Cablegate: Scenesetter for Codel Reid

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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

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