The Washington Times / February 2, 1999
By Larry Luxner
Ecuador and Peru -- their fragile economies battered by continuing global financial chaos, the lingering effects of El Nino and low prices for key commodities from bananas to gold -- have decided that the last thing they should spend money on is fighting each other.
To that end, Peruvian President Alberto Fujimori and his Ecuadoran counterpart, Jamil Mahuad, will kick off a two-day summit Thursday in Washington aimed at boosting foreign investment in the two Andean countries.
The meeting, hosted by President Clinton, takes place just over three months after the Oct. 26, 1998, signing of an Ecuadoran-Peruvian peace treaty in Brasilia attended by five Latin American heads of state, the king and queen of Spain and other foreign dignitaries.
That accord hopes to end over 150 years of border hostilities over a remote chunk of Amazon territory. During that time, five wars were fought between Ecuador and Peru. The last skirmish, in early 1995, led to renewed efforts by the four so-called "guarantor nations" -- Argentina, Brazil, Chile and the United States -- to find a definitive and lasting solution to South America's oldest and most contentious border conflict.
The accord signed in October awards Peru ownership of a disputed 78-kilometer stretch of jungle, while giving Ecuador unfettered access to the region through separate navigation and infrastructure agreements.
Peru's ambassador to the United States, Ricardo Luna, says that despite the historical differences, "there really is very little bitterness on either side," and that the agreement will benefit over three million indigenous Ecuadorans and Peruvians living in border areas.
"The conflict has been sealed and finalized with the Brasilia agreements signed in October," said Luna. "What we're now constructing on the basis of that is not just verbal, rhetorical support from both governments but actual, specific projects of integration and cooperation. We're passing from decades of mutual distrust to a peace paradigm."
Luna's Ecuadoran counterpart in Washington, Ivonne Abdel Baki, says peace with Peru is a milestone she thought would never come to pass.
"Ever since I was a child, I was raised with the idea that Peru was our enemy. That's what they always told us in school," said Baki, who presented her credentials to President Clinton last week. "With peace, our economy will completely open up. We'll have even more trade with Peru than we have with Colombia."
The accord contains separate agreements calling for $3 billion of investment in infrastructure projects such as highways, navigation, urban development, rural electrification, telecommunications, reforestation and assistance to indigenous communities on both sides of the once-disputed border. The Inter-American Development Bank and the Andean Development Corp. have each committed $500 million in seed money; the World Bank is likely to follow suit.
Observers say the treaty will lead to a "peace dividend" for both countries in the form of greater bilateral trade flows, bilateral investment, defense spending cuts and lower risk premiums. During their time in Washington, both Fujimori and Mahuad -- who have had no less than a dozen official meetings since Mahuad's inauguration last August -- will outline 35 specific investment projects ranging from industrial free zones to oil pipelines to the building of two new ports on the Pacific.
That's crucial for an impoverished country like Peru, 70% of whose 24 million people live below the poverty line. In 1998, Peru's Gross Domestic Product grew only 1% -- a dramatic drop from the 7.4% growth recorded the year before. In per-capita terms, according to the UN's Economic Commission for Latin America and the Caribbean, Peru's GDP actually fell 0.8% in 1998 from the $2,209 recorded in 1997.
Things are even worse in Ecuador, where 1997 per-capita income was only $1,392 -- making it one of the poorest countries in South America. Although Ecuador's overall GDP rose 1.0% in 1998, it fell 1.0% in per-capita terms, largely as a result of falling oil prices
Duff & Phelps Credit Rating Co. (DCR) predicts that growth in Peru should pick up in 1999, but will probably fall short of official projections for a 5.5% expansion.
"The investment climate isn't growing as fast as we'd like, but that's because of what's happening in Asia," says Jaime Garcia, general manager of the American Chamber of Commerce of Peru. "It's not a reflection of Peruvian policy."
In fact, Peru's political and business leaders admit their country desperately needs investment to improve living standards. Unemployment is officially 8.5%, but Peru's main problem is underemployment, which comprises 42% of the urban labor force.
"Peru is one of the most open economies in all of South America, along with Chile," said Gustavo Caillaux, Peru's new privatization minister and ex-minister of industry and commerce. "In services such as banking, Peru is the most open. I think in some ways the U.S. is more protectionist than we are."
Along those lines, Peru strongly supports efforts towards a Free Trade Area of the Americas by 2005. It also wants to integrate its economy with those of Ecuador and the other three members of the Andean Community -- Bolivia, Colombia and Venezuela -- not to mention the four founding members of the much larger Mercosur trade pact -- Argentina, Brazil, Paraguay and Uruguay.
"Our policy is free commerce," said Caillaux. "We think our market is too small, so necessarily we must depend on exports to be competitive. We are in the middle of negotiations trying to create a bigger free trade area consisting of Mercosur and the Andean Community. We are not going to be an associate member of Mercosur. Instead, it'll be like a joint venture between the two trading blocs."
John Bowler, an analyst with the Economist Intelligence Unit in London, says Ecuador's exports to Peru averaged less than $9 million a year from 1980 to 1987, then jumped to an average of $125 million a year in 1988-94 before falling again to an average $70 million between 1995 and 1997.
"Ecuador therefore has plenty of room to expand its exports to Peru just to return to levels reached in the early 1990s," Bowles concluded. "In light of good long-term growth prospects for the Peruvian economy, Ecuador can reasonably expect to reach and exceed these levels in the medium term. The rights granted to Ecuador under the trade and navigation treaty will assist Ecuadoran producers in finding outlets for their goods."
According to an analysis carried out by Rand Corp., Peru's military budget will fall by 0.5% to 4% annually over the next two years. Peruvian economist Gabriel Ortiz de Zevallos of Instituto Apoyo in Lima calculates that the savings could reach $325 million a year, equivalent to half a percentage point of GDP.
In Ecuador's case, the savings could also be significant, given Mahuad's recent announcement that he won't buy weapons from any foreign nation for the remainder of his term. Baki said that doesn't include a recent $60 million deal to purchase two Israeli Kfir fighter jets and refurbish another eight Kfirs.
Israel Aircraft Industries had sold Ecuador 24 Kfirs in the 1980s, but two were lost in crashes. Ecuador had long wanted to replace the downed jets, but IAI couldn't close the deal without U.S. consent because the airplanes are equipped with General Electric engines. The Pentagon dropped its objection over the deal after Ecuador signed the peace accord with Peru.
While the Amazon border area is impoverished and far from the major population centers of either country, the region is said to be rich in minerals and biological diversity. And with the end of hostilities, a nascent tourist industry could also be developed, with operators offering packages that include jungle birdwatching, Peru's spectacular Machu Picchu ruins and Ecuador's Galapagos Islands all in one trip.
If peace really brings prosperity, it could help Mahuad calm critics at home -- who say his pro-privatization policies have made life more difficult for Ecuador's 11 million inhabitants while doing nothing to improve the country's oil- and banana-dependent economy.
"Tourism will increase because of the added security, and peace will give an incentive for companies to invest," said Ecuador's Baki. "The president's urgency was to sign a peace treaty with Peru, and now his priority is privatization. I think it's a must. We also have to work on poverty, education and health. If you don't have health to begin with, you'll never get anywhere."