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E.O. 12958: N/A
TAGS: PREL PGOV MARR ECON ETRD PHUM PE
SUBJECT: SCENESETTER FOR UNDERSECRETARY HUGHES
Sensitive But Unclassified. Please handle accordingly.
1. (SBU) Summary: You will arrive in Peru as President Alan
Garcia closes his first year in office with a bang and with a
whimper. The bang is the probable approval by the U.S.
Congress of the U.S.-Peru Trade Promotion Agreement (PTPA).
The PTPA has been the centerpiece of Garcia's
market-oriented, investment-friendly economic strategy and
should help Peru maintain its torrid economic growth, which
reached nearly 8 per cent in 2006. The whimper is the
public's disappointment at the government's slow pace in
converting that growth into palpable poverty reduction.
Public frustration caused widespread protests in July and has
eroded Garcia's popular support nationwide. In relations
with the United States, Garcia has emphasized the confluence
of our mutual interests, most notably, in combating
narco-trafficking, in promoting a democratic, free market
vision of society, and in countering the regional security
threat posed by President Hugo Chavez's "Bolivarianism."
Peru's economic boom and a talented Cabinet eager to address
the challenges facing the country suggest that the democratic
consolidation witnessed during Garcia's first year in office
will continue. End Summary.
---------------------
Garcia after One Year
---------------------
2. (SBU) You will arrive in Peru just after the
administration celebrates one year in office, on July 28 -- a
time when news stands and airways traditionally are filled
with intensive appraisals of the government's performance.
The news is mixed. Since taking office, Garcia has calmed
skeptics who feared a return to the economic mismanagement
and populist spending of his first term (1985-1990).
Instead, he has stayed the economic course carved out by his
predecessor Alejandro Toledo, maintaining macro-economic
stability (less than 1 per cent inflation) and overseeing the
sixth straight year of impressive GDP growth, almost 8 per
cent in 2006 and more than 7 percent in 2007, despite a
recent drop in commodity prices.
3. (SBU) Garcia, moreover, appears poised to achieve his top
strategic goal: approval by the U.S. Congress of the PTPA.
Peru's Congress overwhelmingly passed amendments
strengthening key labor and environmental provisions June 27,
and the agreement now awaits final approval by the U.S.
Congress. PTPA approval would provide a powerful political
boost for Garcia, give Peruvian exports permanent,
tariff-free access to the U.S. market, and help ensure
continued strong economic growth.
-------------------
The Need to Deliver
-------------------
4. (SBU) The GOP's principal domestic policy goal has been
to convert this solid economic performance into palpable
benefits for all Peruvians. According to the National
Statistics and Information Institute, in 2006 44 per cent of
Peruvians lived in poverty, a 4 percent drop from 2004, a
result of the macroeconomic policies pursued by ex-president
Alejandro Toledo. But this reduction in poverty largely took
place within the relatively prosperous coastal provinces,
leaving stubbornly high poverty rates -- as high as 70 to
80 percent -- in the politically volatile southern Sierra
region where Garcia has never been popular. Senior officials
recognize the urgent need to reduce poverty and provide
better social services -- particularly quality education in
public schools and greater access to health care. In
response, the Garcia administration has pursued a host of
initiatives, including building access to clean drinking
water for poor rural and urban communities, linking small
rural producers to national and international markets,
expediting the flow of public purchases and investments, and
transferring bureaucratic functions to regional and municipal
governments.
5. (SBU) The GOP, however, has bumped against the structural
limitations of a dilapidated and often dysfunctional state.
The underlying problem is that state mechanisms, particularly
at the local level, have proven incapable of administering
the abundant resources made available by the economic boom.
Another aspect of the problem is the lack of talented
administrators, who have fled to better paying jobs in Lima,
leaving municipalities unable to manage basic public services.
--------------------------
Protests and Falling Polls
--------------------------
6. (SBU) Fairly or unfairly, the dearth of high-impact
projects has been perceived by many as a failure by
government to deliver on its campaign promises, resulting in
a steady erosion of Garcia's popular support: in August he
received a 63 per cent approval rating, which had dropped to
36 per cent by July 2007. The Peruvian Congress has fared
even worse and in recent national polls received an approval
rating of less than 17 per cent, a result of a series of
scandals that involved fifteen of Peru's 120 legislators.
Despite his growing unpopularity, Garcia shows no sign of
abandoning his pro-market economic vision and returning to
the ill-fated populism that marred his first term. By
comparison, Toledo received only a 16 percent approval rating
after his first year in office.
7. (SBU) Pent-up frustration at the slow pace of reform
fueled a tumultuous month of protests in July, when a total
of 35 major protests took place in 16 of Peru's 24
departments. A wide variety of causes sparked the unrest:
teachers protesting mandatory testing; miners seeking an end
to subcontracting; regional presidents calling for more
public works; and ne'er do wells seizing the chance to sow
trouble. The GOP proved adept at addressing the localized
causes of the unrest, and so far, the widely-separated
demonstrations have failed to produce a national movement,
although Peruvian officials are convinced that Venezuelan
money is helping organizers coordinate more effectively.
Even though Caracas remains active in trying to exploit
localized discontent, poverty and discrimination remain the
fundamental causes of unrest. Although strikes have largely
ended, the cycle of protest could resume during your trip.
--------------
Foreign Policy
--------------
8. (SBU) Garcia's foreign policy aims to complement his
domestic focus on growth-led poverty reduction by
prioritizing ties with pragmatic integration-minded,
pro-growth countries, including Chile. Steps to intensify
and expand Peru's relationship with Chile have been at the
center of this effort and engendered what the GOP sees as an
informal "axis" of Pacific coast nations -- including Chile,
Peru, Colombia and Mexico -- that can counterbalance the
destabilizing influence of Chavez in the region. The point
of this pragmatic posture is to demonstrate that
trade-friendly democracies offer more opportunities than that
static, state-dominated alternative. The momentum for a
closer working relationship with Chile was slowed by the
GOC's July 11 decision not to extradite former president
Alberto Fujimori (the GOP has appealed), but most critics
blamed the Toledo Administration for submitting a flawed
legal brief, and Garcia is likely to continue the pragmatic
orientation of his regional policy.
---------------------
Relations with the US
---------------------
9. (SBU) Garcia's emphasis on deeds and results, not
rhetoric or confrontation, has coincided with a period of
intense and productive relations with the USG. Garcia sees
strong ties with the U.S. as an essential component of both
his economic and security policies. He has traveled to
Washington twice, first in October 2006 and again in May,
when he met with President Bush and a number of key
congressional leaders to underscore the importance of the
PTPA. Garcia has personally received a stream of official
U.S. visitors to Peru, including Deputy Secretary of State
Negroponte, Treasury Secretary Paulson, and then-Director of
Foreign Assistance Tobias. He has also received several
congressional delegations, including the high profile visit
of Senate Majority leader Reid. President Garcia's foreign
policy team has been pleased by the policy attention from
Washington.
10. (SBU) The Garcia government has also proven to be a
reliable U.S. partner as a rotating member of the UN Security
Council. Peru has supported a number of key U.S. and
European UNSC initiatives, including on North Korea, Sudan,
Iran, Haiti and Kosovo. While Peru has sought to avoid
controversy and to support consensus positions, bilateral
calculations have tipped the scales in most of the
government's decisions, which Garcia has often taken himself.
In his meetings with President Bush, Garcia has demonstrated
a keen engagement with issues of global security,
particularly on Iran and North Korea.
11. (SBU) In the fight against drug trafficking, Garcia has
emphasized publicly that counter-narcotics efforts, including
forced eradication, will continue, and he has vowed that
there "would be no treaty in the war against drugs." Part of
Garcia's strong public stance was a reaction to the
unauthorized talks that former Agriculture Minister Juan Jose
Salazar held with cocaleros in the early part of 2007, talks
that emboldened cocalero leaders to seek more concessions
through protests. Garcia sacked Salazar May 22 and replaced
him with a respected businessman who said he would not allow
cocaleros to dominate his ministry's agenda. UN figures
showed coca cultivation increased slightly in 2006.
12. (SBU) Finally, the GOP shares a strikingly similar world
view with the United States, particularly with respect to the
nature of the security threats we face in the region and
around the globe. In this connection, Peru sees
transnational threats such as narcotics trafficking,
terrorism, smuggling, trafficking in persons, and piracy as
the main menaces facing the region. The GOP remains
concerned about Venezuela's attempts to foment instability
and fuel conflict in marginalized sectors of Peruvian society.
STRUBLE