Babson Case Number: BAB105 | Length: 29 Pages

Abstract

This note on Peru is intended as a brief introduction to graduate and undergraduate students in the cultural, political, and economic background of Peru from its independence to 2002. It can be used as supporting reading in teaching the case: “Lucchetti,” BAB104 and as material to support a country and national business systems analysis. The note offers a wealth of background economic data on Peru.

In mid-2002, Alejandro Toledo had been president of Peru for just about a year, and things weren’t going well. His popularity was falling and his political capital was dwindling. A major bone of contention was his plan to continue the policy of his predecessor, the charismatic, enigmatic and energetic Alberto Fujimori, to privatize state-owned enterprises (SOEs).

Fujimori held office for ten years and had pursued strong policies, using his Presidential powers to their fullest. He had ended a guerrilla insurgency, reduced the fiscal deficit, and opened Peru’s economy both internally and to global influences. After decades of political instability, democratic institutions seemed to be establishing themselves. Many economic indicators were good - GDP was rising, inflation was very low, and the currency was stable. However, half of Peru’s population still lived in poverty, and Peru still resembled its underdeveloped neighbor Bolivia more than it did prosperous Chile.

The fiscal deficit had begun growing again in the late 1990s. Fujimori had had the benefit of applying SOE sales to the budget, but many transactions had questionable aspects, and transparency was lacking. After he left office suddenly and under suspicious circumstances, privatizations were subjected to much more scrutiny and opposition. With the deficit growing, a delay in expected privatization income would make Toledo’s budget situation worse.