Latin America

A failure to reform Peru is poised to produce a lurch to the far left

A presidential run-off election is set to deliver a weak, populist government



For much of this century Peru stood out in Latin America as a success. 

The economy grew at an annual average rate of 5.6% between 2001 and 2016, while the share of those living below the national poverty line fell from above 60% to 21% over the same period. 

Inequality fell, too, as the incomes of people living in the Andes, long the poorest area, grew faster than the national average. 

Like Chile and Colombia, which also did well economically, Peru pursued free-market economic policies and export-led growth, eschewing the statist protectionism that has held back Argentina and Brazil.

Progress has largely halted, first because of political conflicts that produced four presidents (and eight finance ministers) in five years. 

Then came the pandemic, which has killed 190,000 Peruvians and pushed 3m into poverty. 

Now Peru’s future has been held hostage by a divisive presidential run-off election. 

With nearly all the votes counted, Pedro Castillo, a rural schoolteacher, subsistence farmer and union leader, was winning by a hair’s breadth against Keiko Fujimori, the daughter of Alberto Fujimori, the conservative who ruled the country as an autocrat in the 1990s. 

Neither candidate is a paragon of democracy.

Mr Castillo represents a cry for social justice from the Peru that has felt left behind, particularly during the pandemic. 

He is an admirer of Evo Morales, Bolivia’s former socialist strongman; his party is led by an apologist for Cuban communism and Venezuela’s dictatorship. 

He has little previous political experience, has given few interviews and scant indication of how and with whom he would govern. 

Ms Fujimori has plenty of baggage herself: when her party held a majority in Peru’s Congress in 2016-19 it sought to sabotage an elected government, to destroy valuable education reforms and to capture independent institutions. 

But she attracted the support of many who fear a leftist adventure.

Peru now faces several perils. 

The first is of a fight over the result, which may not be declared for several days. 

Ms Fujimori has unwisely claimed electoral fraud, with no serious evidence. 

Mr Castillo’s victory, assuming it is confirmed, poses two further risks. 

One is that he follows the leftist-populist script on which he campaigned: nationalisation of mines and the convening of a constituent assembly to write a new constitution which might allow him to seize near-absolute power, as Mr Morales did. 

Since his mandate will be flimsy (he won only 15% of the total vote in the first round) and he can count on only 42 of the 130 members of the new Congress, which would have to authorise an assembly, that might be hard. 

But if he buys popularity by, for example, seizing a mine or the central bank’s reserves, it is possible. 

The other, more likely, risk is of a weak, incompetent government that chips away at the foundations of economic stability and prompts a prolonged crisis of confidence. 

The sol, long one of the region’s most stable currencies, has already lost 8% of its value against the dollar this year.

The hope is that Mr Castillo realises that to govern the country successfully he needs to appeal to the half of it that rejected him. 

To achieve the improvement that he wants in the lives of poorer Peruvians in the interior requires a growing and sustainable economy. There is a precedent. 

In 2011 Peruvians elected Ollanta Humala, a former army officer who had campaigned against the economic “model”. 

His government introduced some useful reforms while keeping the economy going. 

But Mr Castillo has less knowledge of the world and less time to adjust than Mr Humala had.

How Peru got here is a lesson in how to squander progress. 

It was long clear that the country needed to complement its market economy with a more effective state to provide much better public services, not least health care. 

To diversify the economy away from mining requires investing more in people, innovation and infrastructure. 

Instead, the conservative establishment set its face against change. 

The same failure to create more inclusive societies has plunged Chile and Colombia into unrest. 

As we have stressed in these pages in recent weeks, polarisation, fragmentation and populism are also afflicting Latin America’s giants, Brazil and Mexico. 

But Peru’s case, with 18 candidates in the first round, and then a choice between two extremes in the second, is especially severe. 

There may still be a moderate majority in Peru. 

It will need to make its voice heard. 

Low inflation cannot be taken for granted

Recessions often change macroeconomic relationships

The editorial board

Traders on the floor of the New York Stock Exchange watching stock prices fall as inflation worries rattled Wall St on Wednesday © Courtney Crow/NYSE/AP


For much of the decade following the 2008 financial crisis, some central bankers would predict, every quarter, that inflation would soon return. 

After they were invariably frustrated, they would predict, once again, that it would come back — this time slightly lower.

It is this humbling experience that informs reactions to present market worries about a return of price growth. 

Having seen predictions of a return to “normal” inflation come to nothing so many times — as well as misplaced warnings that quantitative easing would lead to hyperinflation — it is now much harder to believe that there will be a swift return to inflation after the pandemic, which provoked even deeper falls in economic activity.

History, however, is replete with “regime shifts” where the behaviour of economies durably changed. 

That includes the low growth and low inflation after the 2008 crisis or what former Bank of England governor Mervyn King called the “NICE period” before it — a decade of non-inflationary constant expansion. 

Many such shifts follow recessions, after which the certainties of the previous regime seem no longer to hold. 

Few have been predictable before the fact.

Market fears of inflation are therefore understandable. 

This week shares and other long-term assets declined in value, thanks to expectations that central banks will be forced to raise interest rates. 

The latest US inflation data, published on Wednesday, pointing to the highest rate of annual price growth since 2008 has only reinforced this impression — although the figures are distorted by comparisons with falls in prices during lockdowns.

Cautious investors may be wise to inflation-proof their portfolio but central bankers face a less clear path. 

It is not obvious whether cost pressures are transitory or part of a more permanent shift. 

Ultimately, whatever happens during the recovery, central banks must keep inflation anchored at their targets and closely monitor changes in expectations.

The pandemic was an unusual recession. 

Rather than being provoked by the excesses of the financial system or a change in monetary policy, it was a deliberate decision to close down parts of economies. 

Just as extraordinary was the response, not only in terms of the size of stimulus — both central banks and finance ministries opened all the stops — but also its design, handing funds to businesses to keep workers employed. 

That may lead to a faster recovery, swiftly using up excess capacity. 

That capacity is likely to have been reduced. 

Not all businesses and jobs have been preserved by government support and recreating them will take time. 

So, too, will any transition to new ways of working, both green and otherwise; frictions could lead to higher price pressures.

Most critical will be the behaviour of the labour market. An explicit goal of US government policy is to shift power towards workers. 

This could lead to temporary price rises being incorporated into pay deals, and eventually into long-term inflation expectations. 

There is no need to overreact. 

Any shift in the balance of power will be small and, perhaps overdue: it is unlikely to lead to a rapid take-off in inflation.

The experience of the recovery from the 2008 financial crisis taught central banks that low inflation was consistent with a much lower level of unemployment than they thought. 

Also instructive was the realisation that they have limited ability to predict changes in the relationship between unemployment and inflation. 

As the world recovers from the coronavirus pandemic they should remember both lessons.

Commodity Price Surges Add to Inflation Fears

Higher prices for commodities are flowing through to more companies and consumers, making it harder for central bankers to ignore them

By Tom Fairless, Alistair MacDonald and Jesse Newman

Corn prices have jumped to their highest levels in eight years./ PHOTO: BING GUAN/REUTERS


The run-up in commodity prices is casting a cloud over the global economic recovery, slamming vulnerable businesses and households and adding to fears that inflation could become more persistent.

The world hasn’t seen such across-the-board commodity-price increases since the beginning of the global financial crisis, and before that, the 1970s. 

Lumber, iron ore and copper have hit records. Corn, soybeans and wheat have jumped to their highest levels in eight years. Oil recently reached a two-year high.

Economists are expecting consumer-price data due later this week to underscore the trend. 

They say China’s producer-price index, a gauge of factory-gate prices, could climb to its highest level since August 2008 on Wednesday amid rising commodity prices. 

The U.S. consumer-price index, released a day later, is expected to show a sharp rise in the 12 months through May, also driven by higher labor costs.

Ordinarily, economists and central bankers try not to worry too much about commodity-price moves. 

Commodity prices can be volatile, and they make up a smaller part of consumer inflation than other costs, like housing.

But manufacturers’ profit margins are shrinking because of higher costs for raw materials. 

Households are paying more for gas, groceries and some restaurant bills, curbing their ability to spend elsewhere. 

In poorer countries, some are going without basic needs entirely.

“We are being hit from every possible angle,” said Franz Hofmeister, chief executive of Quaker Bakery Brands Inc. in Appleton, Wis. 

He says his costs for items including wheat, energy and new aluminum equipment have shot up at least 25% to 35% this year.

Customers protested when his firm lifted prices for pizza crusts, burger buns and other goods by as much as 8%, but more increases might be needed.

“The scary thing is, we don’t really see an end in sight to these cost pressures,” he said.

Many factors are driving the increases, including ultra-strong consumer demand and supply-chain bottlenecks. 

But behind many of them, many economists say, is a deliberate decision by policy makers in the U.S. and elsewhere to run their economies hot for now, with lots of stimulus, to ensure they recover fully from damage caused by Covid-19.

Central bankers must decide whether they can keep looking past commodity-price increases, along with other signs of higher inflation, or must move faster to cool demand through rate rises or other moves. 

In the 1970s, many countries gave priority to jobs and growth over controlling consumer prices during a series of oil shocks, and experienced high inflation.

Brazil, Russia and Turkey already have tightened policy as commodity prices climb.

Officials at other central banks, including the Federal Reserve and European Central Bank, have remained sanguine. 

At an event last month, ECB chief economist Philip Lane argued high unemployment would help keep inflation under control.

“You need a strong labor market” to get more persistent inflation, he said.

ECB officials are expected to increase their forecasts for eurozone inflation this year at a policy meeting on Wednesday and Thursday, while extending aggressive stimulus policies that include subzero interest rates and large-scale bond purchases.

Commodities generally make up a relatively small part of consumer prices. 

They are mainly used for producing goods as opposed to services, which are a bigger part of developed-world economies. 

Goods make up about 20% of the weighting of the U.S. consumer-price index.

Academic work also suggests that the impact of commodity-price shocks on inflation has fallen in recent decades, as elements such as branding have become important in final costs. 

Kevin Kliesen, a business economist at the Federal Reserve Bank of St. Louis, recently found there was a fairly small correlation between the costs of an index composed of industrial materials and one looking at prices for durable goods.

Commodities also have come to play a smaller role in final production as businesses become more efficient, according to research by economists at the Federal Reserve Bank of New York. 

The U.S. roughly tripled its economic output per kilogram of oil consumed between 1990 and 2015, according to the World Bank.

“Oil used to be important enough to swing inflation, but now no commodity is,” said Dirk Schumacher, a former ECB economist now at Natixis.

Still, commodity prices could be decisive at a time when other forces are pushing prices higher, Mr. Schumacher said.

“If you think fiscal policy in the U.S. is overdoing it, then commodities could be the final bit needed to ignite a self-reinforcing price spiral,” he said.

Surging commodity prices also can be an early warning of future inflation because commodity markets react more rapidly to changes in the economy than prices for final goods.

The impact of oil’s climb already is showing up in consumer-price data: Figures for the eurozone showed consumer prices were 2% higher in May than a year earlier, the fastest rise since late 2018, largely because of energy.

In the U.S., it now costs an average of $1.02 a gallon more to fill up a gas tank than a year ago, according to GasBuddy, which analyzes fuel prices.

The Food and Agriculture Organization of the United Nations said global food prices rose in May at their fastest monthly rate in more than a decade, led by surges in products such as vegetable oils and cereals that are crucial to developing world diets.

Companies from General Mills Inc. to Hormel Foods Corp. are raising prices of goods including the latter’s Jennie-O ground turkey.

James Jeppson, of Utah-based food-service distributor Nicholas and Co., says shortages of soybean oil mean he is rationing deliveries of frying oil to restaurant customers, some of whom have paid triple their normal cost for the oil.

Mr. Jeppson has been looking for new products to help restaurants preserve their frying oil. 

Soon, he will begin promoting coated, not battered, french fries, and battered, not breaded, onion rings, which he says will create less buildup in deep fryers, stretching the life of a restaurant’s oil.

Rising costs for everyday foods like bacon and fruit have raised concerns about inflation. 

“Battered onions will still wreck your fryer, just not as quickly as breaded,” he said. “It’s a nightmare.”

Economists note that some commodity prices, notably crude oil, are merely returning to pre-pandemic levels. 

Recent sharp increases are built on comparisons with mid-2020, when consumption was depressed due to the pandemic.

Many also believe commodity-price growth will subside later this year as some U.S. consumer spending shifts to services, which are less commodity-intensive. 

Chinese consumption of industrial metals, which is about half of global demand, is expected to fall as Beijing reins in credit growth, according to Capital Economics.

“Oil has gone from $35 to $70 [a barrel.] It’s not going to rise to $140,” said Dan Smith, special adviser at Oxford Economics in London. 

“A lot of commodity prices will go broadly sideways for the next three to six months.”

Michael Hanson, senior global economist at JPMorgan Chase Bank, says that while higher prices for raw materials will probably result in temporary inflation pressures, it won’t make much of a dent in the U.S. economy.

Much of the recent inflation uptick is due to the frenzied nature of the economy’s reopening, with firms scrambling to find workers and resolve freight bottlenecks, he said, and the economy is strong enough to weather it.

The commodity boom also has winners: It is creating a windfall for farmers and agribusinesses, lifting prices for U.S. farmland and benefiting commodity-exporting nations.

Brazil’s economy returned to pre-pandemic levels in the first three months of this year, boosted by agricultural exports of soybeans, coffee, sugar and iron ore.

At current metal prices, Rio Tinto PLC, BHP Group Ltd. , Anglo American PLC and Glencore PLC could this year generate a combined $140 billion in earnings before interest, taxes, depreciation and amortization, according to Royal Bank of Canada. 

That compares with $44 billion in 2015, when metals prices were at or near lows.

However, in Russia, a commodity exporter, surging commodity prices also are driving up inflation. 

While Russia’s international reserves hit $600.9 billion in May, the highest ever, its central bank increased its benchmark interest rate by 0.5 percentage point to 5% in April. 

It said it would consider further increases, citing “pro-inflationary risks generated by price movements in global commodity markets.”

“We think that the inflation pressure in Russia is not transitory, not temporary,” Russia’s central-bank governor Elvira Nabiullina told CNBC in a recent interview.

In China, factory owners have increased prices or been forced to halt operations to offset losses from higher raw material costs.

At Hong Miao Toy, which produces dinosaur and educational toys in the city of Chenghai, founder Matt Lin says the company’s profit margins have fallen 30% this year.

“I haven’t seen any raw material whose cost hasn’t gone up this year,” Mr. Lin said. 

“I don’t think we will ever return to the time before Covid.” 

He expects plastics costs to go higher as crude oil rises.

Nicolas Peter, chief financial officer of BMW AG , said in May that it expects an impact of 500 million euros, equivalent to about $608 million, from prices for raw materials. 

Increased steel prices have added about $515 to the cost of an average U.S. light vehicle, according to Calum MacRae, an auto analyst at GlobalData.

BSA Machine Tools, which makes lathes and other machines used in manufacturing, has been pushing back as suppliers of steel, aluminum and other components try to increase prices. 

“Otherwise, inflation is going to rise,” said Steve Brittan, an adviser to the Birmingham, England-based company and its former managing director.

But in January, the company raised its own prices by around 5% to 6% to reflect extra costs. 

“We have no choice,” he said.


—Stella Yifan Xie and David Harrison contributed to this article.

Buttonwood

The bull case for beaten-up Britain

The immediate outlook is rosy; structural problems might even be fixed



One of the vices of Britons is a penchant for mourning the country’s decline. 

To be cured of this, Britain would probably need a different history. 

It was the first industrial nation. 

From that starting-point, its influence could only ever go in one direction: downwards. 

There is a large literature blaming long-term decline on sloth, complacency and amateurism. 

Brexit is just another opportunity to lament lost relevance.

This sense of decline is felt keenly in capital markets. 

Sterling was once the global currency but it now accounts for less than 5% of foreign-exchange reserves. 

Britain’s money markets used to stand out in Europe for their high interest rates; but no longer. 

And Britain’s stockmarket is a shadow of its former self. 

Big ipos are as rare as rocking-horse dung. 

This scarcity along with years of share underperformance has seen Britain’s share of global market capitalisation shrink markedly (see chart).

So accepted has the narrative of decline become, that it is probably time to bet the other way. 

The economy is poised for a sharp recovery. 

London’s bourse is stuffed with the shares of companies—miners, banks and energy firms—that ought to do well in an environment of rising inflation. 

And though fixing the structural deficiencies of Britain’s capital markets is a big task, it is not impossible.



On cyclical grounds, there is a strong case for Britain. 

The immediate outlook for the economy is rosier than almost anywhere. 

That in part reflects the ground lost to covid-19. 

The Bank of England reckons that, even after a surge in activity this quarter, gdp will still be around 5% below its pre-pandemic level. 

But it is also because the vaccine roll-out has been impressively quick. 

There is a sense, too, that uncertainty is diminishing. 

Brexit is done. 

The world has kept turning. 

And politics is more stable. 

Even if a fight over Scottish, and possibly Northern Irish, independence still looms, the ruling Conservatives enjoy a handsome majority in parliament.

The ftse All-Share index is heavy with the kind of cyclical stocks that have been in favour recently. 

But, lamentably, it is light on the digital champions of tomorrow. 

This is not for lack of innovation. 

Britain is rather good at fostering startups. 

There are various tax breaks to help fledgling companies raise seed capital. 

Universities have grasped that business spin-offs are to be encouraged, says Anne Glover of Amadeus Capital Partners, a venture-capital firm. 

Britain has four in the top ranks: Oxford, Cambridge, Imperial College and University College, London.

The country still attracts more venture capital than any other in Europe. 

London is an asset in this regard. 

If your ambition is to build a globally relevant technology company, it helps to start it in a global city. 

Berlin is cool and cheap, but lacks a world-class university. 

Paris is pretty, but French labour laws are a pain. 

London can be an easier place for the footloose entrepreneur to settle—though a lot rests on how post-Brexit visa schemes work.

Where Britain has fallen down is in turning fledgling companies into listed world-beaters. 

Promising startups reach a certain stage of maturity only to hit a brick wall in terms of funding. 

They are still too small to be listed, so need private funds to grow. 

But by and large the bigger cheques are written by American venture-capital firms. 

Once the board is packed with Americans, it is natural for them to seek an American exit from their investment—either a sale to a bigger company or a listing on the Nasdaq. 

Many British entrepreneurs are resigned to selling to a foreign buyer.

A recent government-backed review, led by Ron Kalifa, a fintech entrepreneur, proposes a series of reforms to encourage British listings. 

They include changing London’s listing rules to allow for dual classes of shares and smaller free-floats of stock—terms that are offered by New York and Hong Kong. 

There is also a proposal for a specialist growth-capital fund for pre-ipo businesses, backed by British asset managers. 

The goal is to turn a vicious cycle into a virtuous one, says Ms Glover. 

The more tech firms list in Britain, the more local analysts and asset managers will take an interest in them, encouraging further listings.

When Britain says it is “open for business”, it is taken to mean that its most promising firms are available to be gobbled up by foreign bidders. 

If there were local alternatives to such deals, its public markets might begin to look more attractive. Decline might even be reversed. 

In any event, though, the gloom has gone far enough. 

The case against sterling assets is oversold.

The EU Is Still Flying Blind

Given strong public support for the Conference on the Future of Europe, failure to make at least some strides toward developing a shared European vision would amount to a major missed opportunity. Worse, it would discourage those who, for better or for worse, have allowed their expectations to be raised.

Ana Palacio



MADRID – The much-anticipated Conference on the Future of Europe has begun. 

Announced by the European Commission and the European Parliament at the end of 2019, the conference is billed as “a citizen-led series of debates and discussions that will enable people from across Europe to share their ideas and help shape our common future.” 

It is unlikely to deliver.

The prevailing consensus among Israelis that Palestinian nationalism had been defeated – and thus that a political solution to the conflict was no longer necessary – lies in tatters. 

And even as the violence escalates, it has become clear to both sides that the era of glorious wars and victories is over.

I would like nothing more than for the conference to produce a shared vision of Europe’s future, strengthening the European Union’s foundations and dampening the siren song of populism. 

But consider this: the conference was nearly canceled before it began, owing to organizational challenges, many arising from institutional wrangling. 

How can the EU be expected to articulate a shared vision, shaped by the voices of its people, if it can barely even introduce a platform for discussion?

Ultimately, European institutions completed their negotiations – after sparring over everything from the conference president’s institutional affiliation to the entity that would channel the discussion into final proposals – and the event was salvaged. 

Yet, watching the proceedings so far, one would hardly know that its purpose is to restore the democratic bond between the EU and its citizens.

This is partly a matter of politics. 

From the start, it was an open secret that the conference was timed according to the French and German electoral cycles. 

Its conclusion was intended to coincide with French President Emmanuel Macron’s re-election bid in April 2022 and France’s assumption of the European Council presidency.

And, in fact, it was Macron who kicked off the event. 

In an introductory speech lasting 20 minutes – double his allotted time – he energetically praised the “European model” of tackling the COVID-19 pandemic and pushed the European Parliament’s plenary sessions to return to Strasbourg. It was not quite the rallying cry for citizen engagement one might have expected.

Likewise, the composition of the plenary does not enhance the credibility of the conference’s democracy-enhancing mission: of 433 members, only 108 are citizen representatives (tasked with speaking on behalf of the European and national citizens’ panels). 

And there are just eight representatives of trade unions, employers, and civil-society organizations.

To be sure, the rest of the plenary is hardly undemocratic. 

The group includes 108 representatives from the European Parliament, 54 from the Council (two per member state), and three from the European Commission, as well as 108 representatives from national parliaments.

But the ratio of political leaders to citizen representatives is not at all what one would expect to see at a conference that is supposed to be dedicated, first and foremost, to direct citizen engagement. 

The risk now is that the conference will be overtaken by a proxy battle among EU institutions: the European Parliament hopes to launch the right of legislative initiative, and the Council seeks to rein in expectations.

Even if that does not happen, those who hope the conference will pave the way for EU reform – much like the Schuman Declaration did in 1950 – will probably be disappointed. 

The cold reality is that the powers that be (EU member states) lack the political will needed to make meaningful change possible. And we can forget about treaty changes.

Admittedly, the EU has demonstrated that it is capable of getting its act together and devising creative reforms that do not require amending its founding treaties. 

But such events are rare, and they have always occurred at the eleventh hour, after a long, grim look into the abyss, such as during the sovereign-debt and migration crises of the past decade. 

Reactive, delayed, and piecemeal solutions can stave off disaster, but they cannot form the basis for a united and credible EU.

The conference is unlikely to produce the vision Europe needs. 

Yes, the EU will publish a list of admirable – and predictable – objectives, covering everything from climate change and innovation to inclusive growth. And the internal market remains as important as ever.

But this is not the same as establishing a genuine and concrete understanding of what citizens want their future as Europeans to look like. 

This is a prerequisite to loosening populism’s grip and restoring key aspects of the social contract.

Of course, Europe will never be a homogenous entity, and perspectives will vary. The migration crisis appears very different from Italian and Greek shores than it does from the polders of the Netherlands. 

An aggressive maneuver by Russia will not strike fear in the hearts of Spaniards as it does to Estonians, Latvians, and Lithuanians.

But this does not preclude a broadly shared vision. 

And, given strong public support for the conference, failure to make at least some strides toward developing one would amount to a major missed opportunity. 

Worse, it would discourage those who, for better or for worse, have allowed their expectations to be raised. 

That is certainly not in the EU’s interests.


Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University.