Castillo’s economic plans rattling Peru’s free-market proponents
Lima, Jul 26 (EFE).- Following three decades of economic stability in Peru, leftist President-elect Pedro Castillo’s plans for new taxes and tariffs are raising alarm bells among the Andean nation’s free-market proponents.
In recent years, Peru’s gross domestic product has grown at an average annual clip of 4.8 percent, while inflation has remained within a range of between 1 percent and 3 percent. The budget deficit came in at 1.6 percent of GDP in 2019 and hard-currency reserves were equivalent to 36.7 percent of GDP in 2020.
Under its 1993 constitution, the country has followed a “social market economy” model whose defining characteristics have been fiscal discipline, the promotion of private and foreign investment and openness to international markets.
But Castillo, a former rural schoolteacher and union activist, has coined the concept of a “popular market economy” that will feature protectionist measures for the agricultural and textile and apparel sectors, higher taxes on mining companies and a “second agrarian reform” to improve conditions for rural workers.
The head of the Lima Chamber of Commerce’s Institute of Economics and Business Development, Oscar Chavez, told Efe that these kinds of measures have been attempted in the past in Peru.
“The results in terms of what happened with Peru’s economy in the 1980s made us realize that protectionism was unsustainable,” he said.
By contrast, he said Peru’s economy began to grow in the early 1990s under the administration of then-President Alberto Fujimori, the father of former lawmaker and first lady Keiko Fujimori, whom Castillo narrowly defeated in a June presidential runoff.
Fujimori’s administration tamed the hyperinflation left behind by the 1985-1990 government of Alan Garcia, rapidly opened Peru’s economy up to foreign trade and privatized much of the productive sector.
The dean of the Universidad del Pacifico’s Economics and Finance Department, Carlos Casas, said Peru’s economy is recovering from last year’s severe, pandemic-triggered impact and that tax revenues have grown sharply in recent months.
“If the uncertainty dissipates, if the doubts dissipate, the markets could respond very strongly and recover and make viable this (projected) growth of 10 percent, which would still leave us below pre-pandemic levels, but we’d be quite close,” Casas told Efe.
The expert criticized some of the proposals that Castillo wants enshrined in a new constitution.
“If taxes are raised, mining companies’ profits go down. We need more mining projects, and obviously with higher taxes or royalties we become less competitive and the new mining projects probably won’t be carried out,” Casas said.
Referring to agriculture, he said “all protectionist measures are bad in the long term because local producers don’t face competition and over the long haul that generates a lot of distortions.”
Besides the task of reducing persistent high levels of economic equality while maintaining stability, Castillo, who will be sworn in on Wednesday, also will face continued pandemic-related challenges in a country where there have been more than 2 million confirmed coronavirus cases and over 194,000 deaths attributed to Covid-19.
More than 2 million people lost their jobs amid the health crisis, poverty rose by 30 percent, the budget deficit climbed to the equivalent of 8.9 percent of GDP and the nation’s GDP plunged by 11 percent, although the outgoing Economy Ministry is projecting that the economy could grow 10 percent in 2021.
In that regard, Peru’s leading business and industry associations are unanimously calling on Castillo to accelerate the nation’s vaccination drive as a means of spurring the reopening of sectors still under coronavirus restrictions and promoting employment. EFE