Economic downturn poses questions for the future

2 October 2015

This year’s downturn in commodity prices, especially for minerals like copper, has taken the lustre off Peru’s recent economic achievements. For more than ten years, with the exception of 2009, Peru sported strong rates of growth of between 6% and 10%, supported by high mineral prices for its exports and by the inward flow of foreign investment that came with the commodities ‘super-cycle’. This year growth will still be positive – which sets Peru apart from the likes of Venezuela, Brazil and Argentina – but it will be a far cry from the stellar rates of the past, probably around 2%.

The radiant optimism emitted by the all-important Ministry of Economy and Finance (MEF) all looks a little hollow, although government officials confidently predict that next year will be better than this as projects like Las Bambas come on stream. Still, the ministry sticks to the script that only investment in extractives will save Peru, even though the dangers of relying on a handful of highly price-volatile commodities for sustainable employment and growth are becoming daily more evident.

The Humala administration has taken some timid steps designed to promote economic diversification. However, this is not a message that appeals to the MEF or to Peru’s powerful community of extractive investors. It may be a message that gets an airing during the upcoming election campaign. But most of the more obvious contenders seem wedded to the extractives script that underpins thinking on the right and centre-right.

Meanwhile, the decline in tax income from mining, either through individual and corporate income taxes or through the canon system, is already forcing the Treasury to look for ways to cut spending. The brunt of this seems likely to fall on those regional and municipal governments that have done well out of the canon system in recent years. Lower growth will also mean that formal sector employment will decrease, as new entrants to the labour market find are unable to find jobs and are relegated to the insecurity of the informal sector. Lower growth and lower government spending on things like public investment projects and social welfare will also probably mean that Peru’s achievements in recent years in reducing poverty will begin to be reversed, see PSG article.

And while policy-makers remain wedded to export-led growth through extractives, new initiatives are afoot that will probably reinforce Peru’s subsidiary position in the global division of labour. This is the Trans-Pacific Partnership (TPP), the trade liberalisation deal between the United States, a number of Asiatic countries (but not China) and the handful of Latin American states that belong to the Pacific Alliance (Mexico, Chile, Colombia and Peru). The latter are, of course, the handful of countries that have avoided the Pink Tide in recent years, remaining committed to the neoliberal policies favoured by Washington.

An article by Joseph Stiglitz and Adam Hersh in La República last week warns Peruvians of the dangers of signing up to an agreement designed and promoted by the United States in its own interests. Since the TPP negotiations have been kept under wraps (glimpses only revealed thanks to Wikileaks), little is known of the detail. The main objection of the Peruvian government appears to have been over pharmaceutical patents. But as Stiglitz and Hersh make clear, the ability of Peru to stand up for its interests against the might of the United States is limited indeed. “The simple question that confronts Peru is whether with the TPP it will be better off than today” they affirm. “From what we know from the various leaks about the texts being discussed, it is probable that what it result will be that it will be worse”.

With elections pending and with so much at stake, the discussion around future economic policy is deafening by its absence. But that’s the way that the United States and its TPP counterparts, Peru included, want it to be. Discussion can be dangerous.

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  • PSG Aims

    The Peru Support Group exists to promote social inclusion, sustainable development and the observance of human rights in Peru. To that end the PSG highlights shortcomings in observance of established norms, whether international or local in nature, in its research, advocacy and publications. In so doing, it underscores the relationships that exist within the political system, how institutions work, and the effectiveness of policies that aim to reduce poverty and inequality within the context of sustainable development.

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    Over the past century Peru has suffered a series of autocratic governments and a civil war in which nearly 70,000 people died. Many of the country's ongoing political and social problems are a legacy of its somewhat turbulent past. 

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    Human rights violations were widespread during the twenty years after the initiation of armed conflict in 1980. Efforts to convict perpetrators since the war's end have made only limited progress. Today, concerns remain over the treatment of those engaged in social protest, particularly against strategically important investment projects.

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