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December 12, 2006

Peru's Unlikely Capitalist

By

At a time when an anti-U.S. leader like Venezuela's Hugo Chavez is doing everything to drive a wedge between Latin America and the United States, you would think American lawmakers would be eager to confirm free-trade agreements with allies such as Peru. But with trade pacts facing an uphill climb on Capitol Hill these days, what should be a shoo-in is looking iffy.

What a shame, especially considering that Peru's new president Alan Garcia -- once a raging populist -- has come to favor open markets and trade opportunities. During his first term from 1985 to 1990, Garcia's social spending nearly bankrupted the treasury, inflation raged at 7,000 percent, and guerrilla groups ransacked the countryside. His second term, which began on July 28, has nowhere to go but up.

So far, it seems headed that way. Predecessor Alejandro Toledo left office with the country at peace and an economy growing at 5 percent annually. Despite Garcia's narrow win over ultra-nationalist Ollanta Humala -- who wanted to close borders and make Peru dependent on Venezuelan aid -- the president seems to have gained public support for his idea of plugging the country into the global marketplace.

On the campaign stump, Garcia expressed skepticism of the proposed U.S.-Peru Trade Promotion Agreement. His party opposed it, and the pact seemed unpopular with voters. Now in office, he has made trade a central issue and hired renowned economist and author Hernando de Soto (The Mystery of Capital) to put it to work. Both say trade must lift up the poor, calling the idea "internal free trade" or "free trade for the poor."

A majority of Peruvians think the government may be on to something. But the turnaround was no easy feat. By themselves, trade openings mostly benefit existing industries that are able to increase output. While trade negotiators tout growth in gross domestic product (GDP) that comes from dropping tariffs, the effects of removing trade barriers can be almost unnoticeable to workers.

More sales opportunities won't help new enterprises deal with cumbersome licensing requirements, weak property rights, and a culture where personal connections matter more than reliable legal systems. That's where de Soto's plans come in. He insists that even the poorest entrepreneurs should have access to the same legal privileges as the country's elite. That can happen only if laws and institutions work equally for everybody.

Recent history shows how important this is. Despite substantial GDP growth produced by the North American Free Trade Agreement, Mexico's living standards haven't kept pace with economic growth. Its congress, dominated by old-time political elites, largely resisted reforms proposed by former President Vicente Fox to make it easier for everyone to own an enterprise or enter into contracts.

During his first stint as Peru's president, Alan Garcia thought government should be a sugar-daddy -- providing for everyone's welfare. Now he seems to be accepting its role as a regulator to ensure a level playing field for both rich and poor. On Oct. 10, he was in Washington meeting with U.S. President George Bush to explain plans to spread trade gains more evenly. The same day, the Inter-American Development Bank said it would back Peru with renewed credit.

Garcia was only 35 when first elected -- more idealist than pragmatist. He still suffers judgment lapses, having just acknowledged a child born out of wedlock. Yet signs of an economic awakening were evident when he ran unsuccessfully for president in 2001, arguing in favor of attracting foreign investment. In his 2003 book, Globalization with Social Justice, he tried to reconcile open markets with the socialism of his APRA party.

While Garcia may be an unlikely ally in expanding free markets in the western hemisphere, the United States should not squander the quadruple opportunity that a U.S.-Peru pact presents:

  • Approval of the pending U.S.-Peru Trade Promotion Agreement -- which has already been ratified in Peru -- would reward a friendly nation and growing trade partner.
  • It would demonstrate interest in a region convinced that America couldn't care less about its neighbors.
  • It benefits U.S. producers by expanding access to Peruvian markets.
  • It would validate a new free-trade advocate whose voice resonates in Latin America. Garcia is the only Latin American politician to take on Hugo Chavez in a verbal sparring match and win.

What's more, both President Garcia and Hernando de Soto have identified what's missing in most discourse about free trade -- how it should benefit all citizens, especially the poor. Postponing or denying approval of a U.S.-Peru FTA would be a geo-political blunder, convincing neighbors that the United States has turned insular. And it would punish Peru for doing the right thing -- trying to open its markets.

Stephen Johnson is senior policy analyst for Latin America in the Davis Institute for International Studies at The Heritage Foundation.

First Appeared in the Washington Post's Think Tank Town

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