Poverty's Policies
by Jorge Vargas
Today, the Peruvian Republic is one of the nations that is best prepared to handle the economic crisis that, as Mr. Obama would have it, is the worst since the Great Depression.
More sober-minded persons would equate it to the economic slow-down of the 1980s.
The main ingredient to Peru's current success has been exports. One would be foolish to believe that exports will save Peru, now that Mr. Obama and similar, unoriginal politicians like him have dedicated themselves to scaring their publics.
So, what else is left?
Another key engine to Peru's growth has been, luckily, internal: Construction. For the past three years, the Peruvian government - which for once was marked with great foresight - realized that the economy would sooner rather than later hit a slump and it started investing in public works - much like the U.S. government is now trying to do two years too late.
Road construction has been a top priority, along with the Jorge Chavez International Airport renovation projects, and the renovations that have been taking place near that otherwise highly depressed area of Callao-Lima. Furthermore, on the private end, skyscrapers are going up left and right in Peru's capital.
The best part of this construction?
The raw materials are cheaply found in Peru's hinterland.
So, people are being employed - albeit, temporarily.
Peruvians are not savers. Peruvians also do not invest in the stock market. It goes against everything that the national experience has ever taught us.
Why?
The bank failures of the 1980s and the constantly high perceptions of corruption make the people hesitant to give their money to companies that answer to no one - what's to prevent what happened with EnRon from happening in Peru?
And then, of course, one could say that perhaps Peruvians could invest in foreign companies. Perhaps. But what reason has any foreign company ever given to a Peruvian to earn trust?
So, Peruvians are not savers. Peruvians do not invest.
What do Peruvians do with their money?
We enjoy it. We consume. Constant consumption. We eat out every night of the week, and we buy round after round of beers until our pockets are empty.
Europeans and North Americans may call this irresponsible, but when you cannot trust a bank and when you have lived in economies with 3,000% inflation rates and when a thief can break into your house and steal your money at any moment, why in the world would you ever bother saving?
Spending provides instant and assured satisfaction. Satisfaction from saving is less certain.
So, who is propelling the construction of new high-rise apartments in downtown Lima?
Rich exporters. Foreigners. Peruvians from abroad. Peru's old elites. Wealthy mine owners. Rich internal migrants who made a fortune hawking cheap produce in Lima's over-crowded markets.
Young Peruvians who do not have such a strong fear of saving and who work in Western companies and earn good salaries and see the importance of having a fixed investment.
And, of course, people who sell their homes and use that capital to buy and take out a loan to finance the rest.
They are propelling this construction.
But these people will eventually all stop buying homes. What then?
Must Peru simply go back to exporting to the Spanish and the Germans and to the United States in order to barely survive?
After all, the government can only spend so much, and most of the government's money comes from export-import taxes - few Peruvians are directly taxed - and sales taxes. If the global economy continues down this path, Peru's government will have to start eating out of its, thus far, substantial reserves. That can provide Peru with sufficient leverage for nearly a decade. But during that period, Peru's government must be frugal.
What happens when Peru's government is not spending and when the few citizens who do have savings refuse to use them?
The companies kick in.
Peruvians are not savers. Peruvians do not invest. Peruvians consume constantly.
Constant consumption makes it so that the companies will always have large cash assets. Furthermore, as more and more Peruvians are employed than ever before - as is the case now - and as perceptions about the economy remain higher than usual - as is the case now - Peruvian consumption will increase. An increase in demand will eventually lead to a matching surge in supply - offset, slightly, by changes in price and so forth.
To be more precise, as Peruvians consume more, companies need to produce more.
What does production require?
One of two things: More employees at equal or perhaps lower pay. Equal number of employees working more hours - thus, earning more income.
Preferably, we would see a surge in both.
And where are all of these extra employees?
Some of them are still in school.
And the rest are currently working in construction. Those projects will soon be finished and the government will not be funding new ones for a while.
One of the basic tenets of Third World economic policies is that governments do not spend much on infrastructure.
First World pundits call this a sign of corruption, and First World intellectuals call this the resource curse.
They might be right. But more correct is the following: Third World governments know that good economic times are usually only brief and temporary, and investments in infrastructure are very nice, but they are not brief and they are not temporary. Hence, when they do spend in infrastructure, the projects are limited, as brief as possible, and chosen strategically: What can we do that won't take too long but, after meeting that condition, is the most useful to the citizenry and the most likely to win votes (if the government is a democratic)?
Returning to the topic at hand however, the companies have increased revenue to produce more because of increased consumption, and then they will, in turn, hire more workers, or pay their current workers more.
Either way, they will serve to maintain consumption levels and the economy will become briefly self-sustaining.
Let us define briefly as two years.
After that point, government must begin to dip into its reserves to increase employment and government spending yet again.
And that is why Peru's government must begin to pressure the public into buying Peruvian products, or else to buy the products of companies that may be foreign owned but which produce within Peru and with Peruvian employees.
McDonald's, for instance, may produce its food overseas, but its workers are Peruvian and the service it produces is Peruvian. Thus, though it is a U.S. company, it is assisting in this overall goal of increasing employment while also increasing consumption but not increasing inflation.
But, for the most part, only Peruvian companies meet these goals.
This is what Peru must do in order to remain ahead of the pack in this economic crisis, and we must hope that it does not last longer than two years.
For now, however, exports have not fallen, and the Peru-US free trade agreement will only serve to better assist Peru's exporters, which will allow for internal spending to increase in the way of infrastructure projects financed with both private and public funding.
The effects of that agreement are not yet known, and the EU-Peru free trade agreement which is currently being negotiated will only assist Peru in its efforts to stay afloat.
The old policy styles of the 1980s and 1990s, and of decades which preceded those dark years are now dissipating. Gone are the days when the Peruvian government had no reserves to serve as a bulwark. Gone are the days when mining fueled Peru's economy
These are the days of Peru's industrialized, service economy.
Today, Lima's infrastructure is being renovated, because if Peru is to improve, that change must begin in the economic, political, and cultural center of the Republic.
Tomorrow, the infrastructure of Trujillo, Arequipa, Tacna, Piura, and Iquitos. And then, the whole of Peru.
And if the world ever asks us why we are not spending more, why we are not eagerly fixing every single problem facing our Republic now while we have the funding, let us tell them clearly and without hesitation that we are practicing the concept of "saving" that the West taught us.
But let this not be a sell-out answer. Let this not be an answer of "this is your fault."
Let it instead be made clear that we are following that practice because, for once, a Western strategy works, and let it be known that we are choosing this action out of our own free will.
Let it be known the reason for our choice: The hope that one day, and hopefully not a day too distant from this one, there will be a generation of Peruvians unafraid of banks and of investing, a generation of Peruvians unafraid of hoarding wealth in savings accounts. The hope that, one day, the maxim of "eat, drink, and be merry for tomorrow you die" needn't apply to the mentality of the citizens of our Republic.
That is why we act so carefully today. That is why, today, Peru's government must be an example of fiscal responsibility for the whole world to see.
And if the West thinks that we chose the wrong moment for frugality, then let us ask them this: Can you find us a better one?
Let the United States throw billions of dollars into their economy.
We might do the same if we could.
We are not so fortunate.
And sometimes, it's better to be silent and let the monster pass us by than to throw pebbles at it and risk its wrath.
Today, the Republic is responsible.
