Peru: Political Situation, Economic Conditions and U.S. Relations
Released: 2008-01-15T00:00:00

Summary:
Peru, a coca-producing country in the Andean region of South America, has had a turbulent political history. Despite its tumultuous past, Peru has recently taken steps to consolidate its democracy and pursue market-friendly economic policies. For the past seven years, Peru, a leading mineral exporter, has posted some of the fastest economic growth rates in Latin America. GDP growth reached 8% in 2007. In June 2006, former president Alan GarcÃ­a (1985-1990) was elected president in a close race. After taking office, GarcÃ­a embraced the United States-Peru Trade Promotion Agreement (PTPA), which the two countries signed on April 12, 2006 and the Peruvian legislature ratified in June 2006. PTPA implementing legislation ( H.R. 3688 ) passed the House on November 8, 2007, by a vote of 285 to 132; the Senate on December 4 by a vote of 77 to 18; and was signed by President Bush on December 14, ( P.L. 110-138 ). In addition to trade matters, congressional interest in Peru focuses on human rights issues and counternarcotics cooperation. See CRS Report RL34108, U.S.-Peru Economic Relations and the U.S.-Peru Trade Promotion Agreement and CRS Report RS22521, Peru Trade Promotion Agreement: Labor Issues . This report will be updated periodically.

subsections: section_title: Background1
paragraphs: Peru has had a turbulent political history, alternating between periods of democratic and authoritarian rule. Political turmoil dates back to Peru's traumatic experience during the Spanish conquest, which gave rise to the economic, ethnic and geographic divisions that characterize Peruvian society today. Since its independence in 1821, Peru has had 13 constitutions, with only nine of 19 elected governments completing their terms. Peru's most recent transition to democracy occurred in 1980 after 12 years of military rule. The decade that followed was characterized by a prolonged economic crisis and the government's unsuccessful struggle to quell a radical Maoist guerrilla insurgency known as the Shining Path (Sendero Luminoso).
In 1985, leftist Alan GarcÃ­a of the American Popular Revolutionary Alliance (APRA) was elected president. During his first term (1985-1990) GarcÃ­a's antagonistic relationship with the international financial community and excessive spending on social programs led to hyperinflation. His security policies were unable to defeat the Shining Path. By 1990, the Peruvian population was looking for a change and found it in the independent candidate Alberto Fujimori. Once in office, Fujimori implemented an aggressive economic reform program and stepped up counterinsurgency efforts. When tensions between the legislature and Fujimori increased in 1992, he initiated a "self coup," dissolving the legislature and calling a constituent assembly to write a new constitution. This allowed him to fill the legislature and the judiciary with his supporters. President Fujimori was re-elected in 1995, but his popularity began to falter as the economy slowed and civic opposition to his policies increased. He was increasingly regarded as an authoritarian leader, due in part to the strong-handed military tactics his government used to wipe out the Shining Path that resulted in serious human rights violations.
President Fujimori won a third term in 2000, but the elections were marred by irregularities. Within weeks of taking office, a bribery scandal broke that, combined with allegations of human rights violations committed by his top aides, forced Fujimori to agree to call new elections in which he would not run. An interim government served from November 22, 2000 to July 28, 2001, when the newly-elected government of Alejandro Toledo took office. Toledo's presidency (2001-2006) was characterized by extremely low approval ratings but high economic growth rates; 5.9% in 2005 and 8% in 2006. Toledo was able to push through several reforms, including a tax reform measure and a free trade agreement with the United States. Despite the economic improvements, Toledo's presidency was marred by allegations of corruption and recurrent popular protests.
section_title: Current Political and Economic Issues
subsections: section_title: Political Situation
paragraphs: On June 4, 2006, former President Alan GarcÃ­a defeated populist Ollanta Humala 53% to 47% in a close election. GarcÃ­a won in the second round after garnering support from Peru's business community, which had been reluctant to support him in the first round. A retired army officer who led an October 2000 uprising against then-President Alberto Fujimori, Humala espoused nationalist, anti-globalization policies. Many observers were concerned that Humala had authoritarian tendencies. Now the opposition leader in Peru's Congress, Humala was charged in August 2006 with murder in connection to his military actions in the 1990s. In the legislative elections, Humala's alliance won 45 of the 120 seats in the unicameral Congress; GarcÃ­a's party APRA won 36 seats, the center-right National Unity coalition captured 17 seats, and Fujimori supporters won 13 seats.
President Alan GarcÃ­a has taken steps to assure the international financial community that he is running Peru as a moderate rather than as the leftist he had been in his early career. Since initiating his political comeback in 2001, when he made an unsuccessful bid for the presidency against Alejandro Toledo, GarcÃ­a has softened his populist rhetoric and apologized for his earlier errors. President GarcÃ­a seems to have embraced sound economic policies, and the Peruvian economy has continued to perform well. However, his government has faced periods of social unrest and popular protests over lingering concerns about poverty and inequality. GarcÃ­a's approval ratings have varied widely, reaching a high of 76% in August 2007 after his response to an 8.0 earthquake that killed at least 519 Peruvians, and then falling to 29% in November after a series of corruption scandals in his government. GarcÃ­a has made solidifying relations with the United States a top priority and shown himself to be a strong U.S. ally and a leading supporter of free trade in Latin America. Key political challenges facing the GarcÃ­a administration include:
Reducing poverty and inequality. According to the World Bank, the wealthiest 10% of the Peruvian population control 41% of the country's income whereas the poorest 10% control just 1% of the income. In recent years, Peru has seen rising popular demands for a solution to economic inequality. Poverty is more prevalent among indigenous households at 63% compared to 43% among non-indigenous households. President GarcÃ­a has pledged to increase public investment and social spending in order to reduce poverty and inequality, but has struggled to meet popular expectations. Fujimori Trials. In December 2007, the main trial began against former President Fujimori who is accused of corruption and human rights abuses. While most Peruvians feel that Fujimori ought to be prosecuted for his past crimes, many also feel that the possible punishment he faces â up to 30 years in prison and a fine of $33 million â is too harsh. As the trial continues, President GarcÃ­a may lose the support of the Fujimorista bloc in the Peruvian Congress, which he relies on to pass legislation, as well as popular support. In a separate case, also in December, a judge sentenced Fujimori to six years in prison for ordering an illegal search of a private residence during his last days in office. Counternarcotics policies. The government has increasingly relied on forced eradication to reach its coca eradication targets, which has in turn produced violent clashes between coca farmers and police. In 2006, the government eradicated 12,688 hectares of coca, making it the second year in a row that it surpassed its goal of eradicating 10,000 hectares. Former Shining Path guerillas have reportedly been involved in coca growing and in providing security for drug-traffickers in Peru.
section_title: Economic Issues
paragraphs: President GarcÃ­a has continued the pro-market economic policies of his predecessor, Alejandro Toledo, who presided over one of the highest economic growth rates in Latin America throughout his term, with 8% growth in 2006. GarcÃ­a has embraced the U.S.- Peru Trade Promotion Agreement (PTPA), appointed a fiscally conservative finance minister, and cut government pay. Economic growth has been fueled by Peru's strong exports of minerals, textiles, and agricultural products such as sugarcane, potatoes, and asparagus. Peru is the world's second largest producer of silver and sixth largest producer of both gold and copper. It is also a significant producer of zinc and lead. The Peruvian economy has been boosted by U.S., Brazilian and Argentine investments in the Camisea natural gas project, which by 2009 is expected to be exporting liquified natural gas to the United States and Mexico.
President GarcÃ­a has sought to reassure poor Peruvians that he is addressing their needs by pledging austerity measures such as halving the Government Palace's annual spending and redirecting the funds to a rural irrigation project. GarcÃ­a says he will also find ways to use trade to reduce the level of poverty in Peru and widen income distribution. His government is seeking to boost rural development by increasing its investments in road construction, sanitation projects, and water connections.
section_title: U.S. - Peruvian Relations
paragraphs: Peru enjoys strong ties with the United States, characterized by extensive economic linkages and significant counternarcotics and security cooperation. Since the presidency of Alejandro Toledo in 2001, Peru has focused on strengthening those ties. Some 200,000 U.S. citizens visit Peru annually and over 400 U.S. companies are represented in Peru. President GarcÃ­a met with President Bush at the White House in October 2006 and again on April 23, 2007, at which time the leaders discussed their shared commitment to fighting the production and consumption of illicit drugs and to securing congressional approval of the PTPA. On December 14, 2007, Presidents Bush and Garcia met again for the signing of H.R. 3688 , the implementation bill for the PTPA. Issues in U.S.-Peruvian relations include democratic development, human rights, counternarcotics, and trade issues, which are at the forefront of the bilateral agenda.
subsections: section_title: U.S. Aid
paragraphs: The United States provided $141.7 million in foreign aid to Peru in FY2006 and another estimated $138.9 million in FY2007. The FY2008 request for Peru is for $93.2 million, with the most significant cuts occurring in counternarcotics funds traditionally provided through the Andean Counterdrug Initiative (ACI). Beginning in FY2008, alternative development programs previously supported by ACI funds will be shifted to the Economic Support Fund (ESF) account. ACI has been the primary U.S. assistance program to help Colombia and its neighbors address drug trafficking and related economic development issues. The Consolidated Appropriations Act for FY2008 ( H.R. 2764 / P.L. 110-161 ) stipulates that funding from the Development Assistance and Global Health and Child Survival (formerly Child Survival and Health) accounts be made available for Peru at no less than the amount allocated in FY2007. It also provides funding for environmental programs in Peru at FY2006 levels. The joint explanatory statement to the Consolidated Appropriations Act recommends providing $30 million in Economic Support Funds and $36.8 million in ACI funds to Peru in FY2008.
The U.S. Agency for International Development has four main goals for Peru: strengthening democracy; increasing governance in isolated areas where drug traffickers operate; reducing poverty; and decreasing maternal mortality and other health threats. Peru was recently selected to participate in the Millennium Challenge Account (MCA) Threshold Program. That program will focus on combating corruption, strengthening the rule of law, and improving resource management in Peru.
section_title: Human Rights
paragraphs: The government of Peru has taken steps to expand and enforce its labor laws and to prosecute those accused of past and current human rights violations. According to Human Rights Watch, while the Peruvian government has made some progress in holding those accused of past abuses responsible for their actions, many are still able to avoid prosecution. The State Department's Country Reports on Human Rights Practices covering 2006 says that while the Peruvian government generally respects the rights of its citizens, ongoing problems include abuse of detainees and inmates by police and prison guards; poor prison conditions; trafficking in persons; child labor in the informal sector; and failure to enforce labor laws, among others. Human rights groups have also expressed concerns that a law passed in December 2006 to regulate the activities of non-governmental organizations operating in Peru unnecessarily restricts freedom of expression and association in the country.
section_title: Counternarcotics Cooperation
paragraphs: Peru is a major illicit drug-producing and transit country, accounting for 28% of global cocaine production. In 2006, according to United Nations figures, coca cultivation increased by 7% in Peru even though the government increased its coca eradication efforts by 4% from 2005 levels. The United States and Peru signed a five-year cooperative agreement for 2002-2007 that links alternative development to coca eradication more directly than past programs have. Peru is the second largest coca cultivating country in the world after Colombia, but receives less than one quarter of the funding Colombia receives through the Andean Counter Drug Initiative. In FY2008, counternarcotics assistance to Peru is estimated to total $66.8 million, down from the $106.5 million allocated in FY2006, and an estimated $103.3 million in counternarcotics funding provided in FY2007. Recent aid reductions appear to be due to overall budget cutbacks rather than any U.S. government dissatisfaction with Peru's counternarcotics efforts.
section_title: U.S. - Peru Trade Promotion Agreement
paragraphs: The United States is Peru's largest trading partner. Since December 2001, exports from Peru have received preferential duty treatment through the Andean Trade Preference Act (ATPA), later amended by the Andean Trade Promotion and Drug Eradication Act (ATPDEA) in August 2002. These trade preferences were scheduled to end on December 31, 2006. However, the acts have been extended twice, and are now scheduled to expire on February 29, 2008. ATPDEA gives duty-free market access to selected Peruvian goods without requiring reciprocal trade concessions or addressing issues such as intellectual property rights.
On December 7, 2005, the United States and Peru concluded negotiations on the U.S.-Peru Trade Promotion Agreement (PTPA). President Bush notified the Congress of the United States' intention to enter into the PTPA on January 6, 2006, and the agreement was signed on April 12, 2006. The PTPA was ratified by the Peruvian legislature in June 2006. Whereas the ATPDEA provides temporary trade preferences to some goods from Peru, the PTPA is a comprehensive trade agreement that will permanently eliminate tariffs and other barriers on U.S.-Peru bilateral goods and services trade. After several Members of Congress indicated that some of the provisions in the agreement would have to be strengthened, the Bush Administration and Congress reached an agreement on May 10, 2007 on a new trade framework that includes core labor and environmental standards. On June 27, 2007, Peru's Congress approved the amendments to the PTPA. PTPA implementing legislation ( H.R. 3688 ) passed the House on November 8, 2007, by a vote of 285 to 132; the Senate on December 4 by a vote of 77 to 18; and was signed by President Bush on December 14, ( P.L. 110-138 ). During its second session, the 110 th Congress is likely to be interested in implementation of the PTPA.