People’s Capitalism Makes Headway in Peru

Popular capitalism is catching on in Peru. In November 1994 a government-sponsored program
specifically designed to involve low-income citizens in the privatization process held its first auction of shares in privatized government enterprises. With almost 50% of the nation’s population below the poverty line and 75% of the economically active population underemployed, many worried that low-income citizens would not participate. Yet 3,000 people bought out the available shares in less than three hours. In the next auction, 6,600 investors bought out all the shares in 45 minutes.

Participants included people from a variety of lower-income walks of life. To quote a street vendor who bought shares: “Believe it or not, now all Peruvians, regardless of whether they are street vendors, housewives or executives, have the opportunity to invest.”

This June, less than two years later, the government is expanding the program with the goal of involving 100,000 to 200,000 lower-income Peruvians in the continuing sale of the public telephone company, Telefonicas del Peru. The program, known as the “citizen participation program,” offers limited quantities of shares on favorable terms. A total of 18,500 people have participated in the three auctions held to date, and the aim is to reach half a million people by 2000.

This is difficult to imagine in a country that less than five years ago was in dire economic straits and was a hotbed of terrorism. As late as 1992 the fanatic Maoist Shining Path guerrillas posed a credible threat to the government. While President Alberto Fujimori had stabilized hyperinflation and re-established macroeconomic order in 1990, a severe post-stabilization recession had caused wide-spread fear of spiraling social tensions.

Still Mr. Fujimori forged ahead with his reform agenda and by 1994, in a dramatic turnaround, Peru achieved the highest economic growth rate in the world (12.9%) and the portion of the population living in poverty fell to 45.8% from 53.6%. The Shining Path movement practically disappeared. Major reforms of the tax and trade regimes had been introduced, and an active privatization program had sold off 51 state-owned enterprises, garnering $3.6 billion. Yet a major criticism of the economic reform program was its failure to spread the benefits of growth to the poor. Most shares in privatized enterprises, for example, were purchased by foreign firms, as few Peruvians could afford them.

In many countries, including Peru, newly developed stock exchanges and capital markets had
given the wealthy a stake in reform early on. But such reforms offer few immediate benefits to the majority, who are more concerned with such issues as social security and basic public services.

In countries where economic reform has proven sustainable, governments have taken active
measures to involve a broader segment of the population – if not the poorest – in the process and benefits of reform. Peru’s popular capitalism program builds on the experiences of other countries that have encouraged wide participation in the privatization process, such as Chile, the Czech Republic and the United Kingdom. Neighboring Bolivia, likewise, is embarking on such an attempt by distributing 50% of privatization proceeds as shares in a newly established private pension scheme.

Peru’s program is run by Copri, a semi-autonomous agency responsible for privatization. It has a small staff of skilled and dedicated technocrats and strong executive backing. It is not running a giveaway scheme. Its objectives are to strengthen local capital markets and to build support for the economic reform program by building a larger base of investors.

To overcome the major obstacles to wide participation, the low income level of the majority and a lack of confidence in private investment, the program selected profitable and low-risk public enterprises and offered shares on very favorable terms. They can be paid for on a three-year installment plan with a 10% down payment and a subsidized 12% annual interest rate. The government launched an active marketing campaign targeting those Peruvians earning less than $500 per month. The investment limits ($1,400 maximum, $200 minimum), and the procedures for obtaining shares (requiring a personal visit to a bank) are designed to discourage large-scale, wealthier investors.

The program has been remarkably successful. Of those that participated, 90% had never bought shares before, and 35% were from provinces outside the capital, where average incomes are lower. Only 3% of participants have sold their shares. And only 2.5% have failed to pay their monthly installments.

Involving the very poorest Peruvians has been the most difficult aspect of the project. While the program has reached those earning between $250 and $500 per month, it has not been able to reach those earning below $250 a month, one-quarter of the population. Currently opinion pollsters for the project are conducting extensive market surveys to determine how to include this group in the process.

Although the June auction of the remaining shares of Telefonicas del Peru, valued at $1.4 billion, will include international investors, the government is ambitiously targeting low-income citizens as potential buyers. Among other changes, the minimum and maximum share amounts will be even smaller than in the pilot schemes, and the time-period for installment payments will be lowered from three years to 18 months. Surveys have found that low-income investors are reluctant to commit to payments too far into the future at a time when income and job security are precarious. A massive public education campaign is planned for the two months prior to the sale. In addition to Telefonica, there are at least 10 other public enterprises, together valued at approximately $3.4 billion, that are slated for possible inclusion in the program in the next few years.

Success of the citizen participation program is particularly important given a recent shaking of public confidence in the reform agenda, due to elevated inflation and slowed growth. While long-term economic prospects remain strong, growth is unlikely to continue at its very high 1994-95 levels, and public expectations must adapt accordingly. Broadening the base of citizens that have tangible stakes in the market process through the citizen participation scheme is a good first step. Other countries, both within and outside the region, could benefit from the example.