SCENE SETTER FOR SECRETARY PAULSON

UNCLAS LIMA 000785

SIPDIS

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL ECON ETRD EFIN ENRG PE
SUBJECT: SCENE SETTER FOR SECRETARY PAULSON


1. (SBU) Secretary Paulson: Welcome to Peru. Your visit
provides an excellent opportunity to affirm USG support for
the Garcia government's efforts to reduce poverty and expand
social inclusion through continued market-oriented,
investment-friendly growth policies.


2. (SBU) Peruvian government officials, including President
Garcia and Foreign Minister Garcia Belaunde, were initially
disappointed that President Bush's trip to Latin America did
not include Peru. This feeling was assuaged by the
announcement that the President would travel to Lima for APEC
2008, by a presidential phone call in late February, and by
your visit. President Garcia has welcomed the policy-level
attention from Washington, and is particularly pleased with
your visit. In past meetings, he has underscored his
commitment to democratic government and an open economy, and
reiterated his conviction that the relative success of this
pragmatic political-economic model in improving the lives of
all people, especially the poor, will be pivotal in defeating
the statist, autocratic alternative embodied in Venezuelan
President Hugo Chavez' "Bolivarian" revolution. Integral to
this effort, Garcia has said, is U.S. Congressional approval
of the U.S.-Peru Free Trade Agreement, formally known as the
Peru Trade Promotion Agreement (PTPA). You can expect a
similar message during your meeting with him.


3. (SBU) In his first seven months in office, President
Garcia has dispelled many doubts about whether he had learned
needed lessons from his troubled first term (85-90) with
respect to the economy. He has continued policies favoring
macro-economic stability and security for investment that
were implemented by his predecessor, while accelerating
efforts to direct the benefits of growth to the provinces and
the poor. This is understandable given the Peru's recent
record: an average of 5% growth over the past six years, 7%
growth in 2006 and a projected growth rate of 8% for this
year. Fueled in part by high mineral prices, exports and per
capita GDP figures have likewise registered significant
increases over the past five years.


4. (SBU) Garcia has also resisted populist pressures on a
number of sensitive economic questions. One early such
question was a call to eliminate the basic service charge
("renta basica") for users of the national telephone company,
Telefonica. While the ruling APRA party had campaigned in
favor, in power it eventually pursued a more pragmatic course
that resulted in a negotiated agreement between the
government and the company to reduce (but not eliminate) the
basic service charge. Similarly, the government managed to
deflect moves to "nationalize" the vital mining industry (a
la Bolivia with its hydrocarbons industry) or to compel
renogiation of legally established contracts. Either of
these approaches would have undermined investor confidence in
Peru and interrupted the country's steady climb toward
"investment grade" status -- an explicit government goal.
Instead the government seized as its own a behind the scenes
proposal from the private sector under which mining companies
make "voluntary contributions," on a sliding scale of 1 to
3.75% of after tax profits (depending on the size of the
company),to invest in infrastructure and social projects in
the regions and communities in which they operate.


5. (SBU) If Peru's macro-economic numbers are excellent,
persistent poverty remains the central political challenge.
Close to half of Peruvians, mostly in the southern highlands
and Amazonian lowlands, continue to live below the poverty
line. Notwithstanding the economic growth, wealth has failed
to "trickle down" in a politically satisfying way -- up to
now. President Garcia, who beat his populist rival Ollantu
Humala in the 2006 elections by a 5% margin, understands the
urgency of this challenge. That is, he knows that if his
government is to succeed and Peru is to consolidate its
current positive transformation, economic growth and
market-friendly policies must be used to reduce poverty and
to bring in the mass of Peruvians as full beneficiaries of
the country's supposed success.

6. (SBU) Garcia's social policy consists of two
inter-related planks. The first is to consolidate Peru's
tangle of social support programs from 80 down to 20, to
reduce bureaucratic overhead costs and to ensure the
government's limited funds get directly into the hands of
those who most need them. The second plank is to
significantly increase social spending, with a focus on
education, clean water and electrification. In this
connection, Garcia has no bones about borrowing and expanding
ideas from his predecessor such as "Juntos" ("Together") -- a
program that gives financial incentives for poor families to
keep their children in school. As a first step toward
education reform, the government has also moved to break the
asphyxiating stranglehold on public schools of the Maoist
national education union (Sutep).


7. (SBU) In addition, Garcia has inaugurated his own
signature social programs: "Sierra Exportadora" ("Exporting
Highlands"),which aims to fight poverty by linking small
rural producers to national and international markets; "Agua
Para Todos" ("Water for Everyone"),intended to make clean
drinking water available to poor urban and rural communities;
and accelerated decentralization, to transfer money and
decision-making authority from the central government (where
it remains highly concentrated) to the regions and
municipalities. These programs remain more idea than reality
at this point, and have faced a range of concrete obstacles
in their implementation. For example, transfer of funds and
spending authority from the central government to the regions
has been slowed by concern that regional and municipal
governments are ill prepared to take on these new
responsibilities, by the central government's own
administrative incapacity and by a series of ministerial
spending scandals that some observers blame on the
government's impatience to rush to work without having laid
the necessary institutional groundwork first.


8. (SBU) You will note a clear convergence in the themes
struck by President Bush during his Latin America visit --
the importance of democracy, investing in people, improving
education and health, and free trade -- with the policy
priorities of the Garcia administration. Your visit is a
timely opportunity to underscore these convergences and to
reiterate USG support for Garcia's economic management. I
look forward to having you with us in Peru.
STRUBLE