Thomas White Global Investing
Peru Stamp
July 24, 2009
A Postcard from the Americas
Peru: Bitter Battle Casts Shadow on Free Trade Agreement

The Amazon

Lake Sandoval situated in the Peruvian Amazon basin, south of the Madre de Dios River, at sunset. Peru is one of the most mineral rich countries in the world and the resources of the Amazon have always attracted investment.

Not unusually, the streets of downtown Lima were jammed on a hot summer’s day in July. But it was not road traffic that was causing the jam but a mass of people protesting against President Garcia’s free market and free trade policies. Elsewhere, strikes in towns like Cuzco and Arequipa widened the sea of criticism against Garcia, whose approval rating has plummeted to less than 20%. These are unprecedented scenes for a country whose economy is expected to grow 3.3% this year, despite the global recession.

Pressure against Garcia has been mounting ever since June when police forces caused 33 deaths in a clash with Peru’s indigenous people. The protesters were demanding a rollback of new rules that allowed foreign mining in the Amazon forests, and oil companies to tap into the rich resources of Peru’s rainforests. The wave of disapproval that followed this action cast international attention on the ongoing fight for rights in the Amazon basin.

Initially, investors rejoiced when Garcia, who had once served as President of Peru, was re-elected to the presidency in 2006. He opposed Ollanta Humala, who was fiercely opposed to the trade deal with the U.S., even though the world’s largest economy remains Peru’s biggest trade partner.

Garcia encountered troubles when he used his executive powers to bypass Peru’s Congress to implement the Peru-U.S. Free Trade Agreement earlier this year. Two of the most controversial laws were Decree 1064 and 1090, which would have allowed foreign investors access to the Amazon’s unparalleled wealth of oil, gas and forestry reserves, and gave them rights to privatize community land. Indigenous groups raised an outcry, alleging that their rights over the land were impinged. Garcia, on the other hand, maintained that these laws were part of the Free Trade Agreement with the U.S. The President also revamped his cabinet following the protests, ushering in Javier Velasquez as new prime minister, and promising to ‘spur the reforms the country needs to ensure continued growth.’

Although he eventually tendered a public apology, stating that he failed to consult indigenous groups before passing the laws, the matter remains far from resolved. Even Peru’s largest labor union, the General Confederation of Peruvian Workers or CGTP, opposes Garcia’s pro-investment policies, demanding that the state exercise greater control over the country’s immense resources.

Garcia’s previous tenure as president of Peru was disastrous to say the least, with inflation jumping to uncontrollable levels of 7649% in 1990, along with a controversial decision to nationalize private banks. The result was a financial tsunami that pulled the gross domestic product down by 20%.

In the run up to his second tenure as president, Garcia promised that he would not repeat his mistakes of the past, and vowed to attract private foreign investment as a means to boost the economy. And, as a result of its favorable economic policies, Peru has been the best-performing economy in Latin America, recording GDP growth of 8.9% in 2007 and 9.8% last year.

With the global recession already casting its long shadows on Peru’s short-term outlook, it seems the country can ill-afford a protracted domestic battle. At stake is not just the U.S.-Peru Free Trade Agreement but also pacts with Canada, China, the European Union and Japan. It appears that Garcia’s toughest period as president may have just begun.


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