CONSERVATIVE OR POPULIST? LOURDES' ECONOMIC PLANS

UNCLAS LIMA 001064

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR WHA/AND, WHA/EPSC, EB/IFD/OMA
USTR FOR BHARMAN
TREASURY FOR OASIA/INL GSIGNORELLI
COMMERCE FOR 4331/MAC/WH/MCAMERON

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD PGOV PE
SUBJECT: CONSERVATIVE OR POPULIST? LOURDES' ECONOMIC PLANS

REF: A) LIMA 728 B) LIMA 979


1. (SBU) Summary. Center-right candidate Lourdes Flores
has developed an economic plan based on neo-liberal economic
policies, including stressing fiscal responsibility, calling
for the streamlining of government, endorsing the
privatization of state owned enterprises and infrastructure,
and promoting free trade. During a March 8 speech in Lima,
Flores sought to re-energize her campaign by promoting more
populist economic policies. She laid out ten campaign
promises -- including creating 650,000 jobs annually,
providing 8 million Peruvians with health insurance, and
providing $2 billion in microfinance credit to small
businesses. It remains to be seen whether her new promises
will increase her support base as Peru heads into the first
round of elections. End Summary.

Solid Macroeconomic Plans
--------------


2. (U) Flores has surrounded herself with strong neo-
liberal economic advisors, whose ideas are clearly reflected
in the Unidad Nacional's recently published government plan.
The 100-page document emphasizes Peru's current economic
problems -- low levels of production and competitiveness; a
high debt/GDP ratio; high levels of informality; high levels
of poverty and inefficient state institutions -- and
provides numerous proposals for how to promote economic
development and competitiveness in Peru.


3. (U) Flores' economic blueprint stresses the need to
create a favorable investment climate with clear rules of
the game and improved customs procedures; the importance of
maintaining fiscal prudence and restructuring the tax
system; and prioritizing public spending on education,
health, and security. A UN Government would streamline the
procedures for establishing businesses (it currently takes
an average of 98 days to open a business in Peru),would
respect intellectual property rights, and would invest
heavily in the development of infrastructure, including
ports, airports and highways. Flores' ideas, particularly
the reduction of the value added tax and the elimination of
discriminatory taxes, have garnered rousing support from the

business community in Peru.

Encouraging Globalization and Investment
--------------


4. (SBU) In direct contrast to ultra-nationalist candidate
Ollanta Humala (Ref A),Flores's government plan also states
the importance of integration into the world economy,
through increased exports, reduction of tariff levels, and
labor reforms. Flores is decidedly pro-trade and supports
not only the free trade agreement with the United States,
but also pursuing FTAs with other countries. She has gone
on record, stating that the current Congress should debate
and ratify the agreement and that, if elected, she will not
seek to overhaul the accord.


5. (SBU) Flores strongly believes that by making Peru more
competitive in the world economy, Peru will attract more
investment, both domestic and foreign. Peru received less
than $13 billion in foreign direct investment in 2005, only
17 percent of Peru's GDP. In contrast, foreign direct
investment in Chile accounted for 26 percent of the GDP in

2005. In an effort to alleviate fears of foreign investors
and to show disparity with Humala, Flores has indicated that
she will respect existing gas, mining and petroleum sector
contracts, but that her government is likely to establish
tougher contracts for foreign investors in the resources
sector. Like Humala, however, Flores has publicly stated
that her government would not allow the Chileans to
participate in the concessions of Peruvian ports.

Trend Toward Populism?
--------------


6. (SBU) While Flores continues to lead in the polls, her
popularity over Humala and APRA's Alan Garcia has slipped in
recent weeks (Ref B). In an effort to re-energize her
campaign, during a March 8 speech, Flores deviated from her
neo-liberal economic ideas and expounded on ten campaign
promises that smacked of populism. Among her campaign
pledges, Flores promised to create 650,000 jobs annually,
eradicate poverty for three million Peruvians, and provide
eight million Peruvians with health insurance. She also
emphasized the need to spend 6 percent of GDP on education,
and guaranteed the availability of $2 billion in micro
credit for micro enterprises.


7. (SBU) Garcia immediately criticized Flores' promise to
create 650,000 jobs annually, calling her a liar that could
not deliver. He noted to the press that, given the
conditions in the current Peruvian market, a new government
could realistically create 400,000 jobs annually. (Note:
From 1996-2004, an average of 496,000 new jobs were created.
This average includes 103,000 new net jobs created in 2000
and 943,000 in May 2003 - Apr2004. Our assessment of the
Peruvian labor force shows that, even with high levels of
investment and economic growth at a rate of 7 percent or
higher, it will take several years before a new government
is able to generate the 650,000 jobs. End Note.)

Comment
--------------


8. (SBU) Flores' economic message has resonated well with
the business community, but she has been less successful in
attracting the support of poorer Peruvians. It appears that
Flores is now listening to advisors, encouraging her to use
more populist rhetoric to capture the vote. However,
Peruvians may not be convinced by her ten campaign promises,
especially as economists show that it is economically
unlikely that more than half a million jobs can be created
annually.

STRUBLE