John S. Wolfe

How has Peru changed over the years?

One man who could offer a credible explanation spoke to Arizona State’s Executive MBA class during a visit to ESAN University in Lima.

Pedro Pablo Kuczynski, a former prime minister and economic minister for the nation, has seen it all in his 71 years.

The son of a German émigré, Kuczynski studied in Peru before heading to Oxford University in England. He put his economics background to use with the World Bank in the 1960s, on Wall Street and in Washington in the 1970s, and then as the minister of energy and mines in Peru in the early 1980s. Then it was back to Wall Street and investment banking, along with foundation work, until 2000.

That was the year a professor friend at ESAN, Alejandro Toledo, ran for president of Peru, won, and made Kuczynski his minister of the economy. He held that post and the position of prime minister at different times during Toledo’s six-year term. Since then he has contributed to non-profit work in Peru, lectured and continues to write on national issues.

What is Peru’s biggest challenge?

“Poverty,” he told the class.

Of Peru’s 29 million citizens, one-third live in poverty. It creates a problem like a three-wheeled ice cream cart with one flat tire, he said. “It’s a drag on the others.”

Poverty in the country has never been a secret. From the military coup in 1968 to 1988, Peru was a state-run enterprise. Land was confiscated, industries taken over, promises made. There was no progress.

“Locust years,” Kuczynski said. “Per-capita income fell.”

1990 brought a radical change, with the democratic election of Alberto Fujimori. There was privatization, 300 separate taxes were eliminated and the economy bounced back.

But the administration was corrupt and Fujimori was eventually jailed.

When Toledo was elected, the poverty rate in Peru was 55%.

President Toledo and Mr. Kuczynski reduced import tariffs to boost trade and sought to simply the tax structure, to bring more businesses into the “formal” economy, and away from the black market.

They also cut Peru’s debt, from 55% of GDP to 25-30%. (Kuczynski chided the U.S. government for the spending binge it’s been on since 2008; the country is getting dangerously close to the edge, when the debt equals 100% of GDP. Like it or not, the U.S. has to cut entitlements, increase but simply tax rates, and raise interest rates.)

Kuczynski would like the government, now led by Alan Garcia, to keep its eye on reducing poverty. He believes it starts with education (holding students to higher standards and paying teachers more), encouraging investment and growth, and addressing the country’s infrastructure.

“The water systems don’t work,” he said. “No one pays, there are no bills, and pipes break.”

He wants to see the water system privatized, like the country did with the phone system and electricity.

“(Private managers) oversee things better,” he said. “The (Lima) airport was privatized. Ten years ago it was a slum.”

Kuczynski said formalizing the economy will make a big difference. Without it, people pay in cash and there is no tax revenue.

“We need to give incentives to companies to become formal and play by the rules,” he said. “For employees this will mean social security and pension funds.”

If government stays focused on limited spending and encouraging free enterprise, Peru should grow at 7-8% a year for the next 20 years, he said.

“One, there’s a demographic bonus,” he said. “We have few old people, not too many kids, a rapidly growing workforce, and fewer births.”

“Second, China is our second-biggest market after the U.S., and it is growing.”

The one threat, however, is social unrest.

“Peru is potentially unstable because of poverty,” he said. “It’s not the distribution of wealth. It’s the poor population.”