POLITICAL UNCERTAINTY A THREAT TO THE ANDEAN COMMUNITY

Background

The past 18 months have seen both economic and political turmoil in the five countries of the Andean Community, raising concerns that the trend in Latin America toward democracy and freer and more open economies will founder on the rocks of Andean realities. Critical moments are approaching for Peru and Venezuela, where presidential elections will be held in the coming weeks. The internal political and security situation in Colombia and Ecuador is precarious and threatening, and even formerly tranquil Bolivia has imposed a state of siege.

Peru

On May 21, President Alberto Fujimori is scheduled to face opposition challenger Alejandro Toledo in a runoff election. If Fujimori wins as the result of a tainted election, his image both at home and abroad will suffer. A clear victory by either candidate in a fair election should dispel the political uncertainty, but accusations of fraud could aggravate a climate of instability, contributing to an economic downturn.

The two candidates do not appear to differ significantly on macroeconomic policy. Fujimori’s government has performed well in this arena; real GDP rose by an estimated 3.8% in 1999, despite a reduction in domestic demand. The external current account deficit declined to 3.6% of GDP and inflation fell to 3.7%. Recovery appears to be continuing in 2000: GDP grew by 8.7% in February compared to the same month of 1999, and demand for energy increased by more than 9%. Inflation was only 0.54% in February, and exports and foreign exchange reserves grew slightly compared to the same period in 1999. Foreign and domestic investment is stable at the moment, but many investors are taking a wait-and-see approach to the elections.

Venezuela

Economic policy rather than unfair elections seems likely to be the main issue in Venezuela. The economy continues to stagnate owing to private sector uncertainty about the future policies and intentions of the government of President Hugo Chávez. In spite of high oil prices, Venezuela is suffering its worst recession since the 1980s, with unemployment at 18%. Private sector fears resulted in a $4 billion capital flight in 1999. Adding to these problems is the incompetence of the government bureaucracy, which has been slow to advance infrastructure projects. Reform of the judicial system and the firing of allegedly corrupt judges were popular measures, but the appointment of new judges loyal to the current regime has not generated confidence. Chávez’s criticism of the Catholic Church hierarchy hasn’t helped, deepening fears of his demagoguery and potential divisiveness. Depending on the policies followed by the victor of the May 28 elections, the economic situation could get worse. This would not augur well for the political stability of Venezuela.

Colombia

Colombia continues to struggle with its internal insurgency. Violence, crime and corruption are on the rise, and the economy is in recession owing to political violence and uncertainty about the future. The GDP decreased by 3.5% last year and unemployment stands at 20%. More than 25,000 people are killed every year in Colombia, and more than one million have been displaced from their homes. Countless more have been driven into exile, draining the country of its human capital. Colombia’s leading guerrilla groups have been given large parcels of national territory to govern uncontested pending the outcome of ongoing but stalled negotiations. The Revolutionary Armed Forces of Colombia (FARC) recently announced the establishment of its own judicial system for the country, further embarrassing the government and alienating more people from the peace process. As Colombia enters what seems to be its darkest hour, some South Americans have called for a multinational Contadora-style peace commission to mediate an end to the war.

On the positive side, Colombia has implemented an agreement with the International Monetary Fund, and the IMF has stated that “the current signs of economic recovery, together with continued strong fiscal and credit policies, will assure that economic targets are met.” The International Bank for Reconstruction and Development (IBRD) and the Inter-American Development Bank (IDB) also have active lending programs in Colombia. In addition, the US House of Representatives recently approved a $1.3 billion Colombia Plan, which is currently being debated in the Senate. On May 1, US Secretary of State Madeleine Albright declared that the US has “both an urgent national interest and a responsibility to assist the people of Colombia in their struggle to defend and build democracy.”

Ecuador

Ecuador enjoyed a period of apparent calm after the January ousting of President Jamil Mahuad, but the Indian organizations whose protest marches were the main catalyst of his removal have become active again. Together with leftist student groups, they have vowed to reverse the government’s dollarization policy. Miami Herald columnist Andrés Oppenheimer, who recently returned from a visit to Ecuador, offers a pessimistic view of President Gustavo Noboa’s ability to continue his economic reform program (especially the scheduled rise in gasoline prices in June). Oppenheimer reports that most Ecuadorians foresee further economic decline and a possible coup d’etat “led by messianic populist army colonels backed by Indian and ultra leftist leaders.” Noboa has also been criticized for proposing an amnesty for the populist colonels who participated in the January coup. Observers see the amnesty as setting a precedent that would encourage further coups and return the colonels to positions of influence.

Ecuador also has signed an agreement with the IMF and has received the first tranche of a $300 million loan to support badly needed economic reforms. The government is in the process of implementing its dollarization policy in the hope of imposing monetary stability, a priority given Central Bank figures showing 10.2% inflation in April and an annual inflation rate of 88.9%. The crucial test for Noboa will be whether he is able to pass his economic reforms and survive the populist reaction.

Bolivia

Traditionally the most politically unstable country in the Andean region, Bolivia has in recent years enjoyed both political stability and economic advances. Unfortunately, violent demonstrations in some parts of the country against higher water prices, anti-coca campaigns and other issues led President Hugo Banzer to declare a state of siege. On April 27, the entire Cabinet was replaced, and the tumult began to die down.

Bolivia’s recent economic performance has been relatively solid. Inflation was about 2.5% in 1999. GDP growth slipped to about 2%, but its growth in the two previous years exceeded 4% annually. Privatization, especially in the petroleum sector, and liberalization of the mining sector have brought increased foreign investment (about $109 million in hydrocarbons). Bolivia is the only Andean Community member that is also an associate member of Mercosur, and most of its trade is with this bloc and the US.

All in all, Bolivia’s problems seem to be less serious than those of its Andean partners, but the country’s past history of political instability is reason for caution.

The ANC

In spite of their strained political and economic situations, the five member countries of the Andean Community are officially committed to greater intra-regional integration and trade. Presumably this means making the transition from a customs union to a common market. In fact, trade is growing trade between the five countries. During the first two months of 2000, exports to other Andean Community countries increased by 47% for Colombia, 70% for Ecuador and 16% for Peru. Inflation for the member countries declined to 17.3% between March 1999 and March 2000. And at a different level, all of the Andean countries are participating actively in the ongoing Free Trade Area of the Americas negotiations.

However, continued political uncertainty in the five member countries could lead to a decline in intra-regional trade. At least in the case of Bolivia, the allure of Mercosur could be enough to weaken its ties with the Andean Community and move it closer to the bigger and stronger grouping to the South. This would weaken the Andean Community—although perhaps not terminally—and diminish its capacity to function as a dynamic economic integration movement.

Miami Herald Consulate of Peru Department of State www.comunidadandina.org

www.imf.org