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Mariella Chilmaza:
Peru : Economy and Corruption

Corruption Scandal Sparks Cabinet Shake-Up

As host of the 2008 Asia-Pacific Economic Cooperation (APEC) meetings, Peru is emphasizing the link between combating corruption and development in the APEC region. But just one week after Minister of Justice Rosario Fernandez inaugurated an anti-corruption workshop with APEC members, a scandal tested the government's ability to combat corruption within its own ranks.

On October 5, Lima's Channel 4 TV station broadcast a conversation seemingly featuring Alberto Quimper—a board member of state energy agency Perupetro—and lobbyist Rómulo León discussing payments made in exchange for the granting of oil concessions to Discover Petroleum, a Norwegian oil firm. Minister of Energy and Mines Juan Valdivia and César Gutiérrez, president of Perupetro, resigned soon after the scandal surfaced in the media. The firm, which was awarded major exploration contracts in the south of Peru, denies any involvement in the scheme.

Amid mounting frustration, opposition calls for a cabinet reshuffle were headed earlier this month. Prime Minister Jorge del Castillo joined cabinet officials in tendering their resignations in what President Alan García described as a “noble” decision to step down. However, García decried that the cabinet was a victim of political attacks. On October 11, the president appointed Yehude Simon, governor of the northern Lambayeque department and a prominent left-leaning politician, as his new prime minister. This decision is seen as an attempt to reach out to the Left of the socio-political spectrum, perhaps signaling a renewed focus on social programs. Key ministers that remain in the cabinet include: Minister of Finance Luis Valdivieso, Minister of Trade Mercedes Aráoz, and Minister of Foreign Affairs José Antonio García Belaúnde, who is charged with APEC meeting preparations.

Sendero Strikes Again

The long-dormant Shining Path ( Sendero Luminoso ) guerrillas wreaked havoc after years of silence. On October 12, Shining Path ambushed a military convoy in the Huancavelica department of southern Peru, killing 12 soldiers and 7 civilians and wounding another 11 victims. This attack is thought to be bloodiest show of force in a decade by the Maoist insurgent group. After a decades-long war against the state, activity had subsided following the capture of its leader, Abimael Gúzman, in 1992.

Military officials believe that Shining Path's continued presence in the coca-growing regions of Peru is linked to its close ties with the drug trade. Drug money is thought to be the primary source of funding for the insurgency. A military statement noted that the attack was orchestrated by “narco-terrorist criminals of the Shining Path against a patrol from a counter-terrorism base in Cochabamba Grande.”

The García administration claims that, in spite of the seriousness of the attack, Shining Path poses a very minimal threat to domestic security. Membership is a mere fraction of what it was during its heyday, when it numbered more than 5,000. Domestic security experts agree. However, the ambush—in conjunction with the corruption scandal and cabinet reshuffling—has further diminished President García's approval rating to a mere 19 percent, according to a nationwide poll by Ipsos Apoyo. Thus far, public perception of the García administration has been dominated by the economic and security woes experienced during his previous presidency (1985 to 1990). Yet, as illustrated by recent events, present-day concerns are increasingly shaping the president's popularity.

The Economic Crisis at Peru's Doorstep

Despite years of sustained economic growth, Peru is fast learning that it is not immune to the global financial shake-up. Falling commodity prices, which affect the country's robust minerals sector, and rising inflation may ultimately undermine the 5 percent economic growth seen on average since 2000. For now, in an interview with Bloomberg Television, Julio Velarde, president of the Peruvian Central Bank, noted that economic growth in 2009 could decrease to 6.5 percent, down from the projected 9 percent this year. Inflation is another concern. At 6.2 percent for the month of September, the annual inflation rate is well above the government's target of 1 percent to 3 percent. Effects are felt throughout the economy, and the spike in consumer prices is fueling public dissatisfaction with the current administration.

Despite these trends, the Peruvian Ministry of Finance is adamant that the country has the necessary tools to effectively weather the crisis. The ministry is sticking to its forecast of $8.3 billion in foreign direct investment for this year. It further asserts that a worsening of the global crisis would not lead to a Peruvian recession. Minister of Finance Valdivieso has stated that the crisis is worse than feared but that Peru is in a strong position. The country maintains $35 billion in foreign reserves and there is “$2.6 billion or almost $3 billion that [the country] could inject into the economy in order to counteract a short global recession.”

Mariella Chilmaza is editorial associate of the Americas Quarterly Journal of the The Americas Society and Council of the Americas . Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by AS/COA Online on 10/23/2008 . Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 10/24/08

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