from the pages of../

South America

The Selling of Peru

By Larry Everest


Today capitalism and the free market are prescribed by the industrialized countries and international lending agencies as miracle cures for the planet's ills--whether in South Central Los Angeles, South Africa, or the former Soviet Union. "Opening up," "marketizing," and "privatizing" are the watchwords of this global offensive.

Some 70 Third World countries are undergoing IMF/World Bank-dictated stabilization and structural adjustment programs, and $300 billion worth of state-owned industries have been sold off in 50 different countries over the past decade, but few countries have swallowed this medicine more quickly and massively than Peru. "Fujishock"--the IMF stabilization program implemented by Peruvian President Alberto Fujimori in 1990 was so harsh it was called surgery without anesthesia. Now the regime has embarked on a massive selloff of Peru's land, resources, industry, and labor.

All of Peru's state-owned industries--some 220 total--have been put on the auction block, many at firesale prices. Included are Centromin, the country's leading producer of silver, zinc, and lead; PetroPeru, the state run oil monopoly; and Pesca Peru, producer of 40 percent of Peru's fishmeal. The government is selling off major banks, utilities, copper mines, and cement companies. Agricultural land is up for sale, and millions of acres of Peruvian highland and jungle are being opened up for mineral exploration. Peru's national airline, telephone companies and a number of other concerns have already been sold.

The list of interested buyers reads like a who's who of multinationals and banks from the U.S., Japan and Western Europe--Exxon, Nabisco, Owens-Illinois, Mobil, Phelps Dodge, Mitsubishi, and Colgate Palmolive to name a few--along with companies from China, Spain, Mexico, Chile and South Africa.

These steps have been praised by U.S. and World Bank officials as a "remarkable achievement," international investors laud Peru as "the most open economy, possibly, in the world," and the U.S. press has hailed Peru's business "turnaround."


Responding to Crisis and Civil War

Peru's stabilization and privatization programs are both products of global economic forces, as well as responses to a decade of economic crisis, deepening poverty and guerrilla insurgency. By July 1990, inflation had soared 36,000 percent, GDP was dropping, Peru's external debt had more than doubled, and over half the population lived in critical poverty. The Peruvian state was also reeling from the Communist Party of Peru's (Shining Path) decade-long "people's war," and there was concern in Washington that the Maoist guerrillas could win and seriously damage U.S. interests in Latin America.

Given this situation, Peru's economic opening was designed to achieve three interrelated objectives: to enable Peru to make debt payments, protecting the interests of the international financial community; to remove barriers to international capital in Peru, giving the Peruvian economy a shot in the arm in the process; and to help defeat the insurgency.

These initiatives may have been announced by President Fujimori after his July 1990 election, but they were designed by Western governments and business, via the IMF and the World Bank, which control the capital, markets, and industrial inputs without which Peru's economy cannot function. Today, Peru's economy is literally being run by the IMF, whose officials regularly shuttle in and out of Lima to "consult" on every aspect of economic policy.


Poverty and Unemployment

The immediate impact of stabilization and privatization has been a brutal assault on the living standards of the Peruvian people. Inflation cut real wages and salaries in half during the 1980s. Then government subsidies and price restraints were slashed, sending the prices of basics skyrocketing--virtually overnight fuel jumped 31 times, and bread 12 times. So by mid-1991, real wages had been cut another two-thirds from their 1990 levels.

Government social spending was also cut drastically and state workers laid off in order to curb inflation and divert funds to pay Peru's international creditors. 120,000 public jobs have been eliminated since 1990, cutting the size of the government workforce by 25 percent. Peru faced a massive cholera outbreak, yet according to the director general of the World Health Organization, "In order to comply with payments claimed by the International Monetary Fund and the World Bank, Peru now finds itself in the position that it cannot allocate more resources to fight the cholera epidemic." Many state-run companies put up for sale have also laid off thousands in order to cut costs, raise profits, and make themselves "attractive" to foreign buyers. Centromin, Peru's largest mining company, has fired 5,000 of its 17,000 workers since 1990 and the payroll at Cerro Verde Copper Mine was cut from 1,300 to 785 workers. On average, companies being privatized have laid off 52 percent of their workers.

By 1991 only 5 percent of Lima's workforce was fully employed, and 13 million Peruvians--over half the country--had incomes of $15.50 a month or less. Miners with over 20 years experience are relatively highly paid at $7 a day; according to official figures it takes $19 a day to feed a family. "We workers are few and each one works the jobs of two or three," one welder told a Lima weekly.


Stabilization Plus Repression

Economic stabilization and privatization have been coupled with escalating government brutality against the Peruvian people: laws maximizing the freedom of foreign capital have gone hand in hand with brutal assaults on anti-government resistance.

Following Fujimori's April 1992 self-coup, the government has passed decrees and rammed through a new Constitution which amount to a freedom charter for foreign capital. Multinationals and foreign investors are protected against nationalization's, they can freely transfer profits abroad, and they are given big tax breaks for investing in Peru. Foreign capital can invest in all sectors of the economy, with no limits on share of ownership, the amount of natural resources extracted, or where products are marketed.

At the same time, decrees outlawing or severely punishing most any form of protest have been issued by the dozen. The new Constitution reimposed the death penalty for political offenses, and the military effectively runs the country. Hundreds have been disappeared and thousands swept up in mass arrests, many without charges. Acts from armed resistance to simply denouncing the government can be deemed "apology for terrorism." Suspects can then be held incommunicado for 15 days, and tried by faceless military tribunals. Prisoners have been massacred, and rape has been employed as a weapon of terror by the military.

When the February trial of the murderers of nine La Cantuta University students disappeared in 1992 threatened to unmask Fujimori's two closest associates, Vladimiro Montesinos, and Armed Forces Chief of Staff Hermoza Rios, as the organizers of the death squads responsible, Fujimori quickly shifted the case to a military tribunal--abrogating the new constitution in the process.

Repression has mainly targeted the armed insurgents. But the regime has also attempted to suppress other forms of opposition. For instance, it has handed down regulations severely restricting workers' rights to organize unions, bargain collectively, and to strike. By 1992 time lost to strikes had been cut to one-eighth its 1987 to 1990 average.

The U.S. government has expressed concern over some of the Fujimori regime's most egregious abuses, and suspended some aid following the April 1992 coup. This reflected U.S. concerns that other Latin American rulers, faced with similar crises, might imitate Fujimori's self-coup, inviting further regional destabilization.

But actions by the U.S. government and international investors supporting Peru's brutal junta speak louder than their words of concern. In 1993 Peru received $137 million in U.S. aid--more than any other Latin American country. Since 1990 Peru has received more foreign investment from the U.S. than from any other country. And Fujimori advisor Montesinos, who many feel is the real power behind the throne, has a long-standing relationship with the CIA.

Last September Fujimori visited the U.S. and had friendly meetings with President Clinton, former government officials including Henry Kissinger, and groups of U.S. investors. On returning home, he said he was preparing a "little Vietnam" in the jungles of eastern Peru, a reputed Shining Path stronghold. Recent news reports indicate that such a military offensive has begun. On April 20 Reuters reported that human rights observers in Peru said "We have repeated reports...that massive crimes against the defenseless civilian population are being committed as part of the operation, including torture, rape and burning of homes."

The State Department has issued a terse statement of concern. Meanwhile it recently announced that Peru will top the 1994 list of Latin American recipients of U.S. aid, and President Clinton invited Fujimori to this December's hemispheric summit of American "democratic" leaders.


Strengthening Foreign Capital

Proponents of capitalist restructuring freely admit that poverty has risen following adjustment and privatization. But they point to its achievements: inflation has dropped from over 7,000 percent in 1989 to around 40 percent in 1993. The government has restructured some of Peru's debt and secured new loans. In 1993 the economy grew close to 7 percent, the highest rate in nearly a decade. Privatization revenues have hit an estimated $3 billion and a total of $5.7 billion in foreign investment has been promised.

They also argue that today's painful sacrifices will bring future prosperity by attracting the foreign investment Peru needs to modernize and compete in the global market. They point to the "inefficiency" and $2.5 billion yearly deficit of Peru's stateowned industries as a major cause of Peru's economic miseries.

However, this diagnosis conveniently ignores the primary sources of Peru's misery: the all-around domination of foreign capital, including direct control of key sectors of Peru's economy, and the subordinate niche the country occupies in today's global economic order.

For instance, even in 1988, when many industries were state-owned, 40 percent of Peru's primary sectors of mining, petroleum, and agriculture, were in foreign hands. Peru was dependent on international markets for export sales and international financial institutions for capital. This, in part, is why IMF-stabilization programs implemented in Peru in the early 1980s did not resolve the country's economic turmoil. Peruvian politics have long been dominated by a class of compradors dependent on foreign connections and capital for their existence.

Now, privatization will give foreign capital an even more direct hold over the main lines of the Peruvian economy. The state-owned companies being sold off comprise the core of Peru's industrial base, accounting for 15 percent of Peru's total GDP. Decisions concerning investments, employment, product mix, and resource use will be more directly dictated by the global strategies and interests of the industrialized countries--not the balanced development of the Peruvian economy, much less the interests of the Peruvian people. Privatization may provide Peru's economy a quick fix, but in the final analysis it will exacerbate its most basic structural distortions and lead to deeper crisis.


Massive Land and Resource Grab

One form this subordination has taken historically has been the Third World countries as producers of cheap raw materials and foodstuffs for the industrialized nations. Investment and modern technology are lopsidedly concentrated in one or a few "enclaves," while the rest of the economy stagnates, relatively disconnected from the advanced sectors. In Peru, for instance, mining accounts for only 11 percent of GNP, but 50 percent of its exports and over 34 percent of foreign investment.

Privatization is intensifying this lopsided focus, with most new investment flowing into mining, oil, natural gas and fishing--and almost exclusively geared toward export production. The result has been a massive land and resource grab. Thirty-seven international mining and energy companies have staked claim to six million acres of Peruvian land in the last year and a half--twice the area claimed in the previous forty years. Twenty multinationals are bidding for PetroPeru, including Exxon, Texaco, Chevron, Mobil, Arco, and Royal Dutch Shell.

Peru is one of the world's leading minerals producers, but in 1987 the ministry of Energy and Mines estimated Peru's deposits of lead, silver, and zinc would be gone within 25 years. The country also faces a range of environmental disasters that include deforestation, oil spills, and mine-poisoned waterways. Yet new encouraging foreign investment contain few limits on the exploitation of nonrenewable resources, and weaken already flimsy environmental protections.


Accelerating Agriculture's Ruin

The ruin of agriculture, which is crucial to Peru's well-being and economic independence, is the most basic economic distortion caused by the dominant position of foreign capital. Tens of thousands of peasants have been driven off their land and into urban slums by the lack of land, credit, machinery, and by deep rural poverty.

The results have already been devastating. Per capital agricultural production is lower today than it was in 1975 and Peru must now import 30 percent of its food. Peruvians consumed fewer calories in 1988 than in 1965, the growth of four out of every ten Peruvian children is stunted by malnutrition, and 80,000 children under five die each year from starvation or preventable disease.

This too will be accelerated by privatization and adjustment. New decrees allowing peasant communities and cooperatives to sell or rent their landholdings, while eliminating subsidized agrarian development banks have denounced as "counter-agrarian reform." These steps, coupled with the rising competition from cheaper food imports, will ruin more small producers and further concentrate land ownership; less food will be produced for Peru's internal market and more grown for export by large scale agro-business. In the Huallaga valley, for instance, land planted with credit assistance dropped from 106,000 hectares in 1989 to 6,000 in 1991. Farmers then turned from planting rice and corn to harvesting coca.


Bonanza For Foreign Capital

The combination of rock bottom purchase prices and starvation wages has already proved to be a bonanza for some mining companies. The U.S. Newmont Mining Company bought the Yanacocha gold mine in northern Peru and reopened it last August. It will produce gold worth $90 million a year at a cost of $40 million. In the fourth quarter of 1993 alone, Newmont earned $4.2 million in profit from Yanacocha--one quarter of its total global profits. Newmont will recoup its entire $37 million investment within six months.

However, such investments will do little to stimulate the all-around growth of the Peruvian economy or create jobs. First, privatization mainly entails the buying up of existing industries--not creating new ones, and some of these existing industries are being pared down--not expanded. Much of the rest of the foreign investment flowing into Peru has gone into stock market speculation.

Second, extractive industries like mining and petroleum are highly capital intensive. Peru's mining industry employs only 2.2 percent of the workforce despite generating over 10 percent of GNP. So the much touted wave of foreign investment is unlikely to create new jobs--instead, nearly 35,000 miners have lost their jobs and mine employment has been cut by 50 percent since 1989, due largely to privatization.

The high tech equipment used in raw materials extraction (and other privatized industries) is largely manufactured outside of Peru, so new investment will not benefit Peruvian manufacturers. The output from Peru's mines and wells is also mainly for export, not Peruvian domestic consumption.For instance, Peru produces some 400,000 tons of copper a year, yet in 1992 consumed only 28,000 tons, less than 10 percent of the total. These are some reasons that Peru's 1993 growth was very selective, concentrated in fishing and mining, while manufacturing is still operating at only 60 percent capacity.

This focus on raw materials extraction for export, in conjunction with Peru's economic opening, is a recipe for balance of payments crisis. Removing trade barriers and lowering tariffs will raise Peru's import bill, first as newly privatized Peruvian companies import equipment to modernize, and second as domestic producers are unable to compete with more efficient manufacturers from the U.S., Japan, and Europe.

Meanwhile, prices for the raw materials Peru exports have declined to their lowest levels since 1948. Copper prices have dropped 70 percent since the early 1970s, and the prices of Peru's metal exports fell 20 percent in 1993 alone. The result has been a huge 1992 trade deficit of $530 million, and a trade surplus for the U.S. Peru has responded by keeping interest rates high to attract short term funds. But this both slows the growth of Peru's economy and makes Peru's exports more costly.


Defining Debt

Privatization was designed in part to raise cash to pay off Peru's massive foreign debt. But it could end up making Peru's debt crisis worse. First, Peru is over $23 billion in debt, yet most estimate it will receive only $4 to $6 billion from privatization.

Second, privatization revenues and foreign capital flows are not keeping pace with Peru's enormous debt payment burden. Over the last three years it has paid $4.7 billion in debt service to international banks and lending agencie, more than ten times the amount it has spent on poverty relief. From August 1990 through August 1993, $1.171 billion more foreign currency flowed out of Peru than in. Now the government must borrow to cover half of its 1993 budget and scheduled debt payments. Peru's overall debt has risen nearly $3 billion in the last three years.

Third, privatization means selling off industries which generate the export earnings used to repay the debt. (Centromin alone provides some 10 percent of Peru's export revenues).

An export-oriented economy means that Peru will depend even more on injections of foreign capital and technology in order to function and compete on the world market. The Minister of Industry and Trade has stated that Peru needs $5 to $6 billion in foreign investments a year to sustain 5 percent growth.

Yet this amounts to the total revenues projected from privatization, and over twice what Peru has received in foreign investment over the past 15 years. Peru will thus be forced to borrow the difference from international banks and lending agencies, and to continue to rely on coca dollars to pay its debts. Coca revenues are estimated to be $1.3 to $2.8 billion a year; in late 1990 the President of Peru's Central Reserve Bank stated the bank was buying $2 million worth of coca dollars a day in order to accumulate reserves for debt payment." A global recession, capital outflows from Peru, or a further drop in raw materials prices could trigger yet another debt payment crisis.


A Region of Two Floors

Since the onset of the debt crisis in 1982, Latin America has been a focal point of U.S. backed stabilization plans, privatization programs, and efforts to break down barriers to the flow of goods and capital. There is now, following the passage of NAFTA, talk of a hemispheric free trade zone.

As a result, Latin America has been a key source of profit for U.S. capital during a decade and a half of slow, unsteady growth, rising debt, and escalating international economic competition. During the 1980s the region transferred more than $223 billion to the rich industrialized north through debt service, dividends, and remitted profits. In the 1990s 70 percent of all new U.S. foreign investments have been in Latin America, and U.S. exports to the region now total $66 billion--equal to what the U.S. exports to all the developing countries of Asia, and more than U.S. exports to Japan.

The result for most Latin Americans has been disaster. Over half the population--222 million people--now live in poverty--70 million more than in 1980. A Colombian columnist summed up the dichotomy: "Blind people believe that armed uprisings of the poor don't match the happy times in which we live: times of cellular telephones, of newspapers with pink pages just like the Financial Times, of privatization's and of free-trade treaties...Our countries are countries of two floors: a penthouse built on a slum. Neoliberalism has a simultaneous double effect: filling the penthouse with electronic goodies, including burglar alarms, while making the slum below ever more uninhabitable for the great majorities that live there."

Washington may be counting on Latin America as the cornerstone of a regional trading bloc which will buoy the U.S. economy and enable it to better compete with Japan and Western Europe. But the ongoing insurgency in Peru, urban rebellions in Venezuela and Argentina, guerrilla warfare in Colombia, and this New Year's armed uprising in Chiapas, indicate that many in the region have other ideas.

Larry Everest is a correspondent for the Revolutionary Worker and the author of <M>Behind the Poison Cloud: Union Carbide's Bhopal Massacre.