Peru - Politics, government, and taxation

Peru has been politically unstable since independence was declared in 1821 and formally granted by Spain 3 years later. Since independence Peru has had 109 presidents, 18 percent of whom were democratically elected. The remaining presidents came to power through military coups (24 percent), replaced a sitting president (21 percent), were named by Congress (18 percent), were delegated (16 percent), or formed part of a commission of notables (3 percent).

Political parties have generally been tied to 1 man, representing the traditional caudillo (strongman) model that is present in many Latin American countries. When back-to-back democratic elections are held, a rarity in Peru, the ruling party has never held on to the presidency. The country's oldest party, the American Popular Revolutionary Alliance (APRA), was founded by Victor Raul de la Torre in the 1920s. It continues to have a strong presence, despite decades of political persecution and one disastrous term in power. The party's founder, Haya de la Torre, was exiled for years and never reached the presidency. He received the most votes in the 1962 election, but a military junta stepped in after the election and took power for a year. Haya de la Torre lost by a slim margin in the election held in late 1963.

Those elections were won by Fernando Belaúnde Terry who, with Haya de la Torre, is one of the most important political figures in Peru in the second half of the 20th century. Belaúnde's Popular Action party remains active and at 90 he is still the titular head of the party. Belaúnde was deposed in a left-leaning military coup in 1968 and the generals ruled Peru for 12 years, nationalizing most industries and implementing a sweeping agrarian reform program. When the military returned the country to democracy in 1980, Belaúnde was again elected president.

APRA had its first chance to govern Peru in 1985, when Alán García was elected. At 35, García was Peru's youngest president and came to power with a decidedly left-wing platform. García's populist approach and attempt to re-establish some of the programs of the military regime—he tried to nationalize the banks in 1988— worked for 2 years but began crumbling in 1987. He ended his term in 1990 with 7,600 percent inflation and a bankrupt treasury.

The experience of Popular Action and APRA in the 1980s inspired a wave of independent candidates, personified by Alberto Fujimori. An obscure math professor, Fujimori emerged from obscurity in 1990 to win the presidency. Peruvians were tired of "politics as usual" and gambled on an outsider. With no political experience or party, Fujimori turned to the armed forces and used them to consolidate power. When Congress balked at his plans for sweeping economic reforms and harsh laws to control a growing subversive threat, Fujimori and the military took complete control, closing Congress and the courts in 1992 in what is known as a "self-coup." Fuji-mori received the backing of the population and a year later introduced a new constitution allowing for his reelection. He ran again in 1995 and was overwhelmingly re-elected because he had tamed inflation and his government had arrested the leadership of 2 violent subversive groups.

Although he came to power as an outsider, Fujimori rapidly developed the qualities and policies of Peru's traditional caudillos, concentrating power in the executive and bypassing Congress and the judicial branch whenever necessary.

Unsatisfied with only 2 terms, Fujimori and his allies tinkered with the constitution and decided he could run for a third term in 2000. He ran and won, although the elections were labeled fraudulent by local and international observers. Pressure from opposition parties calling for democracy and evidence of widespread corruption, however, never allowed Fujimori to consolidate his third term. He resigned in November 2000 and fled to Japan, his parents' homeland.

Fujimori's rapid decline set the stage for new elections in April 2001. The elections saw the consolidation of a new party, Peru's Potential, led by Alejandro Toledo. It also marked the return of Alán García—Fujimori forced García into exile in 1992—and APRA. Toledo was elected president of Peru in a close race, narrowly defeating former president García.

The free-market economic policies in place since 1990 will not change in the coming years. The incoming government, which took office in July of 2001, will maintain strict macroeconomic discipline guided by a Fiscal Discipline Law that does not permit the deficit to be higher than 1.5 percent of GDP. The economic situation will be difficult, nevertheless. The Peruvian economy has been in a recession since 1997, partly due to poor fiscal management on the part of the former government and partly because of the Brazilian, Russian, and Asian economic troubles. The collapse of Fujimori's administration also scared off local and foreign investors, with direct foreign investment reaching only US$600 million in 2000, compared to US$2 billion a year earlier.

The incoming government promises to reduce taxes and tariffs as a way of stimulating the economy and ensuring the 6 percent GDP growth economists say is needed to begin lowering poverty rates. Toledo, who has a Ph.D. in economics from Stanford University, is a political centrist, and wants to award small-business loans to farmers, balance the budget, lure foreign investment, and create jobs. Job creation is an especially important priority, considering Peru's current under-and unemployment, and the 300,000 young people joining the labor market each year.

The government's principal source of revenue comes from taxes. Of the US$8.39 billion brought in by the government in 2000, US$7.03 billion came from taxes. The largest chunk comes from value-added taxes , which accounted for US$3.4 billion in revenue in 2000. The second-largest category is income tax , which generated US$1.6 billion. A 15 percent tax is applied to personal income and a 30 percent tax is applied to business income. Other important taxes include the excise on gasoline, liquor, tobacco, and other luxury items, which brought in US$1.1 billion. Peru has the world's third-highest tax on beer, after South Korea and Kenya, accounting for 75 percent of the price of 1 liter. Taxes on imports generated US$704 million and assorted other taxes accounted for US$714 million. Government revenue in 2000 represented 14.1 percent of GDP.