Peru’s test on respect for rule of law


The International Monetary Fund and World Bank representatives that will gather in Lima, Peru this week will likely laud the host country’s economic success over the past 15 years and with good reason. That success, which has made Peru’s economy one of the fastest growing in the region, has been built both on responsible macroeconomic policies and the respect for the rule of law.

Left out of that praise and good feelings about the success of institutions and the law will be a long-standing default that the government of Peru has yet to resolve.

The default stems from the bonds that the then leftist-military government gave to landholders from whom it seized their property from 1969 to 1981 in a land redistribution program. Even the socialist military government at the time, though, wanted to avoid being accused of stealing property, so it issued bonds intended to provide compensation for the expropriated property. Those bonds were never paid in full, however, and the landholders remain uncompensated.

At issue is whether the government will end the longstanding default on these bonds. The method it has proposed of doing so seriously undervalues the current value of the land bonds. It is, to be sure, a complicated calculation since the bonds were issued over four decades ago and since then Peru has undergone hyperinflation, two new currencies and, more recently, an impressive economic boom.

But the Ministry of Economy’s formula for establishing the current value of the bonds contains mathematical errors and is based questionable ways for calculating the Peruvian currency to the dollar and interest rates—resulting in an outcome very much in favor of the government. According to an independent report, the government’s method values the bonds at .50 percent of the bonds’ value compared to using the more generally accepted Consumer Price Index (CPI).

What makes it worse is that Peru’s respected judicial system — much reformed and recovered since the days of the Alberto Fujimori government — has jumped into the fray and has become sullied. In July 2013, the Constitutional Court reaffirmed the government’s obligation to repay the debt but, after executive pressure, endorsed the flawed method proposed by the ministry.

What made the decision suspicious was that it came after President Ollanta Humala warned on the eve of the decision that the “current Constitutional Court should refrain from issuing decisions on sensitive cases” so near the end of its term. Later, an investigative report revealed that the final decision had been re-written to favor the president’s position and had been doctored using White Out (liquid paper) to change a judge’s decision.

At stake is not just the integrity and effectiveness of the judicial system but international opinion on how Peru treats property and legal obligations.

The political pressure and high-court shenanigans can’t help but bring back memories of the dark days of judicial interference and corruption under the Fujimori years.

All this comes as a surprise from what has been one of the region’s best examples of the commitment to rule of law, the market and their economic benefits. Peru has become one of Latin America’s most avid signers of free-trade agreements, including the 12-member Trans-Pacific Partnership that was just signed this week and will link together all the major Pacific Rim countries representing 40 percent of the world economic output.

The lynchpin of those agreements and Peru’s ability to compete with its high-flying fellow members hinges on the respect for property and the rule of law. That’s what makes the Peruvian government and Constitutional Court’s recent decisions and the swirl of influence peddling and corruption more than just a violation of the long-suffering bondholder’s rights but a threat to the country’s ability to attract investment.

Peruvians and, in particular, Peru’s international business class should understand what is at stake here: not just the integrity and effectiveness of the judicial system but international opinion on how the government and the judicial system treats property and legal obligations — including those from the past.

Christopher Sabatini is an adjunct professor at the School for International and Public Affairs at Columbia University and the director of Global Americans and LatinAmericaGoesGlobal.org