Peru: Recovery from Crisis
Released: 2002-04-25T00:00:00

Socio-Economic Conditions

Peru lies on the northwest coast of South America. Its western coastal plains and eastern tropical lowlands areseparateddown its middle by the rugged Andes Mountains. Three times the size of California, it has a population of 25million,72% of which live in urban areas. Over 7 million people live in and around the capital of Lima. Official languagesareSpanish and Quechua; a number of other Indian languages are spoken as well. The population is 45% Indian, 37%mestizo(or mixed Indian- and European-descent), 15% white, and 3% black, Japanese, Chinese, and other groups.

Peru is a country of medium human development, according to the United Nations' Development Programme (UNDP),based on three socioeconomic indicators: longevity, educational attainment, and standard of living. Life expectancyin Peruis 68.6 years (compared to 76.8 years in the United States). The adult literacy rate is 89.2%. GDP per capita in 1999was$2,611. Although economic conditions have improved over the last five years, there is still extensive poverty inPeru. Asizeable portion of the population - 49% - live below the national poverty line. Thirty-three percent of thepopulationlacks access to safe water. Twenty-eight percent lack access to sanitation. There is a broad gap in incomedistribution inPeru. The richest 20% of the population account for over half (51.2%) of the nation's income or consumption. Thepoorest20% account for only 4.4% of income or consumption. (1)

Peru has a free market economy. Among the reforms implemented by the Fujimori government (1990-2000) were awide-ranging privatization program; simplification and strengthening of the tax system; lowering of tariffs; and theopeningof Peru to foreign investment. The United States is Peru's largest trading partner; in 1999, the United Statesexported about$1.6 billion to Peru. Peru is a member of the Andean Community and the Latin American Integration Association,withwhose members it shares duty-free access on many products. In 1998, the Andean Community agreed to establisha freetrade area with MERCOSUR, the Southern Cone Common Market, after the year 2000. Peru signed a Free TradeAgreement with Chile in 1998, to be implemented over several years, and is negotiating one with Mexico as well.

Political Conditions: State of Democracy in Peru

Basic elements of a democracy include effective and independent legislative and judicial branches ofgovernment, freedomof expression, respect for human rights, and free elections. A broad array of organizations, both domestic andinternational,criticized Fujimori throughout his decade in power for impeding the development of these democratic elements.

Fujimori effectively controlled both the legislature and judiciary, inhibiting the development of either as independentdemocratic institutions. In 1999 and 2000, Freedom House classified Peru as the only country in the hemisphere,besidesCuba, where the press was "not free." A State Department Human Rights report, released in February 2000, saidthatalthough human rights abuses had decreased in several areas, the Fujimori "Government's human rights record waspoor inseveral areas," including the protection of civil and political rights. The latest elections held in Peru, in April andMay,2000, were deemed by international and Peruvian observers to have been neither free nor fair. That controversy,combinedwith the revelation of high-level corruption in his administration led Fujimori first to agree to new presidentialelections inwhich he would not run, and then to flee to Japan and resign in November 2000.

Under the constitution's rules of succession, the president of the Congress, Valentin Paniagua, became Peru's newpresident. The immediate challenge facing the interim government was to organize the extraordinary elections, heldonApril 8, 2001, with a presidential run-off held on June 3. The Toledo administration faces the more long-termchallenge ofmaintaining stability in Peru while trying to strengthen democratic institutions weakened by 10 years of ademocraticallyelected, but autocratically run, government.

Erosion of Democratic Institutions under Fujimori. Most analystsacknowledge that in some major areas Fujimori brought greater stability to Peru. He did much to bring undercontroldestabilizing factors such as terrorism, drug trafficking, hyperinflation, and border disputes. But Fujimori also ledthecountry into several constitutional crises. He was elected in 1990 under a constitution which limited presidents toservingone 5-year term. In 1992, in what became known as a "self-coup," Fujimori dissolved Congress and took controlof thejudiciary. Under intense domestic and international pressure, Fujimori then oversaw the drafting of a newconstitution thatwent into effect in 1993, and scheduled elections. The new constitution allowed a president to serve two consecutivetermsand established a unicameral legislation.

Fujimori ran again in 1995, and won a second 5-year term. He quickly began paving the way for yet another term, furthereroding the independence of Peru's already weak democratic institutions as he did so. In 1996, the unicamerallegislature,dominated by a pro-Fujimori majority, passed a "Law of Authentic Interpretation" which stated that Fujimori'selectionunder the previous constitution did not count against the two-term limit of the current constitution. In 1997, theConstitutional Tribunal, a high court charged with deciding the constitutionality of laws, issued an opinion that theLaw ofAuthentic Interpretation was not applicable. The Peruvian Congress dismissed the three members of the court whosignedthe opinion (the other four members abstained), rendering the court unable to act. The Congress also thwarted aneffort bycivic organizations to put the matter of a third term to a national referendum, voting against allowing it, even thoughpetitioners gathered 1.4 million signatures - more than the 10% of registered voters required to do so.

The ability of Peruvian citizens to challenge such actions was further limited by the inability of the Constitutional Tribunalto act, and by Fujimori's withdrawal of Peru from the jurisdiction of the Inter-American Court for Human Rights. Fujimoriwithdrew from the court after the Inter-American Commission on Human Rights recommended in 1998 that Perureinstatethe three dismissed justices and restore the Tribunal's power to rule on constitutional issues. Fujimori's governmentannounced it would not comply with the recommendation.

Elections of 2000. (2) Having cleared away obstacles to his candidacy,Fujimori ran for an unprecedented third term. All 120 seats of the unicameral legislature were contested along withthepresidency. Many observers believed that electoral conditions did not represent a "level playing field" but anenvironmentthat heavily, and often unfairly, favored the incumbent. Numerous Peruvian and international election monitoringorganizations and press reports indicated several areas of concern: the executive branch's manipulation of thejudicialsystem to achieve its desired outcome; questions regarding the independence and impartiality of the electoral bodiesresponsible for organizing Peru's elections, and use of public resources for campaign purposes. Concerns regardingfreedom of the press and access to information involved unequal media access, media bias, and harassment ofcandidatesand domestic election observers. Two weeks before the April 9, 2000 elections, an international delegation to Peruorganized by the National Democratic Institute for International Affairs (NDI) and the Carter Center stated that,"Theconditions for a fair election campaign have not been established. Irreparable damage to the integrity of the electionprocess has already been done...". (3)

The first round of elections was followed by three tense days of delayed results, widespread suspicion of fraud, and publicprotests. After international observers said they would not validate a first-round victory by President Fujimori, Peruannounced there would be a second round of elections on May 28, though election officials denied there was anyconnection between the two acts. Election officials said Fujimori won 49.8% of the vote, and Alejandro Toledo40.31%.More than 50% of the vote is needed to win in the first round.

As the second round election approached, both Peruvian and international observers reported that conditions for a free andfair election still did not exist. The Peruvian monitoring organization, Transparencia, and the Organization ofAmericanStates (OAS) observer mission withdrew from monitoring the week before the runoff. Toledo withdrew as acandidatefrom the race. Fujimori denied requests from both organizations and Toledo to delay the vote in order to resolveirregularities. Official results showed Fujimori winning the election, with 51.2% of the votes cast. Toledo hadcalled onvoters to either boycott the vote or spoil their ballots; almost 30% of ballots were spoiled, and Toledo still received17.7%of the vote even though he had withdrawn from the race.

Fujimori's Fall. The United States pressed for regional sanctions, butthe OAS sent a high-level mission to press Peru for democratic reforms instead. An OAS permanent office was setup inPeru to oversee reforms and mediate a dialogue between the Fujimori government and elements of civic society,includingopposition parties. Decreased support for Fujimori, and corruption and human rights scandals involving Fujimori'stopaide, Vladimiro Montesinos, led Fujimori to agree to new elections in April 2001, in which he would not run.

On November 16, 2000, a group of opposition parties took over the presidency of the 120-member legislature for the firsttime since Fujimori suspended Congress in 1992. With Fujimori's loss of control over an institution which hadbecome arubber stamp for his initiatives, investigations into the expanding evidence of corruption in his administration - andhispossible role in it - became a strong possibility. One of the opposition's first actions was to reinstate the three judgesof theConstitutional Tribunal who had been fired after issuing an opinion unfavorable to Fujimori's efforts to seek a thirdterm inoffice.

On November 20, President Fujimori faxed his resignation to the Congress from Japan, where he had gone following a visitto an economic forum in Brunei. Congress rejected his resignation, removing him by declaring him "morally unfit"foroffice instead, a move apparently made to make him ineligible to run for office again in Peru. With Fujimori'sdismissal,and the resignation of his two vice-presidents, constitutional succession passed the presidency to the new Presidentof theCongress, Valentin Paniagua.

Fujimori remains in Japan, where he has claimed Japanese citizenship based on the registration of his birth there by hisparents, who were born in Japan. The Toledo administration seeks Fujimori's extradition, but the two countries donothave an extradition agreement. Further, Japan has confirmed Fujimori's citizenship and said he can remain in Japanindefinitely.

Interim Government

Valentin Paniagua was officially inaugurated President of Peru on November 22, 2000. His cabinet includedformer UnitedNations Secretary General Javier Perez de Cuellar as cabinet chief and foreign minister. The mandate of the interimgovernment was widely been seen to be threefold: (1) to guarantee and carry out free and fair elections scheduledfor April8, 2001; (2) to begin to restore the independence of democratic institutions by rooting out widespread politicalcorruption;and (3) to prevent the economy from sliding into recession. The Paniagua administration served until the newlyelectedToledo administration took office on July 28, 2001.

Following the June 3 elections, the head of the OAS Electoral Observation Mission, Eduardo Stein, praised the performance of Paniagua's interim government, saying it showed "very strong political will and determination toaddresscrucial problems of corruption, and tackle conflicts and conundrums resulting from the fall of the Fujimori regime,"and"therefore draft an agenda for the future government."

Organizing the 2001 Elections. The Paniagua government committeditself to holding presidential and parliamentary elections as scheduled, on April 8, 2001. A respected academic,FernandoTuesta, was appointed head of the National Office of Electoral Processes (ONPE), which oversees elections. Hepromisedto carry out a "profound internal reorganization" of the electoral body, and began by replacing the ONPE leadership. TheUnited States provided technical assistance and funded observation missions.

According to a report by the pre-election delegation of NDI and the Carter Center, "The conditions for organizing genuinedemocratic elections have been established in Peru, and the prospects for realizing them are strong." Describingtheconditions surrounding the 2001 extraordinary elections as "fundamentally different" from those of the previousyear'selections, the report said, "All of those with whom the delegation met expressed a high degree of confidence in theintegrityof the new leaders of government and of the electoral authorities." (4)

Rooting Out Corruption. An independent prosecutor and specialCongressional commission have been investigating the widespread corruption that apparently operated under theFujimoriregime. The network of corruption came to light through videotapes compiled by the former head of Peru'sintelligenceservice, Vladimiro Montesinos. The videos show members of Congress and others accepting bribes fromMontesinos. Montesinos fled the country soon after the first of these videotapes was broadcast last September. The Paniaguagovernment issued a warrant for his arrest, and in June 2001, Montesinos was captured in Venezuela and returnedto Peru. He faces some 168 criminal investigations into crimes including money laundering, illicit enrichment andcorruption,organizing death squads, protecting drug lords, and illegal arms trafficking.

The Paniagua administration also began purging the military of Montesinos associates, and attacking the impunity withwhich they operated. Over 40 high-ranking military officials have been forced to retire. Retired army general WalterLedesma, appointed by Paniagua to oversee the "depoliticization" of the military, promised the "absoluteimpartiality" ofthe armed forces during the elections.

In late February and March, several actions were taken against former President Fujimori. The Peruvian Congress voted tobar Fujimori from holding any public office for 10 years. Congress also stripped him of his five-year presidentialimmunity,allowing for criminal proceedings against him. Peru's attorney general filed criminal charges against him forabandonmentof office and dereliction of duty. Congress and government prosecutors began investigating Fujimori for numerousaccusations of impropriety, including embezzlement, mostly based on his link to Montesinos. The two were knownin Peruas the "Siamese Twins" for their apparently tight-knit relationship, yet Fujimori denies any involvement withMontesinos'alleged illicit activities over his 10 years in power.

Stabilizing the Economy. Peru's fragile economic recovery was stalledby the uncertainty surrounding the demise of the Fujimori government in late 2000. By tackling corruption anddemonstrating fiscal discipline, however, the interim government increased public confidence and kept the politicalcrisisfrom leading to economic chaos. Economic Minister Javier Silva outlined Peru's most serious economic problemsas thenational debt, the fiscal deficit, and the need to create a climate for investment. The government hoped to meet thefiscalgoals for 2001 agreed upon with the International Monetary Fund. Some economists said that approach, adheringto strictfiscal constraints, may prolong economic stagnation. But others said Peru might experience slight economic growthby theend of the year.

The 2001 Extraordinary Elections

The 2001 elections determined the new President and all 120 members of the unicameral legislature. Traditionalpoliticalparties were discredited in the 1980s, and current parties are mainly vehicles for an individual's candidacy. Therewere 8candidates running for president. Because no presidential candidate received more than 50% of the vote on April8, arun-off between the top two candidates was held on June 3, 2001. Members of the legislature were elected on April8, onlyneeding a simple majority to win a seat. The first round of elections were generally deemed free and fair bydomestic andinternational observers.

According to Peru's electoral commission, Toledo, of the Peru Posible party, won 36.51% of the first round vote, andGarcia, of Partido Aprista Peruano, won 25.78%. Just behind Garcia was Lourdes Flores, a former member ofCongressand long-time Fujimori critic, with 24.30% of the vote. Flores, an attorney, served in the legislature, or theConstitutionalAssembly after the legislature was dissolved in 1992, from 1990 to 2000. If elected, she would have been the firstwomanelected president in Latin America on her own achievements, not as the wife of a deceased president. Floresrepresentedthe Unidad Nacional party.

The campaign period leading up to the presidential run-off election was marked more by exchanges of character attacks bythe candidates than by debates on the issues. Polls showed much of the public to be disillusioned with both candidates,with as many as 25% saying they would cast null ballots. Voting is mandatory in Peru. In the final count, 13.8%cast blankor null votes.

There was at least one major episode of election-related violence. A bomb exploded near the national elections boardheadquarters on May 16, injuring seven people. Although pamphlets supporting the Shining Path guerrillas werefoundnear the explosion, Peru's Interior Minister said the material was atypical of the group's fliers and that it waspremature toattribute the bombing to the guerrilla group. Since the arrest of its leader, Abimael Guzman, in 1992, the ShiningPath's members and activities have been reduced to a minimum.

The two presidential candidates facing a run-off were Alejandro Toledo, who withdrew from runoff elections with Fujimorilast year because he believed they were not fair, and Alan Garcia, who was president of Peru from 1985 to 1990. Toledowon the election, with 53.0% of the vote; Garcia garnered 46.9%. Toledo, who earned his doctorate in economicsfromStanford University and was an adviser to the World Bank, emphasizes his humble origins. He is one of 16 childrenfrom apoor indigenous family and shined shoes as a boy.

Garcia spent years in self-imposed exile abroad following allegations of corruption in his administration, and has onlyrecently returned to Peru. Many critics blame Garcia's policies for creating a 7,000% annual inflation rate and a debtcrisiswhich led Peru into economic chaos. Nonetheless, these elections marked a remarkable political comeback forGarcia, whocan now be expected to be a powerful opposition voice during Toledo's term. In conceding the race, Garcia pledgedtowork for unity in pursuing a national agenda.

The head of the OAS Electoral Observation Mission to Peru said that Peru did an "incredible job" organizing "free andfair" elections on June 3 that were an example for the rest of Latin America.

The Toledo Administration

Reforms to restore and more fully develop democratic institutions have continued under President AlejandroToledo'sgovernment. Many analysts believe Toledo's most difficult challenge will be enacting economic programs that willstimulate economic growth after 3 years of recession, create jobs, and reduce poverty. Although economicconditions haveimproved over the last decade, Peru remains a poor country. Some 50% of its population of 25.7 million lives inpoverty,15% in extreme poverty. Forty-five percent of the population is underemployed, although this is down from 74%underemployed in the late 1980s and early 1990s. Thirty-three percent of the population lacks access to safe water. Percapita GDP in 2000 was $2,101.

During the presidential campaign, Toledo promised to create 2.5 million jobs over his 5-year term. Many Peruvians areimpatient for economic improvement, which was reflected in the drop in Toledo's popularity from 59% just afterhiselection to 30% in December 2001. Garcia's strong showing in the elections, say political analysts, denies Toledoa solidmandate for his programs. Nonetheless, Toledo's administration has raised over $1 billion in foreign aid to financehis jobcreation program. (5)

Post-election polls also indicated that, despite having voted for him, many Peruvians have serious questions about Toledo'scharacter. Many feel he did not adequately answer allegations - including that he used cocaine, fathered a child outofwedlock, and beat his wife - that arose during the campaign.

During a visit to Washington last June, Toledo emphasized the need for economic development, saying, "It's hard torebuild democratic institutions when 54 percent of our people live below the poverty line." In exchange for foreigninvestment, he promised to attack corruption and push for badly needed reforms to make Peru's judicial and otherinstitutions more transparent.

According to the Wall Street Journal , Peruvian and Wall Street analysts "point to passage of a prudent 2002 budget, plansfor an ambitious privatization program, and agreement for a fresh standby loan from the International MonetaryFund assigns that Mr. Toledo and an economic team led by Economy Minister Pedro Pablo Kuczynski are creating theconditionsfor growth." (6)

As part of his government's effort to reform the military, Toledo appointed the first civilian Defense Minister in Peru's180-year history, David Waisman. Waisman says that the administration is attacking corruption within the militaryanddepoliticizing it, by purging the leadership and overhauling the military structure and its training institutes.

U. S. Relations with Peru

The United States and Peru enjoyed generally friendly relations over the past decade, although the recurringpolitical crisesof the Fujimori government strained those relations. The current Administrations appear to be establishing arelationshipearly on. As President-elect , Toledo traveled to Washington in June 2001, meeting with President Bush, otherAdministration officials, and business leaders, and asking for economic support and investment. On March 23,2002,President Bush became the first U.S. President to visit Peru.

During that visit, the two Presidents pledged to fight terrorism and narcotics trafficking jointly. President Toledo, alongwith the Presidents of Colombia and Bolivia and Vice President of Ecuador, urged President Bush to extend andexpand theAndean Trade Preference Act, which expired in December 2001. Bush said he is committed to the program andasked theU.S. Senate to vote on it as soon as possible.

President Bush discussed several U.S. initiatives involving Peru during his visit, including the provision of $50 millionover the next 5 years to support consolidating democratic reform and $3.5 million to support the Truth andReconciliationCommission in investigating past human rights abuses. He promised the continued declassification and deliveryof StateDepartment documents requested by Peru's Congress to support its investigation into corruption and abuses undertheFujimori government. Presidents Bush and Toledo also committed to signing a debt-for-nature swap, under whichpart ofPeru's foreign debt will be cancelled in return for the Peruvian government's commitment to conserve and maintainwildlife reserves and other protected areas.

The two Presidents announced the re-establishment, after a 27-year absence, of the Peace Corps program in Peru, to whichPresident Toledo has a personal connection. One of 16 children from a poor indigenous family, it was throughPeace Corpsvolunteers that Toledo won a scholarship to study in the United States, where he ultimately earned a Ph.D. ineconomicsfrom Stanford University.

President Bush also announced a new initiative, the "Millennium Challenge Account," on his tour of Latin America. According to the White House, countries that "practice good governance" by strengthening the rule of law,anti-corruptionefforts, respect for human rights, and similar efforts; and "nourish human capital by investing in education andhealth care,and promote economic freedom through trade liberalization," would be rewarded with funds from the MillenniumAccountthat would be in addition to U.S. assistance already provided. (7)

The primary U.S. interest in Peru over the past decade has been the reduction of illicit narcotics production and trafficking. According to AID, "The overriding U.S. national interest in Peru is to promote genuine democracy." MaintainingPeru'scooperation in combating narcotics trafficking tops a "second tier" of interests, which also include open marketsandexpansion of exports; poverty alleviation; improved health of high risk populations; and sound environmentalpolicies andpractices. U.S. assistance to Peru through AID was $109.6 million for FY2001. Assistance for 2002 includes $23.2millionfor Child Survival and Health Programs; $14.2 million in development aid; $17.5 million in Economic SupportFunds;$30.8 million in Food Aid, Title II; and $67.5 million for the Andean Counterdrug Initiative; for a total of $153.2million. The Administration requested $146.9 million in aid to Peru for FY2003. (8)

Human Rights. The United States pressed the Fujimori government forimprovement in respect for human rights; for much of Fujimori's term his regime had one of the worst human rightsrecordin the hemisphere, according to State Department and other human rights reports. Violations of human rights byPeru'ssecurity forces included extrajudicial killings and torture. These and lack of accountability within the security forcesremain a problem, although the post-Fujimori governments did make significant institutional improvements toimproverespect for human rights. According to the State Department's 2001 Human Rights report on Peru, "Both thePaniagua andToledo Administrations took steps to implement important democratic reforms to improve the exercise of civil andpoliticalrights and to address allegations of corruption in the judiciary, the executive, and the intelligence service." (9) In August2001 Peru's Congress voted unanimously to remove former President Fujimori's immunity from prosecution, andthe nextmonth he was indicted on charges of murder, causing grave injuries, and responsibility for forced disappearances.PresidentToledo formed a Truth and Reconciliation Commission that began to investigate past human rights abuses inNovember2001. The Shining Path was responsible for murders, torture, and other human rights abuses.

Counter-Narcotics Efforts. Regarding counter-narcotics efforts, Peruhas been considered fully cooperative in working towards the goals of the U.S.-Peruvian counter-narcoticsframeworkagreement. During the last 4 years of Fujimori's term, Peru reported reduced illegal production of coca leaf by66%. (10) Since the downfall of former President Fujimori, however, there have been revelations of widespread drug-relatedcorruption in Peru's armed forces during his rule. Fujimori's top military leaders have been jailed, charged withcorruption,trafficking arms to Colombian guerrillas, and protecting drug traffickers from aerial interdiction. Peru remains oneof theworld's largest suppliers of coca leaf for cocaine.

A particularly sensitive issue last year was the accidental shooting down of a civilian missionary plane by a Peruvian AirForce plane conducting counter-narcotics aerial interdiction with U.S. personnel. The April 2001 incident, in whichamother and her infant (both U.S. citizens) were killed, led to the suspension of the aerial interdiction program inPeru andColombia. Two reports are currently under review by the White House while a decision is made regarding theprogram'sfuture. One is an investigation into the incident itself, conducted jointly by the two governments, released publiclyinAugust. Sources close to the investigation say its classified recommendations suggest that the program, if renewed,mustadhere more closely to International Civil Aviation Organization rules and there should be better dissemination ofinformation within Peru to heighten civilian pilots' awareness of the program.

The other report, by former U.S. Ambassador to Colombia Morris Busby, is classified, but reportedly is a broader review ofaerial interdiction policy, with recommendations for the program's future. Before the program could be renewed,officialssay new agreements delineating more stringent oversight and procedures would need to be made by both countries,and anew Presidential Directive would need to be issued. Peruvian Foreign Minister Diego Garcia-Sayan says the aerialinterdiction program is the only practical way to undercut the cocaine industry. Critics say the program is notnecessary,however, because most trafficking through Peru is now conducted by other means, including ocean shipping alongthePacific coast, not by air.

U.S. Ambassador to Peru John Hamilton said that U.S. aid to Peru to fight drug production and trafficking would triplefrom previous years to over $150 million in 2002. Over $80 million is to support alternative development programs,andthe rest is for interdiction, drug crop eradication, and demand reduction efforts. (11)

In March 2002, the United States and Peru signed a Bilateral Peru Riverine Plan to increase joint police and navaloperations against narcotics traffickers on Peru's rivers. The government of Peru is to maintain a regional RiverineTraining School, and the United States will provide $3 million in annual support of river operations andmaintenanceprograms. (12)

Security. The United States has been concerned about security in Peruand in the Andean region as a whole. At the time Fujimori took office, in 1990, two guerrilla insurgency groupshadterrorized Peru for a decade. Fujimori effectively dismantled both the Shining Path (Sendero Luminoso) and theTupacAmaru Revolutionary Movement (MRTA). His enhancement of national security came at the cost of high levelsof humanrights violations, however, and his administration had one of the worst human rights records in the hemisphere. In2001there were signs that the Shining Path, the more violent group, was resurfacing as a threat. Peru's Interior Ministryannounced in November 2001 that it had thwarted a Shining Path plan to attack the U.S. embassy in Lima, afterwhich theU.S. State Department issued an advisory warning U.S. citizens to avoid Peru. On March 20, three days beforePresidentBush is scheduled to visit Peru, two bombs exploded in a shopping center across the street from the U.S. Embassyin Lima. The Embassy was not damaged, but at least eight people were killed and dozens wounded. A Peruvian official saidthebombing resembled attacks carried out by leftist guerrilla groups such as Sendero Luminoso in the 1980s and1990s. (13)

A long-standing border conflict between Peru and Ecuador flared briefly into armed conflict in 1995. The two countriessigned an agreement in 1998 to resolve the dispute peacefully. The United States provides assistance to reinforcethatpeace agreement and promote economic development of the border region. Toledo said that he would work withEcuadorand Chile to avoid border disputes, spend less on arms, and spend more on nutrition, health, and education. (14)

Congressional Concerns Regarding Peru

Congress has expressed concern about the development of democratic institutions in Peru, and has conditionedaid on therespect for those institutions, respect for human rights, and the holding of free and fair elections. Congress has alsoexpressed concern about counter-narcotics assistance, including whether to resume an air drug-interdiction programsuspended after the accidental shootdown of an American missionary plane, and the relationship between U.S.agencies andPeru's former intelligence chief, Vladimiro Montesinos. Trade and investment issues are also of major interest toCongress. Members have also expressed concern regarding the case of Lori Berenson, an American prisoner in Peru.

Counter-Narcotics Assistance. The Andean Counterdrug Initiative,incorporated into the Foreign Operations appropriations bill for FY2002 ( P.L. 107-115 , signed into law Jan. 10,2002),prohibits funding of a Peruvian air interdiction program until the Secretary of State and Director of CentralIntelligencecertify to Congress, 30 days before resuming such a program, that enhanced safeguards and procedures are in placetoprevent the occurrence of any incident similar to the one of April 2001. It also sets forth health and safety guidelinesforaerial coca fumigation and specifies that not less than $215 million shall be applied to USAID economic and socialprograms in the Andean region. This funding is part of the Bush Administration's Andean Regional Initiative. (Forfurtherinformation, see CRS Report RL31016 , Andean Regional Initiative (ARI): FY2002 Assistance for ColombiaandNeighbors," by [author name scrubbed] and [author name scrubbed].)

Investigations of Montesinos and Fujimori. Since the fall of theFujimori government, many observers have expressed concern regarding the former head of the Peruvianintelligenceservice, Vladimiro Montesinos, and his relationship to U.S. agencies, especially to the Central Intelligence Agency. AsFujimori's top adviser, Montesinos was also involved in Peru's collaboration with the United States incounter-narcoticsefforts. Like Fujimori, Montesinos fled the country. He was captured in Venezuela, however, and returned to Peru,wherehe faces some 168 criminal investigations into crimes including money laundering, illicit enrichment and corruption,organizing death squads, protecting drug lords, and illegal arms trafficking.

In their oversight of counter-narcotics programs in Peru, Members of the 107th Congress continue to monitor theseinvestigations, especially as they relate to relations between Montesinos and U.S. agencies. Peru's intelligenceservicereceived $1 million annually from 1990 to 2000 for counter-narcotics assistance from the CIA. A declassified DrugEnforcement Administration document shows U.S. officials were aware by 1996 of allegations that Montesinos wastakingprotection money from drug traffickers. (15) Therewere also reports that the service, known by its Spanish acronym of SIN,was responsible for an array of human rights violations. The United States has provided the Peruvian congressionalcommittee investigating Montesinos's activities with declassified State Department documents, which show U.S.officialsas wary of dealing with Montesinos in light of unconfirmed allegations of his involvement in corruption and humanrightsviolations.

President Toledo thanked President Bush for U.S. help in Montesinos' arrest and asked the U.S. to help build Peru's caseagainst former President Fujimori by releasing related classified U.S. documents. President Bush has promised thecontinued declassification and delivery of State Department documents requested by the Peruvian legislature.

Trade Issues. Peru has an essentially free market economy. The UnitedStates is Peru's largest trading partner, with each country exporting approximately $2 billion to the other in 2000. Over thepast decade, Peru has eliminated almost all non-tariff barriers to U.S. exports. Tariffs averaging 13% apply tovirtually allU.S. exports to Peru. Tariffs on a very few agricultural goods are as high as 25%. Due to bilateral and multilateraltariffreduction agreements with Peru, exporters from some countries other than the United States have preferential accesstoPeru's market.

For 10 years, Peru has benefitted from the Andean Trade Preference Act (ATPA), which expired in December 2001, andadvocates its renewal. Part of the U.S. effort to promote economic alternatives to illicit narcotics production, ATPAgavepreferential, mostly duty-free treatment to certain Peruvian exports. The Andean Trade Promotion andDrugEradication Act ( H.R. 3009 ), would reauthorize and expand the program. The Houseversion passed Nov. 16, 2001; theSenate version ( S. 525, The Andean Trade Preference Expansion Act ) has been reported out ofcommittee and awaitsfinal floor action. Both versions would extend trade preference benefits into 2006, and expand duty-free treatmenttoinclude products that had previously been excluded, under certain conditions. Peru sought an extension to includeunlimited access for apparel made from regional fabrics and traditional fibers such as alpaca and llama. Bothversions ofthe bill would give preferential treatment to such exports. (For further information, see CRS Report RL30790 , The AndeanTrade Preference Act: Background and Issues for Reauthoriztion, by J.F. Hornbeck.)

One of the greatest barriers to trade and investment in Peru, according to a U.S. Trade Representative report, is theweakness of Peruvian government institutions. Neither executive nor judicial branch offices, nor regulatoryagencies, hasthe expertise or resources to effectively conduct their duties. The judicial branch is especially susceptible to outsideinfluence. In seeking foreign investment and support, President Toledo has acknowledged these weaknesses andpromisesto promote reform to strengthen Peruvian institutions.

Investment. The government launched a privatization program in 1992,and has greatly reduced its role in the economy since then. Most major state-owned businesses have been sold. Thegovernment has retained parts of the national petroleum company, some electrical utilities, and the Lima watercompany. U.S. companies have actively participated in Peru's privatization process, especially in the mining, energy, andpetroleumsectors.

Over the past decade, Peru has eliminated most barriers to direct investment. National treatment for investors is guaranteedin Peru's 1993 constitution. Problems for U.S. investors have included efforts by the Privatization Agency toexcludeforeign investors from recent privatizations of electrical utilities by defining investors so as to exclude foreign ones;a lawwhich restricts majority ownership of broadcast media to citizens of Peru; in at least one case reported by the U.S.TradeRepresentative, a Peruvian government entity was reluctant to agree to arbitration with a U.S. firm in lieu of ajudicialproceeding, even though the constitution guarantees arbitration as an alternative to the courts.

Intellectual Property Rights Protection. Peru has been on the U.S. TradeRepresentative's "Special 301" Priority Watch List since April 1999 due to concerns that Peru inadequately enforcesintellectual property rights. Although the government of Peru generally acts to promote and protect both domesticandforeign intellectual property rights, and Peruvian law provides for effective trademark protection, counterfeiting oftrademarks and piracy of copyrighted goods continue to be widespread.

Lori Berenson. Berenson is an American who has been serving a lifesentence in Peru on charges of treason. She was convicted in 1996 by a secret Peruvian military tribunal of helpingtheTupac Amaru Revolutionary Movement (MRTA) plan a thwarted takeover of Peru's legislature. Berenson hasmaintainedher innocence. Since her imprisonment, some Members of the U.S. Congress have appealed for her release or fora new,fair trial. In July 2000, bipartisan groups of 221 Representatives and 40 Senators urged the Clinton Administrationto seekBerenson's release. Both letters cited Peru's failure to provide a fair public trial, as outlined in the InternationalCovenanton Civil and Political Rights, to which Peru is a signatory. In August 2000 Peru's highest military court overturnedherconviction, sending her to civilian court for a new trial on lesser charges of "terrorist collaboration." In June 2001,she wasconvicted and given a 20-year sentence, the minimum for collaboration. Berenson's appeal of that judgment wasdenied byPeru's Supreme Court in February 2002.

Some analysts, including former U.S. Ambassador to Peru Dennis Jett, who was serving in Peru when the MRTA tookhundreds of people hostage at the Japanese ambassador's residence in 1996, say it would be "a major mistake" tomakeBerenson's pardon a high priority in U.S.-Peru relations and would risk making President Toledo appear to be softonterrorism or as interfering with the courts. (16)

When he met with President-elect Toledo in June, President Bush asked Toledo, "in addition to the rule of law," that"humanitarian factors be taken into consideration in a final resolution" of Berenson's case. Toledo said he told Bushhebelieved that the judiciary system should be allowed to "do its job" and said elsewhere that he would not intervenein thecase. (17) The White House denied reports thatPresident Bush had asked Toledo to grant Berenson clemency on Bush'srecent trip to Lima. A spokesman said the President told Toledo Berenson was given due process in her second trial,andthat he was awaiting the recommendation of the Inter-American Commission on Human Rights. The Commissioncouldrecommend her case to the Inter-American Court of Human Rights, which could order Peru to overturn herconviction - heronly other option for release. (18)