A veteran International Monetary Fund economist, Luis Valdivieso, was sworn in by President Alan Garcia Monday as Peru’s new finance minister. He succeeds Luis Carranza, who has headed the finance ministry since Garcia’s administration began in July 2006.
The news spawned satisfaction in Washington and Wall Street. Peru’s most traded dollar-denominated bond, the <PERUGLB27=RR>, rose 0.500 point to bid 100.500, offering a yield of 6.51 percent. There were also positive reactions from Peru’s business, banking and investment sectors.
Political analysts recognize that Valdivieso inherits the portfolio at a more complicated time worldwide, but believe that he has to find solutions to the growing pressure from regional governments within Peru for a bigger piece of the pie and from socio-economically depressed areas that have not seen any of the benefits of the country’s strong economic growth. Most agree that his previous experience in poor countries (see below) should serve him and allow him more political leeway, and that is one of the main reasons President Garcia has chosen him.
Valdivieso, 58, an economist for the past 30 years with the International Monetary Fund, IMF, helped plan Peru’s economic stabilization program for 1990-1992 when former President Alberto Fujimori wrestled with the hyperinflation left by the current President in his first term. By the end of his 1985-1990 presidency, Garcia had left Peru in financial ruin, wracked by guerrilla violence and runaway, four-digit inflation.
But once a harsh critic of the IMF, the “new” Garcia, whose approval rate hovers around 30 percent, has firmly embraced free market policies, following through with the free trade agreement negotiated by his predecessor with the United States, signing other free trade pacts with Canada and Singapore, and seeking trade deals with China, the European Union and even Peru’s neighbor, and traditional rival, Chile.
In his first palace press conference, Validivieseo said one of his key aims is to improve Peru’s investment grade rating.
The former minister, Carranza, who was praised by Garcia in early June for his performance over the past two years, is lauded by Peru’s investment and business sectors as the architect of the country’s unprecedented economic boom –economic growth in 2007 was around 9%– and for keeping the inflation rate lower than that of most other countries in South America.
But both the outgoing minister and Garcia have faced harsh criticism for their market friendly policies which, critics say, have not done enough to reduce Peru’s poverty.
Last week, a nationwide strike was called by the country’s biggest labor union to protest FTA signed with the U.S. last year, the rise in the cost of living spurred by subsidized U.S. agricultural products, new legislation that criminalizes social protest, and to demand better working conditions and benefits.
Though the government reports a 5 percent drop in Peru’s poverty rate last year, more than 39 percent of the total population and two-thirds of the rural indigenous population continue to live below the poverty line. And in Huancavelica, Peru’s poorest department, the poverty rate climbed from 84 percent to 85 percent.
Valdivieso, who is expected to follow Carranza’s strict fiscal policies, is likely to clash with Peru’s labor unions and social movements if he doesn’t do more to spread the wealth generated by Peru’s economic boom.
“Minister Carranza’s discipline has definitively contributed to maintain things in order,” said Justice Minister Rosario Fernandez in comments to RPP Radio, “but as President Alan Garcia has said, the social agenda must be attended to.”
Carranza, who said he stepped down for family and personal reasons and not because of problems within Garcia’s administration, had been described as “austere” by some cabinet ministers, particularly Luis Alva-Castro, Minister of Interior, by Transport and Communications minister Veronica Zavala and by Hernán Garrido-Lecca when he headed the housing ministry. They allegedly complained that Carranza denied them additional funds.
“There is a certain tension between the different departments that try to perform well,” Carranza said, “and it’s difficult for the Ministry of Economy and Finance, which has to put all the pieces together, to make them fit.”
PERU’S NEW FINANCE MINISTER
Luis Valdivieso, 58, received a PhD in economics at Boston University.
- He worked on IMF structural reform programs in emerging markets including Mexico (1982-1987) and Russia (1992-1996).
- He served as the IMF’s chief of mission in East Timor in the late 1990s and early 2000s, and in 2005 and 2006 was the IMF’s representative in war-torn Sri Lanka.
- He helped design the Peruvian economic program for 1990-92, and served as an adviser to Peru’s finance ministry in 1991, when the ministry was run by Carlos Boloña.
- He has contributed to IMF working papers on issues including the impact of debt loads on economic growth, monetary policy, and the effects of capital controls in Malaysia.
