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UNCLAS LIMA 000458 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON ETRD EAID PE
SUBJECT: SCENESETTER FOR DIRECTOR OF FOREIGN ASSISTANCE 
TOBIAS 
 
¶1.  (SBU) Welcome to Peru.  Your visit comes just after the 
six-month mark of President Alan Garcia's government, which 
sees itself as leading a "moderate" Pacific coast bloc of 
nations toward regional integration.  While President Garcia 
does not know the U.S. well, he understands that a 
coincidence of interests -- on economic and commercial 
issues, counter-terrorism and counter-narcotics, and the 
disruptive effects of Venezuelan President Hugo Chavez' 
attempts to export his "Bolivarian" revolution -- require 
close cooperation with the United States.  In his meetings 
with you, President Garcia is likely to underscore the 
importance of the bilateral relationship, inquire about the 
status of Congressional approval of the U.S.-Peru Trade 
Promotion Agreement and express concern about reported cuts 
in U.S. assistance levels, particularly in the 
counter-narcotics area. 
 
Garcia and Latin America 
------------------------- 

¶2.  (SBU) In the regional context, 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. 
He has taken actions that clearly reinforce the moderate 
centrist elements in South America, including cultivating his 
friendship with Chilean President Bachelet and inviting Chile 
to return to the Andean Community.  Garcia sees Venezuela's 
Hugo Chavez as the greatest threat to this vision, and the 
Government of Peru is working to keep lines of communication 
open to new leaders in Ecuador and Bolivia in an effort to 
convince them not to reflexively follow Hugo Chavez' lead. 
Garcia wants to be a consensus-maker, not a 
consensus-breaker, and believes that confrontation only 
favors Chavez.  The recent announcement that Peru and 
Venezuela would send Ambassadors to one another's countries, 
after an almost one-year hiatus in full diplomatic relations, 
is an example of this approach. 
 
Peru, Venezuela and the U.S. 
---------------------------- 

¶3.  (SBU) Surface developments aside, 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 2006 
presidential campaign, are profoundly unsettling to a 
Peruvian President who is trying to satisfy urgent social 
needs in a responsible fashion. 
 
 
Hoping for More from the U.S. 
----------------------------- 

¶4.  (SBU) If Garcia clearly understands the economic benefits 
attached to the Free Trade Agreement (known as the U.S.-Peru 
Trade Promotion Agreement), in recent meetings with U.S. 
officials he has often also highlighted its strategic 
importance.  With President Bush in Washington and Senator 
Reid in Lima, he pointedly noted that democratic governments 
and free-trading regimes need to demonstrate that democracy 
and free trade are better for  everyone in the region, 
including the poor, than are the populist, autocratic, 
"closed economy" alternatives -- implying that PTPA passage 
would be pivotal in this connection.  Garcia and his APRA 
Party voted for the PTPA's ratification last June.  Now, with 
the fate of the agreement unclear, the President is concerned 
about the consequences to his personal credibility and the 
standing of his government if the U.S. Congress does not 
approve it. 
 
¶5.  (SBU) Similarly, Garcia is likely to express his 
disappointment regarding the decline in U.S. assistance 
levels to Peru, particularly for counter-narcotics.  This 
concern is rooted in recent press reports surrounding 
President Bush's 2008 budget submission.   Garcia and his 
Foreign Minister may question whether the U.S. budget 
allocations  sufficiently distinguish between their friendly 
and cooperative government, on the one hand, and the more 
confrontational administrations of Morales in Bolivia and 
Correa in Ecuador, on the other.  They are also concerned 
that the timing of planned reductions in U.S. assistance will 
undercut efforts to implement their newly approved National 
Anti-Drug Strategy, that significantly increased GOP 
expenditures towards combating illicit coca in collaboration 
with donor programs. 
 
¶6.  (SBU) While Peru has a decade-long history of progress on 
counternarcotics, there has been some worrisome regression 
more recently.  Ten years ago, Peru was the world's number 
one producer of cocaine.  The Fujimori government's 
disruption of the narco smuggling air route between Peru and 
Colombia caused coca prices to crash and production to be 
rolled back.  In recent years, cultivation and prices have 
begun to rise, and Garcia stated recently that the GOP had to 
put more of its own money into the fight against illegal 
narcotics.  The new, and long-awaited, 2007-2011 National 
Anti-Drug Strategy, unveiled by the Peruvian government at 
the end of 2006, indeed provides a specific, rational budget 
for counter narcotics efforts -- a first.  The GOP has also 
restarted eradication and interdiction operations in the main 
coca source zones.  In addition to eradication and 
interdiction efforts, the GOP's new anti-drug strategy 
focuses on prevention programs and alternative development. 
With respect to prevention, the strategy highlights 
increasing drug consumption among Peruvian youth and calls on 
Peruvians to recognize that narco trafficking is not only a 
problem for the rich consumer nations but also destroys the 
fabric of Peruvian society. 
 
The Domestic Front 
------------------ 

¶7.  (SBU) On the domestic front, Garcia faces a number of 
challenges but also has significant cards to play.  Garcia's 
key challenge will be to strike a balance between tending to 
urgent social needs and preserving macroeconomic stability. 
His government must produce concrete results for the 
significant swath of voters -- almost 50% -- who chose 
radical nationalist and Hugo Chavez ally Ollanta Humala in 
the 2006 general elections, and stem the fragmentation 
evidenced in the November regional and municipal elections 
(in which traditional parties, including the ruling APRA, 
lost big).  Peru's disenfranchised, concentrated in the 
southern highlands and the Amazonian lowlands, believe that 
five years of economic growth have brought them little, and 
they will be holding President Garcia to his promise of 
quick, decisive and meaningful action to improve their lives. 
 
¶8.  (SBU) President Garcia has shown that he understands the 
urgency of the challenge.  And at least on a symbolic level, 
he has responded quickly, implementing a series of austerity 
measures, including cutting the salaries and benefits of 
public officials and reducing the foreign travel of 
high-level government representatives.  (He himself flew 
economy class to the United States, accompanied only by the 
Foreign Minister, for his meeting with President Bush late 
last year.)  His administration has also proven quick and 
dexterous in responding to social conflicts in the regions. 
He also announced an "investment shock" in sectors like 
schooling and water delivery.  But as the honeymoon bloom 
wears off and the workmanlike phase begins, some observers 
are beginning to look for evidence that the government's 
plans are more than promises and that the hard slow slog of 
implementation has begun -- and finding mixed results. 
 
Enter the Millennium Challenge Corporation 
----------------------------------------- 
 
¶9. (SBU) The Garcia administration's recently submitted 
proposal to the Millennium Challenge Corporation (MCC) for 
funding under the threshold program underscores its 
recognition of the nature of the development challenges it 
faces and the need to show concrete results.  The GOP's 
overall strategy, as reflected in its MCC proposal, is to 
sustain high levels of economic growth, while addressing 
Peru's long-standing issues of inequality.  The GOP proposes 
to do this by improving the quality of the institutions of 
government (through implementing an anti-corruption campaign 
and reforming inefficient agencies) and expanding the access 
to and quality of basic services (such as immunization 
coverage and education).  The GOP is seeking MCC threshold 
funding specifically for its anti-corruption efforts and 
delivery of immunization services to underserved areas of the 
country. 
 
It IS the Economy 
----------------- 

¶10.  (U) In his recent "State of the Republic"-type address, 
Garcia focused almost exclusively on the economy, and said 
his number one focus was growth.  This is no surprise, given 
the booming numbers Garcia inherited from his predecessor 
Alejandro Toledo: five years of sustained economic expansion, 
7% growth in 2006 and forecasts of over 8% for this year. 
For their part, exports have more than tripled over the past 
five years (partly thanks to high metal prices).  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. 
 
¶11.  (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 25-30% of the country's exports.  From 
2001 to 2006, Peru's exports to the U.S. tripled to USD 5.4 
billion.  Garcia is committed to broad trade liberalization 
while PTPA approval is its top priority.  His government also 
seeks to strengthen its ties with neighboring Latin American 
countries.  Peru expanded the Economic Complementation 
Agreement with Chile in 2006, and is pursuing trade deals 
with Mexico, Canada, the EU and several Southeast Asian 
countries.  Trade with China too is signficiant and 
increasing.  Finally, Peru is preparing to host the Asia 
Pacific Economic Cooperation (APEC) summit in 2008 
 
Tactical Political Skills Evident... 
------------------------------------ 

¶12.  (SBU) Garcia is an acknowledged master of political 
tactics, deft in seizing the policy initiative and focused on 
keeping his rivals -- within the government, congress and his 
own APRA party -- on their heels.  This is in sharp contrast 
to Toledo's political inexpertise, and has lent Peru a 
surface political stability it had not seen for several 
years.  It has also helped the President maintain solid 
public support, with poll numbers utill well over 50%.  In 
some cases, Garcia has done this by resorting to gestures 
that, while unlikely to have any legislative follow-through, 
echo favorably with the public.  Following a recent 
controversial Inter-American Court of Human Rights (IACHR) 
decision demanding that the state indemnify the families of 
terrorists who were killed in a 1992 prison uprising, Garcia 
reiterated his public call for the death penalty for 
terrorists (aware that 85% of Peruvians agreed but that 
Congress had already blocked the measure) and threatened to 
pull Peru out of the regional court (later tacking away from 
this threat). 
 
But Strategic Intentions Unclear 
-------------------------------- 

¶13.  (SBU) While few observers doubt Garcia's political 
skills, some wonder whether the apparent short-term tactical 
focus might undermine the government's ability to address the 
country's longer-term structural challenges.  Critics 
complain that his government's signature programs -- "Sierra 
Exportadora" (Exporting Sierra, which is intended to connect 
small rural producers to national and international markets), 
"Agua Para Todos" (Water for Everyone, which is aimed at 
bringing clean water to poor urban and rural communities) and 
Decentralization (which is meant to transfer state functions, 
authority and resources to regional and municipal 
governments) -- are not being implemented with the proper 
dispatch.  For example, the state comptroller recently 
testified to Congress that less than 10% of the monies 
dedicated to decentralization had been transferred to regions. 
 
¶14.  (SBU) To seize back the policy initiative, Garcia 
recently launched a plan for a radical reform of the state. 
An initial draft of the plan calls for significantly reducing 
bureaucratic duplication, streamlining employment in the 
executive branch and re-focusing the state's energies away 
from promoting economic and social progress to regulating the 
activities of the private sector.  To push the idea, the 
President hosted a meeting of the country's political leaders 
to listen to their views and get their buy-in.  In a positive 
scenario, this comprehensive state reform project could build 
on the government's early success in curtailing the powers of 
the radical teacher's union (as a first step toward fixing 
the broken education system) and in refocusing Peru's defense 
forces toward transnational threats such as narco-trafficking 
and terrorism.  Still, people will increasingly be looking 
for proof in the pudding. 
STRUBLE