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Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 DIRECTORATE OF INTELLIGENCE *MV Secret No Foreign Dissem WEEKLY SUMMARY Special Report Problems Facing Peruvian President Belaunde 1C RI/CDF 946762. Pages 1 S. 11-13 Secret N2 36 5 July 1968 No. 0027/68A Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Q Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 SECRET No Foreign Dissem PROBLEMS FACING PERUVIAN PRESIDENT BELAUNDE With one year remaining in his six-year term, President Fernando Belaunde Terry is faced with in- creasing economic and political problems. His Popular Action party is moving to the left and has nominated a leader of the "hothead" faction for the presidential election next June. Although some of the fiscal meas- ures needed to promote financial stabilization are at last being adopted under an extraordinary-powers law passed by Congress in a rare instance of cooperation with the executive, prospects are not good for an early restoration of Peru's once-enviable record of economic accomplishment. As politicians seem less and less capable of governing effectively, military leaders are again working on contingency plans--a routine procedure when they believe they may ul- timately have to assume political power. Belaunde's Style Some of President Belaunde's problems arise directly from his style of governing. He has not been a strong leader, par- ticularly over the past year which has seen a steady deteri- oration in Peru's economy and the President's relations with Congress. The President has increasingly given the impression that he is interested only in finishing out his term, allowing events to drift in the hope that problems would somehow resolve themselves. Belaunde's ideology is a vaguely defined adherence to "social justice." His specific programs are heavily oriented toward public works projects, probably as an outgrowth of his architectural background. His primary goal is to complete the trans-Andean highway system that will connect Peru's coastal region with the fertile Amazon basin to the east. He also has ad- vocated agrarian and urban re- form programs. He has always, however, been vague about the financing of the specific programs. His suggestions for solving Peru's present difficulties are no more definite. Recently even his own cabinet members have openly tended to view his pro- grams as excessively unrealistic in view of Peru's economic prob- lems. Problems with the Popular Action Party Although Belaunde founded the Popular Action Party (AP) SECRET Page 1 SPECIAL REPORT Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Rele 2006/12/16: CIA-RDP79-00927A0000050002-6 SECRET No Foreign Dissem after his defeat in the 1956 presidential election, his al- ienation from its leaders is be- coming increasingly evident. Not long ago the party expelled and censured several of Belaunde's supporters because of policy differences. Although Belaunde fought their ouster and has ad- vocated their reinstatement, the party leadership has refused to accommodate him. At the party's convention in June, Edgardo Seoane, the first vice president of Peru and leader of the leftist "hothead" faction of the AP, was chosen as the party's presidential candidate in the election next June. In his acceptance speech, which probably reflected political oratory more than true convic- tion, Seoane called for sweeping reforms, including state regula- tion of the economy and invest- ment, and legalization of the Communist Party. He also crit- icized rich nations for imposing unfavorable terms of trade on developing countries--an obvious slap at the US. The AP convention adopted a number of leftist resolutions, including a condemnation of "imperialist aggression against North Vietnam." The resolu- tions also call for commercial ties with Communist countries and a general amnesty for Peruvian political prisoners, presumably including captured guerrillas. Other Political Parties Belaunde received the sup- port of the Christian Democratic Party (PDC) in the election campaign of 1963 and in his government until last fall. By November 1967, however, policy differences between his party and the generally more leftist PDC had become irreconcilable. In addition, the PDC blamed the government's policies for electoral setbacks that both it and the AP had suffered. Since leaving the government the PDC has given Belaunde's program only selective support. PDC leaders are becoming increasingly strident in their criticism of the United States. Their presidential nominee has called for suspending payments of Peru's debt to the US and for studying means of canceling US mining concessions. The PDC lost an important moderating influence in December 1966 when the popular mayor of Lima, Luis Bedoya Reyes, left the party to form the Popular Christian Party (PPC). Bedoya and the other PPC leaders have supported the government, but they never formally entered the alliance with AP. Leftists within the PDC are being en- couraged by the Marxist-front Unity of the Left, which has proposed an electoral pact that could be an important force in the elections next year, espe- cially if it also were joined by leftists from the AP. The major opposition party is still the American Popular Revolutionary Alliance (APRA), led by 73-year-old Victor Raul Haya de la Torre. APRA has sup- ported very few of Belaunde's SECRET SPECIAL REPORT 5 Jul 68 Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 r.- `rri SECRET No Foreign Dissem programs, and has stood firmly against raising taxes without first exploiting all other sources of revenue. Apristas have generally supported posi- tive programs, however, when the country was in serious difficulty. This was demonstrated recently when APRA supported a bill giving the executive special powers to deal with the faltering economy, even to include raising taxes. Some rapprochement apparently is developing between APRA and the military, which have been at loggerheads since the 1932 clashes between APRA militants and armed forces personnel that led to deaths on both sides. The military took over the govern- ment in 1962 to prevent Haya from obtaining the presidency, but military spokesmen have recently hinted that he might be permitted to conduct an unobstructed po- litical campaign next year and take office if elected. Congressional-Executive Relations The congressional elections in 1963 gave control of Congress to a coalition of the APRA and the National Odriista Union (UNO), the personal political vehicle of former dictator General Manuel Odria. In April and May 1968, however, the UNO split because of a dispute over the blind obedience required by Odria. The dissidents have formed a new party called the Independent Parliamentary Action Group, which at times cooperates informally with APRA and with what is left of the UNO. This division in- creases the number of groups to be placated by Belaunde if he is to receive legislative support for his policies. Opposition to Belaunde's program in Congress has not been blindly obstructionist. His strained relations with his own party have prevented him from SECRET Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 Approved For Relase 2006/12/16: CIA-RDP79-00927A6500050002-6 SECRET No Foreign Dissem presenting a strong government position to the opposition legislators. In addition Belaunde has not used his presidential prerogatives forcefully and has permitted Congress to delay and dilute his legislative proposals. Belaunde's problems with the legislature are exemplified by the large number of cabinet ministers who have resigned because they were unable to secure congressional approval for their programs or were threatened with censure. The Finance Ministry, for example, has changed leadership so often that no one man has had time to develop a coherent policy. In May, Belaunde was forced to re- organize the cabinet almost completely as a result of de- teriorating public confidence in his government's ability to deal with serious economic prob- lems. year into the contraband activi- ties of several government of- ficials, AP party members, and the military. This investiga- tion, which even involved a few members of Congress, caused a further decline of public con- fidence in the political and governmental machinery that runs the country. The Peruvian Military The Peruvian armed forces consider themselves the arbiters of Peruvian politics. They have played an important but behind- the-scenes role since Belaunde's inauguration in 1963. Although there are sporadic rumors of coup plotting, there is little in- dication that the military is interested in taking a more active hand in government unless there should be a real paralysis of both the legislative and executive branches. The present prime minister is Oswaldo Hercelles, a physician who at one time served as minis- ter of public health. So far, at least, his cabinet has re- ceived more support from Congress than has been usual in Peru. Under the 60-day special powers provision Finance Minister Manuel Ulloa has promulgated a sweeping financial stabilization program, most of which Congress is expected to approve when it reconvenes later this summer. Strains between the execu- tive and the legislature also occurred as a result of a con- gressional investigation this The extent of the armed forces' influence is indicated by the fact that the air force completed purchase of a squadron of French Mirage supersonic jet fighters at a time of budgetary problems. Belaunde must consider military reaction to all his policies and is reluctant to take action that he knows will offend the military establish- ment. Foreign Relations Peru's relations with the US have been plagued by a number of disagreements in recent years. The most serious concerned the SECRET Page 4 SPECIAL REPORT 5 Jul 68 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 SECRET Foreign Dissem purchase of the Mirages, which raised the question of the ap- plicability of US legislation that would limit or suspend aid to countries that buy sophisti- cated military equipment. Ru- mors that aid had already been suspended caused a rash of anti- American sentiment in May. Most Peruvians believe the US legis- lation is an unwarranted inter- ference in their internal affairs. Belaunde has tried to restrain military purchases, but he is forced to keep the military satisfied or face a move against his government by the armed forces. An additional problem with the US has developed over fish- ing rights within the 200-mile territorial limit claimed by Peru. Like Ecuador, Peru has seized US fishing boats that were within its claimed terri- torial waters, provoking pro- tests from members of the US Congress. The Peruvian military seems to consider Chile a serious threat, and most of its contin- gency planning is directed there. Hostility to Chile dates from the nineteenth century War of the Pacific, when Chile captured the Bolivian littoral and part of southern Peru. The prospect of the election of a Communist- supported president in Chile in 1970 adds urgency to the plans of the Peruvian military. Although Peruvian trade with Communist countries expanded in 1967 and a Peruvian trade mission visited Eastern Europe and the Soviet Union this summer, the Peruvian Government has been re- luctant to discuss diplomatic relations. Many politicians advocate expanded contacts with the USSR, and businessmen have also shown a great deal of interest. Public reaction has been favorable to the develop- ment of economic and cultural relations, but formal diplomatic arrangements probably will take some time to mature. Economic Problems During its first several years in office, the Belaunde government sustained the high growth rate that began in 1960. The rise of Gross National Product from 1960 to 1966 av- eraged 6.3 percent annually-- the highest rate in South Amer- ica and one of the'highest in Latin America. Growth dropped to 4.0 percent in 1967, however, and to an annual rate of 3.5 percent in the first quarter of 1968--or barely more than the growth of population. The chief cause of the slow- down was bad weather that cut deeply into agricultural produc- tion. Reduced public and private investment slowed construction, and a combination of higher tar- iffs and devaluation reduced sup- plies of imported materials needed to expand mining and manufacturing. This year, the slowdown has been accentuated by new quantitative restrictions on some imports and by further declines in in- vestment as the business community SECRET Page 5 SPECIAL REPORT Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 SECRET Economic Trends in Peru 1960-1967 GROSS NATIONAL PRODUCT 9 8 7 CONSTRUCTION FISHING 1L 9 I I I I 1 1 1960 1961 1962 1963 1964 1965 1966 1967 6-68 91113 SECRET Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 SECRET No Foreign Dissem lost confidence in the Belaunde government's ability to cope with its fiscal problems. Balance of Payments Difficulties The substantial growth in export earnings had been an im- portant aid to economic expan- sion. In 1967, however, fish- meal prices dropped and cotton exports declined. At the same time, imports rose in anticipa- tion of an increase in import duties. A trade deficit accumu- lated, and short-term capital began to flow out of the country because of an expected devalua- tion. Following the 40-percent devaluation of the sol in Sep- tember, exports grew and imports were curtailed. By the end of the year, a small export surplus was achieved. This surplus has increased this year because of the devaluation's restrictive effect on imports, reinforced by the imposition of a surcharge on most imports and a temporary prohibition on others. Peru's balance of payments, however, has continued to deteriorate, appar- ently because of d continuing flight of short-term capital. Budgetary Problems Budgetary deficits have been a persistent problem for Belaunde. During his adminis- tration the rise in government spending has more or less paral- leled the rise in GNP. Most of the increase in expenditure has been devoted to public invest- ment, wage increases to compen- sate for the rapidly rising cost of living, and--in 1967--the purchase of military equipment. Central government revenues, including foreign aid, have lagged increasingly behind ex- penditures. Belaunde's exten- sive use of exemptions from im- port duties and profit taxes to encourage industrial expansion is partly responsible for the gap. The major cause, however, was congressional refusal to adopt his proposals for new taxes. Because of this impasse, the government deficit increased rapidly. In 1967, it was equal to 20 percent of total expendi- tures in spite of a curtailment of investment spending. Recourse to loans from the central bank to finance the deficit contri- buted greatly to inflationary pressures. In preparing for the budget for fiscal 1968 that began on 1 April under Peru's new budget system, the Belaunde administra- tion again pressed for the ex- tensive new revenue measures. The emasculation of these pro- posals by Congress led to the resignation of two successive finance ministers and was a major factor in the resignation of the entire cabinet on 28 May. Although further cuts in invest- ment spending were made, the prospective 1968 budget deficit was equal to 20 percent of planned expenditures. On 19 June, however, Con- gress granted the government a 60-day period of extraordinary powers to carry out a new fiscal program by decree to reduce the prospective deficit. Major elements of the program include SECRET Page 7 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Approved For Rel SECRET No Foreign Dissem large increases in taxes on gasoline, the adoption of sev- eral new taxes, and cuts in military and other spending. These measures will reduce the deficit to about 14 percent of expenditures. The government hopes that this display of re- sponsiblity will pave the way for refinancing its foreign debt and a consequent further reduction in the deficit. US Private Investment and Foreign Aid The inflow of direct private investment funds dropped sharply in 1966 and continued its down- ward trend in 1967. Important factors behind this trend were growing doubts about Peru's financial stability, and frequent demands by Congress for the nationalization of such foreign firms as the US-owned Interna- tional Petroleum Company. The decline in private foreign in- vestment may be reversed as a result of the Belaunde govern- ment's new fiscal program. Apparently influenced by the program, the US-owned Southern Peru Copper Company announced on 24 June its willingness to pro- ceed with an investment of $280 million to develop newly discov- ered copper deposits. There is also press speculation that the other two large US-owned copper companies in Peru may follow suit, with investments totaling as much as $500 million for the three com- panies over the next few years. Expansion of copper exports as a result of these investments would not take effect for three or four years. Belaunde's public investment program has been financed in part by US economic aid. The Syming- ton and Conte-Long amendments to the US Foreign Economic Assistance Act of 1967, however, recently prompted restrictions on aid to Peru because of its military ex- penditures. This problem may be eased by the government's new fiscal program which calls for a cut in military expenditures. The new climate of coopera- tion between Congress and the executive may alleviate some of Belaunde's most pressing problems but the prospect for any long- range solutions is dim. Be- launde's estrangement from his own party will undoubtedly con- tinue and it is highly unlikely that his over-all relations with Congress will improve signifi- cantly. Belaunde will probably serve out the remainder of his term unless there is a large- scale breakdown in public order as a result of the current fiscal problems. The military is now conducting studies of Peru's ma- jor problems on the possibility that events will necessitate a military intervention in the SECRET Page 8 SPECIAL REPORT 5 Jul 68 Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 SECRET No Foreign Dissem government. It is still too early to determine the military's atti- tude toward next year's elections, but there have been indications that its opposition to APRA may be softening. In spite of the improved pros- pects for a lower government def- icit and some recovery of business confidence this year, a continued slow rate of economic growth is likely. Sluggish export perform- ance over the next year or two, caused in part by a continuing de- cline in copper prices, will re- quire continued import restric- tions and possibly another devalu- ation. In turn, shortages of im- ports will restrain the expansion of investment and production and will contribute to continuing in- flationary pressures. Finally, crop forecasts indicate that be- cause of continued bad weather, agricultural output for the full year 1968 may well be below the 1967 level. (SECRET NO FOREIGN DISSEM) SECRET Approved For Release 2006/12/16: CIA-RDP79-00927A006500050002-6 Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6 Q Approved For Release 2006/12/16: CIA-RDP79-00927AO06500050002-6