By Taimur Ahmad and Lucien ChauvinThe day after Ollanta Humala was elected Peru’s president in 2011, the local bourse suffered the worst single day in its history, plummeting 12.5% before trading was suspended.
The left-wing ex-soldier had narrowly beaten Keiko Fujimori, a right-wing populist congresswoman and daughter of a jailed former president, to become Peru’s head of state. Peruvian Nobel laureate Mario Vargas Llosa famously likened the runoff to a choice between terminal cancer and AIDS.
It wasn’t just financial markets that reacted badly to Humala’s election. Large swathes of the public took fright – as did foreign and domestic companies, the lifeblood of Peru’s open economy.
The fear was that a Humala presidency would hurl the country into the grips of the 21st century socialism model promoted by the late Venezuelan leader Hugo Chávez. He would roll back free-market reforms, following his campaign pledge to fight poverty by redistributing the country’s newfound wealth. Industries would be expropriated, private schools shut down and the economy turned on its head.
His first year was largely an awkward teething period, during which a series of missteps saw his approval ratings falter amid widespread public distrust. But Humala and his economic advisors insisted from the outset that they would preserve economic stability, attract foreign investment and maintain rapid growth.
Throughout a series of ups and downs since taking office, Humala has stuck to that promise on economic management. He has maintained the policy framework of previous administrations, while launching a number of programs to follow his campaign promise of social inclusion.
He picked Luis Miguel Castilla, a deputy finance minister in the previous administration, as finance minister, and retained Julio Velarde for another five-year term at the helm of the central bank. Both appointments helped encourage a belief that the erstwhile leftist revolutionary may pose less of a threat to economic stability than many had feared.
Since then, Peru’s rapid expansion has continued unabated, nudging 7% a year. Peru had the fastest growth, 6.3%, and lowest inflation, 2.6 %, of any country in South America last year. Today, foreign investment continues to pour into mining, hydrocarbons and infrastructure; business confidence is at record highs and the domestic market is booming. Investment reached 27% of GDP in 2012, up from 18% ten years ago, and is expected to rise.
The result is that 18 months into his presidency, Humala’s popularity is close to 60% – a level unseen in Peru in many years. The public cites solid government management, economic stability and social programs as his biggest achievements. His support is strongest in Lima, the capital, where he was trounced in 2011, winning only one of 43 districts, and among the wealthiest sectors, where less than 30% voted for him.
The president is also connecting with Peru’s 30 million people at a more basic level. “He has an image Peruvians can relate to in their daily lives,” says Luis Benavente, a political scientist at the University of Lima and head of consultancy Vox Populi. “He comes across as hard working and a family man, something his two immediate predecessors could not claim.”
Man of the year
Humala is LatinFinance’s Man of the Year in 2013. It is an award not only for what he has accomplished through his pragmatism in managing Peru’s prosperity, but also in recognition of the fact that, partly by virtue of his achievements so far, Humala has been afforded an historic opportunity to transform his nation.
Today’s conditions, which Humala has had a hand in creating and sustaining for the better part of two years, have granted him arguably the best shot of anyone yet to cement the gains of an unprecedented economic boom and to set the foundations for his nation’s longer-term future. So long as that chance is not squandered, he has the potential to go down as one of Latin America’s great leaders.
In an exclusive interview with LatinFinance – his most extensive with any foreign media since taking office in 2011 – Humala says it is still too early to talk about what the landscape will look like when his five-year term ends. But he says he is mindful of the task at hand.
“This is like an oil painting that will be done in 2016,” he says. “I am still putting the outlines on the canvass to start filling in details. We are working in an orderly way and fulfilling goals we have set. The painting will show a much different Peru.”
LatinFinance chooses Humala as Man of the Year not only for what he has so far put on the canvass but also for what he is sketching out. A picture is already emerging of an administration that is far more pragmatic than anyone had anticipated. Should it continue in this vein, many now believe his government has the potential to change the country profoundly for the better.
The president’s approach is winning praise from unexpected quarters. Hernando de Soto, Peru’s best-known economist, head of the Institute for Liberty and Democracy, and an advisor to Humala’s opponent in 2011, says: “Things are much better than I thought they would be. I always considered him a good man and thought his heart was in the right place, but his ideas were not pertinent to 21st century issues. This has changed and he is doing the right things with macroeconomic policy and anti-poverty programs are working.”
Even Vargas Llosa recently applauded the man he had once so sharply dismissed. “He has respected democratic institutions, freedom of press, freedom of criticism in a flawless manner, and has also respected the market economy,” he said in a recent interview. “Peru continues to grow and the middle classes continue to grow.”
Consistency in economic management is widely seen as one of Peru’s crowning achievements over the past two decades. It has allowed for an economic boom that is being increasingly cited for its endurance. The IMF, for example, noted in February that Peru today is the best placed of any Latin American country to withstand another global economic shock.
World Bank president Jim Yong Kim also recently heaped praise on Humala, saying that the Peruvian leader “is managing a success story that goes beyond its own borders and is enjoying well-deserved international recognition”.
Who is Humala?
Yet it is precisely his transformation from radical leftist to center-left pragmatist that has confounded Humala’s detractors, his early backers and many observers, alike.
The president refuses to accept that he’s a different character to the one that campaigned for office. “People say that there are two Ollantas: one the candidate, the other the president. But that is not true,” he tells LatinFinance. “I am the same person who wants to carry out my commitments.”
“What I am doing is complying with my duty, which is to follow through on policies that are completely coherent with the campaign. I offer the Peruvian public social inclusion. The economic model cannot only be focused on growth.”
The commitment to inclusive growth is at the heart of Humala’s economic philosophy. In that sense, it remains fundamentally the same pledge as always. But while the end stays the same, the means have changed. Humala’s administration has managed to boost business confidence and growth, which he now sees as prerequisites for improving social conditions.
“Today we have a stable macroeconomic policy,” he says. “We have concerned ourselves with consolidating a macroeconomic framework that allows us to redistribute economic growth in the country.”
It is a very different approach to 2006, when Humala ran on a left-wing nationalist platform, vowing to change the economic model in a manner similar to his peers in Venezuela, Ecuador and Bolivia. He railed against foreign companies exploiting Peruvian minerals and natural gas, and pledged to stop free-trade agreements in the works with the US, China and other countries.
A campaign linking Humala to Chávez was a large factor in his loss in a runoff to Alan García, who capped a political rebirth after a disastrous five-year term in the 1980s.
Despite the loss, Humala never stopped running, even though local pundits gave him little chance of winning the presidency in 2011. The safe bet until just weeks before the voting was on former president Alejandro Toledo or a list of other center-right candidates bunched together at the top. Humala ran decidedly to their left. The 198-page platform presented by his political party, Gana Perú, talked about resource nationalization, state intervention and revision of the economic model.
Looking back, De Soto says that what scared Peruvians in 2011 was not only the plan, but that the people who wrote it might “run the government with proposals that no one could take seriously in a modern economy”.
But even before he faced the runoff election, Humala had jettisoned that plan, replacing it with a concise seven-point roadmap focused on the important themes for his administration. The roadmap won the backing of once-fierce critics, including Vargas Llosa and Toledo, who had previously equated Humala with fascism. After squeaking out a two-point victory against Keiko Fujimori, Humala went on to govern with his roadmap.
The turning point came when Humala failed to offer cabinet posts to the original plan’s authors. He went on to sideline almost all his early allies, a large chunk of whom were booted out within six months in a shakeup that also saw 10 ministers leave government. The most conspicuous left-wing lawmakers brought in to run on Humala’s ticket, including Social Party founder Javier Diez Canesco, split from the congressional caucus less than a year into office.
Still smarting from what they see as a betrayal, Humala’s newfound opponents on the left, including his parents and three of his siblings, are harsh in their criticism. The president’s father, Isaac Humala, say that if his son does not tack leftward, he might fail.
No choice but pragmatism
Humala says ideologies cannot cloud state management and that the goal is a government that is predictable.
“I have to do what is necessary – sometimes veering to the left, sometimes veering to the right – looking for the best way to get to where we want to go,” he says, likening his task to that of bus driver.
“There are risks, and these risks we assume as a government. The public needs to be at ease, the state cannot add tensions to people’s lives. I do not think that any government policy can be successful if we do not have a successful economy.”
Some argue that Humala had no choice but to adopt a pragmatic approach to leading the country and managing the economy, precisely to preserve the country’s high growth rates. Intervening against the machinery that was producing rapid growth would have cost him dearly.
A large part of the credit for economic policy continuity goes to Humala’s finance minister. “Castilla was able to convince the president that a change in the model would have been completely misguided,” says Eduardo Morón, a former Peruvian deputy finance minister and now head of the Bogota-based Fondo Latinoamericano de Reservas (FLAR).
Humala as president today is seen as much closer in approach to Uruguay’s José Mujica, a pragmatic, no-nonsense leftist, than to Chávez. Humala’s conversion – if it can be called that – to pragmatism also reflects some basic truths about Peru’s economy. While growth in Peru today holds up well in part thanks to strong domestic consumption, it is fundamentally at the mercy of investment – the main driver of demand. Any move that undermined business confidence would have had a direct and substantial effect on growth momentum.
“I always felt that when Humala came to office, if he tried to do something radically different a la Chávez, it just wouldn’t work, it would have been a recipe for disaster. And he knew that,” says Michael Shifter, president of The Inter-American Dialogue, a think tank. “I’m not surprised that he just let these things happen.”
The Humala administration set to work quickly upon taking office. Almost immediately, it raised the minimum wage and ushered through Congress three bills that increased revenue from mining companies – a central factor in creating the environment in which his government has evolved over the past 18 months.
“We created the mining tax, but unlike those who did not know me, who thought I was going to do it based on coercive methods, threats of nationalization, we did it through dialogue with the companies, explaining the country’s needs,” says Humala. “That is what this is about: complying with my duty.”
Erich Arispe, a director in Fitch Rating’s sovereign group, says a major concern was striking a balance to win additional revenues from mining companies while not diminishing Peru as an investment destination. “The private sector was a willing participant in reaching this agreement,” he says. “If you look at mining investment in the country, the agreement obviously did not undermine Peru’s attractiveness.”
Boosting revenue through mining levies, tax reform – the tax take hit 16% of GDP in 2012, the best in Peru’s modern history – and other mechanisms, has allowed Humala to expand social programs. The principal component of the new approach was to set up a Ministry of Development and Social Inclusion (MIDIS) to implement a host of new schemes, as well as to improve those already in place.
The president stresses that his government is not about new initiatives, but that it has instead “created a social policy for the first time in Peru. We have a social policy with second-generation social programs, productive programs. All of these things make me happy, but I cannot say that there is anything that has been concluded.”
Social spending in 2013 – including education, health and inclusion – increased the budget by 67% compared to the previous year.
De Soto says Humala’s push for social inclusion could be the defining characteristic of his tenure. “We will find out what the man is made of when he has to do something new rather than just keep the trains running. This will be seen with social inclusion, not just social programs,” he says. “Tough decisions will be needed in the near future and we have to hope that he will take the bull by the horns and deal with them.”
Once a staunch opponent of globalization, the president has embraced free-trade agreements and a limited role for the state. But he cautions that while he believes in an open economy, he nevertheless has concerns about the free market.
“The economic model cannot only be focused on growth,” Humala says. “The famous trickle-down theory – if you fill the pockets of the rich and it will spill over – does not work because the pockets you are filling have holes. I promised social inclusion, which is development hand-in-hand with growth. We need to sustain growth. We cannot kill the goose that lays the golden egg, but create the conditions for it to lay more eggs.”
Can the miracle last?
Peru’s growth is nevertheless today the envy of nations the world over. With 6.2% expansion forecast for 2013, it looks set to stay that way. Yet observers are increasingly asking how the Humala administration will safeguard the fruits of its economic boom over the longer term.
“The challenge facing Humala right now is precisely that he needs to answer the question of how sustainable this growth is going to be,” says Liliana Rojas-Suarez, senior fellow at the Center for Global Development in Washington. “We don’t want to see a missed opportunity.”
Despite efforts to promote social inclusion, experts fear a more comprehensive plan to propel Peru into the ranks of high-income countries is simply absent. “There’s no sign that he has a very clear commitment to a reform agenda,” says The Dialogue’s Shifter.
“Humala is obviously someone who’s ambitious and can sense the mood. But I don’t think he’s somebody with a well thought-out vision of where he wants to take Peru. He’s someone who knows how to manage this upward trajectory,” he says.
Shifter says this leads to the central issue facing Humala’s presidency. “We had Toledo, we had García and in both cases people talk of lost opportunity. Will people say the same after the Humala administration?”
As Peru’s middle class becomes stronger and more vocal, there is a growing demand for public services. The worry is that Peru’s inadequate infrastructure – both physical and human capital – and a poor educational system, even by regional standards, will hamper growth in the longer term.
The risk may not be immediate, but it is no less profound. Ultimately, few countries sustain high growth for more than a generation – and even fewer continue their high growth rates once they reach middle-income status. “Reform has to happen now,” says Rojas-Suarez. “Twenty years from now is too late. By then, the growth of Peru will already have become unsustainable.”
In infrastructure alone, the country needs to invest close to $40 billion over the coming five years to reach its target of 6% annual growth. The transportation ministry has said the state will invest $12 billion through 2016 building or improving the country’s road network.
Working out how to allocate resources – and how the public and private sectors should cooperate towards this end – remains a central issue. Morón says not enough is being done in terms of creating a national plan for infrastructure. “The idea was to bring projects that are badly needed to the regions, to make them change their priorities. But that has not happened yet,” he says. “You need strings to pull which you don’t have right now. That’s a missing reform that you probably won’t be seeing in the near future.”
Morón says that one of the main challenges is basic management of government departments. “In Peru, you need a president to push every single minister all the way,” he says. “As a minister, you may wish to tackle fifty initiatives tomorrow but it doesn’t depend on you, it depends on other ministries, Congress, the opposition, you name it. You need somebody at the top to coordinate efforts to make sure these things happen.”
When the wind blows
Peru’s formidable output is a function of its mineral wealth and favorable winds over the past decade that have boosted the fortunes of many of Latin America’s commodity exporters. It is the world’s second largest copper producer after Chile and among the world’s top producer of silver and zinc. Production and exports are set to increase over the medium-term.
Peru also exemplifies the positive impact of China, its largest trading partner, perhaps better than almost any other country. Rojas-Suarez says China remains central to Peru’s economic story.
“Peru’s growth is not a miracle,” she says. “It happened for a very particular reason: it has been the story of China to a very large extent – China, combined with excellent macro management domestically. It’s a complex story, but it is not a miracle.”
Fears that China’s growth rate will fall sharply have eased in recent months, yet concerns still linger over the Asian nation’s structural transformation from an export-led economy to one that relies on domestic sources. Experts believe this rebalancing will ultimately mean a more permanent slowdown not only for China, but more generally for economies that have benefitted from a commodities boom over the past decade.
Such a slowdown, when it comes, need not be cataclysmic. But a change in the external environment will inevitably pose new challenges for many countries, including Peru – and could prove to be the litmus test of whoever is leading the country.
“That’s when we’d see who Humala really is and how the political system reacts,” says Shifter. “So far, it’s been a very nice ride, so you can have mediocre politics and weak institutions, [and] that doesn’t put at risk the path the country is pursuing. But that won’t last forever.”
Peru wants to diversify and industrialize its economy, strengthening other sources of revenue. The Humala administration is targeting agriculture and tourism. Agriculture is the second largest export category and the government expects tourism could rival its spot in the coming years.
The government also needs to move on additional reforms to improve bureaucracy. The administration sent new civil service legislation to Congress in late 2012. It was flagged as a priority but has sat for three months with no movement. It is just one of a long list of bills that have been stuck in the legislature for months and, in some cases, years.
Paradox of Peru
In the world of Peruvian politics, Humala and his wife, first lady Nadine Heredia, are anomalies. They are the only politicians with approval ratings above 50% (the first lady is more popular, with 61% according to a recent poll). Former presidents Toledo and García, who are already slugging it out for a chance to return in 2016, have approval ratings below 30%. Keiko Fujimori is doing better, with support closer 40%.
But Humala could face the same dilemma in 2016 that Toledo and García encountered. Toledo’s party did not field a candidate in 2006, at the end of his term, and García’s APRA did not have a candidate in 2011. Humala’s Gana Perú has no obvious candidate other than Heredia, and the constitution would have to be changed for her to run for president.
Steven Levitsky, a Peru expert at Harvard University, says the lack of a political party system has led to the “paradox of Peru” – namely, high growth accompanied by high levels of discontent. Growth over generations “is not sustainable without a political system”, he says.
Given that Gana Perú does not yet appear to have anyone being groomed to step up in 2016, “there is a good chance that the party will go dormant until 2021,” Levitsky says.
Experts agree that the Peru’s political system is essentially in a state of crisis – one that, without reform, poses one of the biggest home-grown threats to long-term prosperity. “It is a vicious circle, because there aren’t strong parties to stop a caudillo and the caudillo does not want strong party, because he wants to remain number one,” says Cynthia McClintock, a Peru expert at George Washington University.
Adds The Dialogue’s Shifter: “You need political parties to guarantee a degree of certainty and stability, though Peru is showing how long you can go on without this. A change in the external environment would put this to the test.”
For now, however, Humala says he is focused on the present, not on what happens in 2016. “We need more infrastructure, more energy, more services. We need to reduce risks to guarantee a sound economy and public policies to ensure that growth is reaching the people who need it,” he says. “We will continue our oil painting through 2016 and it will reflect a Peru that is different, better. I only regret that the day has only 24 hours. It should be longer.” LF