Geopolitics

Peru: Will The Real José Pedro Castillo Please Stand Up?

A source of major concern for investors and the economic and political elite, Peru's freshly-inaugurated leftist president is now trying to make nice. What happens next, though, is anybody's guess.

Pedro Castillo talking to his supporters after election results in June
Carlos Escaffi

-Analysis-

LIMA — Forty three days after the last votes were cast in Peru's presidential runoff, the country's electoral authority officially proclaimed as president-elect José Pedro Castillo Terrones, a socialist schoolteacher from Cajamarca in northern Peru. His inauguration, on July 28, coincides with the 200th anniversary of Peru's independence.

This was a narrow victory that had to ride a wave of challenges and calls to recount votes from Castillo's rival, Keiko Fujimori.

The 51-year-old Castillo is a Catholic and the spouse, for 21 years, to Lilia Paredes, also a teacher though evangelical. He has three children. In his youth, he was a member of the village "patrols' or rondas that kept the peace in the countryside and later resisted the violent Shining Path insurgency in the 1980s. He represents a break, in other words, from the country's ruling elite, established parties and dominant economic groups, and reached the presidency on the back of the votes of the Andean peasantry.

Castillo is giving representation to a sector of the population that has mostly been excluded from the country's socio-economic system.

Castillo is giving representation to a sector of the population that has mostly been excluded from the country's socio-economic system, and his discourse offers them hope of inclusion finally in a country that is often reluctant to give them visibility and recognition. His message centers around simple declarations such as "No more paupers in a rich country," statements directed at all those who have for decades felt sidelined and unseen, and that raise considerable social and welfare expectations.

While campaigning, the president-elect promised reforms to healthcare, education and farming, but also a million jobs a year. Above all, he has vowed to call a constituent assembly to write a new constitution within six months. The current one, he claims, unduly favors the free-market economy.

Castillo" in Peru's capital Lima on July 20 — Photo: EC/GDA/ZUMA

But Castillo also vowed, once his victory was confirmed, to reject "any bid to bring a model of hate. We shan't permit any imported model. This constitution remains in force until the people decide otherwise." Furthermore, he has promised juridical and economic stability for businesses, responding to the conservative Fujimori's calls not to "put up more obstacles' to the economy.

The president-elect promised reforms to healthcare, education and farming, but also a million jobs a year.

Castillo needs to be moderate, something it appears he has begun to understand. Part of that is the need to emit reassuring signals, both to rating agencies and to investors waiting to see what his final postures will be on a range of issues including investments, employment, COVID vaccinations and pandemic management. His earlier declarations in favor of nationalizations and state interventionism alarmed big, foreign investors. And yet, in June, he insisted: "We're not Chavistas or communists. Nobody has come to destabilize this country. We're workers, fighters and entrepreneurs."

Moderation must transcend words, and requires an understanding of what confidence-building entails. It also means working with parliament. The executive and legislative branches cannot continue to be at loggerheads as they have in the past five years, a period in which Peru had five presidents. Parliament will likely closely observe any bid to reform the constitutional principle of presidential incapacity or parliament's powers to sack the president, as it has in past years.

In short, the new president will have to forge pacts and build alliances to implement his promises on health, welfare and jobs, and to build his vision of national dignity and a Peru free of class and ethnic prejudices.



*Carlos Escaffi is an international relations lecturer at the Pontifical Catholic University of Peru.

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Economy

Merkel's Legacy: The Rise And Stall Of The German Economy

How have 16 years of Chancellor Angela Merkel changed Germany? The Chancellor accompanied the country's rise to near economic superpower status — and then progress stalled. On technology and beyond, Germany needs real reforms under Merkel's successor.

Chancellor Angela Merkel looks at the presentation of the current 2 Euro commemorative coin ''Brandenburg''

Daniel Eckert

BERLIN — Germans are doing better than ever. By many standards, the economy broke records during the reign of outgoing Chancellor Angela Merkel: private households' financial assets have climbed to a peak; the number of jobs recorded a historic high before the pandemic hit at the beginning of 2020; the GDP — the sum of all goods and services produced in a period — also reached an all-time high.

And still, while the economic balance sheet of Merkel's 16 years is outstanding if taken at face value, on closer inspection one thing catches the eye: against the backdrop of globalization, Europe's largest economy no longer has the clout it had at the beginning of the century. Germany has fallen behind in key sectors that will shape the future of the world, and even the competitiveness of its manufacturing industries shows unmistakable signs of fatigue.

In 2004, a year before Merkel was first elected Chancellor, the British magazine The Economist branded Germany the "sick man of Europe." Ironically, the previous government, a coalition of center-left and green parties, had already laid the foundations for recovery with some reforms. Facing the threat of high unemployment, unions had held back on wage demands.

"Up until the Covid-19 crisis, Germany had achieved strong economic growth with both high and low unemployment," says Michael Holstein, chief economist at DZ Bank. However, it never made important decisions for its future.

Another economist, Jens Südekum of Heinrich Heine University in Düsseldorf, offers a different perspective: "Angela Merkel profited greatly from the preparatory work of her predecessor. This is particularly true regarding the extreme wage restraint practiced in Germany in the early 2000s."

Above all, Germany was helped in the first half of the Merkel era by global economic upheaval. Between the turn of the millennium and the 2011-2012 debt crisis, emerging countries, led by China, experienced unprecedented growth. With many German companies specializing in manufacturing industrial machines and systems, the rise of rapidly industrializing countries was a boon for the country's economy.

Germany dismissed Google as an over-hyped tech company.

Digital competitiveness, on the other hand, was not a big problem in 2005 when Merkel became chancellor. Google went public the year before, but was dismissed as an over-hyped tech company in Germany. Apple's iPhone was not due to hit the market until 2007, then quickly achieved cult status and ushered in a new phase of the global economy.

Germany struggled with the digital economy, partly because of the slow expansion of internet infrastructure in the country. Regulation, lengthy start-up processes and in some cases high taxation contributed to how the former economic wonderland became marginalized in some of the most innovative sectors of the 21st century.

Volkswagen's press plant in Zwickau, Germany — Photo: Jan Woitas/dpa/ZUMA

"When it comes to digitization today, Germany has a lot of catching up to do with the relevant infrastructure, such as the expansion of fiber optics, but also with digital administration," says Stefan Kooths, Director of the Economic and Growth Research Center at the Kiel Institute for the World Economy (IfW Kiel).

For a long time now, the country has made no adjustments to its pension system to ward off the imminent demographic problems caused by an increasingly aging population. "The social security system is not future-proof," says Kooths. The most recent changes have come at the expense of future generations and taxpayers, the economist says.

Low euro exchange rates favored German exports

Nevertheless, things seemed to go well for the German economy at the start of the Merkel era. In part, this can be explained by the economic downturn caused by the euro debt crisis of 2011-2012. Unlike in the previous decade, the low euro exchange rate favored German exports and made money flow into German coffers. And since then-European Central Bank president Mario Draghi's decision to save the euro "whatever it takes" in 2012, this money has become cheaper and cheaper.

In the long run, these factors inflated the prices of real estate and other sectors but failed to contribute to the future viability of the country. "With the financial crisis and the national debt crisis that followed, economic policy got into crisis mode, and it never emerged from it again," says DZ chief economist Holstein. Policy, he explains, was geared towards countering crises and maintaining the status quo. "The goal of remaining competitive fell to the background, as did issues concerning the future."

In the traditional field of manufacturing, the situation deteriorated significantly. The Institut der Deutschen Wirtschaft (IW), which regularly measures and compares the competitiveness of industries in different countries, recently concluded that German companies have lost many of the advantages they had gained. The high level of productivity, which used to be one of the country's strengths, faltered in the years before the pandemic.

Kooths, of IfW Kiel, points out that private investment in the German economy has declined in recent years, while the "government quota" in the economy, which describes the amount of government expenditure against the GDP, grew significantly during Merkel's tenure, from 43.5% in 2005 to 46.5% in 2019. Kooths concludes that: "Overall, the state's influence on economic activity has increased significantly."

Another very crucial aspect of competitiveness, at least from the point of view of skilled workers and companies, has been neglected by German politics for years: taxes and social contributions. The country has among the highest taxes on income in Europe, and corporate taxes are also hardly as high as in Germany anywhere in the industrialized world. "In the long run, high tax rates always come at the expense of economic dynamism and can even prevent new companies from being set up," warns Kooths.

Startups can renew an economy and lay the foundation for future prosperity. Between the year 2000 and the Covid-19 crisis, fewer and fewer new companies were created every year. Economists from left to right are unanimous: Angela Merkel is leaving behind a country with considerable need for reform.

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