Pursued by the ghosts of the past
October 16, 2008 - Economist.com

New cabinet, old problems
LIMA -- THE economy is heading for growth of 9% this year, the fastest rate in Latin America. Poverty, though widespread, is falling fast. Inflation reached 6.2% in September, but that is one of the lowest figures in the region. And yet for Peru’s president, Alan García, matters have just gone from bad to worse. Almost halfway through his five-year term the unpopular president has been forced to replace his cabinet over a corruption scandal. The new team may find it hard to restore confidence in politics.

The scandal concerns alleged kickbacks in the award of oil-exploration contracts. Taped conversations broadcast on a television programme appeared to show that officials in the ruling APRA party received bribes in return for granting five contracts to Discover Petroleum, a small Norwegian oil company which denies any wrongdoing. The energy minister and the head of Petroperú, the state oil company, resigned, although they were not directly implicated. But that did not placate the opposition, which has a majority in Congress. Rather than face censure Jorge del Castillo, the experienced prime minister, went too.

His replacement, Yehude Simon, has had an unusual political career. A leader of a far-left party in the 1980s, he spent much of the 1990s in jail for his links with the Tupac Amaru Revolutionary Movement (MRTA), a small guerrilla group. In prison, he became a born-again Christian and political moderate. He has since twice been elected as regional governor of Lambayeque, on the north coast, where he has acquired a reputation as an effective negotiator. That may be helpful, since the main job of the prime minister in Peru is to defuse social conflicts.

Mr García is dogged by memories of his disastrous first stint in power in the 1980s. He ruled as a reckless populist, presiding over economic collapse, hyperinflation, corruption and a murderous guerrilla insurgency by the Maoist Shining Path and the smaller MRTA. He narrowly won the presidency again in 2006, partly by convincing Peruvians that he was a reformed character who believed in market economics and free trade, and partly because his challengers were even less convincing.

But despite an economic boom, Mr García’s approval rating has fallen to around 20%. He is pursued by the ghosts of the past. Polls find that most Peruvians firmly believe that inflation is much higher than it in fact is. Many also believe that APRA is riddled with corruption. The involvement in the oil scandal of Rómulo León, who was accused of corruption when Mr García’s agriculture minister in the 1980s, has done nothing to dispel this.

To cap it all, the Shining Path, long ago reduced to a small rump in a couple of remote drug-producing valleys, chose this month to stage its deadliest attack in years. A roadside bomb in Huancavelica, east of Lima, killed 13 soldiers and two civilians on October 9th. It appeared to be a response to an army operation to shut down Shining Path camps.

The new cabinet involves only a few changes from the old. With Mr Simon have come a couple of other moderate leftists. The finance and trade ministers keep their jobs, and economic policy is unlikely to change. Indeed finance officials plan to issue a new bond (which would reopen the market for emerging economies) to lengthen the maturity of the public debt.

But the outlook has darkened. Peru has done well from high prices for its minerals. With commodity prices falling fast, one hope for continued growth is oil and gas exploration. Congress is now reviewing all contracts awarded since 2006, and investment may slow. Peruvians have not warmed to Mr García in the good times. Unless Mr Simon can spread goodwill, the second half of his presidency looks set to be a troubled, loveless affair.