U.S. Praise for Peru's Economy Misses the Mark

By Lisa Skeen
Republished from NACLA

Sep 13 2010 - The Peruvian economy has been enjoying something of a heyday lately, basking in the glow of the mainstream media. Currently being hailed as something of a Latin American wonder child, the Andean country has received increasing press coverage for its near decade of strong growth, which has continued despite the global economic downturn. But extensive coverage of fawning comments by President Obama have overshadowed the parallel narrative of a country potentially on the brink of disaster, with widespread voter discontent, sharp income disparity, and explosively divergent claims to land and resources.

After Peruvian president Alan García visited the White House early this summer, Obama praised the country during a press conference, stating “We've seen not only the solidification of a thriving democracy but also an extraordinary economic success story. Even over the last year in the midst of a very tough global recession, we saw that Peru was able to remain resilient.”

Meanwhile, outside the White House, a small group of activists protested the meeting. A Peruvian woman and her daughter were later charged with defacing government property after the daughter chained herself to a White House fence and the mother poured an oily substance on her.

The incident, which was meant to highlight the environmental destruction wrought by mining companies, was mentioned only in passing on an ABC news blog. Obama's “economic success story” line, however, has reverberated through the mainstream media.

His comments, however, are as much a statement of faith in neoliberal trade policies as they are a statement of faith in Peru itself.

Certainly, the Peruvian economy has expanded. In May, the International Monetary Fund estimated that Peru's economy would expand by 6.3% in 2010 – the largest increase in the western hemisphere – due mostly to foreign direct investment (FDI) in mining and energy and the soaring price of gold, Peru's second-biggest export. Bank of America estimated that investment in the country would nearly double in 2011, to $8.4 billion, from $4.4 billion in 2009.

And yet, García's approval ratings hover at around 31%, up slightly from an abysmal low of 26% in May. His ratings reflect the reality that there is often little, if any, immediate correlation between GDP growth and quality of life for ordinary citizens.

Former president Alejandro Toledo described an alternate reality in an interview with PBS Newshour: “[There are] millions of Amazonians, Afro-Peruvians, who don't have the chance to have access to potable water and sanitation, to quality health care . . . ,[and] access to energy. And that's a population that's very discontented, and today getting together.”

A June report by Oxfam America paints a bleak picture of Peru. Throughout the 1990s, reports Oxfam, the country underwent a dramatic restructuring, with heavy emphasis on decentralization. As a result, local governments are now given 50% of royalties and taxes paid by extractive industries (called the canon minero), which in theory, should have been a boon to local communities, given the rapid growth of FDI. FDI inflows have nearly tripled in the last decade, from $1 billion during 1990-1999 to $2.7 billion during 2000-2009. As in the rest of Latin America, the exploitation of natural resources, particularly minerals and gas, is responsible for the majority of this investment.

Poverty indices, however, indicate that foreign investment and the current system of royalty distribution – hobbled by lack of institutional support and corruption – is highly ineffective at spreading wealth equitably. The García administration claimed the national poverty rate fell from 48.7% in 2005 to 34.8% in 2009, but Farid Matuk, a former head of the National Institute of Statistics and Informatics (INEI) – the organization responsible for these statistics - was highly critical of García's conclusions, which have been widely reprinted in the media. According to Matuk, “The poverty figures are not a product of scientific measurements but an artistic creation . . . there is no math on earth that backs up INEI's statistics.”

A closer look at INEI statistics indicates that poverty levels have actually increased in rural areas, particularly in rural areas associated with mining, agriculture exports, and the Amazon. They range from an astounding 70.3% in Apurimac to 56% in Cajamarca (Peru's leading gold mining region) to a low of 13.7% in the Pacific coast region of Ica. Food poverty levels, considered a more accurate indicator of day-to-day hardship, have increased in rural areas, from 40.7% in 2005 to 45.8% in 2010.

Mining and gas concessions cover a staggering 70% of the Peruvian Amazon, many of which overlap with indigenous lands. Though many of the concessions are not being actively utilized, forecasts about environmental degradation are grim One recently released study offered a worse-case prediction that 91% of the Amazon would be deforested/degraded by 2041.

Rural discontent over land use, which has been simmering for years, boiled over in June 2009 with indigenous protests against the granting of exploration concessions to oil and gas companies in Bagua. Thus far, the protests have had little effect on García's policies.

The potential for such deadly explosiveness has investors concerned that there is a “sizable danger” that Peru will elect a populist president in April 2011. The possibility is considered likely enough to warrant the suspension of anticipated credit ratings upgrades until after the elections.

The potential for the election of a president who appeals to the rural poor rather than the urban business class no doubt looms large in the minds of investors and U.S. officials. Under García, Peru has remained a critical ally of the United States, particularly for its strategic location among other coca-cultivating countries that are, at best, highly wary of U.S. foreign policy. The potential deepening of a military alliance between the two countries was alluded to in comments by U.S. Defense Secretary Robert Gates during an April visit to Lima.

But it is most likely Peru's friendliness to foreign investors that goes the farthest to explain Washington's insistent praise for Peru's “growth” amid such stark evidence of domestic discontent. The United States – Peru Trade Promotion Agreement (TPA) went into effect on February 1, 2009, and according to the U.S. Trade Representative, trade between the two countries grew to $9.1 billion in 2009, up from $3.6 billion in 1999.

The TPA included a requirement that Peru protect labor rights, as well as a pledge of bilateral cooperation on the promotion of environmental protection. Under the agreement, Peru had 18 months from the February 1 implementation date to bring itself into compliance with this pledge. In July of this year, U.S. Ambassador Ron Kirk, expressed concern that Peru would not meet these obligations by the August 1 deadline.

Thus far, the Obama administration has not seriously addressed Peru's noncompliance with those few parts of the agreement capable of positively impacting local communities. Meanwhile, the praise keeps flowing and foreign investors continue to profit as rural Peruvians sink deeper into poverty – and discontent.

Lisa Skeen is a NACLA Research Associate.