Printer Friendly

Nationalization and privatization in Peru: Socio-economic images in perpetual conflict?

Margaret Y. Champion (*)


This article presents a stylized history of public policy regarding the relative places of government and private enterprise in a developing country-Peru. It is a history of clashing images of appropriate policy in the context of political power struggles and a volatile economic environment. The article covers the period 1968-2001 a time during which Peru first experimented with nationalization of private enterprise; then turned to privatization; and most recently sought to find some sort of workable compromise. A stylized history of this process is presented with an emphasis on the visions of proper policy that were publicly presented by the principal players. The time period of the study is 1968 to 2001. [C] 2002 Elsevier Science Inc. All rights reserved.

1. Introduction

1.1. What is the role of the State?

It is generally accepted that defense of the country is the responsibility of a central government. Next is acknowledged the need for the State to guard the welfare of its citizens.

However, although most agree that the State should be concerned with the administration of the public good, leaving the rest to the private sector, others argue that more is needed. Some call for central planning, with production and distribution directed by the State. Others agree with Cornejo, (1982:251) Lima University economics professor who says that what is needed is for the State to participate in and promote economic activity, to act directly in priority strategic sectors, but without controlling the rest of the economy.

The history of world economic development suggests that the prevailing image will change within a country over the course of time. This paper "models" such change in the case of one Latin American country-Peru. The modeling consists of the presentation of a stylized history of the Peruvian experience.

2. The historical background

In Peru, private property, controlled by a few wealthy individuals and groups, was the norm. It was an exclusive system. The State character was basically liberal. The term "liberal," as used in South America, means adherence to a market economy, free trade, a laissez-faire ideology, and reducing public activity in the national economy. Peruvian Senator Silva Ruete (1981:177) terms the theories of Milton Friedman, of the University of Chicago, as "classic liberalism." Intervention in the economy is not only unnecessary but even pernicious. The government should be a passive administrator to assure the increase of private and foreign capital through building the infrastructure necessary to guarantee export profits. (Portocarrero et al., 1988:19).

This tradition gradually changed due to a significant extent to the actions of APRA (Peoples' Revolutionary Alliance of America). APRA was the first major political party in South America to base its program on the State as an economic entity. In 1925 Haya de la Torre (1985:I-174, II-483, V-10,111,141), APRA's founder, wrote from London: "Good government is not possible if it is not based on the organization of the national economy." The first National Congress of the Party in 1931 made a formal call for "progressive implantation of a cooperative system of production and consumption," nationalization of the transportation system and insurance services, with selective expropriation of land, the extractive industries and other natural resources. "Nationalization of our resources is the only guarantee of our liberty." This established a clear position in opposition to the liberal standards that existed before 1919. Feudal landowners were sure the Apristas were communists.

The conservative sociologist V. Belaunde (1940:239) warned of the danger of socialism. The nationalization of productive forces would destroy the hierarchy established on the economic base. It would protect political liberty but would not establish equality. The heads of industry and political parties would be replaced by a rigid oligarchy of politicians who wanted to control the culture. Nevertheless, the State assumed a position of growing intervention and regulation of the economy.

Cox (1971:13), APRA leader, supported the trend. "Democracy cannot be saved by liberalism, but only within the planned organization of the economy. It is not true that planning leads to collectivism and socialism, but creates order within liberty." Added Haya de la Torre (1985:V-361), 1), "Laissez-faire has lost its relevancy within an expanded society which, as a result of the rapid advance of technology, incorporates the State as a factor of production."

The State became allied even more closely with the movement of the economy when the Army took over in 1962. Reformist senior army officers decided to expand the scope of the government, including central planning as an aspect of national security. Since private investment had decreased, the government had to assume the responsibility for investment to maintain the economic cycle. (Garcia Perez, 1985:146)

When President Fernando Belaunde took office in 1963, he did not return to the liberal plan which the army had displaced. Public investment grew rapidly and Belaunde converted the State into a director of resources and corrector of the automatic responses of the market. (Portocarrero, 1988:36) He continued to alter the economic role of the government sector from its earlier position which merely supported the private sector. "I cannot embrace laissez-faire.. the results are constant hunger and misery... planning is necessary in this environment and government must be the promoter," said Belaunde, (1965:124).

Meanwhile, the APRA party had modified some of its views through the years. It was now characterized as a "middle of the road" movement, and Haya de la Torre (1985:V-438) said, "We are not going to nationalize for the sake of nationalization." Where conservatives had once viewed APRA as a dangerous threat to stability, leftists now saw the party as an important obstacle to real change. (Klaiber, 1977:117) Observed Malpica (1970:45), leftwing leader, "APRA is now pro-imperialism and pro-oligopoly."

Ravines (1963:152), a former Communist converted to capitalism, accused the Communists of favoring nationalizations to encourage ruin, economic chaos, corruption and failure of business corporations. It was the best road to insure misery, increase hate for the elites, encourage disorder and subversion and show the failure of the bourgeois State.

3. The military state and nationalization

Fearing that reactionary landlords and the still powerful oligopolies would move to regain their old positions of power, the radical military, led by General Juan Velasco, instituted the golpe of 1968. It used the State to make structural changes which it believed the country needed. Oligarchic accumulation and liberal orientation represented obstacles which widened structural gaps and the social and regional inequality of the country. (Portocarrero, 1988:39) The era of a State-managed economy was at hand.

Said Belaunde: "Haya de la Torre was a strong candidate for the election of 1969 and was the favorite. This stimulated a golpe de estado because at that time the armed forces were determined that APRA would not enter the government, knowing that I would respect the coming election." (Belaunde, 1989)

The Army said it would "put order in the social revolution," not stop it. "The Revolutionary government of the Armed Forces has for its principal goal to make the State more dynamic and effective for better government action," stated Velasco (1972:IX-15). He saw "the necessity to abandon capitalism, because within this system we have become a dependent and underdeveloped country.. however, we reject the alternative of communism... (because of) the programs of those two positions which we consider unacceptable."

Extensive foreign ownership in practically every sector was also unacceptable. In 1968, three-fourths of mining, one-third of fishing, one-half of the manufacturing industry and two-thirds of banking were under direct external control, "an economy basically denationalized that served the massive export of riches to foreign countries... and augmented the fortunes of very small local groups." Velasco (1973:XII-22,44) vowed that "we must insure that the resources of the country serve national interests and not foreign business, the majority of Peruvians and not small groups of ancient privilege." The government's strategy would be to seize property of production and primary export so as to gain control of centers of accumulation and also to monopolize exterior commerce of basic resources. (Vigil, 198 1:216)

The National Society of Industries (SNI) opposed the plan. For effective industrial development of the country, the role of the State should be that of promoter, reserving for itself only those industries which, because of the big investment they demanded, were not within the reach of private corporations. (Bustamante, 1974:70)

Despite such opposition, the Revolutionary government made profound changes in the economic, political and social life of Peru. It eliminated the most important center of power, the export oligarchy and the foreign economic interests with which it was associated. It moved toward full development of modern capitalism in Peru in the form of a type of state capitalism closely linked to multinational firms. (Cotler, 1975:44) Warned Haya de la Torre (1985:VII-475), "There are two capitalisms: private capitalism is exploitation of man by man, and state capitalism is exploitation of man by the State."

The military government gradually expropriated or nationalized a large number of enterprises, creating State corporations to replace them. Up to 1968 there were only 40 public corporations, but by 1975 there were 174 corporations with state participation. (Cornejo, 1982:259) By 1980, the number had grown to 192; by 1989, 270. The expansion of the State was truly remarkable. Between 1955 and 1975 the aggregate value of the State sector grew eightfold, and employment in it almost ninefold. (Garcia, 1985:146)

The government's share in national investment went from 13% in 1965 to 50% in 1971. Ibanez O'Brien (1993:39), Minister of Industry, believed that advisers of the military regime wanted the private sector to disappear.

The government allowed the economy to expand steadily with the impact of revived export income and increased State investment, but with tight credit, import restrictions and price controls. It lacked private investment, but good results came from the policy until 1974 when symptoms of the long run structural faults in the Peruvian economy appeared: balance of payments deficits, food shortages, and inflation. The spectacular growth of the empresarial role of the State had exceeded the economic capacity of the public sector, leading to disequilibrium and inefficiency. (Cornejo, 1982:257) 1975 was worse. The fiscal and balance of payments deficits increased, as well as inflation.

Although the military aimed to consolidate the State in industrialization, lessening external dependence, it erred in being paternalistic and authoritarian. It was successful in liquidating the oligarchy, but did not succeed in the integration and conciliation needed between capital and labor. When the masses felt excluded, and radicalized as a consequence, the government increased authoritarian control. (Bernales, 1981:45)

Morales Bermudez (1985:76), from the conservative wing of the military, was worried about the serious condition of the economy, and seized power in 1975 in an effort to save the situation. He called for increased foreign investment to exploit Peru's natural resources and develop manufacturing plants. This change in leadership led to the abandonment of populism, cut public investment by 42% between 1975 and 1979, and led to devaluation, wage freezes and reduction of food subsidies. Bureaucratic employment by public corporations was reduced. (Cornejo, 1982:257) But these severe stabilization measures were insufficient and too late.

Differences within the military government continued. The radicals called for greater State control, but the conservatives wanted to continue with a significant role for private enterprise, while regulating foreign capital. The need to maintain institutional cohesion meant that the Army must return to the barracks.

Hernando de Soto, economics researcher, observed that "on the Right there are those whose economic income depends on privilege; they want a strong State which benefits private property already existing, and could care less for all the rest. On the Left are persons who do not have economic interests, but are interested in gaining power, which for Peru is more dangerous than the first." (Pasara, 1989B:31)

President Morales wanted to preserve the reforms he believed had been accomplished by the military. A Constituent Convention was called to prepare a new Constitution which included many of the junta's views. Since APRA elected a large percentage of the delegates to the 1979 Convention, its program also figured largely in the results obtained.

Articles 111,112: The State was given a principal role in the progress of the economy, taking into consideration that the country, by being underdeveloped, did not have large amounts of capital. The State was to formulate the political economy and social plans of development that regulated all activity of the public sector. The State guaranteed economic pluralism.

Articles 115,116: Private enterprise was free to operate. It was to be exercised in a social market economy. The State would promote and protect free development of cooperatives and the autonomy of the cooperative entities. It would stimulate and assist the development of self-managed companies, community and other associative forms. (Figueroa, 1980:53,54)

"What now?" asked anthropology professor Matos Mar (1980:135). He expected there would be no more changes of property through violence; reform was stopped. In Morales' term a few properties were returned to owners of medium size acreage, but there was no big reversion as in Chile after Allende. The return to a market economy and private ownership was still ahead.

4. Privatization regains favor

Fernando Belaunde in his second term, revealed an orientation quite different from that in his first regime. He claimed that nationalization by the military government had delayed industrial and social development, and return of State-controlled industry to private hands would provide one million new jobs.

Belaunde's prime minister, Ulloa (1981:162,184), said that it would be necessary to restructure the State apparatus and annul or modify a significant part of the legislation passed since October 1968. The private sector must assume the challenge and take responsibility to increase employment, channel savings, increase exports and restore confidence in the country.

Leftist Pease, 1978:108) said this capitalist ideology was accepted by the people due to propaganda; it warned that socialism would take away their homes. In reality, few owned their own homes, but in spite of this, believed private property was good and their lot would improve in the future.

Dafiino (1985:187), Belaunde's s Economy Minister, thought that the growth of the public sector in Peru was particularly harmful; it was not in addition to the private sector, but substituting for it, lowering productivity. It had doubled in size in the past ten years at the expense of the private sector, and was absorbing scarce financing.

The United Left (IU) disagreed. "Prime Minister Ulloa is weakening the country by privatizing state corporations; it is an anti-industry policy. If one applies the theory of comparative advantage, oil remains, mining and some agriculture; industry disappears," complained Dammert (1981:310), IU deputy for Lima. Following the advice of Milton Friedman, Peru would become a State with little production, subsidiary to foreign corporations. The State did become a subsidiary to the dominant corporations, and concentrated on maintaining public order and social stability by force and social assistance, said Amat y Leon (1981:19), IU economic planner.

In 1983 and 1984 taxes paid by public enterprises accounted for more than a third of all Peru central government revenue, with most taxes paid by PETROPERU; in the first quarter of 1985 more than 36%. Nevertheless, twenty-five to thirty State corporations accounted for 90% of the total deficit of all enterprises.

APRA criticized the government for trying to break up and destabilize the industrial organizations, and supported the pluralistic participation of different forms of companies in industry. It said the government had arranged the figures so the public corporations would assume the integral cost of subsidies. In this way the State concealed part of the deficit with the clear intention of calling the public corporations inefficient.

The basic service corporations caused the most deficits, but for their nature, APRA did not think they should be sold. It was not economic profitability but social productivity that should decide if the State should intervene. (Alva Castro et al., 1982:65)

Cornejo (1982:265) thought that the government should instead stimulate with incentives the well managed public corporations, finance investments with short term credit, and limit the covering of deficits with transfers from the public treasury, which were too easy to get. Montoya (1993:99), graduate business school administrator (ESAN), ascribed the inefficiency of public corporations to their short horizon of planning, a maximum of three or four years. Changes occurred with different ministers and governments.

Catholic University economist, Caravedo (1985:53), points out that efficiency of public corporations can vary according to their structure and management. Some of the public corporations were profitable. The Belaunde government was trying to transfer the most lucrative operations to the private sector and retain less profitable or riskier ones for the State.

The empresarial activity of the State was reduced substantially. Guarantees were made to national and foreign private investors. The government planned to increase exploitation of its natural resources, and a new mining law returned to the legislation of the 1950s, offering strategic areas to transnational capital. "This is regression with serious effects on the future of Peruvian mining," observed Senator Bernales (1981:24) of the moderate left wing.

5. Nationalization stages a comeback

The campaign for the 1985 presidential election highlighted the split between those who favored increased State management of the economy and those who opposed it. The liberal (conservative) parties announced that they would permit privatization and sale of the land of State corporations. Economists said it was necessary to re-establish a market in land to increase profitability.

Ivan Rivera Flores, a conservative candidate for Congress, said growing nationalization of productive structures had brought the country to a stalled economy, inflation and external debt. In 1968 the public debt was $744 million and in 1984 $12,724 million. (Caretas 845:24) Pedro Pablo Kuczynski, banker and cabinet member, wrote to the Wall Street Journal, "What countries such as Peru need is a good dose of deregulation."

Nevertheless, some conservatives had modified earlier mind sets. Mufarech (1981:302), Deputy from Lima, said that some planning was needed; market forces alone were not enough to direct development and maximize resources.

APRA, now placed near the political center, was against the extremes of totalitarian states or liberal abstention (laissez-faire). The importance of the State presence was that it had more resources than individuals to support large projects. However, participation of the private sector was needed because it was essential to the process of savings and investment and expansion of productive capacity. It brought the vitality and efficiency of private initiative, and would take action to avoid totalitarianism. (Alva, 1982:10--14)

Alfonso Barrantes Lingan, presidential candidate for IU, criticized APRA. "APRA has forgotten the fourth point of their Program which calls for nationalization. This principle is now upheld by the United Left. IU will maintain unity in its program even if it loses the election, and will continue to struggle for its adoption." (Ojo 12 April 1985) Expanding public sector employment produces jobs. Labor, therefore, resists any reduction of government's part in basic production and distribution.

The United Left program, directed by Javier Iguiniz, Catholic University economist, included nationalization of the exploitation of major raw materials. It called for expropriation of the leading private bank, Banco de Credito, and the largest copper complex, Southern Peru Copper.

However, all was not united on the Left. Diego Garcia Sayan, independent from Lima on IU' s slate of deputies, said the Left should not really think of abolition of private property in the means of production, but rather a model of society in which each social sector had its own space of development. (Caretas 837:29)

The growing transnationalism of capitalist economies was a process that required the presence of the State. It must assume a more active role as conductor of overall economic policy and as empresarial agent, planning development for national objectives, reducing dependence and external vulnerability, stated Gonzales V. (1981:212) researcher at DESCO (a study center to promote development.)

Such activity may be important to insure the security of the country in times of emergency, but businessman Roberto de Andraca argued that strategic commercial areas did not need to be administered by the State; private business was equally loyal and besides, it was more efficient. If an area was strategic, that was all the more reason why it should be managed by private business. (De Soto & Schmidheiny 1992:140)

Ibanez O'Brien (1993:41), military school official, recalled that during the military regime of 1968 to 1975, strategic corporations included those who produced armaments or had some relation to national defense. Now this sector included those which involved national development, such as SIDERPERU (copper and zinc refining), and CENTROMIN (lead, zinc and silver mining), which are considered untouchable.

APRA won the election. In 1987, citing the need to democratize credit and further national development, President Alan Garcia called for a State takeover of Peru's financial system: banks, financial institutions and insurance companies. Reactions were mixed. The United Left supported the move, but the conservatives said it would kill confidence among private businessmen and reduce investment.

After lengthy discussion, Congress approved a bill to nationalize the financial system, giving the government ownership of ten private banks and twenty-three finance and insurance companies. Local branches of foreign banks were exempt. However, bankers, businessmen and judges forced the president to backtrack on immediate intervention. An adviser hinted that Garcia had cold feet about the original sweeping expropriation plan; the State already controlled two-thirds of the financial system and had done little to democratize credit. Subsequent court rulings cast doubt on the legality of the move. The effort failed because of a lack of planning and indecision on the part of the government and organized, positive resistance on the part of the banks.

Retired right-wing General Luis Cisneros Vizquerra asserted, "I cannot give a date, but if this government of Alan Garcia continues this way, I believe that before the end of the constitutional period, the armed forces will have to react." (CDA, 1989:303) General Morales Bermudez was doubtful about this. "In Latin America most of the military interventions have included substantial civilian participation. Rarely has it been the military who have solely undertaken to make changes in a government." (Quehacer 55:34)

6. Privatization's image regains strength

Mario Vargas Llosa, the internationally known novelist, made his first entry into politics by leading a public protest against the bank takeover. "Our crisis is due to the growth of a State that drains the energy of the country through corruption and inefficiency." (New York Times 30 August 1988) The State corporations were managed without clear objectives and used for political ends, said Kuczynski and Ortiz (1990:9) During the 1980s the financial deficits were due to inefficiency, political bribes, bureaucratization, corruption, and using the corporations for private gain. Neither Belaunde nor Alan Garcia could prevent this. Belaunde talked of privatization, but his intentions were more ideological than real. Garcia tried to increase investment in the State corporations, gradually closing the gap between prices and costs, but in the end he did not succeed, said Quehacer. As an example, observes DESCO researcher Sanchez Albavera (1992:60), during the last two years of the 1980s, electric charges increased o nly 2 centavos per KWH, while operating costs went up 5 to 6.4 centavos, one reason why public service corporations accumulated a deficit of $700 million in the last half of the 1980s, $410 million in 1989 alone.

The entrepreneurial activity of the State had evolved in an indiscriminate and inorganic form, entering some fields or activities that were not necessarily priorities. Felipe Ortiz de Zevallos, independent economist, observed that in the last few decades, the State had reserved for itself productive activities which it was unable to develop. PETROPERU and PETROMAR (offshore oil) had an unexplored monopoly on 26,800,000 hectares. Together they operated only 6,513,000 hectares, reserving the rest like a dog in a manger. (Caretas 896: 18)

Now APRA reconsidered its position. There were more than twenty companies whose management in State hands was not justified and APRA favored selling them to the private sector or to their own workers to organize into cooperatives. Said Garcia, "The State is an instrument for change and the redistribution of riches, not the production of riches." (New Yorker 14 January 1988:55) Enrique Bernales observed that the Left had to face reality; "support of statization is only by entrenched Marxists" (CDA, 1989:274), and Alfonso Barrantes now agreed that, "nationalizing everything is a thing of the past," describing the radical Left as too dogmatic and idealistic. (Latin America Weekly 87--18:8)

Socialist Javier Iguiniz appeared open to compromise if his concerns about social responsibility could be met. Although he had orchestrated the United Left Program, its deficiencies were now becoming apparent. In attempting to satisfy all of the diverse views on the Left, it had resulted in a list of generalities, that discussed everything and offered little. Instead of an ideologue, Iguiniz had been, then, a skillful coordinator. Bernales observed that if by chance the Left should win the election, its program would have to be rewritten. Iguiniz would in honesty admit that with this agenda "we could not govern." (Pasara, 1989A:33)

Nevertheless, in 1987 the State corporations contributed 25% of the GDP, employed 120,000, and accounted for 40% of all exports and 30% of all imports. From 80 to 90% of State assets were concentrated in ten public corporations. (Gonzales de Olarte, 1993:85) Changes in the operation of such a large section of the economy had to be made with caution.

Although the State was viewed as a monster with the growth of the bureaucracy, due to political clientelism, the process of privatization could encourage the consolidation of old groups and foreigners who would rapidly reclaim their space in economic power, becoming new transnational monsters, without benefit to the country, noted Quehacer. Labor unions feared a return to oligopoly power, said industrialist Mariano Valle (1993:72).

If public monopolies become private monopolies, they still will require State regulation. (Montoya, 1993:22,72) The Wall Street Journal added that since buyers are willing to pay more for monopolies, the goal of raising money often overcomes the intention to increase efficiency.

One must consider whether the corporations to be sold are those which offer services which affect, directly or indirectly, large sectors of the population. The income realized must be contrasted with the aim of increased economic and productive efficiency. It is true that after sale to the private sector, warned Quehacer, the State need no longer carry the deficit of these corporations, but this does not mean that the people will not pay the consequences of poor operation or inefficient services.

The government will make it possible for the corporations to operate competitively, but cannot guarantee it, because the managers of the corporations will decide the policies, said Carlos Montoya. The IMF advised that in cases where a corporation already is operating in a competitive situation, privatization will not improve productive efficiency.

Hernando de Soto, informal economy specialist, observed that if a president wants to privatize, without first making sure that there is equality of opportunity to enter the market, transferring property of public monopolies to certain private monopolies, and they do poorly in the private sector, the pendulum will swing the other way, and in the next election the people will want to return the monopoly to the public sector. (Pasara, 1989A:31) Business executive Romero Caro (1993:93) cited the example of Aerolinea Argentina, which was sold too rapidly, under poor conditions, and had to be returned to the State with more debt. When sold, the State canceled its current debt, but now has the airline back with $340 million in new debts, and $200 million less in assets.

7. Privatization in earnest

The election of 1990 was a turning point for Peru. Mario Vargas Llosa, now a candidate for president, asserted that "Peruvians want a small but strong and efficient State and privatization of the public sector. A State economy leads to more poverty, unemployment, less education and health. The fundamentals of democracy are private corporations and private property." (Expreso, 1989)

He would slash government payrolls, end the State-managed economy, and give free rein to the markets. He would halt public subsidies, and make sharp cuts in the bureaucracy. He would end restrictions on foreign investment and privatize seventy State corporations. (Christian Science Monitor, 30 March 1990:3) The World Bank's International Finance Corporation pointed out that 67% of corporations it had helped privatize reported profits, up from 29% while State owned. (Wall Street Journal, 2 October 1995)

Candidate Alberto Fujimori opposed blanket privatization of public firms, but advocated reduction of State participation in industrial production. "I would not privatize profitable State concerns nor any of strategic importance." (LAW 90--12:11) The electorate considered his views, liked them, and elected him president on the second ballot.

Fujimori' s first cabinet in 1990 made an "analysis of public corporations to determine which have possibilities" for transfer to the private sector. "The State reserves such activities that are of national interest and for which it is not possible to attract the interest of the private sector." (Sanchez Albavera, 1992:99) In 1990 inflation was 7650%! and the GDP declined by 5.4%.

Some disagreements arose within the cabinet. Fernando Sanchez Albavera, Minister of Energy and Mining, agreed with Carlos Boloria, Minister of Economy, on beginning the process of privatization, but did not believe it should start with the biggest corporations. He wanted to see association with private capital, guaranteeing State control of management, modernization, increase in profit and reaching new markets. While the private sector developed, many corporations could remain public, following market principles of competence, and assigning their resources per market stimulation, said Valle (1993:89), businessman and UN consultant in industrial development. The IMF advised that with regard to big corporations in most countries, transfers were being made only partly to the private sector, with the State maintaining some control. (Actualidad Economica 90--17)

Pedro Pablo Kuczynski, ex-Minister of Energy under Belaunde, cautioned that "privatization is a means, not an end in itself, a route to arrive at a more fluid and open economy. Its objective is not to reduce the size of the public sector but restructure it so that it will have the resources to do what it must do. (Salcedo, 1992:52)

Alvarez Rodrich (1993:26), Pacific University economics professor, agreed that the declining role of the State in Peru must be reversed in activities such as education, health, security and basic infrastructure. The State must fill a role much larger than it now does. However, to make this possible, it must cease some activities it now conducts which can be handled more efficiently by private entities.

8. Inflation was 140% and the GDP rose by 2.8%

Now, differences arose between the Executive and Congress, which refused to recognize a Supreme Decree, 155-91-PCM, which proposed a change in the President's budget related to public corporations, and passed a Law of Parliamentary Control over presidential acts. The president objected, saying it was unconstitutional and they were trying to tie his hands. Inflation stood at 55% and the economy decreased by 0.9%

In April 1992, impatient with the opposition of the legislators, President Fujimori dismissed them, and instituted authoritarian control of the government. Said Fujimori, "Peru cannot wait three years for Congress to carry out the legislative changes needed." The public responded favorably, greeting him with enthusiasm at public appearances. A Constituent Convention was called for November 1992, to draw up a new Constitution and replace the former legislators. The new document (Article 78) would state firmly that the initiative to prepare a budget was held by the Executive, not the Legislature. Article 60 prohibited almost totally the entrepreneurial activity of the State, unless authorized by law as being in the public interest. (Rubio Correa, 1994:87, 101)

By 1993 inflation was 40% and the economy rose by 5.8% Although Fujimori had originally promised that only nonstrategic public corporations would be privatized, he now favored such a transfer for almost all, said businessman Romero Caro (1993:83), who questioned the plan of the government to complete all planned privatizations by the end of 1994. Considering current political instability, with distortions in relative prices, risk factors would affect sale prices. Romero suggested that perhaps the government thought it preferable to sell the corporations now, cheaply if necessary, because the next government might not have the "courage" to sell them. (Note: The next government, however, was also headed by Alberto Fujimori; the 1993 Constitution allowed his re-election in Article 112).

Quehacer, published by DESCO, (termed a "left-leaning think tank" by conservatives), was concerned about one aspect of privatization. That which was occurring in Peru was based on aims of too short a term, which could affect success. It was being used as an emergency instrument to alleviate the State's financial deficits, such as payment on the external debt and reducing the current account deficit. The doctrine states that it was justified because it would provide fresh income and save State costs. But, the most attractive entities for privatization are obviously those most profitable.

Sooner or later people will ask what happened to the income, said Quehacer. Montoya (1993:61), executive of COPRI (created by the Fujimori government to sell the State corporations and promote private investment), said that funds from privatization would be turned over to the public treasury per Decree-law 674, and used to eradicate poverty. Energy Minister Daniel Hokama announced in August 1994 that $850 million was being assigned to health, education, infrastructure and social projects during the next two years. (LAW 94-30:339) In 1995 the Interamerican Development Bank reported that $370 million realized from privatizations was being assigned to social programs in Peru.

The IMF cautioned that successful privatization is difficult and one should concentrate more on increasing the efficiency of public corporations and looking for other solutions before proceeding with a sale. (Actualidad Economica 90:17) Valle (1993:84) noted that in any case, the public corporations must be made efficient before offering for sale to insure success in attracting private capital. Pedro Pablo Kuczynski said that since most State corporations were oversupplied with workers, many employees would have to be terminated.

Since privatization would generate additional income for the State, part of this income should go to a Fund for State Workers to assure their pay for several years when they are released from employment; it could also be used for training personnel to be hired elsewhere. (Kuczynski & Ortiz, 1990:39) By 1995, 30,000 state employees had been fired due to privatization.

The International Development Bank (IDB) donated $6 million to the ESAN School to offer a program of "reconversion" for displaced workers. However, it is interesting to note that in Chile, it was found that employment at newly privatized companies has gone up, not down, rising an average of 10% in the first two years after privatization, said the Wall Street Journal.

In the 1960s, Ravines (1963:184,284), convinced that capitalism offered the best route for development in Peru, called for a new type of capitalism for Latin America, keeping its virtues and positive values. Capitalism in the United States is impractical in Latin America, he warned; it must be adapted to different circumstances in the South, and become a peoples' capitalism. He called for dispersal of property in increasing the number of corporate shareholders for more equitable distribution of wealth. Strong shareholder groups could promote change.

Thirty years later the Wall Street Journal announced that "popular capitalism" was catching on in Peru. Privatization of State corporations was an opportunity for some of the employees to share in the ownership of their company. ENATRU, the city bus service, was sold to its workers in 1992. The workers were aided by COPRI to form microcorporations, and will continue to operate their own buses. (Gonzales de O, 1993:90)

In 1994 $2.4 billion of foreign money purchased mostly electric and telecom utilities. (LAW 97-30:354) Inflation was 23.7% and the GDP rose an amazing 13.9%. In November a government program auctioned shares in more State corporations; 3000 investors bought out the shares in less than three hours. At the next auction, 6600 bought out all shares available in 45 mm. In July of 1995, 12,000 investors took all available shares of Cementos Norte Pacasmayo. A waiting list of more than 3000 remained, said the Gaceta Peruana.

By 1995 the IDB reported that seventy-two companies had been privatized, realizing $4.4 billion for Peru. The revenue was 1.5% of GDP from 1990 to 1995 and 11.5% of the central government budget. The financial revenue from different sectors was: 56% from infrastructure, 13% from financial services, 23% from the primary sector, 6% from industry and 2% from other sources. (IADB, 1995:158) Foreign money made reactivation of the economy possible and the privatization of the public corporations enabled the government to establish an expansive fiscal and monetary policy which allowed Fujimori to easily win the presidential election of 1995. (Mendoza, 1999:20) GDP rose by 7.7% and inflation was 10.2%.

In June 1996, the government expanded the program in an effort to involve more low income buyers in the sale of public telephone company shares valued at $1.2 billion. A three year installment plan (to be lowered to 18 months), with a 10% down payment, and a subsidized 12% annual interest rate was offered. The GDP grew by 2.8% and inflation rose slightly to 11.84%.

In mid-April 1997, COPRI announced that Peru's total revenues from privatizations had reached $7.06 billion. (LAW 97-18:200) In 1998, however, COPRI revealed that only $500 million was expected that year due to the international financial crisis. (LAW 98- 37:443) Inflation held at 6.5% and the GDP increased by 6.2% in 1997.

Almost 18,500 purchasers have participated in the three auctions to date, and the government aims to reach a half million Peruvians by the year 2000. Broadening the base of participation in the economy will stabilize it and insure continued improvement on all levels, says the Wall Street Journal. Such an inclusive program can succeed.

9. Second thoughts begin to surface

However, there is a problem. Many shares are being purchased by foreign firms; few Peruvians can afford to buy. There are some joint ventures with domestic capital, but in general, privatization is a transfer to external owners. In Chile most privatizing companies were purchased by domestic investors.

The new 1993 Constitution (Article 63) had removed any advantages formerly offered to domestic investment over foreign business; they would now operate under equal conditions. (Rubio, 1994:89) As a percentage of total direct foreign investment, receipts from privatizations averaged 76.7% during the period from 1990 to 1995. (IADB 1996:179)

Are we witnessing a structural change in the Latin American economies-toward private ownership and a market economy? If the proponents of such a change are right, everyone will benefit, although to a different degree, of course. But, if they are wrong, and the new system is exclusionary to many, what then?

Peruvian leaders often seem to think that the relation between the State and the Market calls for a choice between the two. This is incorrect says Alvarez Rodrich (1993:26), editor of Peru Economico, who notes that "countries which succeed have achieved an adequate relationship between the Market and the State."

Roberto Nesta, vice-president of the national industrialists, concludes that the best formula for progress in development for Peru is to use the model of Southeast Asia in which the State and private corporations are associated. If the State role is minimized and only the private sector acts, it will be difficult, because Peruvian private industry is falling into foreign hands, those who have access to world trade networks. Without State aid, a single domestic industry cannot operate in this area. (Quehacer 100:89)

The Wall Street Journal believes that privatization has reduced opportunities for corruption, bribery and patronage. (22 July 1997)

Foreign ownership was not the only problem, however, Privatization has been followed by announcements of large job losses due to more efficiency by private management and greater productivity by the workers. State corporations, with their bloated employment figures, were really acting as a jobs program and this should be taken into consideration along with operational costs. Peru is not the only country to conceal politically induced expenditures. The United States Department of Defense has great difficulty in closing unneeded bases due to opposition by congressmen in whose district they are located, citing loss of jobs and income to the area.

The temptation to continue this practice, which is certainly politically popular, calls for development of new business and expansion of existing firms to create the new jobs. Government can encourage this by offering tax benefits.

It is important to balance the process of privatization, says Quehacer (118), which was encouraged by the World Bank principally in the case of PETROPERU. The article in the Constitution of 1993 which almost totally prohibited any entrepreneurial activity of the State, should be modified.

Although some funds went for social purposes, the growth of the economy contributed little to the eradication of poverty. Now, as income decreases from privatizations, things may get worse. If the funds realized from sale of the public corporations are a one- time windfall and if they are not used as the basis for new plans for development, benefits will be lost as they accrue to the upper levels of the society.

10. Conclusion

As late as 1998 the country appeared to have settled down into a modified market economy, made possible by the leadership of a strong, authoritarian State government, willing to cede its control of a substantial part of the economy. But problems of mass poverty and social justice still loomed large. It was by no means certain that rapid economic development would solve those problems before a new political turn toward state intervention appeared.

Then the economy began to stagnate. Fujimori's popularity slipped. He won a disputed election in 2000 and then resigned and fled to Japan. A new election was held in which both candidates in the runoff pledged to address the social issues through more government involvement. The loser called for substantial nationalization. The winner, Alejandro Toledo, called for a better balance and more cooperation between the public and private sectors. The arguments on both sides seemed remarkably familiar.

Toledo's challenge in the short run is to operationalize his image of a better balance between the government and the private sector. If he is successful there will remain the long run challenge of gaining general acceptance of his vision. Peru's history suggests that this will be a difficult task.

(*.) Tel.: + 1-941-278-0262.


Alva Castro, L., et al., 1982. El Apra responde. Lima: Comision de Plan de Gobierno, Partida Aprista Peruana, Ed. Atlantida.

Alvarez Rodrich, A., 1993. Privatizacion y reforma del estado en los noventa. In Gonzales de Olarte (pp. 25-39).

Amat y Leon, C., 1981. La inviabilidad del modelo neo-liberal para controlar la inflacion. In Guido Pennano (pp. 13-36).

Barrantes, A., 1985. Sus proprios palabras. Entrevistas, recopilacion de los textos.sel. Marcela Cardenas. 1st ed. Lima; Mosca Azul.

Belaunde Terry, F., 1965. Peru's own Conquest. Lima: American Studies Press.

Belaunde Terry, F., 1979. Pensamiento poiftica. Lima: Ed. Minerva.

Belaunde, V.A., 1940. La crisis presente 1914-1939. Lima: Ed. Mercurio Peruana.

Bernales, E., 1981. Parlamento, estado y sociedad. Lima: DESCO.

Bolona, C., 1999. Financing Deficits in Peru. Address given at Conference of Latin American Research Group, Sustainable Public Sector Finance in Latin America. Federal Reserve Bank of Atlanta, Research Dept., November.

Bustamante, A., 1974. La derecha frente a la comunidad industrial. In Jorge Santistevan (Ed.), Dinamica de la comunidad industrial (pp. 67-94). Lima: DESCO.

Campodonico, H., 1996. Se vende y punto. In Quehacer 99.

Caravedo, M., Baltazar., 1985. Empresas publicas de servicios y sectores de bajos ingresos, diagnostico y debate, no. 16. Lima: Fundacion Friedrich Ebert.

Centro de Documentacion Andina, C.D.A., 1989. Politicas, Peruanos, palabras. Lima: CDA.

Cornejo Ramirez, E., 1982. El rol del estado. In G. Saberbein (Ed.), Hacia una politica economica alternativa (pp. 251-267). Lima: CIEPA research institute.

Cotler, J., 1975. The new mode of political domination in Peru. In Abraham J. Lowenthal (Ed.), The Peruvian Experiment; Continuity and Change (p. 44). Princeton: Princeton University Press.

Cox, C.M., 1971. Dinamica economica del Aprismo, 2d. ed. Lima: Imprenta Amauta, S.A.

Dammert, M., 1981. Intervencion, in M. Ulloa et al., (pp. 305-314).

Danino, R., 1985. La crisis de la deuda y la empresa privada en el Peru. In E. Ferrero Costa, Ed., El Peru frente al capital extranjero; deuda y inversion. (pp. 157-205) Lima: CEPEI, Centro Peruano de Estud. Internac.

Figueroa Estremadoyro, H., com., conc., comp. (1980). La nueva constitucion peruana. Lima: Ed. Inkari.

Fitzgerald, E.V.K., 1979. The Political Economy of Peru 1956-1978. Cambridge: Univ. Press.

Garcia Perez, A., 1985. El futuro diferente. Lima: Jalsa.

Gonzales de Olarte, E., et al., 1993. Privatizacion y reforma del estado. Lima: CIUP, Universidad Pacifico.

Gonzalez Vigil, F., 1981. Capital transnacional y polfticas de industrializacion en el Peru. In Henry Pease (Ed.), Estrategias y politicas de industrializacion (pp. 211-232). Lima: DESCO.

Gorriti, G., 1999. The Shining Path. (English edition) Chapel Hill: Univ. of N. Carolina Press. (first ed. 1990 in Spanish, Lima: Ed. Apoyo).

Haya de la Torre, V.R., 1985. Obras completas. Tomos I, II, V. VII. Lima: Ed. Mejia Baca.

Ibanez O'Brien, G., 1987. 1993. Comentarios. In Gonzales de Olarte (pp. 39-45).

InterAmerican Development Bank, IADB. 1987, 1989, 1995, 1996. Economic and Social Progress in Latin America. Washington, D.C.

IADB., 1995. Latin America in Graphs 1994-1995, Washington, D. C.

Klaiber, J.L., S.J., 1977. Religion and Revolution in Peru, 1824-1976. Notre Dame (Ind.): University of Notre Dame Press.

Kuczynski, P.P., Ortiz de Zevallos, F., 1990. Respuestos pan los 90s. Lima: Ed. Apoyo.

Malpica, C., 1970. Los duenos del Peru. 4th ed. Lima: Ed. Peisa.

Mariano Valle, A., 1993. Mitos y temores sobre privatizacion. In Gonzales de Olarte (pp. 67-79).

Matos Mar, J, Mejfa, J.M., 1980. Reforma agraria; logros y contradicciones, 1969-1979. Lima: JEP, Instituto de Estudios Peruanos.

Mendoza Bellido, W., 1999. Recesion y reeleccion. Quehacer 117,

Montoya Macedo, C., 1993. El proceso peruano de privatizacion. In Gonzales de Olarte (pp. 55-67).

Morales Bermudez, F., 1985. Plan de gobierno. Lima: Frente Democratico de Unidad Nacional.

Mufarech, M.A., 1981. Intervencion, in M. Ulloa et al. (pp. 283-304),

Pasara, L., 1989A. Midiendo distancias. In Caretas 1052. (1989B). Abriendo una puerto. In Caretas 1065.

Pease Garcia, H., with Marcial Rubio Correa, Laura Madalengoitia U.(1978)., Mitos de la democracia. Lima: DESCO.

Pennano, Guido, ed., 1981. Economia peruana; [Upside down question mark]hacia donde? Lima: CIUP.

Portocarrero, S., Felipe, Arlette Beltran, B., Zimmerman, A., 1988. Inversiones publicas en el Peru (1900-1968). Lima: CIUP.

Ravines, E., 1963. La gran promesa. Madrid: Aguilar.

Romero Caro, M., 1993. Comentarios. In Gonzales de Olarte (p. 83).

Rubio Correa, M., 1994. Para conocer la constitucion de 1993, 3d. ed. Lima: DESCO.

Salcedo, J.M., 1992. Estado, privatizacion y democracia. In Quehacer 80.

Sanchez Albavera, F., 1992. Las cartas sobre la mesa. Lima: DESCO.

Silva Ruete, J., 1981. Lineas basicas de la politica economica del gobierno y alternativas para el desarrollo nacional. In Guido Pennano (pp. 177-192).

Ulloa, M., et al., 1981. La politica economica y la democracia en debate; respuesta al Ulloa. Lima: DESCO.

Vargas Liosa, A., 1997. Bad reforms imperil free market in Latin America. In Miami Herald January 19.

Velasco Alvarado, J., 1972. La politica del gobierno revolucionario, Tomos IX, XII. Lima: Oficina Nacional de Informacion, Empresa Ed. El Peruano.

Publications references

U.S. Periodicals

Christian Science Monitor., 1990.

Gaceta Peruana, Chicago., 1995, 1996.

Miami Herald., 1997.

New York Times., 1988, 1990.

New Yorker., 1988.

Nuevo Herald., 1996.

Wall Street Journal., 1995-1999.

Latin American Periodicals

Actualidad Economica., 1987, 1991.

Caretas., 1985, 1986, 1989.

Expreso., 1989.

Ojo., 1985.

Quehacer., 1982, 1988, 1990, 1992, 1996-1999


Latin America Weekly., 1987, 1990, 1994, 1996-1998, 2000.
COPYRIGHT 2001 JAI Press, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Author:Champion, Margaret Y.
Publication:The Journal of Socio-Economics
Geographic Code:3PERU
Date:Nov 1, 2001
Previous Article:A new look at prices and money: The Kelsonian binary model for achieving rapid growth without inflation.
Next Article:Market management of the essential economy: An essay.

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters