LIMA, Peru—Like many Peruvians, Augusto Correa has done well over the past two decades. In the 1990s, he and his siblings converted their grandfather’s former home in Lima’s upscale Miraflores district into a small bed-and-breakfast. Customers were scarce at first, but the business grew, and the siblings slowly expanded Hostal Buena Vista, as the bed-and-breakfast is called, from three rooms to 19, adding annexes and a third floor. In the process, Augusto’s brother Jorge opened a second Hostal Buena Vista in the highland city of Cusco, the former capital of the Incan empire, and Augusto recently inaugurated a third one in Lobitos, a beach popular with surfers on Peru’s northern coast.
Correa, who also manufactures beachwear for the domestic market, explains that, whereas the textile market has grown increasingly competitive as a result of recent free trade agreements with China and other countries, his income from tourism is growing. “I think that tourism is one of the most important areas for Peruvians to develop,” he observes.
Though mining has traditionally been Peru’s top source of foreign exchange, and mineral exports played an important role in its impressive economic growth over the past decade and a half, the commodity boom that drove much of that expansion ended in 2014. But tourism remains strong. The number of tourist arrivals in Peru more than doubled over the past decade, fueling the country’s increasingly important service sector, which has helped Peru to weather the decline in commodity prices. And while Machu Picchu is already world famous, the country’s tourism board is promoting other attractions such as lesser-known archaeological sites in the north, the Amazon rain forest and the country’s distinctive cuisine. It is hardly surprising that Peru’s new president, Pedro Pablo Kuczynski, wants to double tourist arrivals again during his five-year term.
Robust Economy, Healthy Democracy
Kuczynski, who took office in July, has promised to revive Peru’s lagging economic growth and extend basic services to the country’s poorest citizens, while reducing crime and corruption. A former investment banker and World Bank official, he was the preferred candidate of Peru’s upper class from early on, but many members of the country’s lower-to-middle-class majority viewed him as foreign or elitist. Voters also worried about his age; at 78, he is the oldest president in Peru’s history. Despite such misgivings, Kuczynski eked out a narrow victory in the June elections thanks to widespread rejection of his rival, Keiko Fujimori, whose father, Alberto Fujimori, ruled Peru during the 1990s but is now imprisoned in Lima for corruption and human rights abuses. Kuczynski was elected with just 50.12 percent of the vote, and his party won a mere 18 of the 130 seats in Peru’s Congress. Yet polls conducted in September found that his approval rating was above 60 percent.
While many voters rejected the authoritarianism and corruption that they associate with Fujimori, the electorate was also wary of the left, namely Veronika Mendoza, a former congresswoman from Cusco who took third place in the first round of the presidential election. Kuczynski benefited from the past two decades of economic growth, which created a growing middle class that believes in the merits of the free-market policies he espouses. He actually contributed to that prosperity, since he served as minister of the economy and finance, and chief of staff, in the administration of former President Alejandro Toledo (2001-2006), which set the foundations for the recent economic boom.
The Kuczynski administration is the latest installment in one of the longest stretches of democratically elected civilian governments in the history of Peru. The country has endured numerous coups and military regimes, as well as insurgencies by two leftist guerrilla groups, the Shining Path and Tupac Amaru Revolutionary Movement, in the 1980s and 1990s that claimed an estimated 69,000 lives and led thousands more to emigrate. Kuczynski’s election is a reaffirmation of Peru’s democracy at a time when Venezuela, Ecuador and Bolivia are growing increasingly authoritarian. Symbolically, it is especially significant because his term will end on the day the country celebrates the bicentennial of its independence from Spain.
Kuczynski benefited from the past two decades of economic growth, which created a growing middle class that believes in the merits of the free-market policies he espouses.
Yet despite the progress achieved during the past two decades, many Peruvians remain skeptical about the merits of democracy. According to the regional public opinion survey Latinobarometro, less than 60 percent of Peruvians surveyed in 2015 agreed that democracy is the best form of government—the lowest support for democracy recorded in any South American country. The good news is that Peruvians’ faith in democracy has improved over the past decade, up from around 40 percent in 2005. According to surveys conducted by the Latin American Public Opinion Project, Peruvians have also grown slightly more sanguine over the past decade, with 88 percent of those surveyed in 2014 indicating that they were satisfied or very satisfied with their lives.
Prosperity and Poverty
The economy has no doubt contributed to the growing optimism, and Peru’s economic prospects remain good. While the economies of Argentina, Brazil, Ecuador and Venezuela have contracted, Peru’s GDP is expected to expand by 4 percent in 2016, giving it one of Latin America’s highest growth rates. Over the past decade, Peru’s economy grew at a rate of 5.9 percent annually, which improved the living standards of most Peruvians. The country’s middle class has more than doubled, and the percentage of the population living in poverty dropped from 55.6 percent in 2005 to less than 22 percent in 2015. However, given that the country’s poverty line is around $3 per person per day, people who climb out of poverty still face considerable hardship.
Nonetheless, personal income has improved for most of the population, and nowhere is the prosperity more evident than in Lima, the country’s political and economic capital and home to about a third of its approximately 31.5 million citizens. That sprawling coastal city has undergone a sustained construction boom during the past decade, with a proliferation of new apartment towers and office buildings in the more affluent neighborhoods, and shopping malls replete with international retail chains and fast food outlets scattered across the metropolitan area. Trendy neighborhoods such as Barranco and Miraflores have an array of new hotels, shops, restaurants and cafés; new airlines and bus companies now connect the capital with the provinces; and private universities and institutes have opened or expanded campuses, largely to accommodate the children of families that moved to Lima from the provinces in recent decades. The federal and municipal governments have complemented the boom in private investment with renovated roadways and parks, a refurbished National Stadium and the first stages of a long-overdue mass transit system.
Despite the progress achieved during the past two decades, many Peruvians remain skeptical about the merits of democracy.
The state has used tax revenues and provincially managed royalties from mining or oil companies to build or improve infrastructure across the country, including roads, bridges, irrigation projects and other public works. But Peru’s infrastructure still lags behind that of most other South American nations.
Just as important for Peruvians in rural areas has been the expansion of service by private electric and phone companies, banks and other businesses that have connected historically remote communities to the rest of the country and international markets. This has transformed the lives of millions, such as Teresa Loza, who grows organic coffee with her husband on a small farm on the eastern slope of the Andes, near the town of Yurinaki. She and her husband have seen their income grow and gained access to electricity and cell-phone service for the first time in the past decade. Their income from coffee production enabled them pay for their two daughters to study at trade schools in Huancayo, a regional capital located six hours away by bus. And whereas Loza used to have to hike to Yurinaki and wait in line to make a phone call, which took hours, she can now talk to her daughters anytime, or check international market prices for coffee, from the comfort of her home.
Yet despite that progress, almost 22 percent of Peruvians still earn less than $3 per day; millions more earn little more than that; and 4 percent of the population lives in extreme poverty, which means they survive on less than $1.70 per day. About half of Peru’s more than 6 million poor live in the shantytowns and marginal barrios of Lima and other cities. The rest live in the countryside, primarily the Andes and Amazon Basin. Though only 23 percent of the population is rural, half of the poor and more than 90 percent of those who suffer extreme poverty live in rural areas. This rural poverty, which has been a constant throughout Peruvian history, inflicts serious hardship, especially on the very young and the very old. According to Peru’s National Statistic and Information Institute, almost 28 percent of rural children suffer chronic malnutrition, and 40 percent are anemic.
According Alvaro Monge, an economist with the consulting firm Macroconsult, one-third of Peruvians remain vulnerable, meaning their incomes are either below the poverty line or close enough to it that they could easily rejoin the ranks of the poor. Though government programs aimed at helping the poorest of the poor have had a significant impact in recent years, basic services and infrastructure in many rural areas and marginal neighborhoods of major cities remain deficient. The challenge of the current administration is to facilitate economic growth and opportunities while improving the situation of people who hardly benefited from the past two decades of prosperity.
One of Kuczynski’s first moves was to ask Congress to grant him powers to enact a series of measures by decree for 120 days in order to reactivate the economy. Though the opposition-controlled Congress demanded some changes to his proposals and limited the special powers to a period of 90 days, it granted the president most of his requests. Those measures include reducing the national sales tax from 18 to 17 percent, lowering taxes for small and medium-sized businesses while increasing the taxes paid by larger firms, and reducing the red tape that all businesses have to deal with.
Decreasing the tax burden of small businesses is part of an effort to draw them out of informality. Economists estimate that more than 60 percent of Peru’s workforce is informal, either working at or owning businesses that don’t pay taxes, social security or state health insurance deductions. Informal businesses are also unable to get loans from banks and other lenders, but Kuczynski plans to expand the availability of credit for small and medium-sized businesses as another incentive for them to join the formal economy.
While his efforts to jump-start Peru’s economy have gotten more press coverage, Kuczynski also has major plans for improving life for the poorest citizens. In his inaugural address, he promised to launch a “social revolution” by expanding access to basic services that many Peruvians lack. To do this, he will build on the achievements of previous administrations, especially that of his predecessor, former President Ollanta Humala, who created a Ministry of Development and Social Inclusion to strengthen existing poverty-reduction programs and create new ones. Those include Qali Warma, which provides meals at schools in poor areas; Pension 65, which provides a small pension to people over 65 who never paid into social security; and Juntos, which provides cash transfers to poor families.
At a meeting with Peru’s foreign press, Kuczynski explained that he intends to make those programs more efficient, eliminating abuses, while complementing them with initiatives to improve and expand basic services. “I believe that the main challenge of my government is to address the lack of basic services for a large portion of the population,” he said. “Approximately 30 to 40 percent [of the population] doesn’t have good schools; they don’t have security, they don’t have hospitals. Together with informality, this is holding Peru back.”
One of Kuczynski’s signature efforts will be expanding potable water and sewage access. He has said he would like to get all Peruvian households hooked up to potable water systems, which would improve lives while creating employment in some of the poorest areas, but he admits that the government may not be able to reach all households within his five-year term. According to the Economic Commission for Latin America and the Caribbean, about 30 percent of Peru’s rural population lacks access to potable water. The issue has long been a concern of Kuczynski, who founded a nonprofit organization called Agua Limpia in 2007 that has helped dozens of poor communities build potable water and sanitation systems.
Almost 22 percent of Peruvians still earn less than $3 per day; millions more earn little more than that; and 4 percent of the population lives in extreme poverty.
Another issue close to Kuczynski’s heart is improving Peru’s public health system. His father was a specialist in tropical medicine who worked for the German government, but, with the rise of Nazism, fled to Peru, where he then worked for the Ministry of Health for much of his life. The elder Kuczynski vastly improved conditions at a leper colony in the Peruvian Amazon, establishing a clinic where Ernesto “Che” Guevara volunteered as a medical school graduate before he went on to become a revolutionary.
Kuczynski evoked his father in his inauguration speech, saying, “The memory of my father, a public health doctor, practicing medicine in the country’s most inhospitable places, giving marginalized patients their dignity back, has accompanied me for my entire life. I cannot betray his memory.”
In that same speech, Kuczynski declared that, when he leaves office in 2021, Peru will be “more modern, equitable and unified.” To accomplish his many goals, he has assembled a team of ministers with ample private-sector and government experience. His minister of economy and finance, Alfredo Thorne, is a former World Bank economist and executive director at JP Morgan Chase with a doctorate from Cambridge; the minister of education, Jaime Saavedra, has a doctorate from Columbia University; and several other ministers have graduate degrees from U.S. universities. Some observers have criticized many of their business backgrounds, but Kuczynski has countered that he chose people with proven management experience because he expects results. His choices also reflect his pragmatism: Saavedra was the education minister in the Humala administration; Vice President Mercedes Araoz and Foreign Trade Minister Eduardo Ferreyros served under former President Alan Garcia (2006-2011); and the minister of foreign affairs, Ricardo Luna, was Alberto Fujimori’s ambassador to the United States.
Corruption and Other Crimes
Kuczynski’s reliance on merit rather than party allegiance and his appointment of successful businesspeople to Cabinet positions may decrease the risk of corruption, which has been a historical scourge of Peruvian governments. According to a 2015 survey contracted by the nonprofit organization Proetica, respondents considered corruption to be the country’s second-biggest problem, after public security, whereas 61 percent said that corrupt officials constitute the government’s biggest problem.
The state institutions perceived to be the most corrupt were the Congress, the National Police, the court system and the executive branch. The latter is hardly a surprise, considering that Fujimori and his former intelligence chief, Vladimiro Montesinos, are in jail on convictions of corruption and other crimes, and two of the three presidents that succeeded Fujimori have been or are under investigation for corruption. Former President Toledo is under investigation for allegedly using shell companies to purchase millions of dollars in real estate. A congressional “mega-commission” investigated the Garcia administration and produced reports alleging everything from kickback schemes for government contracts to the sale of pardons for drug traffickers. However, those reports were subsequently annulled by the country’s Supreme Court. Humala’s wife, Nadine Heredia, the former president of his Nationalist Party, is under investigation regarding alleged illegal donations to Humala’s presidential campaigns from former Venezuelan strongman Hugo Chavez and the Brazilian construction firm Odebrecht.
A commitment to fighting corruption was part of Kuczynski’s platform and it no doubt helped him to get elected, especially after national media revealed that the secretary-general of Fujimori’s party, Fuerza Popular, or Popular Force, was under investigation for money laundering. Kuczynski has proposed the creation of an independent, autonomous authority dedicated to fighting corruption, and his request for special legislative powers in September included a proposal to allow the Financial Intelligence Unit, an office of the country’s banking authority, to monitor individual accounts, which a bank-secrecy law prevented it from doing. That proposal was met with significant resistance from Fuerza Popular legislators.
The rule of law is weakened by an array of illicit activities that include illegal logging, contraband, illegal gold mining, human trafficking, cocaine production and money laundering.
The fact that many Peruvians consider the National Police and the court system corrupt is especially problematic given that public security is the No. 1 concern of most Peruvians. Peru has the highest crime rate in Latin America—more than 30 percent of the population has been the victim of crime—but it comprises primarily petty theft, mugging and extortion. Gun violence is less common than in other Latin American countries, and Peru’s homicide rate is one of the lowest in the region. However, less than 40 percent of Peruvians who participated in the regional Barometro de las Americas survey in 2014 said that they trust the police, whereas 17 percent reported having been victims of police corruption in the previous year. The National Police’s tarnished image suffered yet another blow in August, when the Interior Ministry announced that it was investigating accusations that a group of police officers had participated in “death squads” that assassinated petty criminals in order to earn extra money or promotions.
Interior Minister Carlos Basombrio faces the dual challenge of weeding bad elements out of the police corps while improving the institution’s effectiveness. To achieve the latter, he released a 10-point plan for enhancing public safety that includes increasing the number of police on the street by 10 percent, expanding a program that offers rewards for information leading to the capture of wanted criminals, and strengthening coordination between the National Police and local and regional public security forces. At the same time, Justice Minister Marisol Perez has introduced measures for reforming the country’s court system. Patricia Zarate, a researcher at the Institute for Peruvian Studies who specializes in public security and justice, notes that while reforming the police and judiciary is essential, it won’t be easy given the internal resistance that the new ministers will face. However, she observes that one area where improvement should be relatively easy is the simplification of the bureaucratic processes for reporting a crime or using the courts.
This darker side of Peru’s informal economy is a result of the central government’s neglect of the provinces, the lack of legal economic options in many areas, and an ignorance of or disregard for the law. Peru has historically been a nation of rich and poor. Most economic rewards go to a Lima-based elite of predominantly European descent and to foreign companies, whereas many members of the indigenous and mestizo—or mixed-race—majority work the land or sell their unskilled labor for low wages. Class resentment and suspicion of the state fueled the rise of the leftist guerrilla movements that inflicted much suffering in the 1980s and 1990s, and such sentiments continue to turn legitimate concerns about the impact of mines or other megaprojects into violent opposition. Such social conflicts have halted the development of various projects promoted by past administrations, and they are bound to pose challenges to Kuczynski’s efforts to reactivate the economy.
Development and Its Discontents
While Peru’s economy has become more diversified in recent decades and many sectors have potential for growth, Kuczynski wants mining to resume its role as a motor of economic progress and a source of revenue for the state. While dramatic increases in market prices for the metals Peru exports are unlikely with the currently weak global economy, the country has the potential to significantly increase the amount of minerals it exports, especially copper. Yet this administration has inherited hundreds of unresolved social conflicts that include local opposition to major mines, some of which will need to be resolved for the Kuczynski administration to reach its economic goals.
This darker side of Peru’s informal economy is a result of the government’s neglect of the provinces, the lack of legal economic options in many areas, and an ignorance of or disregard for the law.
Peru is the world’s seventh-largest producer of gold, the third-largest producer of silver and zinc, and is on the verge of becoming the second-largest copper producer. However, most of those mineral deposits are located high in the Andes, in or near the watersheds of rivers on which countless farms and communities depend. Over the years, mine construction, poor disposal of waste and accidents have contaminated rivers, devastating downstream agricultural communities and leading to substantial opposition to mining in rural areas. The indigenous Quechua and Aymara who inhabit the Peruvian Andes also have a spiritual connection to the land, and may resist moving to accommodate mines or the destruction of what they consider sacred mountains. At the same time, mining companies tend to bring in experienced workers from other parts of the country, rather than training local people, which limits a mine’s contribution to the local economy.
In an effort to ensure that mining and other extractive enterprises, such as oil and natural gas, contribute to the development and administration of the surrounding region, Toledo’s government (2001-2006) established a system by which half of the taxes paid by such megaprojects are returned to the municipal and regional governments in their area of operation, a payment known as “canon.” Though the various canons have funded an array of infrastructure improvements and programs for rural people, and there is federal oversight of how the funds are spent, municipal governments have sometimes invested the revenue poorly, and there have been cases of embezzlement. And as the value of mineral exports plummeted in recent years, local governments faced shortfalls, leading to resentment.
Whether driven by disappointment, distrust of foreign companies and the central government, or fear that a mine will destroy the environment and their livelihoods, local people have marched, blockaded major roads, held government officials hostage, and staged other acts of protest, which often end with violence. An emblematic case is the Conga project, a gold and copper mine planned for Peru’s Cajamarca region by the U.S.-based Newmont Mining Corporation in partnership with the Peruvian company Buenaventura that was effectively halted by local opposition. The project was meant to replace the diminishing production of that consortium’s nearby Yanacocha mine, one of the largest gold mines in the world, which reached a peak production of 3.3 million ounces of gold in 2006, but has been in steady decline since then. Yanacocha now produces less than 1 million ounces of gold per year, and the consortium expects to close it by 2020.
The value of the Conga gold and copper deposits is calculated at around $5 billion, but the project would destroy lakes and streams that provide water for a vast area. When construction began in 2011, local people started protesting. Opposition was fueled by the perception that the Yanacocha mine had hardly benefited the region. Despite the fact that the mine has produced between $1 billion and $2 billion worth of gold per year over the past decade, Cajamarca remains Peru’s poorest province with more than half of the population living in poverty and 20 percent in extreme poverty.
Local people have marched, blockaded major roads, held government officials hostage, and staged other acts of protest, which often end with violence.
The Humala administration’s first response to the opposition movement was repression, and a violent crackdown resulted in the deaths of some protesters. The government then hired international experts to complete an assessment of the project, but local leaders rejected their suggested modifications. Protests continued, and independent surveys confirmed that the majority of Cajamarca residents opposed Conga. The consortium’s construction permits expired in 2015, after which executives at both Newmont and Buenaventura admitted that the mine won’t be built in the near future.
Kuczynski notes that the case illustrates the dire need to improve living conditions in communities near mines. “How can it be possible that with all the wealth that has been generated in Cajamarca during the past 20 years, 40 percent of the population still lacks electricity?” he asked during a press conference.
Though work on the Conga project was halted years ago, tensions between the consortium and the local population linger, as is illustrated by the case of Maxima Acuna, a subsistence farmer who has lived for decades on land that the mining companies hold title to. When security forces tried to evict Acuna and her family in 2011, she resisted. They beat her, and her home was destroyed. With help from a local nonprofit, Acuna appealed the eviction order, and in December 2014 a judge ruled that she and her family could stay on the land. In April 2016, she was awarded the Goldman Environmental Prize, which raised her profile significantly, yet she reports that harassment by mining company personnel has intensified since then.
Acuna is one of countless rural Peruvians whose rights have been trampled in the rush to exploit natural resources. Garcia’s second administration (2006-2011) drafted a legislative package to facilitate private investment that posed so many threats to traditional land and resource rights that Peru’s main indigenous organizations launched a national mobilization in 2009 to demand the repeal of nine of its decrees; the protests lasted 10 weeks and led to a bloody confrontation with police that claimed 24 lives. According to Jose de Echave, an economist with the Peruvian nonprofit CooperAccion, 2009 was the worst year for such clashes, with 52 people killed, but they have continued since then. Nineteen people were killed and 872 people injured as a result of social conflicts in 2015, primarily rural protests against mines or other megaprojects.
At a press conference, Kuczynski explained that he hopes to decrease the likelihood of such conflicts by investing in the provision of basic services before mines even open, and to promote dialogue rather than police repression. “We’re going to sit down with people in the affected areas, we’re going to listen to them, but most of all we’re going to make prior social investments in the mining areas,” he said.
The president says that while Conga is on ice, other major mining projects remain feasible, such as the Quellaveco and the expansion of Las Bambas, both copper mines in southern Peru. Though copper prices remain low, Peru’s exports of the metal increased by at least 50 percent in 2016 and are expected to continue rising in 2017.
According to Echave, more than 30 percent of current mining conflicts involve a total rejection by local people, but at least 60 percent involve issues that mining companies and communities should be able to resolve. However, he adds that most conflicts are based on multiple issues and thus can’t be resolved simply by increasing access to basic services.
Reigning in Environmental Destruction
Kuczynski has said that he supports “clean and environmentally responsible mining,” but the challenge that the state has faced in mining, and in other industries, has been to achieve compliance with environmental laws. Forest management is another example: Approximately 80 percent of Peru’s timber exports are illegal, according to the Environmental Investigation Agency (EIA), while large tracts of rain forest have been illegally destroyed in recent years to create oil palm plantations. EIA’s Peru representative, Julia Urrunaga, explains that loggers and timber exporters have long operated with impunity, and even when the authorities are informed of environmental crimes, they often lack the resources or willingness to act. When they do, they may face threats in the field or pressure from above to desist. For example, a group of 31 police, prosecutors and forest service personnel who raided an illegal logging operation in the northern province of Rioja in late September were overpowered by 200 armed men and held hostage for 19 hours.
Some of the most devastating environmental destruction in recent years has been wrought by small-scale gold miners in Peru’s portion of the Amazon Basin. Tens of thousands of miners have destroyed vast expanses of rain forest and riverbanks in the province of Madre de Dios, one of the most biologically diverse areas on Earth. The Humala administration spent years trying to halt that destruction, sending troops to destroy illegal mining camps while demanding that small-scale miners register their operations and pay taxes, but the most tangible result was the election of the miners’ leader as regional president two years ago. Since then, illegal mining has increased, and miners have moved into protected areas that are major tourist attractions. Kuczynski says he will simplify the process for registering small-scale mining operations while creating a national “mining bank” to provide miners with credit and purchase their gold, and use it as leverage to get the miners out of protected areas and riverbanks.
Building a Modern Nation
The failure of Peru to effectively enforce its environmental laws reflects the limits of its state institutions and the challenges that the central government often faces when dealing with regional governments. Such shortcomings don’t bode well for some of the president’s goals for the next five years, despite the quality of his ministers and government plan. In his optimistic inaugural address, Kuczynski said that he wants Peru to be a modern nation when he leaves office in 2021, with less poverty, corruption, discrimination and crime, and high-quality public education and health care systems. He would also like Peru to join the Organization for Economic Cooperation and Development.
While all presidents enter office promising more than they can accomplish, it is unlikely that any of Peru’s prior presidents had accomplished as much before entering office as Kuczynski. He could well be the most intelligent leader that Peru has ever had, and he is undoubtedly the worldliest person, with the broadest knowledge of the international economic system, to ever lead the nation. Yet Kuczynski and his ministers will have to depend on state bureaucracies that get very low marks from Peruvians to implement their programs, and they are likely to face ample resistance along the way. Such challenges will be compounded by the fact that Kuczynski’s party is a small minority in the country’s Congress, which is dominated by legislators from Keiko Fujimori’s Fuerza Popular party.
Despite such varied challenges, Peru is approaching its bicentennial with the auspicious combination of a strong economy and a progressive, experienced leader who is committed to strengthening the country’s democratic institutions and reducing poverty. Citizens of other South American nations no doubt wish that they were so lucky.
David Dudenhoefer is a freelance journalist and communications consultant based in Lima, Peru, from where he covers several South American countries.