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Last Updated: Tuesday, 30 May 2006, 22:17 GMT 23:17 UK
Devil in the detail for Peru's voters
By Hannah Hennessy

On 4 June, voters in Peru will decide whether, for them, it's better the devil you know or the devil you don't.

Former Peruvian President Alan Garcia
Alan Garcia is still in the lead, say opinion polls

The two men vying for president both represent a swing to the left. The former President, Alan Garcia, would mean a move to the centre-left.

His nationalist rival, Ollanta Humala, could deliver a more seismic shift to the kind of politics favoured by Venezuela's Hugo Chavez, his close ally and a growing thorn in the side of Washington.

The policies and political experience of both men will have an impact on Peru's economy, which has been one of South America's top performers in recent years.

Mr Humala is politically na´ve, but has tapped into a growing vein of disillusionment with Washington-friendly free-market policies that are seen as failing the region's poor.

The overall picture is there is going to be more pressure on companies
Sally Bowen

Mr Garcia is more business-friendly, but his 1985-1990 presidency was marked by rampant inflation, destabilising terrorism and debt default.

Some Peruvians are not convinced when he says he has learnt from his mistakes. Economists say the international community may demand proof of this before it is prepared to lend money to Peru.

Gold and gas

Both candidates have vowed to continue the prudent fiscal management of President Alejandro Toledo's current government, which has overseen sustained economic growth.

But the real driving force of Peru's economy has been the billions of dollars of foreign investment pumped into its vast natural resources and their soaring prices on the world market, says political analyst Sally Bowen.

Peruvian presidential candidate Ollanta Humala
Ollanta Humala has the support of Venezuela's Hugo Chavez

"This is really the key for the future and what most people are focusing on is energy and mining and what Garcia and Humala will do in those areas," she adds.

Mr Humala plans to revise contracts with foreign firms, in effect nationalising the extractive industries. He has ruled out expropriation, but wants to rewrite the constitution so the state plays a role at every stage of the extraction process.

He wants Peruvians to benefit from the gold and gas that comes out of the ground. It's a view that has won support among the half of Peruvians still living below the poverty line, despite the country's economic success.

Mr Garcia is more moderate. He knows Peru needs foreign investment and says international companies must contribute more.

He wants to revise contracts to increase royalties and make sure those who owe taxes pay.

"The overall picture is there is going to be more pressure on companies," says Sally Bowen. "Garcia reckons he can do this by talking with them and making them see sense. Humala is planning on making them see sense, by increased state control at every level."


International mining consultant Mark Smith says investment in Peru will be affected whichever man is elected.

"With Humala, it will come to a screeching halt, unless, or until, he proves to be market-friendly - unlikely, given his affiliations with Chavez and [Bolivia's President Evo] Morales and his election rhetoric.

Andean farmers at an election rally in Cuzco
Andean farmers' woes are a key election issue

"If Garcia wins, the resource industry will be little affected, but the rest of the economy could suffer from a short-term fear of a repeat of the 1980s. If he proves to be a good president, then that slowdown may be short-lived."

Mr Humala and Mr Garcia hope to maintain current levels of macroeconomic stability, pursuing similar targets to the current government, such as inflation of less than 2.5% and economic growth of 7%.

They both oppose a free trade agreement signed last month with Washington and awaiting approval by Congress in both countries.

Mr Garcia wants to renegotiate it, while Mr Humala wants it torn up. He backs a regional bloc of left-wing states, proposed by Mr Chavez, which would make the region less dependent on Washington.

Social spending

Both men want to spur growth and end rampant poverty with massive increases in social spending, although it is not quite clear how they will fund these changes.

Mr Garcia says he will slash excess spending and salaries in the public sector, from the president down.

Mr Humala's advisors want to issue bonds to finance cheap loans, in order to promote agriculture among impoverished communities in the Andes mountains.

The two men know Peru's future is inextricably linked to its natural resources. Peru's next president needs to find some balance between helping ordinary Peruvians and attracting enough foreign investment to sustain economic growth.

For now, the economy is strong, but neither it nor the international community will tolerate sustained mismanagement.

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