Fujimori and the Business Class: A Prickly Partnership

Peru’s business community has been a key pillar of support for
Fujimori’s neoliberal economic program. In recent months,
however, some Peruvian industrialists have begun to grumble about
high interest rates, the weak domestic market, and dumping
by big foreign companies.
BY MANUEL CASTILLO OCHOA
I’ve come here to save
you,” business leader
“JEduardo Farah told an
audience of students from a pri-
vate university in Lima in March.
“I’ve come to prevent profession-
als like you from turning into taxi
drivers.” The words of Farah, the
current president of the National
Society of Industries (SNI),
Peru’s largest association of
industrialists, illustrate the cur-
rent sentiments of one sector of
the Peruvian business class
toward the government of
Alberto Fujimori.
Farah was alluding to the
thorny situation in which
Peruvian industrialists find them- A bird’s eye view of downtown Lima.
selves these days. These business people argue that
since the government began to implement its structural-
adjustment program in 1991, Peru has been undergoing
a process of deindustrialization that will ultimately lead
to long-term recession. Instead of developing the coun-
try, they say, this process is further impoverishing it and
making it more underdeveloped.
Not all the business “voices” are
as cantankerous as those of indus-
trialists like Farah. Others like
Ricardo Mirquez, the country’s
vice-president and a prominent
businessman in the textile indus-
try, don’t have much sympathy
for the naysayers in the business
community. In a recent interview,
he argued that in order to be com-
petitive in the marketplace, Peruvian businesses must reduce
their costs and upgrade the skill
level of their workforce. Accord-
ing to Mdrquez, Peruvian busi-
ness people had grown used to the
government giving them credits,
tax exemptions, and investment
incentives while shielding them
from outside competition. Now, Murquez says, busi-
nesses must restructure their operations and become
more disciplined.
Carlos Bolofia, an economist who as Fujimori’s min-
ister of economics in 1991 and 1992 was one of the
architects of Peru’s stabilization and structural-adjust-
ment program, named his recent book A Change of
Course. The title alludes to what has happened to the
Peruvian economy, and consequently Peruvian business
people, over the last six years. Bolofia’s great “change
of course” concerns an economic and social transition
whose goal is to move from a society in which a strong
VOL XXX, No 1 JuwlAuo 1996 25
5
4
4
Manuel Castillo Ochoa is a researcher at the Center for the
Study and Promotion of Development (DESCO) in Lima. He is
co-author of De poder a poder: Grupos de poder, gremios
empresariales y politica macroecon6mica (DESCO, 1994).
Translated from the Spanish by NACLA.
VOL XXX, NO 1 JULY/AUG 1996 25REPORT ON PERU
state pervades national life to one in which the market
and private investment have preeminence. The diver-
gence of opinion among business people about
Fujimori’s economic program reflects the contradic-
tions inherent in that transition.
In one way or another, Peruvian society as a whole is
tolerating the change, despite all its problems, short-
comings and contradictions. Two antecedents help
explain this response. First, Peruvians vividly remember
the calamitous results of state populism under the previ-
ous administration of Alan Garcifa (1985-90). In 1989,
the economy contract-
ed by 11.7% while the
following year, infla-
tion peaked at 7,649%.
The economic disar-
ray made Peruvians
from all social classes
turn away from the
state and look to the
market as the engine
of economic growth.
Policies in favor of
state intervention and
control, even in their
most moderately pop-
ulist forms, lost popu-
lar support.
The second ante-
cedent was the escalat-
ing violence wrought
by the guerrilla insur-
gency which affected
the entire population.
Between 1980 and
1995, 35,000 people Workers fired fro lost their lives, and
economic losses that were directly the result of the war
reached $25 billion. For most Peruvians, Shining Path
represented a political radicalism taken to its furthest
extreme. The mayhem encouraged the majority of the
population to eschew ideas of social change and sys-
temic alternatives.
These two elements paved the way for the growing
hegemony of proposals advocating large-scale business
investment and neoliberal economic restructuring.
Private enterprise, entrepreneurship, and market com-
petitiveness became quickly interwoven with notions
such as business retooling, out-sourcing, and flexible
specialization. People were now defined not according
to social class, but as winners and losers in the market-
place. Growing out of this rebirth of a business culture
that extolled private initiative, the business sector-not
only domestic firms, but transnational corporations
too-was held in greater esteem. A revitalized private
sector was now considered a founding element in the
country’s national development.
In this new ideological climate, Fujimori proposed
establishing “new relations” between the state and the
business sector. His plan was to transform Peru’s
closed and protected economy into an open, free-market
economy with few controls and regulations. He spoke of
a shift from a state that bestowed favors on particular
business interests to a state that would make decisions
about public policy in an impartial manner. The princi-
pal axes of his administration’s economic program
m the Fabrica Moraveco in Lima hold a protest.
became commercial and financial opening, deregula-
tion, privatization, and state reform. The final result
appeared promising: Peru’s reinsertion into the inter-
national economy, renewed foreign investment, and the
production of goods for export made by restructured
and newly competitive national companies.
The government didn’t have to wait long for business
to express its support. After sizing up the situation, the
business class as a whole-beyond individual discor-
dant opinions-backed the new program. Business peo-
ple seemed to forget that Fujimori’s program was a
rehashed version of the economic program that the sec-
ond administration of Fernando Belatinde (1980-85)
had wanted to implement and that they themselves had
rejected at the time. Ten years later, they saw in
Fujimori a new politician-untainted by the errors of
the past-who promised the commercial paradise of
Southeast Asia on Peruvian soil.
26 NMZTA REPORT ON THE AMERCA5 NCIA REPORT ON THE AMERICAS 26REPORT ON PERU
Trade reform wreaked havoc on
employment. It is estimated that of eve
10 Peruvians, one has stable work, sev
are under-employed, and two are
unemployed.
After initially stabilizing the economy, the gov-
ernment turned to a massive reform of the com-
mercial sector. Before the reform, the average
tariff on foreign goods was 66%; today, it is 15.7%.
Other sorts of import controls such as quotas were also
eliminated. These changes created an unprecedented
opening for imported goods of all sorts. The new trade
policy has had three principal effects. First of all, an
estimated 20% of Peruvian industrial enterprises have
shut down, and the rest are operating with an idle
capacity of 40%. Other industrial firms, in order to
avert bankruptcy, have transformed themselves from
manufacturers into importers of foreign merchandise.
Finally, companies have laid off personnel in an effort
to reduce operating costs. Taking 1990 as a base rate of
100%, Peru’s employment index dropped to 74.9% by
the end of 1995. While employment in the trade and
service sectors has recently begun to edge up, industri-
al employment remains stagnant.’ It is estimated that of
every 10 Peruvians, one has stable work, seven are
under-employed, and two are unemployed. Of the seven
who are under-employed, four eke out a living in the
informal sector of the economy.
The Fujimori regime carried out financial reform in
an equally drastic fashion. In 1991, the Fujimori admin-
istration eliminated controls on foreign currency. Later
on, the President issued a decree that permitted limit-
less repatriation of flight capital. A new banking law
and other mechanisms were implemented in 1992 to
further attract finance capital. Stock-market earnings, for example, were declared to be tax-free until the year
2000.
These policy changes have reinvigorated the nation-
al financial system. At the same time, they have led to
widespread speculation with active interest rates that
has spiraled out of control. The financial reforms have
come down hard on the Peruvian industrial sector, which needs access to credit to survive in an economy
that is more competitive because of the opening to
imports. The banks are lending money at high interest
rates to attract foreign capital and to clamp down on
inflation. This has left domestic businesses high and
dry.
The simultaneous opening of the commercial and
financial markets–together with the narcodollars
that have entered the economy–has led to the
over-valuation of the Peruvian sol. This has fed
-ry imports since Peruvians can buy foreign products
?n at relatively cheap prices. This import bonanza, in turn, has resulted in a huge trade deficit. While
Peruvian exports have been growing since 1990,
they have not kept pace with imports. Last year,
Peru exported over $5 billion worth of goods, but
imported $7.2 billion. As a consequence, Peru was
saddled with a trade deficit of $2.2 billion (equiv-
alent to 6.9% of the GDP).
Deregulation of controls on foreign investment was
another component of the government’s concerted
effort to attract foreign capital. In that limited sense, it
has been successful. Since 1990, in accordance with
global trends in international finance capital, the
process of disinvestment in Peru has been arrested.
Over the last three years, international finance capital
and Peruvian flight capital have been reentering the
country. 1993 was a particularly auspicious year as
many foreign investors, turned off by the relatively low
interest rates in the United States, parked their dollars
in Peru.
The influx of foreign capital has a downside, howev-
er. Flight capital is notoriously fickle. On the turn of a
dime, it can go air-borne, throwing the government’s
current accounts into serious disarray. Deregulation has
also set off a process of dollarization of the Peruvian
economy-around 60% of bank deposits and invest-
ments are now in dollars. 2 In such an economy, any
fluctuation in the exchange rate affects things like debt
payments, making it preferable to leave the rate alone.
Yet exports suffer if the currency becomes over-valued.
If the government is afraid to tamper with the exchange
rate, it forfeits a key instrument for dealing with a trade
deficit or an economic recession.
The Fujimori administration privatized state-run
companies as another way to inject fresh capital
into the economy. Of the 183 state-run compa-
nies that existed in 1990 when Fujimori took office,
around 173 have been privatized. Only the oil compa-
nies, a big mining company and the ports remain in
government hands. The proposed privatization of the oil
industry has recently provoked a strong popular back-
lash [see “Oil and the Opposition,” p. 29].
While it is true that the privatization process has pol-
ished Peru’s external image in capital markets, its
domestic impact has been less favorable. In contrast to
Mexico and Argentina, where national economic groups
bought state companies, in Peru-because of the scarce
resources of national groups-foreigners purchased the
majority of state enterprises. For example, the Chinese
VOL XXX, No 1 JULY/AUG 1996 27REPORT ON PERU
government bought Hierro-Perd for $120 million, and
Telef6nica de Espafia bought the Compafiia Nacional
de Tel6fonos for $2.1 billion. Petro-Perni is sure to be
purchased by foreign capital as well since the sale price
is well beyond the means of
the Peruvian business sector.
The privatization process
has had strong repercussions
on the banking sector in par-
ticular, after new rules allowed
foreign groups to buy na-
tional banks. The Spanish-
owned Bilbao de Espafia
bought the Continental na-
tional bank for $255 million;
the Chilean consortium
Errazuris and Lusick have
bought other national banks;
and even a bank linked to the
Ecuadorian military, Banco
Pichincha de Ecuador, has got-
ten into the act. In the above
cases, Peruvian groups have
entered into joint ventures with
the foreign groups. Mean-
while, the largest privately-
owned Peruvian banks have A woman in a Lima superma
sought strong partners in the have flooded the country aft
U.S. stock market. For example, the Banco de Cr6dito
has set up a partnership with Morgan Guaranty Trust of
New York, while the Weisse consortium has launched a
campaign to introduce its shares on Wall Street under
the auspices of its U.S. partners.
Privatization-and the external opening in general–
have led to the denationalization of both the banking
sector and large companies. At the same time, these
processes are reshaping Peru’s big business sector. A
handful of regional economic groups have used the pri-
vatization process to become bigger players on the
national scene. For example, a group from the Peruvian
city of Arequipa bought the national cement company,
Cementos Yura, for $96 million, while the Peruvian-
owned Wong Group has invested massively in the
import business. Over the long haul, this process will
lead to a selective concentration of national wealth and
the transnationalization of the Peruvian economy. 3
While foreign capital has a much stronger presence
in the Peruvian economy thanks to the neoliberal
reforms, the inadequacy of domestic savings continues
to be a problem. In 1993, Peru’s domestic savings rate
equaled 14.5% of the GDP; by 1995, it had climbed to
17.5%. But, as analysts point out, the rate would have
to reach 22% in 1996 in order for the country to sus-
tain the same level of economic growth as in previous
years. 4
Three sources generally account for the low level of
domestic savings. First, Peruvian businesses are not
saving money because their profits are down due to the
recession, the lower demand for goods from an impov-
rket examines U.S. cereals, one of the numerous imports that
er controls were lifted.
erished population, and the strong currency that attracts
imports. Secondly, families are not able to save money
because stable employment is still extremely hard to
come by. While the number of people living in extreme
poverty has dropped since 1990, poverty levels are still
higher than they were in the “pre-crisis” years of the
early 1980s. Finally, the Peruvian government is not
able to generate savings either because, although it is
collecting more money in taxes than before, this new
revenue is siphoned off by infrastructure expenditures
and payment of the foreign debt.
nother important prong of Fujimori’s neoliberal
economic agenda was state reform. The admin-
istration hoped to reduce the state’s role in
social and economic life and to eliminate the public
deficit. State reform fell most heavily on public
employees. For example, the Ministry of Industry,
which had 2,200 employees in 1990, today has fewer
than 200. In 1990, there were 470,000 public employ-
ees; today, there are about 210,000.
While the government has had no qualms about fir-
ing thousands of state employees, it has been less dili-
gent about cutting public spending. According to the
economic reform program monitored by the
International Monetary Fund (IMF) through biannual
consultations and “letters of intent,” the Peruvian gov-
28 N8CLA REPORT ON THE AMERICAS
5
4
4m
4REPORT ON PERU
ernment is not supposed to run budget deficits. But dur-
ing election campaigns, the government routinely
ignores this stricture. During the 1993-4 period leading
up to the national elections, for example, the adminis-
tration did not skimp on public spending, above all on
infrastructure projects that the president personally
inaugurated on the campaign trail.
This sudden governmental largesse resulted in spec-
tacular growth in the GDP, which reached 12.9% in
1994. Contrary to conventional wisdom, this growth
spurt was due less to private investment or the reinvest-
ment of profits than to public spending at a level similar
to that of past populist governments. As government
spending slowed down, growth dropped in 1995 to
6.9%.
The business sector is of two minds where public
spending is concerned. On the one hand, spending cuts
can set off an economic recession just as injecting gov-
ernment money into the economy can give business a
much-needed boost. On the other hand, the business
sector likes balanced public budgets. The business
community is wary of generous public spending
because it contends that the government often tries to
close budget gaps by raising taxes on business. In 1990,
business taxes were 4.2% of GDP; today, to the chagrin
of the Peruvian private sector, they account for 12%.5
The Fujimori administration promised that state
reform would usher in new institutions that would elim-
inate tax exemptions and special business supports. The
application of the neoliberal economic program, how-
ever, has not rooted out favoritism and co-optation. The
financial sector has fared the best under Fujimori, with
the construction industry in second place. “Why does
the government fundamentally punish industrialists
while, for example, it gives miners tax exemptions?”
asked the SNI’s Eduardo Farah in a typical complaint.
The government’s appointments of several prominent
business leaders to high posts in the administration
indicates its selective co-optation of business. Far from
neutralizing possible opposition, however, this strategy
has in fact further alienated those who have not been
rewarded with government posts.
eru finds itself today in a phase of “post-stabiliza-
tion.” Obviously, its economic problems persist.
The term “post-stabilization” is meant to reflect
how the country has overcome-always a relative term
in a place like Peru-the most serious problems that it
suffered in the 1980s: hyperinflation, significant macro-
economic imbalances, chronic contraction of the GDP,
and disinvestment. Those characteristics have been re-
versed, and the government has achieved economic and
Oil and the Opposition
T he government’s attempt to derail opposition to the proposed privatization of Petro-PerO is a pal- pable demonstration of the contradiction in which:
the government finds itself enmeshed. On the one
hand, the government talks up the neoliberal dis-
course of a new open institutional model; on the
other hand, however, it acts in exclusionary, anti-
democratic ways when things don’t go as desired.
The government hopes to collect about $3.8 billion
with the sale of Petro-Perl-nearly the same amount as all the other privatizations to date. The:
government sees the privatization of the national
oil company as a way to increase its coffers, enhance
foreign investment, and remain on good terms with- the IMF. It is proving more sticky than expected, how-
ever, given that Peru’s nationalist tradition considers
“hot money.” Meanwhile, Peru’s for-
eign debt has grown from 16% of the
GDP in 1990 to 22% today. Then,
there are the economic program’s
enormous social costs: alarming lev-
els of unemployment, informal-sector
work, and poverty. The absence of
new public institutions and Fujimori’s
authoritarian style of governance
reflect the shallowness and vulnera-
bility of Peruvian-style democracy. At
some point, the Peruvian people’s tol-
erance for the “change of course” is
ort.
Yet at the same
ime, the econom-
c program is hob-
led by major
roblems. In the
hort to medium
erm, the country
as to confront its
Luge trade deficit
nd the over-valu-
tion of the cur-
“ency. The dollar-
zation of the
leruvian economy
nd its depen-
[ence on finance
apital and repatri-
ted flight capital
leave Peru vulner-
ble to sudden
utflows of this
Its back to
the gove
signed a ne
of intent”
IMF in May
bound to wear thin. it promISE
The government believes it has two
alternatives: reduce state spending state spen
even more, or offset the trade deficit furt by restricting imports and devaluing
the currency (at the risk of reigniting
inflation). In the fourth quarter of
1995, the government opted for the
latter course, by trying to implement
a “pragmatic” partial reinstatement of import controls.
For example, the administration prohibited the unre-
stricted import of used cars, a policy shift which was
condemned by orthodox economists. These measures,
however, did not have the desired effect. The trade
deficit remained enormous.
In May of this year, its back to the wall, the govern-
ment signed a new “letter of intent” with the IMF in
which it promised to follow the first alternative. The
agreement calls for the drastic reduction of public
spending (by the end of the year, there should be a bud- get surplus of 1 or 2%), the completion of the privati-
zation process, operative autonomy for the organiza-
tions in charge of tax collection, further lay-offs among
the civil service, and cutbacks in the buy-out packages
to laid-off public employees and in pension payments
to retirees. In other words, the new “letter of intent” will
unleash a larger recession within the recession.
Nevertheless, support for the government remains
unwavering among business associations that represent
banking, insurance and broadcasting since these sectors
have benefited handsomely from the reforms. Exporters
in the fishing and mining sectors-which have grown
dramatically under Fujimori-are also clearly support-
ive of the government. These exporters, grouped in
associations such as the National Society of Exporters
(SNE), encourage the government to focus on Peru’s
“comparative advantages” and to maintain a weak cur-
rency.
Peruvian industrialists-who have had a rough ride on
the neoliberal wave-have been less unequivocal in
their support. While they back the government’s long-
term strategy of restructuring the economy toward
exports, they disagree with the way the
government is pursuing that goal.
These industrialists, represented in
associations such as the SNI and the
the wall, Association of Exporters (ADEX),
argue that high interest rates, weak
rnment domestic markets, and dumping by big
“foreign companies make wholesale w “letter restructuring of their operations impos-
with the sible. They favor higher tariffs in some cases, the promotion of industrial in which exports through lower taxes, and a
weaker currency. The Chambers of
d to slash Commerce generally advocate the
same policies.
ling even The government stands at a cross-
ler. roads-torn between either forging
further down the path of neoliberalism
or opting for a neo-populist form of
governance where money is used to
cultivate support and to buy off poten-
tial opposition. In making its decision,
the government will take into account the concerns and
interests of the Peruvian business sector, one of its key
constituencies. Yet that sector is sending contradictory
signals. Some business people are urging the govern-
ment to deepen the reforms that it has already taken,
while others want those same reforms to be modified or
scaled back. With the IMF breathing down its neck, the
government seems to be leaning towards the former
option. Either way, there is little relief in sight for
Peru’s poor majorities.
Fujimori and the Business Class: A Prickly Partnership
1. Nota Semanal, No. 16 (April, 1996) published by the Central
Reserve Bank of Peru.
2. Central Reserve Bank of Peru, Memoria 1994, p. 64.
3. See Manuel Castillo Ochoa and Andres Quispe, “Los grupos de
poder con Fujimori: cambios macroeconbmicos y reconversi6n,”
in Pretextos, No. 7 (1995), published by DESCO.
4. Boletin de Opini6n, No. 23 (February, 1996), published by the
Consortium of Economic Research in Lima.
5. PerU en numeros 1994, Anuario Estadistico (Lima: CUANTO,
1995).