Alan García
Peru's Born-Again Free Marketeer

By MARY ANASTASIA O'GRADY

Lima, Peru

Knock on the door," a solider standing guard in front of Peru's Government Palace says when I tell him I have an interview with President Alan García. I gaze up at the massive wooden portal – the perfect entry for the palace's 6-foot-5-inch resident or even someone twice that size – and do as I'm told.

A small wicket in the middle of the big door swings open and I give my name. I am admitted and escorted through the famous mirrored "golden salon," modeled on a room at Versailles. At 8:30 on a Saturday morning, the palace is silent. The click of my high-heels on the marble floor echoes under the vaulted ceiling. We reach another smaller chamber; coffee is served.

Terry Shoffner

The Peruvian economy is doing well these days, but with the world's attention focused on an aspiring dictator in Venezuela, its success has gone relatively unnoticed outside the region. Thus I want to talk to Mr. García and he has agreed to talk to me: A clever and seasoned politician, legendary for his silver-tongued populism, he is now in the business of marketing his country to investors. And why not? With an average growth rate over the past six years of better than 6.2%, the story is a good one. And it is about much more than a boom in mining exports. Peru has blossomed because of competitiveness, something that could not have been imagined a decade ago.

Mr. García led Peru once before, from 1985-1990. That presidency ended in disaster. In July of his last year in office, when his successor Alberto Fujimori was sworn in, the monthly inflation rate was 63%.

Price controls had spawned long lines for food. The government had a fiscal deficit totaling a whopping 7.5% of GDP. The economy contracted 8.8% in 1988 and 12.2% in 1989. Meanwhile, Shining Path terrorists dominated the countryside, making life miserable for the peasant population, unattractive to foreign investors and impossible for tourism.

Mr. García left office in shame and, hounded by corruption charges, fled in 1992 to live in exile in Colombia. Upon his return nine years later, he lost a bid for the presidency against Alejandro Toledo.

In 2006, he ran again and won in a run-off against a hard-left populist who was promising to replicate Chávez-style government in Peru. His victory was owed in part to the many Peruvians who, despite bitter memories of his disastrous administration, held their noses and voted for him just to avoid the horror of chavismo. Then they braced themselves for life again under the man known as "crazy horse."

So far not only have their fears not materialized but something truly unexpected has happened instead: Mr. García now speaks the language of a born-again economic liberal and defends markets as a way to reduce poverty. Whether the conversion is authentic is a matter of much debate in Peru these days. What I can say for sure, after a 70-minute interview, is that he firmly grasps the principles behind the arguments he now professes to believe.

Peruvian growth is often assumed to be about the mining sector – copper, gold and the like. But Peruvians are discovering their comparative advantages in niche markets around the world in a host of other sectors, including manufacturing, apparel and agriculture. A visitor to Lima immediately appreciates vast improvements in services compared to even a half-decade ago.

How has all this come to pass? "I think the essential change is in the commercial economic model of Peru," he says. The country "has decided to insert itself in the global economy, open its borders to investment, lower tariffs [and] guarantee fiscal and monetary stability. I think this, sustained for more than 10 years now, is bearing fruit."

Mr. García also recognizes the fact that many of his neighbors are not courting investors, making his country a beneficiary of their bad attitudes. "Peru looks like the country [in the region] most favorable to modernization," generating a level of investment "that is extraordinary." The country has had "an important rate of growth in the past three years, from 6% annually to almost 8% and then 9%. We expect to maintain, this year, the highest growth rate and the lowest level of inflation in South America."

For a country defined by decades of poverty and violence, this borders on the miraculous. But what may be more amazing is that the region's most notorious left-wing populist of the 1980s now champions free enterprise. Even Colombian novelist Gabriel García Márquez never wrote such a surreal tale. I ask the president to explain his epiphany.

The question produces a burst of laughter that seems to contain at least a kernel of irritation, but if so it fades quickly. He immediately goes to the heart of the issue. "First, more than reading, one has to see the reality and this reality is what has changed." For the president, that reality is all about the birth of the microchip. "Twenty-five years ago the world was divided in two," he says "and what did not exist was the extraordinary revolution in communication and information, which is the basis of all the change in the world economy now and of the change in our ideas. The Internet, electronic money, the economic opening of trade without borders," this is what's driven the shift in thinking. "This new reality demands that we not oppose the wave of globalization but take advantage of it in favor of society."

More shocking for those who remember the old Alan García is his newly espoused faith in the private sector as an engine of human progress. "I have an enthusiastic and hopeful perspective that we are beginning a new economic phase of the economy, like in 1750 with the steam engine. We are beginning a totally different chapter in economics. The world is linked and there is a growing democratization through participation by consumers and producers.

"At the same time there is the process of individualization of decisions, communications that makes humanity more free. Just like when Cho En Lai was asked if he judged the French Revolution a success and he said, 'It's too early to tell,' I think we are in the first years of something that may take centuries to evaluate." Government's role, in Mr. García's opinion, is "to persuade the people – this is its role as a leader – to be open to all the possibilities of . . . investment and, with this, to decentralize economic activity and thereby create more employment."

Still, his critics in Lima say that he has yet to prove his mettle by pushing through the next phase of reforms. Businesses still toil under a massive regulatory and tax burden; and Peru particularly needs labor reform that will lower the cost of hiring and firing workers. This will require cuts in payroll taxes and in severance obligations of companies when workers are let go.

Mr. García agrees that labor regulation is a drag on businesses and has no trouble diagnosing the problem: "We no longer live in a closed economy with protection. It is an economy of competition and speed. And therefore the businesses are destined to be born, live and die because any company can enter a market and displace others. In this sense, businesses are condemned to instability. As a consequence we cannot continue with concepts that come from another time and another situation."

Instability, he says, is particularly a problem for services and low-tech manufacturing businesses that face stiff competition from around the globe. But he also notes that the problem makes life difficult for Peruvian workers. "We need a reform that formalizes the masses – some 70% of Peruvians workers – who work in the informal sector and have no rights, as well as the businesses which are not legal and don't pay taxes."

For decades politicians around the region have looked at different ways to reduce the size of the underground economy. Most see the answer as more law enforcement; Mr. García seems to favor incentives. Rather than hiring an army of tax and labor inspectors to force compliance, he recognizes that the rules of the game have to be changed. He says Peru has to lower the cost of being in the formal sector if it wants to "increase its internal saving capacity through the pension funds and increase its ability to offer health care to Peruvians." Without such changes, the country will be stuck with "informality," what the president calls "the slavery of the 21st century."

Opponents of labor reform, he says, include workers in the formal sector who want to protect their privileges enshrined in regulation, and businesses that dread the organizing power of legal workers. But Mr. García says that the 70% who don't have formal-sector jobs will be liberated from the slavery if the reform that he is working on is passed by the Peruvian Congress. It is a "pro-jobs" reform, he insists, more than a labor reform.

Meaningful labor reform would go a long way toward erasing his past sins, and maybe even secure his legacy. But much will depend on what happens to the inflation rate, which has been heading north of late. Poor Peruvians, particularly in the mountainous area of the country which favored his opponent in the run-off election, have been demonstrating in the streets against rising food prices. Mr. García blames this on rising global demand for rice, "the disastrous ethanol program" and the fact that the country grows no wheat and has to import it all from abroad.

Just to be provocative, I ponder aloud whether price controls wouldn't be a good way to help the poor. He snickers and then shoots back: "Price controls are my enemy." Instead, he says, the answer to rising prices is to increase the productive capacity of Peru. That's not a bad course of action, though it will take some time. What would be better is to let the "sol" appreciate. Regrettably, the central bank is loath to do that because it believes it will make exporters less competitive, a view that has led many a government into trouble.

President García wants the world to know that he is a born-again believer in the connection between liberty and human progress. And as a world-class orator, he has no trouble laying out the case. But Peruvians once bitten are thrice shy, and they are not so eager to bless his conversion. The key, it would seem, to ending the debate and rewriting the history books that will tell of his heroic leadership is to put his vision into action. No wonder all eyes are on this former populist's attempts to tackle the difficult issue of labor reform.

He certainly packs the optimism necessary for the job; he has no time for the doom-and-gloom set. "When they say that the world is threatened by immigration, poverty, destruction of the environment and concentration of monopolies, I laugh. I have complete faith in human intelligence and technology to overcome any obstacle, geographic or social."