ALAN GARCIA'S ECONOMIC PLAN

C O N F I D E N T I A L LIMA 001139

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 03/21/2011
TAGS: ECON EFIN EINV ETRD PGOV PE
SUBJECT: ALAN GARCIA'S ECONOMIC PLAN

Classified By: EconOff Timothy Stater for reason 1.4 (b&d)


1. (C) Summary: Should center-left presidential candidate
Alan Garcia become President of Peru again, he would most
likely pursue an economic program similar to other
left-leaning Latin American presidents like Brazilian
President Lula and former Chilean President Lagos: generally
conservative policies with minor leftist tinkering on the
margins. Given the Peruvian economy's good performance over
the last several years and Garcia's abysmal economic record
from his first Administration, he has thus far in the
campaign proposed a relatively conservative economic course
of low inflation, fiscal restraint and free trade. Regarding
the free trade agreement with the U.S., Garcia is supportive
in private and vague to mildly negative in public. Like the
other candidates, he has the tendency of jumping on the
bandwagon if the front-running candidate Ollanta Humala makes
a proposal that resonates with voters. As the April 9
election date nears, Garcia may take more extreme positions,
perhaps targeting the FTA. End Summary.


2. (U) APRA presidential candidate and former-president Alan
Garcia is in the running to make it into the second round of
voting, but time is running short. Garcia's economic
platform is generally conservative, promising to maintain
most of the present administration's successful policies
while promising to create more jobs in the sierra. However,
his first term (1985-1990) was so disastrous that he has
little credibility in economic matters among the business
community.

Letting Bygones Be Bygones
--------------


3. (U) When Garcia was elected President of Peru in 1985 at
the age of 35, the government was weak, the terrorist war
with the Shining Path was spreading, inflation was rampant,
and the international debt burden was very high. Garcia
vowed to make bold changes, and one of his first acts was to
restrict international debt payments to 10 percent of exports
earnings. He later attempted to nationalize Peruvian banks
and insurance companies and launched large public works
projects. The economy responded positively in the first two
years, but as international and private capital dried up, the
economy collapsed. By the end of his term, inflation had
gone from 87 percent to 7,649 percent, per capita income had
dropped to below the 1960 level, the GDP had fallen 20
percent and poverty had grown from 41 percent to 55 percent.


4. (U) Garcia has tried to put the best possible spin on the
fiasco by reminding Peruvians that Peru was in bad shape when
he took over, other Latin countries faired worse, and he, at
any rate, is wiser for the experience. He now purports a
fairly conservative economic agenda, with a mildly populist
spin.

Garcia - Part Deux
--------------


5. (U) Garcia's plan for government is lengthy and somewhat
anodyne. He calls for the cutting in half the salaries of
the president, ministers, congressmen and mayors, but fails
to mention that the President does not control the budget for
Congress nor mayors. Like the other candidates, he favors
decentralization, calling for granting more resources and
responsibilities to the regions. He is for internet
connectivity. He wants to continue and expand the housing
programs that are working. In the first six months, he
proposes to grant 100,000 land titles.


6. (U) His governing plan calls for improving government
procurement at all levels. The savings from this would be
used to expand educational and health programs. He would
hire 250 labor inspectors to focus on eliminating abuses in
the services sector. He calls for the doubling of the credit
of the Banco Agro, a farm credit bank that he created in the
1980s. Garcia also makes a small mention in his plan that he
would try to complete the Lima rail project that he started
in the 80s and still stands, like Ozymandias' trunkless legs
of stone, as a monument to his Administration's failings.

Me Too - Contracts, Foreigners and Jobs
--------------


7. (U) Like the other candidates, Garcia has done some
bandwagon jumping when ultra-nationalist candidate Ollanta
Humala hits an issue that resonates with voters. Humala came
out against allowing Chileans to invest in Peruvian ports,
and Garcia followed quickly with a similar proposal. Humala
says that he will review and possibly renegotiate the energy
and mining contracts with foreign companies. Garcia has been
less sweeping, but he has said that he would review gas and
mining contracts to see if there should be greater taxes on
what he sees as windfalls ("sobreganancias") from record high
global prices. Garcia took a different tack when
center-right candidate Lourdes Flores recently and somewhat
desperately announced a pledge to create 650,000 new jobs per
year. Garcia said that such a promise was undeliverable and
all but called Flores a liar.

Sierra Exportadora
--------------


8. (U) The pillar of Garcia's economic plan, and the subject
that interests him most, is a promise to deliver economic
growth to the sierra. He has published a small book on the
subject called "Sierra Exportadora". The Peruvian economic
expansion of the last several years has largely bypassed the
sierra, taking place instead in the mining and gas sectors
and the coastal areas with agricultural export industries.
Garcia proposes to rectify that by connecting the sierra to
the coast with highways and transplanting the agricultural
programs that have worked in the coastal areas. Economic
growth would come from the production and export of products
such as asparagus and artichokes.

The Trade Deal
--------------


9. (C) Garcia has tried to steer away from addressing the
free trade accord with the U.S.. In conversations with the
Ambassador, he has confided that he supports the agreement
and that his party, which holds the most seats in Congress
(28 of 120),will vote to approve it. APRA, however, is a
broad party, and Garcia avoids publicly supporting the
agreement so as not to compromise some anti-trade
congressional candidates on his party's ticket. In recent
days, his polls numbers lagging, Garcia has made more
strident remarks, saying that Peru "negotiated with the U.S.
from its knees," and that he would not sign the Agreement if
it meant sacrificing the agricultural sector. He mentions
that he would seek to renegotiate the agricultural chapter,
saying the Colombians got a better deal. Despite statements
like these, Garcia appears to appreciate that the economic
success of the last several years has been export driven, and
continuing that trend will depend on a U.S. trade accord.

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


10. (U) Chastened by the spectacular failure of his first
term and lacking any credibility on economic issues, Garcia
has taken generally conservative economic positions. He has
said that his Administration would maintain many of the
policies of the current Administration, and that is probably
true. His support for the trade accord is probably sincere
as well, as much of APRA's core regions on the coast are the
chief beneficiaries of Peru's agro-export boom. In addition,
the trade accord is a sine qua non for the success of his
plan to spur export-led growth in the sierra. As he tries to
position himself to get into the second round, his positions
may veer as opportunities beckon.
STRUBLE