issue 197 - July 1989
Hopes were sky-high when Alán García came to power with
bold and ambitious plans. The economy boomed. But today inflation
is heading towards 10,000 per cent per year and poverty deepens daily.
Rosemary Thorp explains the crisis - but also finds pockets of optimism.
Susana is 22. When I met her she was working with such assurance and skill - leading a healthcare team in a Peruvian shanty town - that it was quite startling to learn her background.
When Susana was small her mother came to Lima with her six children - escaping by stealth from a violent husband in the mountains. The family had nothing: they began by living in one room in a relative's house. Her mother made a little money by going to the market at dawn and buying fruit which she then peddled in the middle-class suburbs.
Eventually they had to leave the place where they were living. So, with several hundred other families, they took part in an overnight land invasion - seizing unoccupied desert land on the edge of Lima. There were no public services such as water or electricity: these only started appearing ten years later. Susana's family put together a makeshift house, initially from matted reeds. Somehow enough cash was found to buy clothes so Susana could go to school.
A few years later she was offered the chance of a lifetime - a job as a maid for a diplomatic family who were going to Austria. But, at 15, she was determined to finish secondary school. So she refused and instead got a maid's job in Lima, which enabled her to go to school in the afternoon. She worked full time in the holidays to save money for the school enrollment fee.
Meanwhile she became interested in social action. Her own church told her she must leave if she was going to be involved in such political activity. But the welcome she has received from a progressive Catholic church group is some compensation.
I watched her in action: a sensitive team leader supporting and encouraging her group: she regrets she was never able to go to university.
Susana's story pinpoints for me a paradox of Peru - the harsh reality of poverty, yet the extraordinary resilience and hopefulness, and the hunger for education. It underlines too some of the tragedy: the State university she would most probably have attended was on strike, its quality badly undermined by lack of funds and affected by student unrest. What she was dreaming of was partly illusion, while her church group was actually giving her 'education' in a real sense.
But why so much poverty?
Peru has always had one of the worst income distributions in Latin America. But today it is clearly worsening: malnutrition and child mortality have been growing in the last few months. At the same time the whole population is increasingly being caught up in a web of violence. The guerilla forces - Sendero Luminoso, the Revolutionary Movement Tupac Amaru (MRTA) and the right-wing paramilitary group. Comando Rodrigo Franco - all confront an ill-funded, ill-equipped police and army of low morale.
Meanwhile the economic chaos has become acute. Inflation was at one thousand per cent a year in December 1988 and is by now so high that it is impossible to measure properly. Economic policy has lost credibility - all the more frustrating since the initial expectations of the present Government were so high.
Alán García was elected to the presidency in July 1985, as a leader of APRA (the American Popular Revolutionary Alliance). Popular support for García was overwhelming - 90 per cent according to opinion polls soon after the election.
The new Government promised to deal with Peru's economic problems in a very unorthodox way. Instead of cutting back on demand it would go for growth, favouring both the urban and rural masses. At that time inflation was at 11 per cent a month (which then seemed high) while there was enormous excess capacity. García proposed a price freeze that would take care of inflation. The resulting increase in demand would be accommodated by all that spare capacity.
Imports would inevitably flood in but these could be funded by delaying payments on Peru's debt to the foreign banks. This led to García's famous declaration that Peru would pay back to the banks not more than 10 per cent of the country's export earnings in any one year. The international community reacted by ostracizing Peru and García received none of the support he had hoped for from his Latin American neighbours.
The debt policy may have, been unpopular abroad, but it was a political success at home. It was certainly more positive than the previous recessive policies pushed by the International Monetary Fund. The new policy was ambitious - and dangerous. To succeed it required caution and careful monitoring at the early stages so that the economy did not grow out of control. It needed investment in key areas. And it needed a realistic recognition of the fact that a price freeze could only be partial and would lead to distortions in the economy.
In fact there was an immediate but short-lived boom - the economy grew by eight per cent in 1986. This created quite the wrong atmosphere for the kind of moderation and far-sighted planning that was needed. And even the famous debt policy was weakly implemented. In its first year in office the new Government actually spent the same percentage of export earnings on debt repayments as the previous Government had done in its final year.
After 18 months it became apparent that the Government did not know how to adjust its policy. Confidence dwindled, inflation grew and many people were sending their capital abroad. By the middle of 1987 President García's desire for a fresh political initiative led him to his worst fiasco: an ill-prepared and ill-judged bank nationalization.
Since then, policy has comprised a series of 'economic packets', roughly one every three months. And on each occasion some important ingredient is omitted or changed at the last moment, for political reasons or because of institutional rivalry. The credibility of the Government has sunk lower each time and investment has fallen.
Peru's story is an extreme one when compared with other Latin American countries. Peru has always been known as a 'beggar on a pile of gold' - referring to the extraordinary richness of its natural resources. But these can also be seen as 'gifts of the devil'. Its wealth of minerals like copper and silver have ensured that it has always been closely integrated into the world economy. One export boom has succeeded another. These have been financed very often by foreign firms with which the Peruvian elite were able to enjoy a prosperous 'symbiotic' relationship.
This elite has had very little need of a strong state - which might, for example, have intervened to protect and develop incipient industrial activities, or build new infrastructure. Instead the elite needed a passive non-interventionist state that did little more than maintain order. Peru's entrepreneurs were accustomed to relying upon foreign capital and foreign initiatives to an unhealthy degree.
This 'old' model provided a reasonable rate of growth as long as the string of easy export booms continued - though it never included the poor, who were always marginalized. But even this ended in the 1960s when there was a radical fall off in both investment and the volume of exports - leading to an economic crisis. This was temporarily eased by the sudden flood of foreign loans made available to Latin America in the 1970s.
García's Government chose a particularly ambitious route amid dangerously high expectations and it didn't work. But he was grappling with a deeply unhealthy underlying situation. A succession of governments of very different political complexions have struggled with it the last 20 years - with a conspicuous lack of success.
It is this weakness of the State which, curiously enough, leads me to the sense of optimism that can be found at the grassroots in Peru. Disillusion with the State's capacity to solve Peru's problems has been part of the reason for a ferment of self-help activity often involving non-governmental organizations (NGOs) and radical church groups.
These groups have very distinctive approaches. Respect for the individual, mutual support and awareness of how to change one's situation are all important - approaches which dovetail neatly with the 'liberation theology' of progressive church-based groups. This theology asks us to listen to the poor and to accompany them and it insists that each individual is loved and lovable and that from this will flow self-empowerment and the capacity for real change.
But change is coming not only from church groups and NGOs. It is also emerging autonomously within communities. In Piura in the north of the country, peasants trying to defend themselves against the actions of the armed groups, have formed rondas or self-defence groups. These rondas seem to be developing into broader help groups. In Lima neighbourhood committees perform a similar function.
Elsewhere producer groups are uniting to learn how to sell their wool or craftwork on the world market. Once formed, the group often extends into community action too, providing education and encouraging primary health care.
This then is the context of Susana's story. While she is no doubt exceptional, she is not alone. Thousands are taking control over their own lives. And like her they are often finding their own continuing education through church or other groups.
But it would be false to finish on anything but a note of tension. The very success of community building at a grassroots level has produced a fierce onslaught from Sendero - and aid workers have recently become the target of attack. These are real and terrifying threats to development.
One should not be naively optimistic about Peru. As a founding parent of Liberation theology, the Peruvian Gustavo Gutierrez said recently, 'poverty is death'. That is true both as metaphor and literal reality in Peru today.
Rosemary Thorp is a Lecturer in Economics of Latin America at Oxford University. She has written books on Peru, has spent much time there since 1966, and is a sponsor of the UK-based Peru Support Group.
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