What would be the economic impact of the measures taken by the Pedro Castillo government to stop the crisis?

The five days of truce have passed between the government of Pedro Castillo and the representatives of guilds of carriers and farmers. The cessation of protests in the central part of the country was achieved after controversial agreements such as the increase in the minimum living wage to S/ 1025.00 and the exemption of the Selective Consumption Tax (CSI) on fuels for a specified period of time. In this regard, the economist and professor at the Universidad del Pacífico, Silvana Huanqui, shared her analysis with Infobae Peru.

Are the agreements implemented the solution to the crisis generated by rising prices?

The problem of inflation comes from external sources. The measures will increase the purchasing power of a specific population, but it is important to analyze sustainability. The minimum wage was increased, but we must take into account the increase in productivity, if companies are not being charged the cost of recovering this purchasing power. Let us remember that most people who earn minimum wage in the formal sector are from medium and small companies. If companies fail to bear this increase due to the cost overruns it generates, redundancies would be generated or several workers would go into informality. It is necessary to analyze whether the remedy is worse than the disease itself. The agreements achieved a headline that sounds good, but the effects could be much worse.

Would it be like a very short dose of oxygen?

I'm not even sure that it works like oxygen, it will be for some people who will benefit from recovering purchasing power, but those who bear the cost are companies. Measures such as CSI fuel exemption have to be seen in the long term. Six months from now, this tax will be charged again. The feasibility of this happening in a short time can lead to new social movements. It is a factor in the syndrome of political myopia where we try to get out of step by kicking problems for the future, causing them to be worse. It may not only affect the next government, but this one in a few months.

What could we expect taking into account the background of other governments and their responses to crises?

Temporary measures have often been taken at once. For example, the bond adopted during the pandemic. It was not recommended because it was a very heavy expense for the tax authorities, but in other governments there have always been strong protests and measures have also been taken with high costs. The increase in the minimum wage has increased without meeting the basic criteria and the result is an informality close to 80 per cent. Little or nothing is being done to work towards a formal market. Failure to properly handle dialogue is leading this government to make these kinds of decisions. Problems should be treated with a broader look, otherwise we will end up with a rather tight tax box.

The Russian invasion of Ukraine has been mentioned as one of the causes of the crisis. How true is this statement repeated by the president?

We definitely can't get it off the map. Clearly the increase in fuel prices is due to the conflict. However, not all countries have seen such an increase in social demand. The conflict surprised us when social conflict in Peru was already on the verge of a government that had already shown little efficiency on several issues.

Could you describe the connection between rising prices and the conflict in Ukraine?

Russia is an oil producer and when its borders are closed it ends up not exporting or importing. Oil is no longer coming out, so there is less production worldwide. The price of the oil market is driven by a world price and as there is less supply it rises. This means that we, who are importers of oil, have to buy it at a more expensive price, this being a main input for almost all companies. This increase in inputs is carried over to the final price.

And in the case of food?

There are specific foods such as corn or products such as fertilizers that come from Russia. At the time of generating this global shortage, prices rise because there is less supply. The problem is due to two sources, in some cases because of the products imported by Russia and at the level generalized by oil that ends up affecting the prices of all goods and services. That is why inflation is widespread in all products.

What is it for Pedro Castillo to do to prevent the crisis from continuing to affect his government?

The president has an obligation to make structural changes, he must rethink the vision he has as a government and be more emphatic about where he wants to go. The goals and the route have never been clear and the decisions ended up being bad because of the political influence around it. Government as it stands is not sustainable because the lack of capacity it is reflecting will lead to greater demands and more short-sighted policies that can put pressure on the fiscal cash, which can lead to an economic crisis in the medium term.

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