CUSCO REGON: POVERTY GROWING AMIDST PLENTY

C O N F I D E N T I A L LIMA 001507

SIPDIS

E.O. 12958: DECL: 09/13/2018
TAGS: PGOV PREL PINR PE
SUBJECT: CUSCO REGON: POVERTY GROWING AMIDST PLENTY

REF: A. LIMA 1453

B. LIMA 389

Classified By: DCM James D. Nealon for reasons 1...

id: 169695
date: 9/12/2008 21:12
refid: 08LIMA1507
origin: Embassy Lima
classification: CONFIDENTIAL
destination: 08LIMA1453|08LIMA389
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C O N F I D E N T I A L LIMA 001507

SIPDIS

E.O. 12958: DECL: 09/13/2018
TAGS: PGOV PREL PINR PE
SUBJECT: CUSCO REGON: POVERTY GROWING AMIDST PLENTY

REF: A. LIMA 1453

B. LIMA 389

Classified By: DCM James D. Nealon for reasons 1.4b and d.


1. (C) Summary: Recently released poverty statistics from the
Cusco region help put Peru's positive national-level
macro-economic news into political perspective. According to
the National Statistics and Information Institute (INEI),
poverty in Cusco actually increased by 4% from 2004-2007 at
the same time as nationwide poverty dropped by nine percent.
That Cusco is the heart of Peru's tourism industry and home
to significant natural resource wealth only underscores the
region's -- and Peru's -- broader challenge: how to
distribute resources from a relatively prosperous urban core
to impoverished rural areas. Cusquenos blame the increase in
poverty primarily on mismanagement and abdication of
responsibility by local government. Local observers also
blame national laws restricting the use of mining and gas
royalties received by the regional and local governments.
Others argue that radical political agitators and individuals
with a political or economic stake in Cusco's continued
poverty have actively sought to undermine development
efforts. End Summary.

Growing Poverty in a Wealthy Region
--------------

2. (C) A central question surrounding Peru today is how an
economic boom, with growth high and macro-level poverty
beginning to drop (ref A),can be accompanied by plummeting
popular support for the country's political leadership,
including President Garcia. One answer is that the
"big-picture" view conceals as much as it reveals. Zoom in
toward the regional, sub-regional and local levels and the
picture gets more varied and fuzzier, the good news more
ambiguous. A snapshot of poverty in the Cusco region offers
a representative example of this complex and somewhat
counterintuitive situation.


3. (C) According to recent statistics from Peru's National
Statistics and Information Institute (INEI),poverty in Cusco
region has increased in recent years -- from 53.1% in 2004
to 57.4% in 2007 -- at the same time as national poverty
levels fell from 48.6% to 39.3%. This growth in poverty is
notable given the region's rapidly expanding wealth in
mineral resources and natural gas reserves and its status as
the heart of Peru's tourism industry. Between 2004 - 2007,
Cusco's natural gas canon increased from about $24 million to
about $200 million while its mining canon increased from zero
in 2004 to nearly $100,000,000 in 2007. (Note: "Canon"
refers to natural resource royalties appropriated to regional
governments, municipalities, and universities for use in
development and infrastructure projects. End Note.) From
2004 and 2007, the number of tourists visiting Machu Picchu
rose from about 450,000 to about 800,000.


4. (C) Cusco region's challenge mirrors the broader challenge
faced by Peru as a whole: how to distribute resources from a
relatively prosperous urban core into impoverished rural
areas. Cusco city, the capital of Cusco region, is
predominantly middle-class with ample employment -- urban
employment in Cusco grew more than 7% in the first half of
2008, according to the Ministry of Labor -- and upward
pressure on wages for skilled workers, local observers told
poloff during a recent visit. One NGO representative told us
the demand for skilled construction workers was so high that
it was difficult to find anyone to help with building
renovations. By contrast, the scene changes dramatically an
hour outside the city. Emboffs recently visited several
agricultural villages near the tourist route to Machu Picchu
and observed impoverished communities rivaling Peru's poorest
regions. The NGO representative commented that, judging by
the telling metric of childrens' shoes, much of rural Cusco
-- where children often have no shoes at all -- is even worse
off than the struggling Puno region on the Bolivian border.

Failed Local Government
--------------

5. (C) Cusquenos blame the increase in poverty primarily on
the mismanagement and corruption of regional and local
governments. Our local contacts say that Regional President
Hugo Gonzalez -- who won election in 2006 with about 29%
support -- rapidly lost credibility after appointing family
members to key policy positions. XXXXXXXXXXXX told poloff that Gonzalez uses political criteria to designate resources for public work projects and
said that Gonzalez's daughter often chooses people for
government jobs. In January 2008 Gonzalez sought to repair
his image by appointing an apolitical technocratic manager to
oversee development, but the manager resigned in frustration
after six months of internal infighting. Cusco's Mayor
Marina Sequeiros in June 2008 was voted out of office by the
city council on charges of corruption, including using
municipal funds to pay her personal maid.


6. (C) Our Cusco contacts also argue that local governments
have abdicated their responsibility to provide basic public
services. XXXXXXXXXXXX told poloff that the
teacher evaluation and training services provided by his NGO
and others in rural Cusco by law should be provided by the
regional government. The medley of NGOs doing this work do
not follow uniform standards or practices, and do not have
the authority to implement their recommendations. The
regional government allows NGOs to handle the job and has not
dedicated staff to assuming the services. XXXXXXXXXXXX added that
after months working with one dedicated employee in the
regional government's education office, the employee was
replaced. Cusco's Regional Director for the National
Institute of Civil Defense -- Peru's FEMA equivalent -- told
a similar story. Even though the central government in June
had transferred new disaster planning responsibilities to
regional governments, Cusco's government showed no
inclination to assume these duties or even to discuss the
matter with Civil Defense. The Director said that his office
would be forced to continue carrying out the same
responsibilities with fewer resources. Meanwhile, the
Regional Government managed to spend only about half of its
investment budget -- including canon resources -- in 2007.

Mining Canon Resources Inflexible
--------------

7. (C) National laws restricting the use of mining canon
resources has also undermined Cusco's development potential,
according to local observers. The laws governing mining
canon allows governments to invest the canon only in new
infrastructure and other development projects, not in
maintaining former public works such as roads, or in
recurring costs such as salaries. Cusco's Human Rights
Ombudsman told poloff that these restrictions led to
situations like the one in the town of Espinar, where the
mining firm Xstrata had built and staffed an impressive
hospital while the Regional Government was unable to take
over management of the hospital because it could not use
canon resources to pay for operational costs. Xstrata has
continued paying doctors for now, but will eventually
withdraw, leaving no sustainable impact. Lack of creative,
sustainable ideas for using mining canon has led some
municipal governments to build unnecessarily large sports
stadiums or statues. (Note: Poloffs have observed this
phenomenon in other Peruvian regions, including one lucrative
mining area in Tacna where five of six small towns had
oversized stadiums. End Note.) Another portion of canon
resources goes unspent and is returned to the central
government.

Intransigents and Radicals Undermine Development
-------------- ---

8. (C) Individuals with a political or economic stake in
Cusco's continued poverty have also sought to undermine
development, according to local contacts. The regional human
rights ombudsman told poloff about the case of a successful
effort to reduce poverty in rural Cusco called "Sierra
Productiva" (Productive Sierra). Initiated by poor farmers
from the town of Canas, the program has sought to apply
ancient, local agricultural technologies to improve
productivity and income. Sierra Productiva has had so much
success that it has attracted the attention of prominent
economists in Lima, mining companies, and other firms that
want to support and extend its reach. The program has also
drawn attacks from local leaders who fear that the its
success will lead to a reduction in other social assistance.
According to our contacts and press reports, a former Canas
mayor from the communist New Left Movement, regional
directors of the social program Juntos, local radio stations,
and leaders from the radical teachers union Sutep have all
worked to undermine Sierra Productiva. They alleged that the
program has created the false impression that Canas has
eliminated poverty and no longer needs outside help. Sierra
Productiva's supporters argue that these groups' real motive
is to destroy a program that, if successful on a broad scale,
would undermine support for leftist parties and unions.


9. (C) Leftist groups have also launched a series of strikes
that has directly hit tourism revenues and undermined the
region's image. A violent strike led by radical unions and
parties in February halted commerce for two days and led the
central government to cancel several days of APEC meetings
(Ref B). Rural strikes in early July forced the cancellation
of trains to Machu Picchu and led to a massive,
military-escorted, midnight evacuation of 1,200 tourists from
the area, according to Peru Rail's chief of security. XXXXXXXXXXXX said part of Cusco's problem is that the communist Patria Roja party dominates student
organizations at local universities, which he said churn out
lawyers and activists better suited to political agitation
than to deal with the region's genuine development problems.

Comment: Southern Highlands Lagging Behind
--------------

10. (C) Cusco's stagnation in the midst of plenty is a
worrying reminder of the long development road Peru has yet
to travel. Some regions, particularly along the coast, have
successfully managed their resources to reduce unemployment
and rural poverty. Others, particularly in the southern
highlands, continue to fall behind.
MCKINLEY

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