization of the Peruvian economy-around 60% of bank deposits and invest- ments are now in dollars. 2 In such an economy, any fluctuation in the exchange rate affects things like debt payments, making it preferable to leave the rate alone. Yet exports suffer if the currency becomes over-valued. If the government is afraid to tamper with the exchange rate, it forfeits a key instrument for dealing with a trade deficit or an economic recession. The Fujimori administration privatized state-run companies as another way to inject fresh capital into the economy. Of the 183 state-run compa- nies that existed in 1990 when Fujimori took office, around 173 have been privatized. Only the oil compa- nies, a big mining company and the ports remain in government hands. The proposed privatization of the oil industry has recently provoked a strong popular back- lash [see "Oil and the Opposition," p. 29]. While it is true that the privatization process has pol- ished Peru's external image in capital markets, its domestic impact has been less favorable. In contrast to Mexico and Argentina, where national economic groups bought state companies, in Peru-because of the scarce resources of national groups-foreigners purchased the majority of state enterprises. For example, the Chinese VOL XXX, No 1 JULY/AUG 1996 27REPORT ON PERU government bought Hierro-Perd for $120 million, and Telef6nica de Espafia bought the Compafiia Nacional de Tel6fonos for $2.1 billion. Petro-Perni is sure to be purchased by foreign capital as well since the sale price is well beyond the means of the Peruvian business sector. The privatization process has had strong repercussions on the banking sector in par- ticular, after new rules allowed foreign groups to buy na- tional banks. The Spanish- owned Bilbao de Espafia bought the Continental na- tional bank for $255 million; the Chilean consortium Errazuris and Lusick have bought other national banks; and even a bank linked to the Ecuadorian military, Banco Pichincha de Ecuador, has got- ten into the act. In the above cases, Peruvian groups have entered into joint ventures with the foreign groups. Mean- while, the largest privately- owned Peruvian banks have A woman in a Lima superma sought strong partners in the have flooded the country aft U.S. stock market. For example, the Banco de Cr6dito has set up a partnership with Morgan Guaranty Trust of New York, while the Weisse consortium has launched a campaign to introduce its shares on Wall Street under the auspices of its U.S. partners. Privatization-and the external opening in general-- have led to the denationalization of both the banking sector and large companies. At the same time, these processes are reshaping Peru's big business sector. A handful of regional economic groups have used the pri- vatization process to become bigger players on the national scene. For example, a group from the Peruvian city of Arequipa bought the national cement company, Cementos Yura, for $96 million, while the Peruvian- owned Wong Group has invested massively in the import business. Over the long haul, this process will lead to a selective concentration of national wealth and the transnationalization of the Peruvian economy. 3 While foreign capital has a much stronger presence in the Peruvian economy thanks to the neoliberal reforms, the inadequacy of domestic savings continues to be a problem. In 1993, Peru's domestic savings rate equaled 14.5% of the GDP; by 1995, it had climbed to 17.5%. But, as analysts point out, the rate would have to reach 22% in 1996 in order for the country to sus- tain the same level of economic growth as in previous years. 4 Three sources generally account for the low level of domestic savings. First, Peruvian businesses are not saving money because their profits are down due to the recession, the lower demand for goods from an impov- rket examines U.S. cereals, one of the numerous imports that er controls were lifted. erished population, and the strong currency that attracts imports. Secondly, families are not able to save money because stable employment is still extremely hard to come by. While the number of people living in extreme poverty has dropped since 1990, poverty levels are still higher than they were in the "pre-crisis" years of the early 1980s. Finally, the Peruvian government is not able to generate savings either because, although it is collecting more money in taxes than before, this new revenue is siphoned off by infrastructure expenditures and payment of the foreign debt. nother important prong of Fujimori's neoliberal economic agenda was state reform. The admin- istration hoped to reduce the state's role in social and economic life and to eliminate the public deficit. State reform fell most heavily on public employees. For example, the Ministry of Industry, which had 2,200 employees in 1990, today has fewer than 200. In 1990, there were 470,000 public employ- ees; today, there are about 210,000. While the government has had no qualms about fir- ing thousands of state employees, it has been less dili- gent about cutting public spending. According to the economic reform program monitored by the International Monetary Fund (IMF) through biannual consultations and "letters of intent," the Peruvian gov- 28 N8CLA REPORT ON THE AMERICAS 5 4 4m 4REPORT ON PERU ernment is not supposed to run budget deficits. But dur- ing election campaigns, the government routinely ignores this stricture. During the 1993-4 period leading up to the national elections, for example, the adminis- tration did not skimp on public spending, above all on infrastructure projects that the president personally inaugurated on the campaign trail. This sudden governmental largesse resulted in spec- tacular growth in the GDP, which reached 12.9% in 1994. Contrary to conventional wisdom, this growth spurt was due less to private investment or the reinvest- ment of profits than to public spending at a level similar to that of past populist governments. As government spending slowed down, growth dropped in 1995 to 6.9%. The business sector is of two minds where public spending is concerned. On the one hand, spending cuts can set off an economic recession just as injecting gov- ernment money into the economy can give business a much-needed boost. On the other hand, the business sector likes balanced public budgets. The business community is wary of generous public spending because it contends that the government often tries to close budget gaps by raising taxes on business. In 1990, business taxes were 4.2% of GDP; today, to the chagrin of the Peruvian private sector, they account for 12%.5 The Fujimori administration promised that state reform would usher in new institutions that would elim- inate tax exemptions and special business supports. The application of the neoliberal economic program, how- ever, has not rooted out favoritism and co-optation. The financial sector has fared the best under Fujimori, with the construction industry in second place. "Why does the government fundamentally punish industrialists while, for example, it gives miners tax exemptions?" asked the SNI's Eduardo Farah in a typical complaint. The government's appointments of several prominent business leaders to high posts in the administration indicates its selective co-optation of business. Far from neutralizing possible opposition, however, this strategy has in fact further alienated those who have not been rewarded with government posts. eru finds itself today in a phase of "post-stabiliza- tion." Obviously, its economic problems persist. The term "post-stabilization" is meant to reflect how the country has overcome-always a relative term in a place like Peru-the most serious problems that it suffered in the 1980s: hyperinflation, significant macro- economic imbalances, chronic contraction of the GDP, and disinvestment. Those characteristics have been re- versed, and the government has achieved economic and Oil and the Opposition T he government's attempt to derail opposition to the proposed privatization of Petro-PerO is a pal- pable demonstration of the contradiction in which: the government finds itself enmeshed. On the one hand, the government talks up the neoliberal dis- course of a new open institutional model; on the other hand, however, it acts in exclusionary, anti- democratic ways when things don't go as desired. The government hopes to collect about $3.8 billion with the sale of Petro-Perl-nearly the same amount as all the other privatizations to date. The: government sees the privatization of the national oil company as a way to increase its coffers, enhance foreign investment, and remain on good terms with- the IMF. It is proving more sticky than expected, how- ever, given that Peru's nationalist tradition considers "hot money." Meanwhile, Peru's for- eign debt has grown from 16% of the GDP in 1990 to 22% today. Then, there are the economic program's enormous social costs: alarming lev- els of unemployment, informal-sector work, and poverty. The absence of new public institutions and Fujimori's authoritarian style of governance reflect the shallowness and vulnera- bility of Peruvian-style democracy. At some point, the Peruvian people's tol- erance for the "change of course" is ort. Yet at the same ime, the econom- c program is hob- led by major roblems. In the hort to medium erm, the country as to confront its Luge trade deficit nd the over-valu- tion of the cur- "ency. The dollar- zation of the leruvian economy nd its depen- [ence on finance apital and repatri- ted flight capital leave Peru vulner- ble to sudden utflows of this Its back to the gove signed a ne of intent" IMF in May bound to wear thin. it promISE The government believes it has two alternatives: reduce state spending state spen even more, or offset the trade deficit furt by restricting imports and devaluing the currency (at the risk of reigniting inflation). In the fourth quarter of 1995, the government opted for the latter course, by trying to implement a "pragmatic" partial reinstatement of import controls. For example, the administration prohibited the unre- stricted import of used cars, a policy shift which was condemned by orthodox economists. These measures, however, did not have the desired effect. The trade deficit remained enormous. In May of this year, its back to the wall, the govern- ment signed a new "letter of intent" with the IMF in which it promised to follow the first alternative. The agreement calls for the drastic reduction of public spending (by the end of the year, there should be a bud- get surplus of 1 or 2%), the completion of the privati- zation process, operative autonomy for the organiza- tions in charge of tax collection, further lay-offs among the civil service, and cutbacks in the buy-out packages to laid-off public employees and in pension payments to retirees. In other words, the new "letter of intent" will unleash a larger recession within the recession. Nevertheless, support for the government remains unwavering among business associations that represent banking, insurance and broadcasting since these sectors have benefited handsomely from the reforms. Exporters in the fishing and mining sectors-which have grown dramatically under Fujimori-are also clearly support- ive of the government. These exporters, grouped in associations such as the National Society of Exporters (SNE), encourage the government to focus on Peru's "comparative advantages" and to maintain a weak cur- rency. Peruvian industrialists-who have had a rough ride on the neoliberal wave-have been less unequivocal in their support. While they back the government's long- term strategy of restructuring the economy toward exports, they disagree with the way the government is pursuing that goal. These industrialists, represented in associations such as the SNI and the the wall, Association of Exporters (ADEX), argue that high interest rates, weak rnment domestic markets, and dumping by big "foreign companies make wholesale w "letter restructuring of their operations impos- with the sible. They favor higher tariffs in some cases, the promotion of industrial in which exports through lower taxes, and a weaker currency. The Chambers of d to slash Commerce generally advocate the same policies. ling even The government stands at a cross- ler. roads-torn between either forging further down the path of neoliberalism or opting for a neo-populist form of governance where money is used to cultivate support and to buy off poten- tial opposition. In making its decision, the government will take into account the concerns and interests of the Peruvian business sector, one of its key constituencies. Yet that sector is sending contradictory signals. Some business people are urging the govern- ment to deepen the reforms that it has already taken, while others want those same reforms to be modified or scaled back. With the IMF breathing down its neck, the government seems to be leaning towards the former option. Either way, there is little relief in sight for Peru's poor majorities. Fujimori and the Business Class: A Prickly Partnership 1. Nota Semanal, No. 16 (April, 1996) published by the Central Reserve Bank of Peru. 2. Central Reserve Bank of Peru, Memoria 1994, p. 64. 3. See Manuel Castillo Ochoa and Andres Quispe, "Los grupos de poder con Fujimori: cambios macroeconbmicos y reconversi6n," in Pretextos, No. 7 (1995), published by DESCO. 4. Boletin de Opini6n, No. 23 (February, 1996), published by the Consortium of Economic Research in Lima. 5. PerU en numeros 1994, Anuario Estadistico (Lima: CUANTO, 1995).
