In 1971, Pete Townshend of The Who wrote the song “Won’t Get Fooled Again.” Its lyrics reflected the cynicism of the times – a growing conviction that revolutions often succeed only in bringing to power regimes similar to those they replaced. The ’60s were gone and with them the sense of hope and euphoria that characterized the era, or so my father tells me. I wasn’t alive in the ’60s, and I like Townshend’s song because of the heavy power chords and aggressively synthesized organ.
Bringing this discussion to matters of professional interest, Peru’s recent election of Ollanta Humala as its next president – a one-time nationalist, revolutionary and former soldier – smacked of populist upheaval and insurrection. Humala’s success in the polls rocked the small Andean nation’s private sector. As if on cue, stocks with exposure to the country’s extractive industries promptly took a swan dive, though with none of the grace commonly associated with the act.
Humala stormed on to the political scene in 2000 after leading a failed military coup against then-President Fujimori – he was ultimately pardoned by Peru’s congress on the heels of Fujimori’s downfall. In 2005, he established the Peruvian Nationalist Party, Gana Peru, and challenged former President Alan Garcia in a run-off election the following year. Humala lost the election, but solidified his position as a legitimate political contender.
In Peru’s 2011 presidential election, Humala surged once again and succeeded in capturing the hearts and minds of Peru’s disenfranchised and rural poor. He won a hotly contested run-off election in early June against Keiko Fujimori, the daughter of his former foe. In campaign-mode he was a firebrand, denouncing the nation’s mining industries and suggesting the need for a recalibration of the social playing field. He attacked the Garcia administration’s cozy relationship with the private sector, making jingoistic campaign threats of expropriation, windfall taxes and aggressive state intervention.
Of course he does have a point. Peru has done very well recently, a result of the extended commodities boom and the pro-market policies of its former president. It is the world’s second-largest producer of silver, copper and zinc. Mining now accounts for the bulk of the country’s foreign investment, with minerals representing 60 percent of the country’s exports. Consequently, Peru has seen five years of on-average 7 percent GDP growth.
Nevertheless, nearly one in three Peruvians live in abject poverty, though it is worth noting that the poverty rate has dropped significantly under Garcia’s five-year term. Despite these improvements, many rural communities still feel disconnected from the positive effects of this growth and say that the extractive industries threaten their way of life and do not benefit them.
Since his election and ahead of his swearing-in, Humala has softened his tone appreciably. In the process, he has undergone one of the more remarkable political transformations of any Latin American politician in recent memory. His rhetoric has seamlessly changed from populist revolutionary Hugo Chavez to market-friendly Lula da Silva. In less than 60 days, he has moved from principled intransigence to pragmatic compromise, and he has done so with impressive ease.
Given his rapid conversion, it is appropriate to ask whether we are dealing with a true revolutionary, or is the new boss really just the same as the old boss? Does Humala really want to unravel Garcia’s economic legacy in the name of economic egalitarianism by heavily taxing and regulating the mining sector, or have the real-world benefits of continued private sector involvement in Peru’s economy tempered his views? It’s a lot easier to throw stones when you’re outside the glass house.
Humala’s much-refined and “radio-friendly” message of social reform, coupled with economic growth and a strong private sector, has certainly helped him politically. He has succeeded in expanding his base, bringing into his fold upwardly mobile moderates and those with a more capitalistic bent.
His 18-member cabinet is stocked with technocrats, businessmen and members of competing political parties – Humala’s own party, Gana Peru, is young and lacks the deep institutional bench of some of its peers. Economists Luis Miguel Castillo and Julio Velarde, well-regarded on Wall Street and by governments across the globe, have been tasked with leading the Ministry of Finance and the Central Bank, respectively.
Despite toning down his rhetoric, Humala has not backed off his campaign promise to increase the government’s take of mining profits. For now, he appears to have shelved talk of a major windfall tax and instead is focusing on growing government receipts via a restructuring of existing taxes and royalties. And, at least for the time being, Humala seems intent on reaching out to the private sector.
For private mining companies already invested in Peru or with plans to do so, intelligence gathering and proper due diligence must now become critical components of the decision making process in order to identify and mitigate any risk resulting from decisions by the new government. His leadership and the longevity of his first cabinet will be critical in his capacity to achieve greater economic inclusion while maintaining strong economic growth and nurturing Peru’s nascent, but vibrant private sector. Much will depend on exactly what kind of boss Humala becomes.