Despite Bids at Reform, Runaway Inflation Wracks Peru

Guido Pennano, a respected Peruvian economist, held out a 1,000-inti bill and asked, “Do you know how much Peru’s biggest bill is worth now?”

“Less than $2,” he said, answering his own question and sinking back into his chair with a grimace. “Imagine. In January of this year, it was worth $5.” He thought for a moment. “No, wait--it was $50!”

The collapse of Peru’s currency, a consequence of its most severe economic crisis, is in plain view on the decaying, colonial-era Plaza San Martin in downtown Lima and in the elegant suburb of Miraflores.

Thousands of men and women wave calculators, the calling card of the money changer, one of Peru’s few growth industries. Customers meander among them on the main avenues seeking the best rate from the street bankers, whose trade has been tacitly endorsed by the government.

A single $100 bill brings an inch-thick wad of 500-inti notes, worth about $1 each, which come stapled and folded in sets of 10 bills each.

The real banks along the avenues are quiet places these days, even when their workers are not on strike. Although inflation is about 1,400% a year, the highest savings bank interest rate is only 270% a year. Little wonder that the action is outdoors, in cash, as people scurry to protect themselves from the ravages of hyper-inflation.

Much of Latin America is writhing in economic disarray, fed by vast foreign debts, overspending and the drain of inefficient, subsidized government-owned industries. But nowhere is the crisis as extreme as in Peru.

The free-lance banking business is one reflection of the ingenuity of Peruvians as they struggle to survive. But anger and resentment are growing, and some people worry that Peru is sinking toward an abyss that jeopardizes democratic rule, which returned in 1980 after a dozen years of military dictatorship.

Rumors circulate that President Alan Garcia will become the first South American president in this decade to leave office prematurely, either escorted out by the armed forces or, more likely, say Peruvian analysts, by resigning.

Three years after he took office in a blaze of publicity and good will, basking in 90% popularity ratings and vowing to challenge the world’s creditors, Garcia is on the ropes, beset by food shortages and strikes, reeling from inflation and isolated by the foreign lenders whose help he desperately needs.

Just as he received the accolades for Peru’s growth in 1986 and 1987, the 39-year-old populist is getting the blame for the current disaster and for the resulting threat to social and political stability. His popularity rating has fallen below 20%.

Yet the coup rumors have subsided. Economist Pennano explained: “The military doesn’t want to accept the cost. They are going to wait until the last minute, until the people cry out to them, ‘Save us from this disaster.’ ”

The strongest argument against a coup now, leftist leader Alfonso Barrantes said, is that “the economic crisis is so grave that the generals themselves know that they cannot solve it either.”

Barrantes, president of the United Left coalition, is ahead in the polls for the March, 1990, presidential election. He and his main rival, novelist Mario Vargas Llosa, both insist that Garcia must serve out his five-year term to protect Peru’s democracy.

“Only Alan Garcia can benefit from a dictatorship,” said Vargas Llosa, founder of the new center-right Liberty Movement and the candidate of the Democratic Front, a center-right coalition that includes Popular Action, the party led by former President Fernando Belaunde. “But Peruvians know perfectly well that a military dictatorship will mean another failure, and mean more terrorism and political violence than we have now. Nobody wants a dictatorship.”

More prevalent than coup rumors are calls for Garcia to resign--and reports that he offered to do so recently but changed his mind or was talked out of it. He disappeared from public view for more than a month, during which he was said to be depressed and evaluating his future.

Grown Too Much

Garcia has denied any such introspection, and was lively and eloquent late last month during a summit with six other Latin American presidents in Uruguay, where he defended his policy of limiting foreign debt payments to 10% of Peru’s export earnings, expected to be about $2.8 billion this year.

“Peru ate its debt--we used it to grow,” Garcia said at the summit. “We have grown too much and consumed too much. But that is a problem of administration--of execution--not of policy.”

Nevertheless, after months of ignoring the signals of looming chaos, Garcia partially acknowledged the realities in September, when he imposed a biting austerity program. He reduced government subsidies, which sent consumer prices soaring, and further devalued the inti. The measures sent inflation to 114% for the month--equal to the figure for all of 1987.

Garcia and his ruling party, the American Popular Revolutionary Alliance, have been reluctant to embrace orthodox free-market reforms, fearing that major belt-tightening would set off popular unrest. Garcia is already grappling with a Maoist guerrilla insurgency that has left 12,000 dead since 1980, not to mention the havoc caused by a thriving cocaine industry.

Apart from some protest strikes and looting, the September austerity package did not prompt widespread violence. But neither did it appear to set Peru on the way toward recovery. Inflation was 40% for the month of October.

An array of economists and political foes criticized the measures as tardy and watered down to the point where they are ineffective. Without much harsher medicine, and soon, they say, Peru is courting economic deterioration that is potentially far more dangerous in the long run.

System Has Died

An opposition senator, Javier Diaz Orihuela, predicts inflation of 13,440% in 1989 if policies are not radically changed. He says Peru is already experiencing “macro-hyper-inflation.”

Sen. Enrique Bernales, who headed a commission on violence in Peru, said: “My vision is not of a classical social explosion. Rather, the people are simply going to bypass the state altogether . . . . This system has already died. Its laws, its police already have stopped functioning. This society exploded some time ago.”

With a consumption-oriented policy, Peru enjoyed two years of stunning economic growth in Garcia’s early days, reaching 9% in 1986 and 7% last year. But that growth was achieved with mirrors, Garcia’s critics say, paid for with foreign currency reserves that have evaporated.

His now-aborted plan to nationalize the banks in 1987 provoked deep mistrust from Peru’s business elite, eroding his credibility and what little confidence remained for investors. Capital flight abroad reached about $800 million in 1987.

Garcia recently acceded to a demand by his new finance minister, Abel Salinas, to reopen negotiations with the International Monetary Fund and World Bank, Peru’s major creditors. But fresh aid is unlikely without drastic reforms, and many doubt that Garcia has the stomach to impose them.

The economy is expected to shrink this year by 6%. Miners began a strike in October that is costing the nation $5 million a day in lost earnings from Peru’s key exports, copper and other metals. The government oil company is said to be losing $300 million a year. Yet there is still resistance to privatization, a unified exchange rate and budget cutting, so inflation rises faster than pay raises and buying power sinks.

Delaying Shipments

“Either the government is going to have to take very severe measures, or hyper-inflation is going to take care of the problem for them,” said a foreign economic analyst living in Peru.

The free-market exchange rate is above 500 intis to the dollar, but exporters receive 250 intis for each dollar earned from export. Thus, many are holding down production, delaying shipments, or shunting goods illegally across the porous borders into Bolivia and Chile for dollars, which they then exchange at the far higher street rate, while awaiting a drastic increase in the official rate.

In the short term, the government would lose revenue by paying exporters more. But in the longer view--probably only after Garcia’s term ends--exports would rise and would not need to evade legal channels, assuring the government of a share of the action.

The political decline of APRA, the centrist, nationalist party that Garcia brought to power for the first time in its 60-year history, leaves a polarized field in the next election and a clear ideological choice for voters.

Barrantes’ United Left, a six-party coalition including Marxist and non-Marxist parties, is divided internally but still leading the polls. Barrantes, a former Lima mayor, preaches moderation and dialogue with Peru’s creditors, although some doubt he could bring his partners with him on that road.

On the other side, Vargas Llosa dislikes being labeled right-wing, given that term’s authoritarian connotations in much of Latin America. But he is solidly in the free-market camp, saying the government’s “patrimonial” role in Peru, under both military and elected governments, has led to its downfall.

Need Economic Freedom

The poor have already rebelled, he argued, by creating a vast underground economy beyond government control. Lima is awash in street vendors plying their wares, including complete roadside auto muffler and body shops.

“This is new, this is something created in spite of the state and the political parties, by the natural pressure of the poor,” he said. “We have civilian regimes in Latin America not because of the elite, but because of pressure from the poor . . . . But now, in order to grow, to become modern societies, we need to complete this liberalization with an economic freedom, something we have never had in our history, for which the poor are fighting. And that is the great hope for Latin America.”

Meanwhile, Peruvians try to take care of their own needs. In the pueblo joven (young town) called Children of Adm. Grau, on the northern fringe of Lima, women have set up their own soup kitchen and even built a school of woven reeds to serve the 438 squatter families that have moved into one-room shacks since 1985. Mothers teach preschoolers the ABCs in the mornings. A hearty lunch, made with donated U.S. grain, costs 50 intis (10 cents).

“We used to go to the market happily,” cook Rosalia Sanchez said. “Now we go in fear, we don’t know if we can buy what we need.”

Her friend, Elizabeth Guerrero, said: “There are many proud people here who don’t want to admit they are in need . . . . The Peruvian has to struggle to live. But God believes in us.”