Proposals by Pedro Castillo, candidate in Peru

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

In the novel "Conversation in the Cathedral", Mario Vargas Llosa puts in the mouth of its protagonist, Zavalita, the question "At what precise moment did Peru get screwed up?"

Sometime later, trying to find an answer to the same question, the author will say that there was no specific moment in which Peru was "screwed up", but there were several moments throughout its history.

If the polls of the second round of elections are reliable, now we will have a more precise answer: on June 6, 2021.

Pedro Castillo, the candidate leading the polls so far, belongs to the "Peru Libre" party. According to Vladimir Cerrón, the founder and leader of the party, it is a “Marxist, Leninist and Mariateguista” organization.

José Carlos Mariátegui was a Peruvian writer, politician and philosopher, founder of the Socialist Party, which would later become the Peruvian Communist Party. He advocated an Indo-American socialism, with a prominent role for indigenous peasants. In Ecuador, Dimitri Madrid and Leonidas Iza are leaders of a “mariateguista” movement.

The Pedro Castillo Program was drafted by Vladimir Cerrón, and it is of unusual radicalism for a party that seeks to win democratic and multi-party elections. Remember that even Fidel Castro, Hugo Chávez and Rafael Correa at the beginning said that they were not Marxists, nor did they have any intention of expropriating private property; instead, they claimed to be Christians and humanists.

On the other hand, the Government Program of Perú Libre (available on the website of the National Elections Jury of Peru, https://bit.ly/3vp3fUC) begins chapter 1 by stating “we recognize ourselves as Marxists, Leninists, Mariateguists”. It mentions Lenin (Vladimir, not Moreno), Fidel Castro, Evo Morales and Rafael Correa more than twenty times.

One of the occasions on which the document quotes them is to talk about freedom of expression, or, better said, to point out that they consider it necessary to restrict said freedom: it indicates that a "law regulating communication" must be passed to achieve "freedom from enrichment, blackmail, defamation, slander and above all lies ”(p. 28 of the PDF). It is curious that, in these attacks on the independent press, the communists are confused with the fascists (Hitler spoke of the lying press, while Trump spoke of the lying media and fake news).

The plan mentions the phrase "nationalize" 35 times, which is a euphemism for expropriating, that is, taking away the property from its owners. It talks about creating a "nationalizing state" and a "socialist state." It affirms that, if a “negotiation” is not accepted to impose onerous terms, “the Peruvian State must proceed with the nationalization of the deposit in question in the mining, gas, oil, hydro-energy, and communication sectors, among others” (p. 16).

It proposes changing the curriculum to form citizens "with national identity, supportive, dignified, autonomous and revolutionary." It would increase spending on education and health to 20% of GDP (the current total budget, for all categories of expense, stands at 21.3% of GDP). Despite this proposal to triple public spending, it proposes that 70% of the tax collection remain with local governments.

It points out that the "Catholic Church" is the "political, media and propaganda ally" of the sectors of power. The document adds that "the Concordat with the Holy See, a framework on which the Catholic Church is exempt from taxes, must be abolished" (p. 60).

It affirms that “The socialist state must… strengthen agriculture to achieve security in the face of an imminent foreign food blockade after declaring the character of the State” (that is, they anticipate that Peru will face a blockade from abroad after declaring itself a socialist State).

It mentions the revision or cancellation of Free Trade Agreements, specifically mentioning the Pacific Alliance and the Trans-Pacific Partnership Agreement (TPP) (p. 64). It also rejects the CONVEMAR.

It sharply criticizes the NGOs, stating that they are "thousands of mercenaries [who] have organized these institutions in order to control, manipulate, etc., the masses and orchestrate thousands of counterrevolutionary apparatuses." It seems they want to ban them.

Then on p. 72, gives the impression that they want to declare war on the United States: "it forces us to prepare socially, politically and militarily against the imperial decadence that is not willing to die without resistance."

Following the Chavista practice, it calls for a Constituent Assembly, which would draft a new “nationalizing” Constitution, to shape a “new economic regime”.

Curiously, in the only aspects in which the program has liberal aspects (decriminalization of abortion, women's rights), Pedro Castillo has declared that he is against abortion, gay marriage, gender equality, euthanasia or the legalization of marijuana.

Apart from the government program, there are links between Castillo and Peru Libre with MOVADEF, the political arm of Sendero Luminoso. Congressmen elected by Peru Libre were imprisoned for being members of Sendero (including Guillermo Bermejo and Alfredo Pariona). Castillo himself was supported by MOVADEF to reach the leadership of his faction of the teachers' union, CONARE-SUTEP.

According to testimony presented to the Truth Commission, Vladimir Cerrón's father "Professor Jaime Cerrón Palomino played the role of ideologist for the PCP-Shining Path organization within the University of the Center." The government plan of "Peru Libre" concludes with two pages of quotes (of Marxist content) from Cerrón's father.

(*) Note:  this is the personal opinion of the author and does not reflect the views of any institution or entity. English translation of a column published on May 7, 2021 in Diario “El Universo” of Ecuador.  

https://www.eluniverso.com/opinion/columnistas/propuestas-de-pedro-castillo-nota/

Elections in Ecuador: Two opposite options

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

On Sunday, April 11, Ecuador will go to the polls to choose between Andrés Arauz, candidate of Correísmo; and Guillermo Lasso, candidate of the CREO-PSC alliance (with the support of other political forces).

These are two diametrically opposed alternatives, in almost all aspects.

While Arauz said in his proposal on "good de-dollarization" that he will raise the Tax on Currency Outflow (ISD) to 27%, and that the Central Bank would grant a "fixed quota" for importers (creating a market distortion, as he himself recognized in his 2009 Master's Thesis); Lasso proposes to eliminate the ISD. Apart from this exchange control (unique in a dollarized economy), Arauz would probably increase tariffs or collect safeguards on imports again.

The correista bloc in the Assembly also proposed to deliver a “universal basic income” in “electronic currency”; candidate Arauz later rejected that proposal and said, instead, that a $ 1,000 bond would be delivered to 1 million families by taking resources from the reserve of the Central Bank of Ecuador. It should be mentioned that these correspond to the reserve of private bank deposits held in the Central Bank; that is, ultimately, it is the depositors' money. Currently, the international reserve does not cover all commercial bank deposits, which is why there is a gap of nearly $ 7 billion between the assets and liabilities of the Central Bank (the Moreno government began to reduce this gap inherited from Correa, but with the pandemic it has increased again).

In more general terms, Lasso's proposal focuses on the generation of productive employment, and he even proposed increasing the monthly minimum wage to $ 500 (from the current $400); while Arauz focuses on the delivery of cash transfers, even at the risk of further reducing the net international reserve, and therefore putting dollarization at risk.

Arauz's pre-announcement that he will increase the ISD to 27% could possibly lead to an outflow of currency in anticipation of this measure.

Lasso has proposed to lower five taxes, while Arauz proposes to increase the income tax and create a wealth tax. Arauz would bet on strengthening a State-centered model, including increasing public spending; while Lasso would seek to strengthen the private sector.

Lasso proposes reducing income tax for companies that create at least 10 jobs.

While Lasso has said that he would strengthen dollarization, Arauz talks about the emission of "electronic currency" and using the resources of the international reserve. By refusing to lower public spending and investment, Arauz will maintain a high deficit and continue with the aggressive public indebtedness process that began in 2014 under Correa; it is likely that his fiscal policy, his proposal to raise the ISD, the potential use of the BCE reserves and the issuance of electronic money would lead to Arauz not receiving the outstanding disbursements from the IMF for $ 2.5 billion. Lasso has said that he would seek to reduce the deficit.

On issues that interest the young and progressive voters of Hervas and Yaku Pérez, such as mining, oil exploitation and the protection of water sources, Lasso's position is closer to the voters of Pérez and Hervas than the practice of Correísmo, which expanded oil and mining extraction, even in places of great biodiversity and environmental vulnerability such as the Yasuní National Park (manipulating the Electoral body under its control for the purpose of thwarting a plebiscite against oil exploration in the Yasuni). Lasso proposes to maximize environmental prevention in mining and oil production, including prior consultation of affected communities.

This extreme extractivism during the Correa decade even led to the murder of several indigenous activists who were opposed to the oil and mineral exploitation, such as Bosco Wisuma, Freddy Taish, José Tendentza, three of the 35 unsolved murders of the Correa government (others include 15 journalists and people who denounced corruption , such as General Jorge Gabela, Quinto Pazmiño and his wife, journalist Fausto Valdivieso, among others).

Correísmo also faces accusations and sentences of corruption, including Rafael Correa, Jorge Glas, ministers Carlos Pareja Yanuzelli, María de los Ángeles Duarte, Ricardo Patiño, Walter Solís, Vinicio Alvarado, Fernando Alvarado, Alecksey Mosquera, María Duarte, Raúl Carrión , Ramiro González and Viviana Bonilla, the Legal Secretary Alexis Mera, the Comptroller Carlos Polit, the assembly members Cristian Viteri and Esperanza Galván, the president of the Central Bank Pedro Delgado, the directors of the IESS María Sol Larrea and Iván Espinel (as well as former IESS President Ramiro González), the director of Petroecuador, Álex Bravo, the Secretary of Intelligence, Pablo Romero, the Secretary of Communication Carlos Ochoa, and the Presidential advisor Pamela Martínez, among others. Of these, 8 were imprisoned, and the rest are at large. It is estimated that the amount of resources lost to corruption reached $ 35 billion.

Arauz has mentioned that he will seek to have the sentences against Correa and other members of his government annulled.

Lasso has never been criminally charged, and, despite the fact that the Correa government investigated his alleged participation in the banking crisis of 1999, he was never accused. Eduardo Valencia, who led the investigation, found presumptions of guilt of Juan Falconí Puig and Pedro Delgado in the embezzlement of the CFN that occurred in 1999-2000, but they were never charged or separated from their positions in the Correa government; Delgado fled to his “son's wedding” in Miami in 2012 and never returned.

Arauz affirms that virtual platforms are natural monopolies, and that is why they must be considered public utility goods, as happened when they turned the right to communication into a public service. This proposal would be aimed at controlling virtual platforms and their users.

The two government plans could be strengthened in terms of environmental issues, sexual and reproductive rights, identity issues, the prevention of animal abuse, and gender and diversity approaches, among other topics of interests of the Millennial and Gen Z voters.

(*) This is a translated and expanded version of the column published in Diario “El Universo” on March 5^th, 2021.

https://www.eluniverso.com/opinion/columnistas/dos-opciones-opuestas-nota/

The image shows the original version of the article by Andrés Arauz on "good dedollarization".

Ecuador: Agreement with the IMF and the presidential candidates

By Luis Fierro Carrión

Twitter: @Luis_Fierro_Eco

On Sunday, February 7, the first round of the elections will take place in Ecuador.

Whoever assumes the Presidency will have to decide whether to continue the Agreement with the IMF (and therefore receive the outstanding disbursements of $ 2.5 billion), suspend it, or to try to renegotiate it.

Although the first two disbursements made in 2020, for $ 4,000 million, did not have significant conditionality (it required an increase in the coverage of the human development bond to 250,000 additional families, as well as to approve reforms to anti-corruption laws); disbursements for the new government will imply a significant fiscal adjustment of 5% of GDP.

The program seeks an increase in tax revenue of 2.5% of GDP (about $ 2.5 billion), along with a reduction in spending of a similar magnitude. With this, it would be expected to reduce the deficit of the non-financial public sector from $ 7.3 billion in 2020 to $ 2.9 billion in 2021.

A 3% value-added tax (VAT) increase is suggested; as well as an increase in personal income tax (PIT) of 5% for income above $ 27,000 per year (and 3% for income below $ 27,000).

The IMF Report (Staff Report) published on December 23 mentions that the three main candidates (Lasso, Arauz and Pérez) have indicated that they might push for fiscal reforms, but it is not clear if any of them have committed to increase VAT or the income tax. The IMF held meetings with Guillermo Lasso, Andrés Arauz and César Montúfar (Yaku Pérez did not agree to meet).

Lasso has said that he will cut taxes, despite a deficit of 7% of GDP; Arauz and Pérez have indicated that they will seek to renegotiate the Agreement, while Arauz has specifically said that he plans to increase current public spending and investment, which would be contrary to the required fiscal adjustment. It would be unlikely that under these circumstances the new disbursement of the Fund would take place, which would worsen the financial gap of 7.7% of GDP expected for 2021. Arauz has also mentioned that he would propose an annual wealth tax of 2%.

The candidate who appears fourth in the average of polls, César Montúfar, has said that he would not approve an increase or a reduction in the Value Added Tax (VAT), but that, if he would be in favor of increasing the progressivity of the income tax, and likewise reduce the exemptions from said tax. He has also proposed a 1% wealth tax for net assets over $ 400,000 (excluding primary residence).

Regarding spending reduction, Lasso mentions the “reduction in the size of the State”. Larger cuts both in personnel costs and investment would be complicated, since they have already been greatly reduced. Public investment has decreased from 8% of GDP in 2018 to 6.1% of GDP in 2020, and a further reduction to 5.4% of GDP is anticipated in 2021. This includes investment in the oil sector, of about 1.5% of GDP, which is required to maintain the current oil production levels.

Public sector salary spending has dropped from $ 10.3 billion in 2018 to $ 9.6 billion in 2020, and is expected to remain at levels close to $ 9.6 billion in 2021-23. Some 50,000 public employees have already been dismissed.

According to Table 6 of the Staff Report, the net effect of the increase in the number of families that receive the cash transfer and the increases in VAT and IR rates would be to increase income in the first 3 deciles, maintain similar income in deciles 4-7 , and reducing incomes in deciles 8-10 (and a reduction of the Gini coefficient, an indicator of inequality, to pre-pandemic levels).

The IMF report estimates that one and a half million people fell below the poverty line due to the pandemic (and that the poor have increased from 30 to 38% of the population).

The Fund recommends continuing efforts to facilitate job creation (allowing more flexibility in working hours, part-time hiring, etc.).

The IMF also suggests continuing the reduction of diesel and gasoline subsidies initiated by Correa and Moreno. The gasoline subsidy would be practically eliminated, and the diesel subsidy would drop from $ 965 million in 2019 to $ 739 million in 2021.

With these efforts, total public debt could fall from 66% of GDP in 2020 to 56.6% in 2025 (without crossing the critical threshold of 70% of GDP).

Another commitment is to increase the independence and autonomy of the Central Bank, and to prevent financing from the ECB to the government (Arauz has announced contrary policies).

Arauz plans to increase the so-called "foreign currency outflow tax" to 27%, which will actually prevent the entry of investment resources. He proposes a "creative monetary policy" to create "electronic money" without any endorsement. These policies also would be contrary to IMF recommendations.

Ultimately, it is likely that, with Arauz or Pérez, the program with the IMF will be suspended, which would lead to an increase in “country risk”, an increase in the interest rate to which Ecuador would have access in international markets. .

The bond restructuring opened a four-year window of lower principal payments (apart from the principal reduction in 2020). The risk would be that a new government begins to borrow again (via bonds or bilateral loans from China), which would put the sustainability of the debt at risk. Similarly, if the program with the IMF is not maintained, the remaining $ 2.5 billion will not be received, which could aggravate arrears in payments to suppliers, salaries, etc.).

Source:  IMF Staff Report published on December 23, 2020.

https://www.imf.org/en/Publications/CR/Issues/2020/12/23/Ecuador-First-Review-Under-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-and-49980

New Year, New Life?

By Luis Fierro Carrión (*)

Twitter: @Luis_Fierro_Eco

In my first column in Diario "El Universo", published last January, I asked if 2020 would be a prosperous year. Obviously, my rather pessimistic forecast fell short in the face of cruel reality, which recalls the phrase of Queen Elizabeth II, "annus horribilis" (horrible year in Latin).

The COVID-19 pandemic (the worst pandemic since 1918-1920) gave way to the worst economic recession since the Great Depression of 1929. Unemployment levels soared worldwide and in Ecuador, reaching a record rate of 13.3% in June (in September it fell to 6.6%).

There were 40 thousand excess deaths in Ecuador until mid-December (0.22% of the population, the second worst rate in the world after Peru), and the health crisis left thousands of people with chronic diseases. Goldman Sachs estimated that Ecuador was third in the world in the level of contagion (33 % of the population), after Peru (39 %) and Mexico (34 %).

After such a distressing year, the last few weeks have brought some hope that 2021 will be better.

Towards the end of the year, medical authorities in the UK, the US and the European Union approved the vaccines for COVID-19 developed by BioNTech/Pfizer and Moderna. The UK also approved the Oxford/AstraZeneca vaccine. Vaccines have also been approved in Russia and China, albeit without a transparent and open regimen regarding their results (trials of the Chinese Sinopharm vaccine in Peru were suspended after some patients experienced severe neurological side effects).

Another ray of light was the election of Joe Biden as president of the United States, who will bring back a foreign and internal policy based on strategies, norms, multilateralism, and, in the case of pandemic control, on science.

A positive side effect of the pandemic was a 7% reduction in greenhouse gas emissions worldwide, mainly due to the reduction in the use of fossil fuels for transportation (vehicles and aircraft). It has been a practical experience of reducing unnecessary travel and allowing work from home for part of the population, which could lead to a more sustained reduction in emissions.

Although the annual climate conference (COP26) was postponed to 2021, a virtual “climate action summit” took place, in which proposals were presented to strengthen climate action plans (Nationally Determined Contributions, or NDCs).

Several Latin American countries presented more ambitious proposals, including Ecuador (which committed to decarbonization by 2050), Costa Rica (ratified its net emissions goal of zero in 2050), Peru (increased its emission reduction goal to 40 % until 2030), among others.

The award of contracts for wind generation projects in Loja and solar energy in El Aromo (a large plot of land that the Correa government flattened at a cost of $ 1,500 million, for a supposed refinery) was also announced. The two projects, with an investment of $ 400 million, will generate 320 megawatts.

The electoral campaign begins, with 16 or 17 presidential candidates (one candidate is still pending qualification). The average of the polls to date puts Guillermo Lasso, Andrés Arauz, Yaku Pérez and César Montúfar in the first four positions; there is likely to be a second round, and it will be settled between two of these four candidates.

These are clear options: one from the right, one from the center, and two from left-wing populism. Both Pachakutik and Correísmo have proposed to give a "universal basic income" to citizens in "electronic currency", which, as I wrote the previous month, would quickly lead to the de-dollarization and collapse of the economy.

There is hope that 2021 will be better than 2020, but it will depend, in the case of Ecuador, on the will of the voters.

(*) Updated translation of a column published in Diario “El Universo” on January 1^st, 2021:

https://www.eluniverso.com/opinion/2021/01/01/nota/9091186/ano-nuevo-vida-nueva