Peru today and yesterday

Ryan Floyd

March 8, 2013

I took a trip to Peru in September of 2012 to research one of our holdings and dig a bit more deeply into the country's history and culture. I met up with one of my best friends who lived in Cuzco from 2006-2007. He wrote the definitive biography of Hiram Bingham—the American who “rediscovered” Machu Picchu—and now lives in Lima doing research on his dissertation on the history of grave robbing.

Peru has experienced a different trajectory than other Latin American countries. The modern state, and before it the Spanish imperial state, is literally placed on top of the foundations of the Incan Empire. Chris helped show us the elaborate architectural works even beyond the well-known Machu Picchu, giving a helpful insight into the long history of state-hood in Peru. The Incans developed an imperial system throughout the Andes from roughly 1438 until their eventual collapse under the Spanish in 1572. Ethnically the Incans were a small group, but they grew by offering military support, improved food management through massive granaries on the hills of mountains, and preserving and respecting the subjected groups' gods. They were fierce warriors, able to fight with 200,000 foot soldiers. And they were impressive masons.

In many ways, the Spanish built a new religious and political superstructure directly upon the Incan foundation. A visitor can see this in various churches built on Incan temples and modern roads on Incan paths. One can almost think about the change like Christianity being placed upon the Roman Empire. The Spanish brought Western bureaucracy: extensive book-keeping, banking and the use of currency, and Christianity. They were ruthless in their military exploits, burning pre-colonial ancestors and chopping off hands to make a point, resettling entire towns, and employing Andean people in terrible working conditions in the mines. Yet I have been surprised—frankly—to learn how differently the Spanish treated the local population compared to our experience in North America. Intellectuals debated heavily the nature of the souls of Andean people, and that the Spanish king had to give them rights as subjects, a very different discussion than those related to Native Americans and Africans in English North America. Unlike in Argentina and Chile, Peru emerged from independence in 1824 with a large native population that whites used for labor but otherwise mistrusted and denied rights.

Peru has gone through tremendous growing pains the last thirty years. Inflation raged higher than 50% each year from 1980-1992, reaching as high as 7000% in 1990. The government fought an insurgent terrorist group from 1979 until as recently as 1998. Their GDP declined dramatically from 1980 to 1995 during a period when the Maoist group the Shining Path destabilized the country. Journalist Alan Riding described the scene for the New York Times in 1989:

“the country is in shambles. Inflation, running at 40 percent a month, has brought hunger, mass unemployment and a rash of company bankruptcies. Strikes regularly disrupt public services. Cocaine trafficking is flourishing. And in the vast rural and mountain areas of the nation, Maoist Shining Path guerrillas and a small band of pro-Cuban rebels are causing havoc, with little resistance from the armed forces…..The Andean Sierras, long ignored by the white castes that have governed from the coast, are being rocked by violence and insurgency. Lima, once known as the City of Kings, is now ringed by smoldering slums housing hundreds of thousands of Indian and mestizo migrants. On its filthy downtown streets crowded with beggars, peddlers and freelance money-changers, Peru's deepening poverty is crudely on display….The poor wander disconsolately through markets, trying to stretch their pocketbooks. The middle classes line up to acquire passports and dream of starting a new life abroad. The rich can leave when they want to, but prefer to hold onto known comforts. Leftist intellectuals worry about a rightist coup and, above all, about the growing activities of a rightwing terror group known as the Rodrigo Franco Command, which has claimed credit for a number of recent bombings, murders and death threats. Wealthy conservatives surround themselves with bodyguards and watch out for the approaching revolution; and politicians of all colors squabble among themselves over the dwindling pickings of power."

It was something close to the worst of times in Peru in the 1980s and 1990s. But politics over the last thirty years is more complicated than just “us versus them.” The Shining Path tried to cloak itself in Andean culture but ultimately antagonized the poorer parts of the country. They made socialism and communism extremely unappealing by combining that language with that of war and destruction. On the opposite end, the country isn’t exactly in love with strong military power either. Government authorities were responsible for almost as many deaths in the countryside as the Shining Path! Peruvians now appear skeptical when a politician speaks the language of social utopia of any stripe.

In response to this social and economic collapse, the government waged a ruthless war against the Shining Path, eventually destroying its nerve center. They created a new currency and permitted people to maintain accounts in soles or dollars. They allowed free current and capital accounts. And, most encouragingly, the country has deepened its institutional base. Often a country moving towards a representative government may revert to a previous authoritarian state, but each time it lurches ahead, often with higher levels of per capita GDP, its chances of maintaining democratic government increases. The country flirted with representative government between 1956-1967, 1981-1991, and finally in a better and what appears to be a deeper form since 2002.

A lot of this discussion has centered on Lima, but Peru's real growth story stems from the second and third tier cities. I spent about a week going through Cuzco, Ollantaytambo, Chinhero, and smaller cities and towns in the Andes, driven mostly by tourism and some small textile production. The bigger-picture change in Peru stems from growth in the "regions," areas outside of Lima. The imperial capital is losing its importance in the national economy, and this is a good thing. Cities in the north like Trujillo and Chiclayo in the South are growing a solid one percent faster than the economy in Lima. Almost each company I met described a similar dynamic. Some mentioned the economic results of mining in rural areas seeping into second-tier cities. Others said that the level of income in the country has reached a certain threshold now where companies are justified investing in plants and factories in cities other than Lima to take advantage of the rising incomes. People don't have to travel all the way to Lima to buy basic goods—clothing, televisions, banking services. And the trend perpetuates itself. The retailer opens up a new distribution hub to feed their new outlets. Consumer goods companies in turn recognize the new route to market and create a new manufacturing center in the area. Banks increase their branch network and provide credit the community. I have seen a similar trend in Indonesia and India.

One banker told me that almost all trade and investment occurred with the United States and Europe over the last one hundred years, yet trade now is increasingly between Latin American countries. Instead of raising money by listing in New York, Latin American companies go on road shows to mutual funds and pension funds in Colombia, Peru, and Chile. Consumer goods companies are acquiring small brands elsewhere in Latin America. And now foreign talent is becoming attracted to Peru for fast-growing jobs. I met many CFOs born outside of Peru attracted by the opportunities. All of this good news has brought increased interest from foreign investors. Private equity funds, like Carlisle, have decided to make Peru their third Latin American hub after Mexico and Brazil. With such terrible growth in the United States and Europe, Western firms have been pressed to find growth wherever they can find it. A logistics business told me that they used to be able to earn 15% returns on new investments, but recently they have had to accept either lower returns or walk away from projects because of much higher competition. American firms are so desperate for growth they are willing to bid up the price to levels that don't justify the risk. I heard many times that multiples for private transactions are the highest for the last ten years, a theme echoed in Vietnam and Nigeria.

I was encouraged by signs of active life in Lima. Though the population is 7.6 million, and allegedly its pollution is the worst among Latin American capitals, I saw many people jogging along breezy sidewalks and along the ocean. I noticed people walking dogs throughout Lima, though admittedly mostly in the higher end areas and not in the Andes. The trend is to dress one's dog in a jacket even though it rains only five inches a year, one seventh of the level of New York City. I liked the encouraging signs of civic life: dozens of soccer fields, plus a charming Peruvian tradition called an emoliente. A person behind a stand mixes citrus juice, spics, warm water, and aloe to produce a yummy warm, thick beverage akin to a mixture of herbal teas. Often a group of five or six people sit stand around the stand, almost huddled together to keep warm with their Peruvian sweaters and scarves, enjoying the beverage together.

Though I generally don't like watching television, I am encouraged by the growth of the industry in Peru. I had expected tremendous competition from imported Spanish content against our local TV company, but Peruvians prefer watching dramas with their own cities in the backgrounds and local story-lines. Admittedly, Peruvian television this isn’t high brow stuff. The most popular show in Peru is called “This is War” and pits teams of near-naked men and women against one another in battles involving lots of Jello and licking. Still, this is content from Peru and not Mexico or Chile. I didn't realize—though I should have known—that Peruvians didn't want to watch television from other Spanish-speaking countries with funny accents.

In a way, the TV is acting as a nation-building device, creating a common language for people from the Andes to urban areas. In one telenovela, the main character is a young married woman. She had been born to an Andean woman and a light-skinned urban Peruvian man. The woman couldn't afford to keep her, so had to give her up for adoption. Now with the brighter Peruvian economy, the young daughter enjoys a smart job, snappy gadgets, and marriage to a wealthy man. In the twist of the story, she has unknowingly hired her mother as her maid. The mother—perhaps a stand-in for Peru's conscience—notices the daughter's materialism, break with the past, and crass behavior. The show is a tremendous hit, as Peruvians watch how the character tries to navigate new economic demands while staying true to its Andean history. On the theme of a new sense of nationhood, I had dinner and some Pisco Sours with a professor of Peruvian history who spoke of a new kind of feeling in the country. Twenty years ago, the upper classes listened to European music but found salsa or merengue vulgar. Now they embrace the local and Latin American flavors of dancing and music. He noticed that Andean styles have become fashionable, that the lighter skinned direct descendants of the Spanish are trying to seem more Peruvian and less European than ever before.

Peru is a magical country where one feels history living and breathing alongside oneself in business meetings and even conversations. I got the sense that the country really is figuring out a way to work out age-old challenges. The country itself is becoming trendy also. I walked by a van transporting tourists for a "Lima Gastronominal Tour." It seems every American city has a restaurant serving "Ceviche Peruana," including one in Durant, Oklahoma. From 1.1 million tourists in 2002, the country received 2.5 million foreign visitors in 2011.