Toledo's Peru: Vision and Reality

3. Market Economics with a Human Face

The macroeconomic policies followed by the Toledo administration were highly successful. In continuing the orthodox economic approach initiated by Fujimori, President Toledo brought five years of strong economic growth to Peru. Laboring under the weight of a prolonged economic failure that stretched back several decades, he was less successful in fulfilling campaign promises to create jobs and reduce poverty. Buffeted by widespread social mobilizations, the president’s approval numbers spiraled downwards, eventually reaching the lowest level of any chief executive in Latin America. Fujimori’s Economic Legacy Within two weeks of his July 1990 inauguration, President Fujimori announced the first phase of an economic stabilization program. Dubbed “Fujishock” by local pundits, it was based largely on policies he had denounced during the election campaign. Key elements of the program included the liberalization of foreign trade through the removal of exchange controls, the elimination of restrictions on most imports, and a deep cut in tariff rates. Public sector companies were told to raise prices to profitable levels, implement a hiring freeze, and furlough employees hired during the closing months of the García administration. Overnight , the Fujimori administration ended both price controls and subsidies, many of which had been in place for decades. As a result, Peru experienced its steepest single-day price increase in the twentieth century, and the popularity of President Fujimori plummeted among lower-middle-class and lower-class supporters. Thereafter, the administration pursued largely orthodox economic policies in an effort to end hyperinflation and restore the international standing of Peru.1 Market Economics with a Human Face Chapter Three 34 Toledo’s Peru In conjunction with the implementation of strict neoliberal reform policies, President Fujimori, in the wake of the April 1992 autogolpe, centralized political authority, facilitating the implementation of dramatic policy change. To eliminate political space for potential challengers, he reversed a decentralization initiative that had created thirteen regional governments in 1989. Enjoying majority support in Congress after 1995, he minimized political dissent within his own party, expediting legislative approval for initiatives drafted by the executive branch. The authoritarian nature of the chief executive, combined with an increasingly closed political system, ignored or muted opposition from challengers .2 As economic and political stability improved, the Fujimori administration gradually reinserted Peru into the international financial community and successfully addressed development and debt issues. Early efforts toward economic normalization ended in a Paris Club agreement in July 1996 in which Peru succeeded in restructuring much of its $9.25 billion debt, and by the end of the decade , it had largely completed debt restructuring and normalized relations with external creditors. The economic stabilization policies followed by the regime also ended a period of sustained hyperinflation. By 1997, the inflation rate was down to single digits for the first time in twenty-five years. Growth rates also improved with annual GDP growth averaging a highly respectable 5.3 percent in 1991–97. Peruvian exports also increased substantially, and the rate of foreign investment responded favorably to changes in investment legislation and the privatization program implemented by the government.3 After several years of strong performance, the Peruvian economy slumped in 1998–99 under the influence of several external shocks, including the El Niño weather phenomenon and the Asian financial crisis. El Niño wreaked havoc with both the agricultural and fishing sectors, while turbulence in global financial markets squeezed liquidity. Weaker commodity prices impacted negatively on traditional exports, and as export revenues dropped, the current account balance deteriorated. With the decline in output, domestic demand also dropped, and unemployment increased. In response, the Fujimori administration initiated a somewhat more expansive fiscal policy but mostly remained committed to the macroeconomic policies of the past. A nascent recovery in the first half of 2000 was cut short as government expenditures in some sectors were restrained to offset overspending elsewhere prior to the presidential election. At the same time, private investment declined in view of the high state of political uncertainty surrounding the final months of the Fujimori regime.4 Given the delicate state of the economy, the strategy of the interim administration of Valentín Paniagua, who took office in November 2000, was to ensure Market Economics with a Human Face 35 macroeconomic stability in the transition to the elected government scheduled to take office in late July 2001. In support of this goal, the interim government targeted real GDP growth of 2.5 percent in 2001 with...