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 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
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
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
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
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 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
"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
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
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
"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
"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
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
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
"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
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
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
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 Washington
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