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RR RUEHWEB

DE RUEHPE #4698/01 3492257
ZNR UUUUU ZZH
R 152257Z DEC 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 3379
INFO RUEHBO/AMEMBASSY BOGOTA 4178
RUEHBR/AMEMBASSY BRASILIA 7125
RUEHCV/AMEMBASSY CARACAS 0006
RUEHLP/AMEMBASSY LA PAZ DEC QUITO 0882
RUEHSG/AMEMBASSY SANTIAGO 0997
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUMIAAA/CDR USCINCSO MIAMI FL

UNCLAS LIMA 004698 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON OTRA PVIP PHUM PE
SUBJECT: SCENESETTER FOR CODEL REID 
 
¶1.  (SBU) Welcome to Peru.  Your visit comes at a moment when 
the new government led by President Alan Garcia is emerging 
from its honeymoon period and is beginning to feel popular 
pressure for action.  The message from the June presidential 
election -- a contest in which Hugo Chavez protege Ollanta 
Humala won just under 50 percent of the vote, scoring big in 
the highlands, the jungle and among the poor -- was clear: 
after five years of solid economic growth, a significant 
swath of Peru's population still feels excluded from the 
benefits of economic growth, and wants them now. 
 
¶2.  (SBU) From his first day in office, President Garcia has 
shown that he gets the voters' message and is responding.  In 
a high profile government austerity campaign, he has cut the 
salaries and benefits of government officials.  In his 
foreign travels, Garcia has been careful to minimize 
expenditures (even flying economy class to the United States 
for his meeting with President Bush).  He has announced an 
"investment shock" in key sectors like schooling and water 
delivery.  And his administration has proven quick and 
dexterous in responding to social conflicts in the regions. 
 
¶3.  (SBU) Despite these actions, no leader could deliver on 
such extensive needs in such a short time.  Garcia knows that 
the electorate won't wait for long, and his personal 
popularity has dropped from a post-election high of 76 
percent to the low-50s today.  To ensure success over the 
long term, Garcia will need to strike a balance between 
meeting social demands and maintaining macroeconomic 
stability, demonstrating responsiveness to the legitimate 
demands of Peru's poorest citizens while avoiding the lure of 
populism. 
 
----------------------------------- 
An Economy Hitting on All Cylinders 
----------------------------------- 
 
¶4.  (U) While the challenges are significant, Garcia has some 
important cards to play.  Perhaps the most important is 
Peru's booming economy, which Garcia inherited from President 
Toledo.  Peru has enjoyed five years of sustained economic 
expansion -- GDP growth is expected to reach 7 percent for 
2006 and exports have more than tripled over the past five 
years.  Growth has cut the poverty rate from 54 percent in 
2001 to 48 percent today.  Extreme poverty -- those living on 
less than $1 per day -- declined from 24 percent to 18 
percent during the same period. 
 
¶5.  (U) Peru's growth has been private-sector generated, 
export-led, and largely powered by increased trade with the 
United States (thanks to the Andean Trade Preferences 
Act--APTDEA).  The United States is Peru's top export 
destination, absorbing almost a quarter of all the country's 
exports.  From 2001- to 2006, Peru's exports to the U.S. 
tripled to USD 5.4 billion.  Garcia knows the importance of 
the U.S. to Peru's economy and is therefore committed to 
trade liberalization.  He has made obtaining U.S. 
congressional approval of the Peru Trade Promotion Act a top 
priority.  His government also seeks to strengthen its ties 
with neighboring Latin American countries.  For example, Peru 
and Chile expanded their Economic Complementation Agreement 
this year, and Peru is close to completing free trade 
agreements with both Chile and Mexico. 
 
---------------------------- 
Favorable Political Elements 
---------------------------- 
 
¶6.  (SBU) Garcia's second great asset is political skill, 
both his own and that of his team, which has lent Peru a 
stability the country has not enjoyed for several years.  The 
President's Prime Minister, Jorge del Castillo, has proven to 
be an effective "fireman," dousing social conflicts in the 
regions by brokering deals between factions.  Beyond this, 
the President has adeptly balanced popular initiatives with 
budgetary restraint and respect for macroeconomic stability. 
 
¶7.  (SBU) To square sectoral demands for spending with 
macroeconomic stability, Garcia frequently launches proposals 
that sound more populist than they really are.  For example, 
in September Garcia announced that military officers accused 
of human rights violations can get their legal defense funded 
by the state.  Later, the Minister of Defense noted that if 
those same officers are found guilty, they have to reimburse 
the government the cost of that defense.  So far, this 
Two-Step has worked well for the President, enabling him to 
address sectoral demands but avoid budget-busting 
consequences. 
 
¶8. (U) In addition, the President has encountered a more 
cooperative Congress than anticipated.  Though APRA does not 
constitute a majority, the other parties have not hardened 
into opposition.  Rather, congressional coalitions have 
formed on an issue-by-issue basis, enabling the President 
largely to control the agenda. 
 
--------------------- 
How Long a Honeymoon? 
--------------------- 
 
¶9.  (SBU) While Garcia's honeymoon continues, we see 
significant challenges on the horizon.  The President's party 
took a drubbing in recent elections for regional presidencies 
(APRA dropped from controlling 12 to 3 regional governments). 
 A crop of locally-based political leaders took over most 
regional governments, some of them radicals and many with 
little proven administrative experience.  Some analysts 
believe Garcia can work this to his advantage, using an 
ongoing program of decentralization to foist the 
responsibility (and blame) for programs on regional 
governments that ultimately depend on the GOP for most of 
their budgets.  Others maintain that program failures -- 
whether the fault of the GOP or Regional Presidents -- will 
inevitably blow back on the central government. 
 
¶10.  (SBU) Garcia's second concern is the fate of the Peru 
Trade Promotion Act in the U.S. Congress.  When you meet with 
him, the President will express his anxiety over its passage, 
and unease about the likely consequences to his personal 
credibility and the standing of his government if it does 
not.  The agreement is popular in Peru (and has become even 
more so since the Peruvian Congress approved it in June). 
Garcia knows access to the U.S. market has been the key 
element to Peru's recent economic growth.  Uncertainty over 
the Peru Trade Promotion Act's approval could cut the 
economy's growth rate, reduce job-creation (both critical to 
the President's efforts to meet the needs of dissatisfied 
social sectors) and cause Garcia to lose political ground to 
radicals who sympathize with Venezuelan President Hugo 
Chavez. 
 
¶11.  (SBU) Beyond these political hazards, Garcia faces an 
even larger challenge.  The President is an acknowledged 
master of political tactics, but observers doubt he has the 
political will to undertake the kind of state reforms needed 
for Peru to make the leap to the next level of development. 
In particular need of reform are a corrupt judiciary that 
moves at a glacial pace, a public education system in 
disarray, and an Army shaken by scandals over malfeasance 
demand far more than smartly-timed, short-term measures. 
 
------------------------ 
Garcia and Latin America 
------------------------ 
 
¶12.  (SBU) In the regional context, Garcia will have to 
strike a balance between radical populist impulses and 
responsible economics similar to the one he seeks to maintain 
on the domestic front.  On the one hand, Garcia aspires to 
lead a loose group of moderate, market-friendly leaders -- 
some but not all from historically leftist parties -- who are 
disposed to work closely and cooperatively with the United 
States.  These include the Presidents of Mexico, Colombia, 
and Chile.  On the other hand, Garcia will tread carefully 
with Venezuelan President Hugo Chavez and his regional 
allies, seeking to reduce surface tensions with Chavez and to 
avoid being seen as subordinate to the U.S.  In this context, 
Garcia might act in ways that reflect his immediate tactical 
interests (as when he embraced the Venezuelan President at a 
recent meeting of South American Presidents on Cochabamba, 
Bolivia) rather than Peru's longer term strategic priorities. 
 
 
¶13.  (SBU) Through all this, we should keep in mind that an 
array of concrete interests aligns Peru and the United States 
and divides Peru from Venezuela.  Chavez' "Bolivarian" vision 
for Latin America opposes the free-market model of growth to 
which Garcia is committed.  Chavez' frequent fulminations 
against other Latin American leaders, and his pull-out from 
the Andean Community of Nations (CAN), undermine the positive 
regional integration (one that engages the United States) 
Garcia envisions.  Garcia shares none of Chavez' sympathy for 
the FARC, which he sees as Colombian version of Peru's 
Sendero Luminoso and MRTA.  Finally, Chavez' promotion of his 
Bolivarian ideology and his petro-financed meddling in 
Peruvian politics, on ample display throughout the April-June 
presidential campaign, are profoundly unsettling to a 
Peruvian President who is trying to satisfy urgent social 
needs in responsible fashion.  Consequently, while Garcia 
will try to avoid head-to-head confrontations with Chavez, 
basic national interests drive the Presidents of Peru and 
Venezuela in fundamentally different directions. 
 
-------------------------- 
An Interest-Based Alliance 
-------------------------- 
 
¶14.  (SBU) Garcia is an enormously skilled politician who has 
inherited an economy that depends on the U.S. for much of its 
free-market growth.  He hopes to satisfy pressing social 
needs within the framework of responsible macroeconomic and 
fiscal policy.  He aspires to lead a group of countries who 
see the U.S., not as a problem, but as a partner in 
development.  Taken together, these factors make Alan 
Garcia's Peru the United States' best ally in South America 
after Colombia. 
STRUBLE