Few jobs in politics are easy, but fewer still are as difficult as being president of Peru in 2021. Sworn in in late July, Pedro Castillo is Peru’s fourth president in just nine months, taking over a country plunged into social, political and economic turmoil by the Covid-19 pandemic.
A former strike leader and rural schoolteacher, Castillo has never held public office. When he took a shock lead during the first round of the presidential election, Peru’s news channels lacked even a photograph of the candidate to display on TV.
Running as the candidate of the Marxist-Leninist party Perú Libre, of which he is not a member, Castillo’s slogan of “No more poor people in a rich country” attracted widespread support among Peru’s rural poor.
Investors are watching the new administration’s every move for signs of Castillo’s plans for the economy. When Perú Libre’s Guido Bellido was announced as prime minister, markets reeled in horror. Castillo’s subsequent decision to appoint a centrist World Bank economist as finance minister seems to have done little to quell investor hostility.
What are Castillo’s policies?
Facing a tight race against far right candidate Keiko Fujimori, daughter of jailed dictator Alberto Fujimori, Castillo sought to distance himself from the more radical elements of Perú Libre’s platform, including the party’s commitment to mass nationalisations.
As far as foreign direct investment (FDI) is concerned, his central pledges have been to renegotiate tax breaks for large multinationals and to limit the repatriation of profits. OECD countries alone extracted nearly $6.7bn (27.25bn sol) of FDI income from Peru between 2017 and 2019, 34% more than the country’s entire annual healthcare budget.
Castillo has also proposed a reorientation of Peru’s agricultural sector towards small-scale production for the domestic market, a sharp deviation from decades of emphasis placed on large-scale, export-oriented industrial agriculture.
Castillo’s plans might displease foreign investors, but they are far from extreme in international terms.
Agricultural goods currently make up 22% of Peru’s goods exports. While previous administrations have been keen to attract foreign investors to the sector, their efforts have stoked discontent among the 27% of Peruvians working in agriculture.
A package of incentives introduced under the Fujimori dictatorship halved income tax for the agriculture sector while slashing the minimum wage for workers and brutally cutting their social security contributions, holiday entitlements and compensation for unfair dismissal. More than 93% of Peru’s agricultural workers are employed informally, according to the UN, limiting their access even to the most modest protections remaining after the reforms.
As recently as 2017, the World Bank praised the reform package as one of several measures serving to “create a favourable business environment to stimulate private investment” in the agricultural sector.
In November 2020, however, striking agricultural workers in the Ica region demanded the repeal of the package. The strike quickly spread across Peru’s Pacific coast, soon incorporating as many as 400,000 workers. Within days, Congress was forced to repeal the measures.
Castillo has also floated the idea of a tax on windfall profits – those made from fluctuations in commodity markets. This would be particularly significant for Peru’s large and highly lucrative mining sector, which is responsible for 48% of the country’s exports.
Peru’s copper, gold and silver mines have been the country’s chief attraction for foreign investors. The value of FDI stock in the mining sector tripled to $6bn between 2005 and 2019, government figures show.
Castillo’s plans might displease foreign investors, but they are far from extreme in international terms. The US introduced a tax on windfall profits in the oil sector in 1980, while Sweden, Norway and Finland have all introduced similar measures within their energy sectors.
It also remains highly uncertain whether Castillo will succeed in implementing even his more modest proposals. Perú Libre has only 27 of 130 seats in the Peruvian Congress, putting Castillo far short of a majority and making even his successful formation of a cabinet an open question.
Congress must approve the cabinet – if it twice declines to do so Castillo can call fresh elections, but it is far from clear that this would strengthen his position.
Gridlock is the greater long-term threat to Peru
Whether or not investors stand to lose out in the short term from a successful Castillo administration, Peru’s experience over the past year-and-a-half suggests that the greater danger may lie in political gridlock.
Peru's Covid-19 pandemic has been the worst in the world. Since March 2020, one in every 166 Peruvians has died from the virus – a rate almost twice as high as that of the next most afflicted country, Hungary (one in 325).
The causes of Peru’s [Covid-19] calamity lie in the country’s deep structural inequalities.
The disastrous effects of Covid-19 were not due to a lack of seriousness on the part of the government. Peru went into lockdown faster and harder than many countries in Europe, including the UK, only ten days after confirming its first case of the virus. International and inter-regional travel were banned entirely, with citizens required to fill out forms for permission to leave their home.
The causes of Peru’s calamity instead lie in the country’s deep structural inequalities. With one-third of the country’s urban population living in slums, the virus was able to spread quickly even during lockdown. The fact that only 42% of Peruvians own a fridge, including just 64% of urban Peruvians, also made daily trips to the market a necessity for the vast majority of residents.
Moreover, in a country where more than two-thirds of workers are in informal employment and two in five lack even a bank account, the government struggled to implement its generous stimulus payments. As a result, vast numbers were forced to flee the cities for their home villages, many fighting their way through volleys of tear gas.
“For decades we have had an underfunded health system with poor primary care and hospitals that are outdated,” Peru’s former Minister of Health Patricia Garcia told the British Medical Journal. “By the time the pandemic hit, we had underpaid health professionals and very low numbers of intensive care beds.”
While healthcare expenditure has slowly increased in recent decades, it remains far below the OECD average and has failed to keep up with rising demand. The entire country has just 1,656 intensive care unit beds, according to official data – five for every 100,000 residents.
The result has been a disaster for both human health and the Peruvian economy, with Peru’s GDP contracting by 30.2% during the second quarter of 2020 – the largest decline of any major economy.
In Europe and North America, both the pandemic and the impending threat of climate change have accelerated the formation of a new political consensus – less afraid of raising taxes on the wealthy to pay for infrastructure and the welfare state, and more willing to take a strategic role in shaping the economy. If this is what Castillo is offering Peru, then the greatest danger may be that he achieves too little.