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C O N F I D E N T I A L LIMA 000029 
 
SIPDIS 
 
E.O. 12958: DECL: 2020/01/07 
TAGS: PREL PGOV ECON ETRD SNAR PTER PE
SUBJECT: Scene Setter for Deputy Secretary Steinberg 
 
CLASSIFIED BY: Michael McKinley, Ambassador, State, Amb; REASON: 
1.4(B), (D) 
 
¶1.       (C) Summary: Peru remains a critical "swing state" in a 
region divided along political fault lines.  Peru's remarkable 
success in turning the page on 30 years of dictatorships, populism, 
near failed state status, and authoritarianism has given way to a 
decade of record economic growth, democratic consolidation, and 
significant poverty alleviation.  But there is still a long way to 
go.  The challenges include a still high absolute poverty rate, 
weak institutions, drug trafficking, residual terrorist activity, 
and the lure of false populism. 
 
¶2.      (C) Your visit comes at an important moment in this 
continuing transition.  Peru has weathered the global economic 
crisis in impressive shape but is moving into an electoral season 
that will span the next 18 months.  The country will be choosing 
between consolidating and expanding past gains or possibly veering 
off into another (Bolivarian) direction.  Meantime, the government 
hopes to resume robust growth and further integrate Peru into the 
global economy via free trade agreements with China, Japan, the 
European Union, Canada and others.  President Garcia has also 
sought to strengthen relations with Ecuador, Colombia and Brazil. 
Garcia is among the most strategic of current Latin American 
presidents and has been a solid U.S. partner on Honduras, nuclear 
proliferation, Copenhagen, APEC agendas, and Colombia. 
 
¶3.      (C) As in Colombia, there is growing concern here that the 
U.S. is paying insufficient attention to its partners in South 
America.  Your visit should help correct this perception and 
underscore the importance we attach to Peru's accomplishments to 
date.  You will also have the opportunity to see first-hand our 
successes in alternative development, our progress in implementing 
a ground-breaking free trade agreement with strong environmental 
and labor commitments, and to review our public affairs outreach to 
new generations and marginalized populations.  End Summary. 
 
¶4.      (C) Peru has been and considers itself a solid U.S. partner 
in a complicated South America that is divided along political and 
ideological fault lines.  In meetings with U.S. visitors, President 
Garcia has referred to the regional "cold war" at play -- pitting a 
populist, autocratic bloc openly antagonistic to the U.S. against a 
democratic, trade and investment-friendly one that prizes its ties 
with the U.S.  In this context, the U.S-Peru partnership is rooted 
in a shared vision of opportunities and challenges.  For example, 
the GOP sees enormous benefits associated with Peru's insertion 
into the international economic system and has actively sought to 
deepen its global engagement, including by welcoming foreign 
investment and signing free trade agreements with the U.S. and a 
slew of other countries -- from Canada to China, Singapore and the 
EU.  We also see eye to eye regarding the tangible threat of 
international criminal groups, particularly drug traffickers and 
the potentially resurgent Sendero Luminoso (Shining Path) terrorist 
organization, and the growing nexus between the two.  Neither has 
President Garcia hesitated to publicly highlight the dangers of 
false populism (having succumbed to the temptation during his first 
term - 1985-90) and the threat of Venezuelan and Bolivian meddling 
in Peru's internal affairs, including via support for a 
wide-ranging network of radical groups seeking to undermine the 
country's progress and change its political-economic model.  Even 
so, Garcia has sought to minimize diplomatic conflict with Bolivia 
and Venezuela while sometimes responding in kind to public 
provocations. 
 
¶5.       (C) The fruit of a decade plus of pragmatic policy 
continuity (perhaps the single most tonic feature in a country 
whose modern history is characterized by a jarring series of policy 
zigzags), Peru has been among the region's top economic performers 
over the past 8 years.  In 2008, before the international financial 
crisis struck, Peru's growth reached Asian tiger levels, surpassing 
 
9%.  Peru's relative non-exposure to the kinds of toxic assets that 
devastated the U.S. and other developed economies, the significant 
reserves it accumulated during the boom years, and its ability to 
stimulate the economy with a counter-cyclical injection of nearly 
USD 3.3 billion (2.5% of its GDP) enabled Peru to weather the 
global economic storm in impressive shape.  Growth estimates for 
2009 hover between 1-2%, and most analysts believe Peru is now 
poised to resume the strong growth trajectory it enjoyed prior to 
the crisis. 
 
¶6.       (C) Importantly, Peru's economic success has clearly 
reduced poverty levels and improved lives.  According to government 
statistics, poverty levels plummeted from 52% in 2004 to less than 
37% in 2008, and deep poverty (defined as living on less than 1 
dollar a day) dropped to below 20%.  The positive economic and 
social trends have continued since, generating diverse employment 
opportunities unavailable before (for example, in the emerging 
agro-industrial and booming construction industries), producing 
pockets of new wealth (particularly in Lima and coastal cities) 
while also fostering a still small but expanding middle class.  In 
this sense, Peru has been and remains a positive news story. 
 
¶7.      (C) But serious challenges remain, including the glaring 
fact that a country with a third of its population still mired in 
poverty cannot call its work done.  Maintaining the policy 
structure that ensures continued and increasingly diversified 
economic growth is the top priority.  Distributing the benefits of 
that economic growth more broadly, particularly to the country's 
poorest and most marginalized citizens, is crucial.  But these 
efforts will require expanding the presence of the state (the state 
is virtually absent from large swaths of the country), reforming 
state institutions and improving public services - particularly 
security, education and health -- so as to bridge the politically 
destabilizing gap between rich and poor.  While the Garcia 
government has made some progress on this score, including by 
increasing social spending and pursuing an ambitious 
decentralization policy that has sought to devolve decision-making, 
development and spending authority to regional and local 
governments and entities, much more remains to be done. 
 
¶8.       (C) Peru's 2011 presidential elections will be pivotal. 
In them, and to a lesser degree in the regional and local elections 
this year, Peru will likely choose between a pragmatic centrist 
option that maintains the current course - consolidating, 
diversifying and building on past gains - or veering off into 
another direction a la Venezuela, Bolivia and Ecuador.  Many 
analysts believe that an additional five to ten years of 
macro-economic stability and steady growth are needed to ensure 
that Peru's pragmatic consensus gains the kind of quasi-politically 
impregnable permanence it enjoys in, say, Chile.  Because the 
consensus here remains fragile and subject to disruption - the 
Amazon violence in which 24 police officers and 10 civilian were 
killed this past June is a case in point - it is safe to say that 
Peru is not yet out of the woods.  President Garcia beat his 
Venezuelan President Hugo Chavez-financed rival by a narrow margin 
in 2006.  Most analysts believe the competition could be similarly 
close in 2011, with Peru's clear economic and social gains 
partially offset by institutional weaknesses and continuously 
challenged by radical actors, some of them dangerous.  Moreover, as 
a quintessential "swing-state," broadly representative of the 
Andean region's complex political, social and economic realities, 
Peru's fate will almost certainly have consequences beyond its own 
borders.  Its success along current lines would buttress the 
prospects of generally pro-U.S. regional pragmatists while its 
defeat or failure would strengthen the hand of the instinctively 
anti-U.S. populist camp. 
 
¶9.       (C) U.S.-Peru relations in recent years - bridging the 
Toledo and Garcia governments -- have been excellent.  Given our 
broadly shared world view, President Garcia and other government 
officials have forcefully defended U.S. interests in a series of 
UNASUR meetings in which Venezuela and others sought to 
mischaracterize for political advantage our Defense Cooperation 
Agreement (DCA) with Colombia.  The GOP has also taken the same 
tack on Honduras, recognizing the elections as an important step 
toward reconciliation.  Our bilateral relationship was permanently 
anchored in a free trade agreement that went into force early last 
year -- complete with cutting edge environmental and labor 
components.  The historically intensive nature of the bilateral 
relationship is rooted in long-standing counternarcotics 
cooperation that includes supporting Peru's efforts to expand state 
presence, strengthen its security forces, reduce coca cultivation, 
interdict drug trafficking and provide poor rural farmers with 
licit and economically viable alternatives.  It is also buttressed 
by extensive people to people ties - close to one million Peruvians 
live in the U.S. - and by a broadly favorable popular view of the 
U.S., reflected in recent polling that shows President Obama as the 
top-rated world leader and the U.S. as Peru's best friend in the 
region. 
 
¶10.   (C) That said, there is a growing concern among Peruvian 
government leaders and opinion makers that the U.S. may be too 
deeply distracted by its multifarious challenges at home and 
elsewhere to pay due attention to its partners in South America - 
Peru (and Colombia) foremost among them.  While our Peruvian 
friends are perfectly aware of the U.S.'s need to focus on first 
things first, the perceived neglect of our interests here has led 
to an occasionally expressed sentiment that we may be taking Peru's 
progress and partnership for granted.  But Garcia is not one to 
whine or wallow, and this sentiment has probably sharpened the 
GOP's pre-existing interest in diversifying its international 
commercial and political relations.  Peru's emerging strategic 
partnership with Brazil, consolidated in President Lula's late 
December visit to Lima, is one example.  Garcia's near obsessive 
focus on China as representing the global future is another. 
Peru's imminent free trade agreement with China (its top export 
market) and the government's recently announced plans to acquire up 
to 80 Chinese-made tanks are two key components of this budding 
relationship.  The fact is, however, Peru's primary economic, 
security and assistance relationship remains the U.S. for now. 
Your visit enables us to explore key next steps on an already 
significant agenda. 
 
¶11.   (U) Welcome to Peru. 
MCKINLEY