TREASURY SECRETARY PAULSON MEETS WITH PERU'S

C O N F I D E N T I A L LIMA 001271

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STATE FOR E, EB, EB/TPP, WHA/AND
PASS TO TREASURY FOR LOWERY, LEE
COMMERCE FOR GUTTIEREZON
USTR FOR EISSENSTAT
NSC FOR FISK

E.O. 12958: DECL: 04/04/2017
TAGS: ECON OVIP ETRD PGOV PREL PE
SUBJECT: TREASURY SECRETARY PAULSON MEETS WITH PERU'S
PRESIDENT GARCIA ON TRADE, PERU'S ECONOMY AND THE REGION


Classified By: AMBASSADOR J. CURTIS STRUBLE, REASONS 1.4 (b) AND (d)


1. (C) SUMMARY. President Garcia received Treasury Secretary
Henry Paulson March 20 for a discussion of the Peruvian
economy, regional developments and his upcoming visit to
Washington. Secretary Paulson reaffirmed the Administration
and President Bush's determination to secure passage by
Congress of the Peru Trade Promotion Agreement (PTPA).
Acting upon the President's instruction, Secretary Paulson
offered President Garcia an April 23 date for his visit with
President Bush in Washington, which Garcia accepted.
President Garcia praised President Bush's efforts to raise
the profile of U.S. relations with the Western Hemisphere.
He told the Secretary Peru's hopes were high for the PTPA,
and that passage of the accord was important to send a
message to South America in favor of trade-led growth and
democracy. Garcia was pleased with Secretary Paulson's
praise of his management of the Peruvian economy, which has
seen low inflation and close to 8% growth this year. Both
discussed regional efforts to spread the benefits of this
growth to the poor. Secretary Paulson offered his support
for the PTPA on the Hill as well as his willingness to work
with Peru on opening up the financial services sector and
spreading access to capital to SMEs through more
competition. END SUMMARY



2. (C) President Garcia received Treasury Secretary Henry M.
Paulson on March 20 in Lima. President Garcia was
accompanied by Foreign Minister Jose Antonio Garcia Belaunde.
Secretary Paulson was accompanied by Ambassador Struble,
Treasury Assistant Secretary Clay Lowrey and Deputy Assistant
Secretary Nancy Lee. The Secretary met separately with

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Minister of Economy and Finance Luis Carranza. He also met
with leading businessmen, politicians and journalists to
discuss poverty reduction, a small-group of Peruvian
micro-finance providers and small entrepreneurs and engaged
in a dialogue with 200 business students at the Pontificio
Universidad Catolica.


3. (C) Following an exchange of greetings, President Garcia
praised President Bush,s decision to raise the profile of
U.S. relations with Western Hemisphere neighbors. Secretary
Paulson said that he would spend a significant amount of his
time in the region pushing measures such as business
facilitation and educational improvements that move the
benefits of growth further down the population.

GARCIA VISIT TO WASHINGTON IN APRIL
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4. (C) The Secretary said that President Bush looks forward
to meeting with Garcia in Washington and had asked the
Secretary to determine whether April 23 would be a convenient

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date to get together. President Garcia said it is a perfect
date because it coincides with the anniversary of Cervantes,
death: it is a good day to talk about how to free South
America of impractical political leaders and their schemes.


5. (C) Garcia said he has a great deal of hope that the U.S.
Congress will approve the Peru Trade Promotion Agreement
(PTPA) despite certain concerns on the part of Ways and Means
Committee Chairman Rangel and other Democrats. Secretary
Paulson agreed though it would not be easy. He said it would
be his top priority, adding that he had spoken with Chairman
Rangel and others in the last few weeks. &We have to get
this done,8 the Secretary concluded.

PTPA IS MESSAGE TO SOUTH AMERICA
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6. (C) President Garcia stated that the PTPA is important for

growth but is equally important to communicate a message to
South America. Garcia characterized the situation in South
America as a competition. Venezuela is using its oil and oil
income to sell its model. Peru believes in investment and
trade led growth. The PTPA, he said, will help Peru win this
competition. Secretary Paulson agreed, while noting the
challenge presented by growing protectionist sentiment in the
United States. President Bush is committed to the PTPA, he
said, and while no trade agreement is ever easy in Congress,
they always seem to get through.


7. (C) The Secretary congratulated Garcia on his country,s
strong economic performance and its improved World Bank
rankings on facilitation of small business start ups.
President Garcia noted his own satisfaction with Peru,s 7 to
9 percent growth rate, one percent inflation rate, and strong
growth in private investment. &We have a solid economic
structure,8 Garcia said, &We just need to speed it up. For
me as the leader of a popular party, it is important to show
that growth is accompanied by social progress.8


8. (C) President Garcia observed that the single greatest
boost the U.S. could give Peru is to offer its opinion of how
the country is doing economically. Garcia noted that the
U.S. Treasury is broadly respected and its views carry a lot
of weight. &If you like what you see,8 the President
added, &please say so as it will strengthen the psychology
and confidence of investors.8

SOCIAL PROGRESS, SMALL BUSINESSES
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9. (C) Secretary Paulson agreed with Garcia that social
progress was key. He said he would be talking with Finance
Minister Carranza and others about how the U.S. can work with
International Financial Institutions to push the benefits of
growth down to the poor. The Secretary highlighted the
importance of focusing on infrastructure, education and
small/medium enterprises (SMEs). Secretary Paulson recalled
an observation he had made the night before to the Prime
Minister and others; it is easier to identify problems than
to identify solutions. The United States wants to identify
good policies. The Treasury Department is focused on the
problem of markets, getting capital to small businesses and
infrastructure.


10. (C) President Garcia said he recently changed the banking
regulator because financial markets in Peru are very closed.
The country has free trade in goods but not in financial
products, Garcia complained, and the only way to get credit
to small businesses is to get more players in the system.
Secretary Paulson said that this is a big theme for him

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whether in China or elsewhere. Competition in financial
services has a multiplier effect on the economy; savers get
better returns and more capital is put behind ideas. Closing
off the sector hurts the whole economy. The situation in
Latin America is particularly difficult, he said, because no
major financial institution has yet come up with a business
model to bring financial services to poor people; solving
that need is key.

LACK OF TITLE, LACK OF CAPITAL
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11. (C) President Garcia said that this problem falls to the
state as well as to financial institutions. He cited the
poor,s lack of title to their property as an example. Peru
has an aggressive two-year program to issue property titles,
he said, complemented by a program to make credit available
to SMEs. If the financial services market is opened more it
will spread availability.


12. (C) Paulson said that he liked how President Garcia was
thinking; SMEs are the engine of growth in every country.
Garcia said that he expects a big impact in 1 to 2 years. He
added that the GOP has planned to offer export services to
SMEs to complement the PTPA as part of economist Hernando De
Soto,s &Internal Free Trade Agreement8 program. Otherwise,
he warned, only big business will benefit from the
opportunity. Secretary Paulson praised the idea of an SME
assistance program noting that PTPA can help move SMEs into
formality but many will need help competing globally.
Pushing top line growth downward is a problem everywhere, he
said, though without strong growth no one benefits. The
Secretary noted the problem that a widening gap in incomes

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had created in the United States. Only in the last year had
the average worker felt real growth in wages.

Because of that lag, many average workers wonder if trade is
good for them. The issue is really not trade but technology;
unskilled workers have trouble growing their wages as fast as
the global economy.


13. (C) President Garcia said that a defect of parliaments
everywhere is that they respond quickly with a short-term
mentality to the concerns of constituents. Touching on a
mention of China, Garcia, ever a student of history, said
that the United States showed intelligence 100 years ago when
it opposed international policies that limited China,s
growth. Secretary Paulson agreed, saying he wished more
members of the U.S. Congress understood that.

APPLAUDING THE U.S. VISION FOR THE FUTURE
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14. (C) From time to time, Garcia said, the U.S. has a great
vision for the future. FDR,s Good Neighbor Policy and
JFK,s Alliance for Progress had been such moments. Peru
sought to promote growth hand-in-hand with the United States
and saw the proposal for a Free Trade Area of the Americas
(FTAA) in that way. Taking a jab at Brazilian opposition to
the FTAA, Garcia said that Peru is a small country and can,t
play both sides at once; Peru has to be orthodox. He
predicted that FTAs with the U.S. will be a defining event in
South American history. They will show in just a few years
what kind of approach produces solid results.

PERU: WE WANT A STRONG LONG-TERM FRIENDSHIP
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15. (C) South America has three serious countries, Garcia
said: Chile, Colombia (although it is beset with political
problems) and now Peru, which wants to join the group.
Unfortunately, he said, Chavez has a toehold in Ecuador and
appears to have scared Argentina. Peru can show that the
Chavista path is uselessly confrontational.


16. (C) Peru desires to weld a strong, long term political
friendship with the U.S., Garcia said. &We won,t hold back
) if you are our friend we should act like it. If Ecuador
doesn,t want the base in Manta, we will offer one here to
fight drugs and to show that Chavez is wrong.8 Garcia added
that he thinks governments like that of Venezuela inevitably
lead to international terrorism, just as was the case with
Libya for 20 years. Secretary Paulson ended the meeting by
saying there was no doubt in his mind that Peru is an
important friend of the United States and that it is
important Garcia,s government be successful for its
demonstration effect in the region.

COMMENT
--------------

17. (C) Secretary Paulson's visit was timely and served to
strengthen support for an increasingly strong bilateral
relationship. The visit, and Secretary Paulson's optimism,

helped reassure Peruvian worries over the fate of the PTPA in
Congress. Coming a month after the release of Peru's
spectacular macro-economic figures for 2006, the Treasury
Secretary's commendation on Garcia's stewardship of the

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economy was music to the President's ears, but also provided
a boost in confidence to local markets. The visit highlighted
a common interest in the challenges of poverty reduction and
trade-led growth, where a measure of success in Peru would be
a positive signal to the rest of the region.


18. (U) Secretary Paulson's party cleared this message.
STRUBLE