P 032213Z FEB 09
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TO SECSTATE WASHDC PRIORITY 9983
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C O N F I D E N T I A L LIMA 000146 
 
 
E.O. 12958: DECL: 02/03/2029 
TAGS PGOV, PREL, SNAR, PINR, ECON, EFIN, ETRD, PE 
SUBJECT: GARCIA AT THE HALF-WAY MARK 
 
Classified By: DCM James Nealon for reasons 1.4(c) and (d). 
 
¶1.  (C) Summary: At the ...

id: 190261
date: 2/3/2009 22:13
refid: 09LIMA146
origin: Embassy Lima
classification: CONFIDENTIAL
destination: 
header:
P 032213Z FEB 09
FM AMEMBASSY LIMA
TO SECSTATE WASHDC PRIORITY 9983
INFO AMEMBASSY ASUNCION PRIORITY 
AMEMBASSY BOGOTA PRIORITY 
AMEMBASSY BRASILIA PRIORITY 
AMEMBASSY BUENOS AIRES PRIORITY 
AMEMBASSY CARACAS PRIORITY 
AMEMBASSY LA PAZ PRIORITY 
AMEMBASSY MONTEVIDEO PRIORITY 
AMEMBASSY QUITO PRIORITY 
AMEMBASSY SANTIAGO PRIORITY 
NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
USCINCSO MIAMI FL PRIORITY


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C O N F I D E N T I A L LIMA 000146 


E.O. 12958: DECL: 02/03/2029 
TAGS PGOV, PREL, SNAR, PINR, ECON, EFIN, ETRD, PE 
SUBJECT: GARCIA AT THE HALF-WAY MARK 

Classified By: DCM James Nealon for reasons 1.4(c) and (d). 

¶1.  (C) Summary: At the half-way point in President Garcia's 
term, the political balance is mixed but positive overall. 
On the plus side, Garcia has demonstrated sound economic and 
disciplined fiscal management, including in the face of the 
global crisis.  He has conducted a pragmatic foreign policy, 
whose centerpiece is the U.S.-Peru Trade Promotion Agreement 
(PTPA), while seeking to strengthen Peru's ties with 
like-minded neighbors and key European and Asian partners. 
These accomplishments, coupled with a mild leftward shift, 
have fueled a recent rise in the President's poll numbers. 
On the other side of the ledger, notwithstanding the 
government's expressed intentions and political will, weak 
institutions continue to hamper public service delivery and 
to complicate Garcia's ability to confront thorny problems, 
including drug trafficking and terrorism.  In addition, the 
ongoing eavesdropping scandal could yet cause the government 
further problems (septel).  Garcia's challenge remains clear: 
expand the system's reach and representation, and thereby 
reduce the political space for the many anti-systemic 
elements plotting for 2011 -- it remains a close call.  End 
Summary. 

Sound Economic Management 
------------------------- 
¶2.  (C) At the half-way point of his second term, President 
Garcia has dispelled some personal demons and showed he has 
learned from past mistakes.  (His first term, 1985-90, is 
widely seen as a disaster -- plagued by economic 
mismanagement, foreign policy miscalculations and a failure 
to stem the rising tide of terrorism.)  While die-hard Garcia 
skeptics claim to discern disturbing parallels between his 
first term as President and the present one, the political 
balance now is positive overall.  For one, Garcia has 
overcome lingering doubts regarding the depth of his economic 
conversion by demonstrating sound economic management and a 
disciplined approach to government spending.  He has presided 
over a period of unprecedented growth (over 9% in 2008) and 
relatively low inflation -- the highest and lowest in the 
region respectively.  These positive numbers began to 
significantly reduce Peru's endemic poverty, which fell from 
over 44% in 2005 to 39% in 2007.  Garcia has also been an 
impassioned cheerleader for investment-led growth, 
confronting a deep-seated historical mindset that sees the 
state as benefactor and principal motor of development.  Even 
in the face of the global economic crisis of uncertain depth 
and scope, President Garcia has followed a fiscally prudent 
course while using the significant reserves accumulated in 
the boom years in shaping a public stimulus plan whose launch 
will be calibrated to the crisis's (likely rising) impacts on 
Peru.  Corruption remains a widely discussed concern and a 
top government priority, but few concrete cases have emerged 
to date, notwithstanding constant media coverage of the 
ongoing phone-tap scandal. 

Pragmatic Foreign Policy 
------------------------ 
¶3.  (C) Pragmatism has also marked Garcia's foreign policy, 
in which Peru's economic interests have shared a leading role 
with geo-political strategy.  The U.S.-Peru Trade Promotion 
Agreement (PTPA), entered into force February 1, has been the 
centerpiece of the government's trade-friendly foreign policy 
aimed at integrating Peru into the broader international 
economic system.  In parallel, Garcia has sought to 
strengthen Peru's ties with like-minded neighbors such as 
Chile, Colombia and Mexico via bilateral efforts, trade 
agreements, and regional initiatives such as the "Arc of the 
Pacific."  He has also intensified Peru's commercial 
relations with regional leaders like Brazil, and sought to 
woo fence-sitters, particularly Ecuador.  Finally, he has 
kept at arm's length the volatile populist governments of 
Venezuela and Bolivia.  To mark distance from UNASUR, Garcia 
has sent an envoy to the organization's presidential level 
meetings.  He was also a no-show at the Brazil Summit. 

¶4.  (C) Peru's role as host of two successful high-profile 
international conferences -- the EU-LAC Summit in May and the 
APEC summit in November -- also enabled the Garcia government 
to project a positive image of the country onto the global 
stage.  This has produced some concrete benefits.  After much 
back and forth, in late 2008 the EU agreed to pursue 
negotiations on a comprehensive agreement, which includes a 
free trade component, with Peru outside the Andean Community 
framework.  President Garcia has also demonstrated a keen 
personal interest in expanding Peru's commercial and other 
ties with Asia, particularly China, with which Peru is 
completing a free trade agreement.  He is tentatively 
scheduled to visit Japan, Korea and China in early March -- 
for the second time this term -- to underscore his interest 
in deepening Peru's engagement in that dynamic region. 

A Rise in Polls 
--------------- 
¶5.  (C) The government's accomplishments in maintaining 
stability, successfully carrying out two international 
summits, and securing implementation of the long-awaited 
US-PTPA have probably contributed to a recent rise in 
Garcia's nationwide poll numbers -- from below 20% in October 
to 28% in January (35% in Lima).  (President Toledo's support 
was in the single digits at this point of his term.)  Some 
analysts believe the dip in inflatin -- a central cause of 
his earlier falling numbers -- has also played a role. 
Political insiders also credit Garcia's calculated shift to 
the left to reclaim the center and stem his fall in the 
polls.  In doing this, he has sought to distance himself from 
his image as "president of the rich" (whom he spent his first 
two years successfully cultivating) while moving closer to 
the "people."  This shift is reflected in Garcia's choice of 
Yehude Simon to succeed Jorge del Castillo as PM, in a series 
of public events in which he has been seen mingling with the 
common folk, and in periodically announcing high-profile 
public-works projects -- water, roads, energy -- in poor 
areas throughout the country. 

Serious Challenges Remain 
------------------------- 
¶6.  (C) Notwithstanding the government's expressed intention 
to improve public services, weak and even dysfunctional state 
institutions continue to hamper basic service delivery and 
undermine public confidence.  This challenge is particularly 
worrying in politically vulnerable regions where the state is 
largely absent and the anti-systemic opposition is strong. 
Some critics complain that Garcia has not made a serious 
attempt at state reform.  As for the ongoing decentralization 
process in which Garcia has invested a great deal of time, 
energy and political capital, it so far has brought mixed 
results, sometimes exacerbating rather than mitigating the 
state's underlying structural dysfunctions.  Much will depend 
on how this process plays out in the remaining half of 
Garcia's tenure. 

¶7.  (C) Meantime, the country's public education, health care 
and transportation infrastructure, in spite of significant 
increases in social spending and whatever the diverse 
improvements, remain under-equipped to address the real 
challenges and fall short of meeting popular expectations. 
Echoing a long-standing lament, his detractors claim Garcia 
tends to promise more than he can deliver, to continually 
repackage past promises into seemingly new proposals, and to 
focus more on publicly launching projects than on ensuring 
their bureaucratic follow-through.  All this results in a 
pattern of expectations raised and then dashed -- a recipe 
(in the view of critics) for rising frustration. 

¶8.  (C) Peru's deficient state mechanisms have complicated 
Garcia's ability to confront some of Peru's profound 
structural challenges.  The recent national police operation 
to remove squatters from public land in the northern region 
of Lambayeque, which resulted in three dead police officers, 
underscores the problem of weak state authority confronting 
difficult and sometimes dangerous actors and situations.  The 
Garcia government has made a more serious effort to combat 
drug-trafficking than its predecessor -- including by 
launching a National Anti-Drug Strategy partly supported with 
its own budget -- and that effort has scored some notable 
successes.  Rural communities in the San Martin region that 
have turned from coca production to licit lifestyles are an 
illustrative case in point.  That said, coca production and 
drug trafficking throughout Peru have probably expanded 
somewhat over the past 30 months, and the government's 
continuing efforts need strong reinforcement to ensure a more 
enduring success.  Similarly, in late 2008 the Army launched 
a long-delayed operation to challenge remnants of the Sendero 
Luminoso (SL) terrorist group on their home turf in the 
emergency VRAE region, but many critics believe the scope of 
the operation has been unequal to the task and will have 
little permanent  effect unless it is significantly expanded. 
Bringing the necessary urgency, focus and resources to bear 
will be paramount in meeting this challenge. 

Unfolding Wire-tap Scandal 
-------------------------- 
¶9.  (C) In addition, the ongoing eavesdropping scandal could 
yet undermine Peru's forward progress.  The initial round of 
the scandal, in which several figures with government 
connections were caught in secretly taped telephone 
conversations apparently greasing the skids for deals 
involving oil block concessions, caused the collapse of 
Garcia's first cabinet.  The current round, in which some of 
the wire-tappers-for-hire have been identified and additional 
tape recordings have come to light, is still unfolding. 
Notwithstanding the almost relentless media coverage over the 
past six weeks, so far there has been no smoking gun or 
evidence of fire.  Little has come to light that directly 
implicates government officials in any legally actionable 
corrupt act, no suitcase of cash or illegal bank account. 
That said, the whiff of corruption is strong, and the 
impression that private interests prey upon public 
institutions and trust pervasive.  There is also a lingering 
concern that information yet to come to light could cause 
further problems for the government. 

Comment: Still a Close Call 
--------------------------- 
¶10.  (C) Garcia's challenge remains clear: expand the 
system's reach and representation, consolidate the still 
fragile trade- and investment-friendly policy consensus, and 
thereby reduce the political space for the many anti-systemic 
elements plotting for 2011 -- the year of the next general 
elections.  Given the positive but still ambivalent results 
of President Garcia's first 30 months and the increasingly 
complicated imperatives of latter-term, pre-electoral 
politics, it remains a close call. 


MCKINLEY 

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