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Viewing cable 07LIMA785, SCENE SETTER FOR SECRETARY PAULSON

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Reference ID Created Released Classification Origin
07LIMA785 2007-03-16 15:17 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0025
PP RUEHWEB

DE RUEHPE #0785/01 0751517
ZNR UUUUU ZZH
P 161517Z MAR 07
FM AMEMBASSY LIMA
TO RUEATRS/DEPT OF TREASURY WASH DC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 4415
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 1624
RUEHBO/AMEMBASSY BOGOTA PRIORITY 4456
RUEHBR/AMEMBASSY BRASILIA PRIORITY 7250
RUEHBU/AMEMBASSY BUENOS AIRES PRIORITY 2823
RUEHCV/AMEMBASSY CARACAS PRIORITY 0217
RUEHGT/AMEMBASSY GUATEMALA PRIORITY 1002
RUEHLP/AMEMBASSY LA PAZ MAR 4112
RUEHME/AMEMBASSY MEXICO PRIORITY 3478
RUEHMN/AMEMBASSY MONTEVIDEO PRIORITY 9129
RUEHQT/AMEMBASSY QUITO PRIORITY 1086
RUEHSG/AMEMBASSY SANTIAGO PRIORITY 1173
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUMIAAA/USCINCSO MIAMI FL PRIORITY
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