Latin America’s next success story?

Peruvian President Alan Garcia will be in Washington Friday to see President Bush sign the U.S.-Peru free-trade agreement into law. It could not have happened at a better time. Peru is increasingly distinguishing itself as a successful market democracy. After more than five years of high and sustained economic growth — Peru grew eight percent last year — development is spreading to regions that have traditionally benefited little from past progress. Unlike neighboring countries like Argentina and Venezuela that are also experiencing rapid growth, Peru’s rise is characterized by widespread investment and wealth creation as opposed to redistribution or the transient effects of high commodity prices.

Peru has become an embarrassment for Hugo Chavez, who has neighboring Bolivia and Ecuador as client states, and is pouring a lot of resources into the Peruvian countryside in a campaign to promote his anti-capitalist ideology. Peru has become a key country in Latin America’s ideological battle between the modernizers and the populists.

Unlike other South American countries, Peru has stuck to the far-reaching market reforms it made in the early to mid-1990s, and maintained sound macroeconomic polices. It’s paying off. Anybody who has been visiting Peru during the past 15 years has noticed vast improvements in countless areas of national and everyday life.

More importantly, a change in values may also be taking place. The majority of Peruvians supported the FTA with the United States. Quality of service and attention to detail, have improved among Peruvian workers; likewise management across a broad array of businesses has also improved. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about his homeland, not because of its positive economic indicators, but rather because “something profound seems to have changed in the culture of the country. One would have to be blind not to see that.”

In his excellent new book, La Revolución Capitalista en el Perú (The Capitalist Revolution in Peru), leading Peruvian journalist Jaime de Althaus carefully details some of the changes in Peruvian society.

The middle class is growing. The gap between rich and poor, and between Lima and the rest of the country, has also shrunk. Income gains have been proportionately greater for the poor than for the rich.

Traditional and non-traditional exports have boomed, with the latter experiencing higher growth. Peru has now become an exporter of software, to the tune of $20 million last year and growing at a rate of 25-percent.

Peruvian companies — many of them new — have become successful nationally and internationally, not only exporting abroad, but setting up plants and offices abroad in areas as diverse as textiles, soft drinks, mining, milk products, clothing, banking, and detergents. In a sign of the times, some Peruvian companies have seen their businesses nationalized in Evo Morales’s Bolivia.

Vast areas of the Peruvian coast that had long been desert have turned green as a result of the country’s “silent agroindustrial revolution.” The changes have also taken place in parts of the interior. Peru’s produce is now diverse, ranging from sugar cane to paprika to asparagus.

Department stores and other businesses now regularly cater to the “popular” classes. Enormous malls have been built and now thrive in some of the poorest parts of Lima.

Garcia, whose first term in office during the second half of the 1980s was a disaster, is building on this progress and — I never thought I would say this — is so far turning out to be a good president. He now calls for Peru to grow at Asian levels for years to come. He accuses bureaucrats, NGOs, environmentalists, and special interests of blocking important policy changes that would increase growth and reduce poverty.

Garcia wants to allow private investment in large parts of the jungle to increase wood exports and protect the region from those who log it illegally. He calls for private titling in large areas of land so that they can be better used. He wants to allow an increase in private investment in the fishing industry, mining and other natural resources. He wants to see hydroelectric dams built nationwide by private capital, rather than the state. And he calls for the state to cede property it does not use, and functions that are better performed by others.

Much remains to be done before Peru can be declared a success story, but the free trade agreement will help by making trade policy permanent, and the competition and reliable rules of the game that are made possible by permanent trade policy have been key to Peru’s success so far. This is a critical time in the region’s history. If President Garcia can push Peru into modernity, he will go down in history not only as one of its greatest presidents, but as one of Latin America’s as well.