In the very same week, Peru won ‘investment grade’ status and angry crowds burnt down the regional government building in Madre de Dios. Two sides of the same coin that is Peru: the fastest growth of any major country in Latin America and a rising tide of popular discontent, particularly in areas outside Lima. Two years into his second government, President Alan García may well be wondering how to convert growth into popularity.

In the first quarter of this year, Gross Domestic Product grew by over 10% on an annualised basis. Propelled by investment in the mining sector and high world minerals prices, growth is spilling over into other sectors, such as construction and manufacture, as demand in the economy increases. While construction activity is obvious on every block in Lima’s richer neighbourhoods, it is also in evidence in some of the poorer ones.

But trickle down does not trickle uphill. The economic boom that Lima is enjoying is largely absent elsewhere, particularly in the highlands. The government is trying to stimulate public investment in the interior of the country, but up to now has been hobbled by the operation of the so-called SNIP (National System of Public Investment), a device which gives the Minister of Economy and Finance control over decisions on public investment projects and the disbursement of project finance.

The extent of popular dissatisfaction is evident in García’s declining approval ratings; these now put him on around 30%, half those when he took office two years ago. There have been several instances of protest on the streets in recent weeks, culminating in a one-day strike of the CGTP in mid-July. The strike coincided with mobilisations throughout the highlands and in the jungle.

García made it clear two years ago that his second government would not be a repeat of the first. Abandoning all pretence of heterodoxy, the new government entered into alliance with the business elite by deepening the neoliberal policies initiated by Alberto Fujimori in the 1990s and pursued by his immediate predecessors.

As if to rebut all criticism of his government’s economic policies, on July 14th García appointed a new finance minister to replace the technocratic Luis Carranza. In the search for a replacement he went straight to the IMF in Washington to select Luis Valdivieso, a Peruvian who has worked there for many years on the Asia desk. By coincidence, Valdivieso was sworn in on the very day that Peru was conferred ‘investment grade’ by Standard & Poor’s, the international investment risk evaluators.

Despite the country’s buoyant growth rates, the new minister faces a number of problems. First and foremost is the accelerating rate of inflation. Whether or not this reflects just the rising cost of imported food and energy, many people are beginning to see their incomes rise more slowly than prices. To stem inflation, the authorities are having to rein in credit by raising interest rates. This will hit those who have borrowed hand-over-fist in the last couple of years to buy new houses, cars and other consumer items.

At the same time, imports are rising faster than exports, and in the first quarter Peru had a deficit on its current account for the first time for several years. Also, aware of the poor use to which public spending has been put, the new minister may wish to reduce public spending. In sum, Valdivieso may well reach for the lever to slam on the brakes.

Come what may, Alan García remains committed to his plans to regenerate the Peruvian economy by promoting private, particularly foreign investment. He mapped out his thinking last year in a newspaper article, entitled the ‘dog in the manger syndrome’ (El Síndrome del Perro del Hortelano). [See PSG Update, No 124]. His idea includes reforming laws to enable investors to buy up large-scale property titles in the Amazon and to whittle down the property rights of peasant communities in the Andes to encourage mining and other activities.

Using presidential decrees to approve the so-called ‘Law of the Jungle’ was what ignited the protests in Madre de Dios. There has also been opposition in Ucayali and Loreto. García had to send off his new environment minister, Antonio Brack, as envoy to calm the passions aroused. Apart from anything, the development of the Amazon for forestry and other uses has massive environmental implications.

At the same time, the executive has announced decrees that will undercut the rights of peasant communities in defending their lands against outsiders. Using facilities conceded to him by the Congress to make Peruvian law conform to the Free Trade Agreement (FTA) with the United States, García proceeded to sign a decree that reduces the margin by which communities agree the sale of land to third parties.

These controversial policies are gauged to increase the government’s unpopularity in those parts of the country where its level of support is already meagre. How this expresses itself politically, is difficult to foresee. But Standard & Poor’s may find that it has not given enough thought to political risk in awarding Peru ‘investment grade’.