SCENESETTER FOR CODEL NELSON

UNCLAS LIMA 000447

SIPDIS

SENSITIVE
SIPDIS


E.O. 12958: N/A
TAGS: PGOV PREL ECON OTRA ETRD PE
SUBJECT: SCENESETTER FOR CODEL NELSON


1. (SBU) Welcome to Peru. Your visit comes just after the
six-month mark of President Alan Garcia's government, which
sees itself as leading a "moderate" Pacific coast bloc of
nations toward regional integration. While President Garcia
does not know the U.S. well, he understands that a
coincidence of interests -- on economic and commercial
issues, counter-terrorism and counter-narcotics, and the
disruptive effects of Venezuelan President Hugo Chavez'
attempts to export his "Bolivarian" revolution -- require
close cooperation with the United States. In his meetings
with you, President Garcia is likely to underscore the
importance of the bilateral relationship, press for
Congressional approval of the U.S.-Peru Trade Promotion
Agreement and solicit clarification of reported cuts in U.S.
assistance levels, particularly in the counter-narcotics area.

Garcia and Latin America
--------------

2. (SBU) In the regional context, 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.
He has taken actions that clearly reinforce the moderate
centrist elements in South America, including cultivating his
friendship with Chilean President Bachelet and inviting Chile
to return to the Andean Community. Garcia sees Venezuela's
Hugo Chavez as the greatest threat to this vision, and the
Government of Peru is working to keep lines of communication
open to new leaders in Ecuador and Bolivia in an effort to
convince them not to reflexively follow Hugo Chavez' lead.
Garcia wants to be a consensus-maker, not a
consensus-breaker, and believes that confrontation only
favors Chavez. The recent announcement that Peru and
Venezuela would send Ambassadors to one another's countries,
after an almost one-year hiatus in full diplomatic relations,
is an example of this approach.

Peru, Venezuela and the U.S.
--------------

3. (SBU) Surface developments aside, 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
oter 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 2006
presidential campaign, are profoundly unsettling to a
Peruvian President who is trying to satisfy urgent social
needs in responsible fashion.

Hoping for More from the U.S.
--------------

4. (SBU) If Garcia clearly understands the economic benefits
attached to the Free Trade Agreement (known as the U.S.-Peru
Trade Promotion Agreement),in recent meetings with U.S.
officials he has often also highlighted its strategic
importance. With President Bush in Washington and Senator
Reid in Lima, he pointedly noted that democratic governments
and free-trading regimes need to demonstrate that democracy
and free trade are better for everyone in the region,
including the poor, than are the populist, autocratic,
"closed economy" alternatives -- implying that PTPA passage
would be pivotal in this connection. Garcia and his APRA
Party voted for the PTPA's ratification last June. Now, with
the fate of the agreement unclear, the President is concerned
about the consequences to his personal credibility and the
standing of his government if the U.S. Congress does not
approve it. Similarly, Garcia is likely to express his
disappointment regarding the decline in U.S. assistance
levels to Peru, particularly for counter-narcotics. This
concern is rooted in recent press reports surrounding
President Bush's 2008 budget submission.


5. (SBU) While Peru has a decade-long history of progress on
counternarcotics, there has been some worrisome regression
more recently. Ten years ago, Peru was the world's number
one producer of cocaine. The Fujimori government's
disruption of the narco smuggling air route between Peru and
Colombia caused coca prices to crash and production to be
rolled back. In recent years, cultivation and prices have
begun to rise, and Garcia stated recently that the GOP had to
put more of its own money into the fight against illegal
narcotics. The government unveiled its long-awaited
2007-2011 National Drug Strategy at the end of 2006 with a
budget attached -- a first -- and has now restarted
eradication and interdiction operations in the main coca
source zones.

The Domestic Front
--------------

6. (SBU) On the domestic front, Garcia faces a number of
challenges but also has signficant cards to play. Garcia's
key challenge will be to strike a balance between tending to
urgent social needs and preserving macroeconomic stability.
His government must produce concrete results for the
significant swath of voters -- almost 50% -- who chose
radical nationalist and Hugo Chavez ally Ollanta Humala in
the 2006 general elections, and stem the fragmentation
evidenced in the November regional and municipal elections
(in which traditional parties, including the ruling APRA,
lost big). Peru's disenfranchised, concentrated in the
southern highlands and the Amazonian lowlands, believe that
five years of economic growth have brought them little, and
they will be holding President Garcia to his promise of
quick, decisive and meaningful action to improve their lives.



7. (SBU) President Garcia has shown that he understands the
urgency of the challenge. And at least on a symbolic level,
he has responded quickly, cutting the salaries and benefits
of public officials and reducing the foreign travel of high
level government representatives. (He himself flew economy
class to the United States, accompanied only by the Foreign
Minister, for his meeting with President Bush late last
year.) His administration has proven quick and dexterous in
responding to social conflicts in the regions. He also
announced an "investment shock" in sectors like schooling and
water delivery. But as the honeymoon bloom wears off and the
workmanlike phase begins, some observers are beginning to
look for evidence that the government's plans are more than
promises and that the hard slow slog of implementation has
begun -- with mixed results.

It IS the Economy
--------------

8. (U) In his recent "State of the Republic"-type address,
Garcia focused almost exclusively on the economy, and said
his number one focus was growth. This is no surprise, given
the booming numbers Garcia inherited from his predecessor
Alejandro Toledo: five years of sustained economic expansion,
7% growth in 2006 and forecasts of over 8% for this year.
For their part, exports have more than tripled over the past
five years (partly thanks to high metal prices). 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.


9. (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 25-30% of 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 U.S.
Peru Trade Promotion Agreement (PTPA) a top priority. His
government also seeks to strengthen its ties with neighboring
Latin American countries. Peru expanded the Economic
Complementation Agreement with Chile in 2006, and is pursuing
trade deals with Mexico, Canada, the EU and several Southeast
Asian countries. Trade with China too is signficiant and
increasing. Finally, Peru is preparing to host the Asia
Pacific Economic Cooperation (APEC) summit in 2008

Tactical Political Skills Evident...
--------------

10. (SBU) Garcia is an acknowledged master of political
tactics, deft in seizing the policy initiative and focused on
keeping his rivals -- within the government, congress and his
own APRA party -- on their heels. This is in sharp contrast
to Toledo's political inexpertise, and has lent Peru a
surface political stability it had not seen for several
years. It has also helped the President maintain solid
public support, with poll numbers still well over 50%. In
some cases, Garcia has done this by resorting to gestures
that, while unlikely to have any legislative follow-through,
echo favorably with the public. Following a recent
controversial Inter-American Court of Human Rights (IACHR)
decision demanding that the state indemnify the families of
terrorists who were killed in a 1992 prison uprising, Garcia
reiterated his public call for the death penalty for
terrorists (aware that 85% of Peruvians agreed but that
Congress had already blocked the measure) and threatened to
pull Peru out of the regional court (later tacking away from
this threat).

But Strategic Intentions Unclear
--------------

11. (SBU) While few observers doubt Garcia's political
skills, some wonder whether the apparent short-term tactical
focus might undermine the government's ability to address the
country's longer term structural challenges. Critics
complain that his government's signature programs -- "Sierra
Exportadora" (Exporting Sierra, which is intended to connect
small rural producers to national and international markets),
"Agua Para Todos" (Water for Everyone, which is aimed at
bringing clean water to poor urban and rural communities) and
Decentralization (which is meant to transfer state functions,
authority and resources to regional and municipal
governments) -- are not being implemented with the proper
dispatch. For example, the state comptroller recently
testified to Congress that less than 10% of the monies
dedicated to decentralization had been transferred to
regions.


12. (SBU) To seize back the policy initiative, Garcia
recently launched a plan for a radical reform of the state.
An initial draft of the plan calls for significantly reducing
bureaucratic duplication, streamlining employment in the
executive branch and re-focusing the state's energies away
from promoting economic and social progress to regulating the
activities of the private sector. To push the idea, the
President hosted a meeting of the country's political leaders
to listen to their views and get their buy-in. In a positive
scenario, this comprehensive state reform project could build
on the government's early success in curtailing the powers of
the radical teacher's union (as a first step toward fixing
the broken education system) and in refocusing Peru's defense
forces toward transnational threats such as narco-trafficking
and terrorism. Still, people will increasingly be looking
for proof in the pudding.
STRUBLE