Cablegate: Scenesetter for the Visit of Secretary Gutierrez

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E.O. 12958: N/A
TAGS: ECON OVIP
SUBJECT: SCENESETTER FOR THE VISIT OF SECRETARY GUTIERREZ
TO PERU

1. (SBU) Summary: You will arrive in Peru at a good time
for President Alan Garcia. Last month, the government
statistics office declared that poverty rates had declined
significantly to 44.5%. Last week, President Garcia took his
first steps on the world stage at the APEC Summit in Sydney,
an event Peru will host in 2008, calling for a new
political-economic architecture for the Pacific Rim. This
week's polls show his approval ratings rebounding as a result
of his government's strong response to the August 15
earthquake that left over 500 dead and many more injured.
The next likely event is the long-hoped for likely approval
by the U.S. Congress of the U.S.-Peru Trade Promotion
Agreement (PTPA). The PTPA has been the centerpiece of
Garcia's market-oriented, investment-friendly economic
strategy and should help Peru maintain its torrid economic
growth, which reached 8 per cent in 2006. Garcia's skillful
blend of patience and pragmatism has pushed the PTPA forward
as the focus of the government's efforts to spread the
benefits of trade-led growth to the Peruvian population left
behind. The PTPA would also bolster Peru's place among
pro-market democracies, providing a successful example that
contrasts with Bolivarian alternatives.

2. (SBU) Nevertheless, Garcia still faces public skepticism
about the government's slow pace in converting that growth
into palpable poverty reduction. Public frustration caused
widespread protests in July and had eroded Garcia's popular
support nationwide. In relations with the United States,
Garcia has emphasized the confluence of our mutual interests,
most notably, in combating narco-trafficking, in promoting a
democratic, free market vision of society, and in countering
the regional security threat posed by President Hugo Chavez's
"Bolivarianism." Peru's economic boom and a talented Cabinet
eager to address the challenges facing the country suggest
that the democratic consolidation witnessed during Garcia's
first year in office will continue. End Summary.

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Garcia after One Year
---------------------

3. (SBU) Since taking office, Garcia has calmed skeptics who
feared a return to the economic mismanagement and populist
spending of his first term (1985-1990). Instead, he has
stayed the economic course carved out by his predecessor
Alejandro Toledo, maintaining macro-economic stability (less
than 2 per cent inflation) and overseeing the sixth straight
year of impressive GDP growth, 8% in 2006 and more than 7%
projected for 2007.

4. (SBU) Garcia, moreover, appears poised to achieve his top
strategic goal: approval by the U.S. Congress of the PTPA.
On June 27, Peru's Congress overwhelmingly passed the labor
and environmental amendments requested by the U.S. Congress.
The GOP also negotiated an understanding with U.S.
Congressional leaders in August. The agreement now awaits
final approval by the U.S. Congress. PTPA approval would
provide a powerful political boost for Garcia, give Peruvian
exports permanent, tariff-free access to the U.S. market, and
help ensure continued strong economic growth. A free trade
agreement with the United States would also bolster Peru's
place among pro-market democracies, providing a successful
example in contrast to Bolivarian alternatives.

-------------------
The Need to Deliver
-------------------

5. (SBU) The GOP's principal domestic policy goal has been
to convert this solid economic performance into palpable
benefits for all Peruvians. According to the National
Statistics and Information Institute, in 2006 44.5% of
Peruvians lived in poverty, a 4% drop from 2004. But this
reduction in poverty largely took place within the relatively
prosperous coastal provinces, leaving stubbornly high poverty
rates -- as high as 70 to 80% -- in the politically volatile
southern Sierra region where Garcia has never been popular.
Senior officials recognize the urgent need to reduce poverty
and provide better social services -- particularly quality
public education and greater access to health care, water and
infrastructure. The Garcia administration has pursued a host
of initiatives, including building access to clean drinking
water for poor rural and urban communities, linking small
rural producers to national and international markets,
expediting the flow of public purchases and investments, and
transferring bureaucratic functions to regional and municipal
governments.

6. (SBU) The GOP, however, has often bumped against the

structural limitations of a dilapidated and often
dysfunctional state. The underlying problem is that state
mechanisms, particularly at the local level, have proven
incapable of administering the abundant resources made
available by the economic boom. Another aspect of the
problem is the lack of talented administrators, who have fled
to better paying jobs in Lima, leaving municipalities unable
to manage basic public services.

------------------------------------
Steadiness Despite Public Impatience
------------------------------------

7. (SBU) Fairly or unfairly, the dearth of high-impact
projects has been perceived by many as a failure by
government to deliver on its campaign promises, resulting in
a steady erosion of Garcia's popular support: his 63% August
2006 approval rating dropped to 36% by July 2007. However,
Garcia's dynamic efforts to take personal charge of
earthquake relief efforts helped his popularity ratings
rebound to close to 35%. Garcia shows no sign of abandoning
his pro-market economic vision and returning to the ill-fated
populism that marred his first term. By comparison, Toledo
received only a 16 percent approval rating after his first
year in office.

8. (SBU) Pent-up frustration at the slow pace of reform
fueled a tumultuous month of protests in July, when a total
of 35 major protests took place in 16 of Peru's 24
departments. A wide variety of causes sparked the unrest:
teachers protesting mandatory testing; miners seeking an end
to subcontracting; regional presidents calling for more
public works; and ne'er do wells seizing the chance to sow
trouble. The GOP proved adept at addressing the localized
causes of the unrest, and so far, the widely-separated
demonstrations have failed to produce a national movement,
although Peruvian officials are convinced that Venezuelan
money is helping organizers coordinate more effectively. Even
though Caracas remains active in trying to exploit
localized discontent, poverty and discrimination remain the
fundamental causes of unrest. Although strikes have largely
ended, the cycle of protest could resume during your trip.

--------------
Foreign Policy
--------------

9. (SBU) Garcia's foreign policy aims to complement his
domestic focus on growth-led poverty reduction by
prioritizing ties with pragmatic integration-minded,
pro-growth countries, including Chile. His bold call at the
September 9 APEC summit in Sydney for a new political-
economic architecture of the "Pacific Arc" is part of a
series of efforts to expand relationships with both Latin and
Asian partners in this region. Steps to intensify
and expand Peru's relationship with Chile have been at the
center of this effort and engendered what the GOP sees as an
informal "axis" of Pacific coast nations -- including Chile,
Peru, Colombia and Mexico -- that can counterbalance the
destabilizing influence of Chavez in the region. The point
of this pragmatic posture is to demonstrate that
trade-friendly democracies offer more opportunities than that
static, state-dominated alternative. The momentum for a
closer working relationship with Chile was slowed by the
GOC's July 11 decision not to extradite former president
Alberto Fujimori (the GOP has appealed), but most critics
blamed the Toledo Administration for submitting a flawed
legal brief, and Garcia is likely to continue the pragmatic
orientation of his regional policy.

---------------------
Relations with the US
---------------------

10. (SBU) Garcia's emphasis on deeds and results, not
rhetoric or confrontation, has coincided with a period of
intense and productive relations with the USG. Garcia sees
strong ties with the U.S. as an essential component of both
his economic and security policies. He has traveled to
Washington twice, first in October 2006 and again in May
2007, when he met with President Bush and a number of key
congressional leaders to underscore the importance of the
PTPA. Garcia has personally received a stream of official
U.S. visitors to Peru, including Deputy USTR John Veroneau,
Deputy Secretary of State Negroponte, Treasury Secretary
Paulson, and then-Director of Foreign Assistance Tobias. He
has also received several congressional delegations,
including the high profile visits of Senate Majority leader

Reid and House Ways and Means Chairman Rangel. President
Garcia's foreign policy team has been pleased by the policy
attention from Wahington.

11. (SBU) The Garcia government has also proven to be a
reliable U.S. partner as a rotating member of the UN Security
Council. Peru has supported a number of key U.S. and
European UNSC initiatives, including on North Korea, Sudan,
Iran, Haiti, and Kosovo. While Peru has sought to avoid
controversy and to support consensus positions, bilateral
calculations have tipped the scales in most of the
government's decisions, which Garcia has often taken himself.
In his meetings with President Bush, Garcia has demonstrated
a keen engagement with issues of global security,
particularly on Iran and North Korea.

12. (SBU) In the fight against drug trafficking, Garcia has
emphasized publicly that counter-narcotics efforts, including
forced eradication, will continue, and he has vowed that
there "would be no treaty in the war against drugs." Part of
Garcia's strong public stance was a reaction to the
unauthorized talks that former Agriculture Minister Juan Jose
Salazar held with cocaleros in the early part of 2007; talks
that emboldened cocalero leaders to seek more concessions
through protests. Garcia sacked Salazar May 22 and replaced
him with a respected businessman who said he would not allow
cocaleros to dominate his ministry's agenda. UN figures
showed coca cultivation increased slightly in 2006.

13. (SBU) Finally, the GOP shares a strikingly similar world
view with the United States, particularly with respect to the
nature of the security threats we face in the region and
around the globe. In this connection, Peru sees
transnational threats such as narcotics trafficking,
terrorism, smuggling, trafficking in persons, and piracy as
the main menaces facing the region. The GOP remains
concerned about Venezuela's attempts to foment instability
and fuel conflict in marginalized sectors of Peruvian society.
NEALON

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