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Last Updated: Monday, 5 June 2006, 11:51 GMT 12:51 UK
Peru still wary of Garcia's past
By Robert Plummer
Business reporter, BBC News

Alan Garcia reviewing troops during his first term as Peruvian president
Economic turmoil in Peru under Alan Garcia also brought social instability

Alan Garcia's first term as president of Peru from 1985 to 1990 is now used by ardent free-marketeers as a textbook example of how to ruin a country's economy.

And although he proclaims himself a changed man since those days, voters who saw him as the lesser of two evils will be hoping that his return to office will not be equally disastrous.

During Mr Garcia's previous five years in power, prices went up by more than two million per cent as his government printed money to maintain high levels of public spending.

The ravages of chronic inflation took their toll on the currency, the inti, which was subsequently replaced by a new unit, the sol, at an exchange rate of a million intis to one sol.

During the same period, the number of Peruvians living in poverty went up by five million, rising from 41.6% to 55% of the population. Peru's gross domestic product shrank by one-fifth.

Overspending

Throughout the turmoil, Mr Garcia maintained a cavalier attitude to the laws of economics, taking the view that market forces could not be allowed to interfere with social justice.

"The laws of gravity don't mean that humanity has to give up flying," was how he summed up his approach.

Even at the end of his presidency, when his approval rating among Peruvians fell to 5%, he still defended the idea that a government can spend beyond its means in the interest of helping the least fortunate.

Peruvian presidential candidate Alan Garcia
Alan Garcia has always been highly rated as an orator

"Other governments, other ideologies and other social sectors have postulated that if the government's income is 100, it can only spend 100," he said in the early 1990s.

"We say that if the government receives 100, it can spend 110, 115, because those extra 15 will provide credit for peasant farmers."

Mr Garcia's first big mistake was when he unilaterally set a limit on repayments of foreign debt, declaring that Peru would pay no more than 10% of the money it received from exports.

Although this went down well with voters, it alienated the International Monetary Fund and ensured that no-one would lend Peru any more money.

However, social spending continued unabated, emptying the treasury's coffers. When Mr Garcia left office, Peru's reserves were minus $900m.

Full circle

The consequences were not merely financial. The armed Maoist insurgents of the Shining Path movement took advantage of the resulting instability, stepping up their brutal campaign of violence and posing a real threat to democracy.

Peru's economic and military fightback was led by Mr Garcia's successor, Alberto Fujimori. But Mr Fujimori's authoritarian tendencies created a whole new set of problems for Peru, leading to his resignation in disgrace amid political and financial scandals.

With Mr Fujimori's successor, Alejandro Toledo, now due to make way for Mr Garcia's return, Peru has come full circle.

Election publicity in Huaycan, south of Lima
But will he do better the second time around?

So how has the economy fared in the meantime? Well, by the end of Mr Garcia's first administration, gross national income per capita had fallen to $720, which was lower than in 1960.

Since then, it has more than trebled, reaching $2,360 last year.

Growth took a dip in 2001, but since then it has averaged 4 to 5% a year.

Peru is also back on good terms with the IMF, which has lent it money to help support market-based economic reforms.

However, Peru still has one of the worst income distributions in Latin America and poverty levels have remained stubbornly high at about 52%.

As a consequence, the majority of the population have seen little or no benefit from Peru's newly-regained macro-economic stability.

Small wonder, then, that the most business-friendly candidate for the Peruvian presidency, Lourdes Flores, was eliminated in the first round, leaving voters with a choice between a failed former president and a disciple of Venezuela's President Hugo Chavez.

Now Mr Garcia has a unique chance to build on the achievements of recent years - and to roll back the big increase in poverty that took place on his watch.

But if he squanders the opportunity, he risks going down in history as a double failure.




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