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Luis Carranza, architect of Peru economic boom
February 29, 2008 / 3:43 PM / 10 years ago

Luis Carranza, architect of Peru economic boom

LIMA (Reuters) - Luis Carranza, the architect of Peru’s recent economic success, says he’s willing to court stiff political opposition in his drive to reduce poverty and sweep away cumbersome red tape.

Since becoming finance minister nearly two years ago, Carranza has tussled with groups from across the political spectrum, including exporters, unions, manufacturers, and mining companies. Some have protested by shutting down roads nationwide.

But Carranza, 41, has won nearly every battle, gaining backing for key reforms from President Alan Garcia at a time when mainstream economics are under attack in much of Latin America for allegedly hurting the poor.

“We’ve made some decisions with very high political costs,” Carranza told Reuters in an interview. “But the changes will benefit the population over the long term, so in every case the president has supported me.”

President Garcia, who is working to remake his reputation after his first term in the 1980s ended in economic chaos, has given his finance minister wide latitude to ensure things go right this time around, analysts close to the Peru government said.

“The president has a historic chance to lift the country out of poverty, and my job is to help him out,” Carranza said.

Peru, once considered a derelict emerging market, is expected to win investment grade ratings from credit agencies this year. Its economy grew 9.0 percent last year, one of the fastest rates in the world.

The poverty rate has fallen during six straight years of growth and is projected to sink to 30 percent in 2011 from more than 50 percent a decade earlier.

A former banker at Spanish lender BBVA, Carranza said he spent years investigating what drives economic growth while working for Edward Prescott, his doctoral advisor at the University of Minnesota, who went on to win the Nobel prize.

“Prescott was obsessed at this time with the initial question of Adam Smith -- what generates the wealth of nations and what determines successes or disasters?”

PUTTING CONSUMERS FIRST

Peru’s fiscal and monetary policy were sound long before he took office, Carranza says, so he has tried to lay the groundwork for two more decades of strong growth by focusing on structural reforms, eliminating handouts that a paternalistic state used to shower on lobby groups, and by putting consumers first.

“We cannot defend any sector or the specific needs of any company, our idea here is that the big beneficiary should be the consumer,” he said at his office.

Carranza miffed domestic producers when he slashed tariffs to zero on 70 percent of imports, but consumers were delighted, and it helped curb inflation.

Peru is pursuing free-trade deals with China, Mexico, and Europe after signing one with the United States last year.

He has simplified tax rules, structuring them to reward investments in plants and machinery, and overhauled the budget to steer public spending away from salaries and into infrastructure projects.

Both reforms appear to be paying off. Last year, private and public investments rose some 25 percent each, and domestic demand became the engine of an economy traditionally led by mining exports.

The dynamism helped lift household incomes 15 percent in the provinces last year, where poverty is worst, he said.

Carranza refuses to call himself a pragmatist, technocrat or neoclassical economist, and decries labels.

“I‘m an economist who tries to make things work. Economics is the art of finding the optimal situation, and political economy is the art of figuring out what is feasible,” he said.

America Economia, a magazine, named him the best finance minister in Latin America last year in a poll of his peers.

Though Carranza is known as an austere budget hawk, he has embraced social spending and made it more efficient by putting cash in the hands of people who need it, instead of letting it get soaked up by bureaucracies.

He gives cash to very poor families that keep their kids in school, where they receive free meals. School principals and public hospital directors get small pots of discretionary money to make repairs or buy special supplies.

A WEAKENING LEFT?

In the mining sector, he wants Congress to approve a bill that would give cash transfers to residents of mining towns. It would be financed by an existing mining tax, the receipts of which currently go to local politicians.

“Town folk need to see the benefits of mining developments and unfortunately they don’t see them,” he said. The transfers could diminish opposition to billions of dollars in new mines that small towns fear will pollute the water and air.

This year, Carranza is working to reform labor laws to make them more flexible so that payrolls rise, while workers get pensions and health plans. He is also trying to deepen capital markets to spur long-term growth.

Though left-wing unions and nationalists frequently denounce the government in sometimes violent protests, Carranza says they are losing sway.

President Garcia cannot run for re-election and investors are keen to see a centrist emerge as the front-runner in 2011 presidential elections.

“When they (left-wing groups) see their electoral base evaporating because growth is so potent and reaching so many people, they become very nervous,” Carranza said.

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