Peru’s Garcia: Leftist, Supply Sider : Brash Iconoclast Embraces Reforms, Takes on the IMF

‘All successful revolutions require a foreign enemy. The (International Monetary) Fund is my enemy.”

--Alan Garcia

President Alan Garcia of Peru, a defiant maverick of international finance, has found an improbable ally in his search for radical reform. It is called supply-side economics.

Garcia was recounting the virtues of demand-led growth to a recent visitor when his office telephone rang. It was the president of Peru’s central bank, who reported that foreign reserves had inched up a few million dollars.

“Good,” Garcia said, smiling. “Don’t let go a single one.”

Seven months into a five-year term, the 36-year-old president basks in his international reputation as a brash iconoclast. In Peru, he is wildly popular. He sails close to the wind--and relishes every minute of it.

He bristles with ideas, projects, reforms--redistribution of income, rapid transit for clogged Lima, canals to increase agricultural production, more work and less corruption to restore public confidence in government. And now, he has given birth to Garcianomics--like Reaganomics, except that the spin is to the left, not the right.

The underpinning of Garcia’s drive for democratic reform is his decision to restrict payments on Peru’s $14-billion foreign debt to 10% of annual export earnings--around $300 million this year. Curtailing payments leaves him money with which he hopes to stimulate reform and growth in a have-not country where living standards have fallen back to levels first achieved two decades ago.

Without change and development to benefit the poor majority, Garcia argues, there can be no hope for democracy or stability in a nation of 20 million that is ready to explode because of hunger and social unrest.

Garcia’s go-it-alone nationalism has won him outspoken admirers among the political opposition in other Latin American countries, where development is mortgaged to heavy debt repayments.

It has also earned him the enmity of foreign bankers and international lending institutions and roused grave disquiet within the Reagan Administration. Washington dislikes Garcia’s fiery rhetoric, his defiance of the international economic rules and his foreign policy, which has room for friendship with Nicaragua, Cuba and North Korea.

Secretary of State George P. Shultz told a Senate committee in Washington recently that better relations with Peru would require “greater moderation” on the part of the Garcia government.

“We applaud President Garcia’s commitment to stamp out narcotics trafficking and his determination to end terrorism within the context of democracy and human rights,” Shultz said. But he added that a “mutually constructive relationship . . . will require greater moderation and cooperation and meaningful economic reform.”

U.S. banks already list their Peruvian loans as “value impaired,” and they have written off a substantial percentage of them. American economic and military assistance is suspended because of arrears. U.S. support continues, however, for Garcia’s drive against Peru’s flourishing cocaine industry.

The International Monetary Fund, which Garcia calls “a senseless institution,” has warned that in April it will declare Peru ineligible for further assistance if $72 million in arrears is not dealt with properly. That may also trigger action from more than 200 creditor banks and rule out any further development assistance from the World Bank, the IMF’s sister lending agency.

Garcia is prepared for the worst. Last week the central bank disclosed that it had withdrawn Peru’s deposits of gold, silver and foreign exchange from U.S. and European banks.

Garcia does not appear anxious to break openly with the international financial community, but neither is he willing to compromise his Peru-first strategy. As a buffer against financial isolation that would force Peru to deal with trading partners on a cash-and-carry basis, Garcia is husbanding his foreign reserves, which have grown from about $890 million to about $1.5 billion since he became president, the government says.

“All successful revolutions require a foreign enemy,” Garcia said in an interview. “The (International Monetary) Fund is my enemy. But the U.S. errs when it considers my attacks on the fund attacks on the U.S. Washington should realize that the fund is its enemy, too. I want to have good relations with the U.S.”

The distinction between the fund and its principal backer may be a product of Garcia’s conceit, but he is not alone among Latin American leaders in his hostility to the austerity that is the traditional cost of IMF support for sick economies.

Other major Latin American debtors, which pay painfully more than Peru does in terms of a percentage of exports, are having trouble generating needed growth. More than one looks with envy at Garcia’s self-arranged payments.

Make an Example

It may be that Garcia is gambling that sooner or later other democratic governments with pressing social problems will follow Peru’s lead. An alternative possibility being mentioned here is that the creditors will make an example of Garcia precisely to discourage any more Perus in a region of the world where debt totals a staggering $360 billion.

Supply-side economics, announced early last month in a nationwide address, represents the second phase of Garcia’s domestic economic program, underwritten partly by money he is not sending abroad.

The first phase, borrowed in part from Argentina’s Austral Plan, attacked inflation by freezing prices and wages after substantial increases had been awarded to workers who earn the least. Despite some shortages of such basic goods as potatoes and chicken, inflation fell dramatically, from 100% on an annual basis to around 30%, Garcia says proudly.

Juan Francisco Raffo, managing director of Peru’s largest private bank, said: “The positive effects of the first phase were overwhelming, although business thought they were inadequate.”

On a blackboard beside his desk, Garcia portrays Peru as a pyramid with a broad base and a narrow top. At the top, the richest 25% of Peruvians share 85% of the national income. The next 55%, mostly the urban poor, share 14%.

Cut Interest Rates

“We want to squash the pyramid,” he said. “In the first stage, I estimate we have transferred 6% from the top to the next lowest segment. The next stage should transfer another 5%.”

So far, besides his effort to stimulate economic growth from increased demand by ordering a raise for the country’s lowest-paid workers, Garcia has reduced real interest rates and has maintained a constant exchange rate. Further, he has slashed sales taxes and other business taxes as well as tariffs for government-provided business essentials such as diesel fuel and electricity.

When a visitor asked if the sum of his package was not in fact supply-side economics with a populist twist, Garcia smiled and replied with one of his few words of English: “Yes.”

In addition to the structural reforms, Garcia hopes to create as many as 40,000 jobs with labor-intensive construction of a $300-million rapid transit system to ease congestion in this capital of 6 million people.

Some private economists forecast that the government budget deficit will increase to about 9% of the gross national product as a result of the tax cuts and that excess liquidity created by Garcianomics will again stoke high inflation by year-end. Garcia insists that neither will happen, arguing that as domestic production grows to meet increased demand, so will government revenue.

Alliance Undercut

One political benefit of Garcia’s performance so far is that he has undercut an alliance of Marxist political parties that is his strongest internal opposition. In percentage terms, only half as many people who actually voted for Garcia’s Marxist opponent in last year’s presidential election now acknowledge having done so. Garcia got about half the vote in that multiparty race, but a poll has found that fully two-thirds now recall having voted for him.

Indeed, the only sector of Peruvian society that Garcia’s charisma has not charmed at least to a draw is the violent left. Guerrilla activity led Garcia to order a military-enforced state of emergency in the Lima area last month, another measure that won him points in a city notorious for its lawlessness.

Garcia is not apt to squander his domestic gains by seeking peace with his self-declared foreign enemies. Neither, on the other hand, would he advertise that Peru is in fact paying more than the 10% limit he has so stridently defended.

Private Debt Payments

Payments are being made on only a third of the interest due on the $12-billion public debt, but payments on $2 billion in private debts are up to date, and some government enterprises are meeting their payments without objection from Garcia.

The sum will put payments well above the 10% level in 1986, Peruvian economists and foreign bankers agree.

As the April IMF cutoff approaches, Garcia is also curbing his rhetoric. He still exuberantly tosses off outrageous one-liners but no longer enjoys seeing them in print.

“Quote anything I said except the real spicy stuff,” he cautioned one recent visitor.