By Taimur Ahmad and
The 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
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
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
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
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
"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
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
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
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
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
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
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
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
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
"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
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
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
"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
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
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
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
"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
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
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
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
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