International Reprisals After Coup Strain Peru's Economic Reforms

PERUVIAN President Alberto Fujimori is finding his country increasingly isolated from world financial bodies at a time when he is trying to enact far-reaching economic reforms.

"The cost of President Fujimori's April 5 [suspension of the Constitution] is Peru's reinsertion in the international financial community," says Hernando de Soto, formerly Peru's "drug czar" and chief liaison between Fujimori and the United States. "I believe that on the Peruvian side, both at the level of government and of public opinion, that has not been understood."

Economists calculate that Fujimori's April 5 move will directly cost Peru $300 million to $400 million this year. According to Bernard Aronson, assistant US secretary of state for inter-American affairs, $164 million - more than half of the canceled aid - was coming from the US.

Economy Minister Carlos Bolona Behr is putting a brave face on the situation. "Obviously, with more external resources we could achieve a series of goals, but we've already been going a long time with no outside help, stabilizing and advancing with the economic program, and that's what we'll have to go on doing."

Mr. Bolona says he is committed to continuing with the International Monetary Fund-approved economic recipe, with priority given to reducing inflation, stabilizing prices, and cutting public expenditure.

In a radio interview, Bolona emphasized the positive aspects of the April 5 decision. "There existed prior to [that decision] a great risk that efforts to balance the budget would be paralyzed," he said. He said the comptroller general's office had tried to sabotage privatization plans; Congress had blocked tax reforms and passed laws (like one giving emergency agricultural aid) that endangered the budget; and judges had been manipulated by the "mercantilist" interests of big business.

"These threats to the economic program have now been eliminated," Bolona said.

But with the external funding tap turned off, Peru's budget for the current year will need restructuring. "In one respect, the April 5 measure gives Bolona more room for fiscal maneuvering," Lima economist Augusto Alvarez says. "The restructuring of the tax system, elimination of tax exemptions for jungle and frontier zones, and more public expenditure cuts - measures that Congress had blocked - will clearly now go ahead."

Improved tax collection will be crucial. Under the previous government, tax collections fell to an all-time low of around 4 percent of gross domestic product. Reforms in tax administration have doubled that in the past year, but most economists agree that a level of 15 percent is essential if even the most basic services are to be maintained. Tax collection procedures now are being modernized, and stiffer penalties, including prison sentences, are in the pipeline for tax evaders.

But the security forces are overdue for a substantial pay raise; and the long-abandoned social emergency program, intended to cushion the effects of economic adjustment on Peru's poorest, now is "more crucial than ever before," according to Bolona.

The failure of last week's mission from the Organization of American States (OAS) to reconcile Fujimori and opposition parties seems to have exacerbated Peru's economic isolation.

"SUPPORT group" of friendly countries - formed last year to help Peru normalize relations with multilateral creditors - had been impressed by Fujimori's early determination to rein in runaway inflation and settle long-standing debts. The group, whose members include the US, Japan, Germany, and Spain, last year had pledged $1.3 billion in bridging credit.

But immediately following the April 5 coup, the US, Germany, and Spain announced the suspension of all but humanitarian aid; and shortly after the OAS mission, Spain announced it was pulling out of the support group.

Even Japan, which had initially expressed "understanding" of Fujimori's April 5 move, is moderating its support of Peru. Fujimori had been forging even closer links with the land of his ancestors, with three trade-and-aid promotion visits in 20 months. But last week Japan announced the postponement of a $100 million credit promised last year until the Inter-American Development Bank (IADB) defines its position on Peru.

"I get the impression that Fujimori and his advisers calculated the cost of April 5 purely in accounting terms," says Mr. Alvarez. "They forgot that the US is the foundation of the support group, and that, in turn, forms the basis of all other negotiations and agreements with the IMF, the World Bank, and the IADB."

On a recent trip to Lima, Mr. Aronson spelled out the US conditions for resumption of economic aid to Peru. The US sought a "democratic, not unilateral" dialogue between "all social forces in Peru - and as quickly as possible." This was the only way to avoid growing isolation, Aronson warned in a press conference after a reportedly tense interview with Fujimori.

Bolona dispatched Peru's chief debt negotiator to Washington this week to keep the IMF and IADB doors open. "No country today can live in isolation," he says. "The thing is how to ensure external support continues. What we need is more democracy, to show to the outside world - that needs working on."