SCENE SETTER FOR CODEL PRICE

UNCLAS LIMA 001114

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PGOV PREL PINR PTER PHUM USAID OVIP PE
SUBJECT: SCENE SETTER FOR CODEL PRICE


1. (SBU) Summary: Peru is a close U.S. partner in a
complicated South American region. Our bilateral relationship
is anchored in a shared vision of opportunities and
challenges - specifically, that a pro-growth strategy is best
suited to reduce poverty and that strengthening institutions
is the most effective way to confront drug-trafficking,
terrorist remnants and, ultimately, increase support for
democracy. Peru's strong macro-economic performance has
limited the domestic effects of the international slowdown.
Politically, Peru is finding a way forward in a dialogue
process following violence in the Amazon region that left 24
police and 10 civilians dead. The objective of your visit -
to establish formal legislature to legislature ties - is
welcome among Peruvian representatives eager to improve
Congress's sagging image. End Summary.

Free-Market Pragmatism


2. (SBU) Peru is a close U.S. partner in a South American
region characterized by contrary political cross-currents. On
one side is the "Bolivarian" project embodied by Governments
of Venezuela, Bolivia and, to a lesser extent, Ecuador. On
the other side stands Peru, along with Chile, Colombia,
Mexico, Brazil and others. Emblematic of the pragmatic
approach, Peru has actively opened its doors to foreign trade
and investment -- signing free trade agreements not only with
the U.S., but also Canada, China, EFTA (Norway, Iceland,
Lichtenstein, Switzerland) and negotiating with the European
Union, Japan, and South Korea -- and sought to consolidate
its still fragile democratic institutions with incremental
reforms rather than sweeping visions.


3. (SBU) Since 1990, successive Peruvian governments
dominated by different political parties have adhered to a
free-market system, following sound fiscal and monetary
policies. These policies have brought steady and relatively
high economic growth, low inflation as well as slow but
steady reduction of former extremely high poverty and
unemployment levels. These successive administrations have
mostly avoided populist policies, and the general population
has increasingly supported foreign investment, reduction of
import duties, and free competition.


4. (SBU) Peru's strong macro-economic performance has
limited the domestic effects of the international slowdown,
even as export earnings have fallen, some jobs have been lost
in key mining and textile sectors, and the local stock market
has followed volatile global trends. Peru's high foreign
exchange reserves, low debt and limited exposure to the core
structural causes of the crisis, particularly toxic real
estate assets and other risky credit, have enabled it to
weather the storm relatively smoothly so far. However, for
the first time in eight years, in April, Peru experienced
negative monthly GDP growth following general declines in
growth since October 2008. While is it uncertain whether
Peru's economy has touched bottom, many analysts still
believe that projected growth this year will reach 2-3% --
the highest in Latin America.

Close U.S. Partner


5. (SBU) Our partnership with the Government Peru is anchored
in a similar vision of the opportunities available to us and
the challenges facing us here in Peru and throughout the
region. For example, we see eye to eye with the government
regarding the central importance of a pro-growth strategy in
reducing poverty and inequality. There has been some
progress on this front. Peru's strong economic growth,
averaging approximately 7% over the past eight years, has
begun to chip away at poverty -- which fell from 54% in 2003
to 36% in 2008. Peru's longer-term challenge is to make sure
that the benefits of sound economic management and continued
growth are better distributed and accrue to all Peruvians,
especially the poor. In this sense, Peru is in a kind of
race against time to make sure the benefits of the pragmatic
model are sufficiently widespread so as to prevent the
political rise of a serious anti-system political movement in
the 2011 national elections.


6. (SBU) We also support the government in confronting drug
trafficking and remnant Sendero Luminoso (SL) terrorist
elements -- the other central challenges to Peru's continued
advancement. To this end, we are working with the Peruvian
government to strengthen still fragile public institutions,
including security forces; to improve the service delivery
capabilities of democratic government, from the national to
the municipal and district levels; and to expand state
presence into remote areas where criminals and small numbers
of terrorists influence economic activity, including by
trafficking drugs. In short, we agree with the government
that improving peoples' economic prospects and helping
government institutions better deliver needed services --
from security to health and education -- is the most
effective way to counter latent support for populist
political projects, in Peru and throughout the region. In
this sense, we see Peru's continued success as carrying a
wider regional significance.

Government Regrouping


7. (SBU) Peru's government is regrouping following the
violent events of early June in the Amazon region of
northwest Peru that resulted in the deaths of 24 police and
10 civilian protestors (five of them indigenous). While
there is still some confusion surrounding the exact details
of the clash, there is little doubt that the Peruvian
government suffered a debilitating public relations blow,
inside and outside Peru. The immediate cause of the protests
that preceded the violence - in addition to longer-term
resentment in Amazon areas over state neglect and lack of
prior consultation - were a series of legislative decrees
regulating forest management, agricultural credit and land
use, and other development issues in the Amazon which
indigenous communities believed to be damaging to their
interests. (Note: One of these decrees, the forestry law,
contained provisions required by the U.S.-Peru Trade
Promotion Agreement (PTPA). These provisions included
environmental protections and mechanisms to combat illegal
logging. End Note). After the violence, sparked when
underprepared police tried to clear a blocked road that had
practically left nearby cities without food or fuel, Congress
repealed two of the decrees in question (including the one
related to the PTPA). Since then, President Garcia
reshuffled his Cabinet, and the new Ministers are now seeking
a way forward through a dialogue process designed to defuse
tensions and reassure indigenous communities with respect to
the government's intentions.

Congress in Need of Support


8. (SBU) The focus of your visit will be your interactions
with members of Congress and the inauguration of HDAC's
relationship with Peru's legislative branch. Congressional
representatives look forward to your visit. Many of Peru's
democratic institutions do not enjoy high popular support,
but Congress' image is particularly dismal. In a recent
poll, Congress has an 11% approval rating. Its perceived
ineffectiveness in helping resolve the recent Amazon crisis
only exacerbated a serious underlying problem. Calls for
broad structural reform have generally resulted in
legislative stalemate. Engaging with U.S. legislative
counterparts on these kinds of important issues, in the
context of the HDAC visit, offers a welcome opportunity to
rebuild support for legislative and political party reforms
and restore the credibility of Peru's Congress.


9. (U) Welcome to Peru.
MCKINLEY