PERU: ECONOMIC AND POLITICAL PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00126R001401850003-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 22
• Document Creation Date: December 22, 2016
• Document Release Date: May 13, 2010
• Sequence Number: 3
• Publication Date: November 1, 1984
• Content Type: NIE

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Director Secret
Central
Intelligence
Peru: Economic and
Political Prospects
Secret
NIE 97-84
November 1984
Copy 4 7 2
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N I E 97-84
PERU: ECONOMIC AND
POLITICAL PROSPECTS
Information available as of 30 October 1984 was used in
the preparation of this Estimate, which was approved by
the National Foreign Intelligence Board on that date.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS,
EXCEPT AS NOTED IN THE TEXT.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the Departments of State and
the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air Force
The Director of Intelligence, Headquarters, Marine Corps
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CONTENTS
Page
SCOPE NOTE ...................................................................................... 1
KEY JUDGMENTS .............................................................................. 3
DISCUSSION ........................................................................................ 7
The Political Scene ....................................................................... 7
Crucial Problems Facing the Government ................................. 9
Outlook .......................................................................................... 12
US Relations with an APRA Government .................................. 16
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SCOPE NOTE
National elections, including one for the presidency, are scheduled
to be held in Peru in April 1985. This Estimate looks at who the likely
winner will be and how he may handle Peru's pressing political and
economic problems. These include the worst recession in modern
Peruvian times, difficult relations with the country's foreign creditors
because of a massive foreign debt, and a four-year-old insurgency that
shows little signs of waning. Peru is the only country in South America
with which the Soviet Union has an arms supply and military advisory
relationship, The Estimate examines whether the results of the election
are likely to affect this relationship. It also assesses the significance of
election developments for Peru's relations with Cuba and, especially,
the United States. The period of the Estimate is the next year or two. I
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Figure 1
Emergency Zones
Boundary representation is
not necessarily authoritative
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KEY JUDGMENTS
The popularity of the administration of Peruvian President Be-
launde, and the election prospects of his center-right Popular Action
(AP) Party, are in sharp decline. At this point, a victory by the center-
left American Popular Revolutionary Alliance (APRA) appears likely in
the general elections scheduled for April 1985. We believe that the
military will permit the APRA candidate, Alan Garcia Perez, to take of-
fice. Although the limits of their tolerance for radical government are
not fully known, the armed forces probably would intervene only in the
unlikely circumstance of a victory by the radical leftist United Left (IU)
coalition or if the IU gains significant influence over Garcia in
preelection maneuvering.
We believe neither the domestic economy nor government man-
agement of Peru's serious foreign debt problem is likely to improve in
the next year or so, regardless of who wins the election. Once in office,
the worst rhetorical excesses of the APRA-which in its preelectoral
pronouncements emphasizes statist economic solutions and appeals to
national resentment against foreign banks, the International Monetary
Fund (IMF), and the United States-probably would fade. But an
APRA government would be even less likely than the current adminis-
tration to make the reforms necessary to stabilize the economy and
restore prospects for growth. Moreover, an APRA government would be
a more difficult negotiating partner for the United States. Debt
negotiations would be particularly trying. Although outright debt
repudiation is highly unlikely, there is already some risk that the
Belaunde administration will abandon IMF programs, declare a morato-
rium on debt service payments, and try to deal directly with major
banks. This risk would become more substantial under an APRA
government.'
We believe that an APRA government probably would expand
contacts with the Soviet Union and Cuba, and possibly with China. It
also probably would open diplomatic relations with North Korea. The
Peruvian armed forces almost certainly will continue to buy military
equipment from the Soviets, but budgetary limitations are likely to
' Treasury believes that an APRA government, with elections behind, would gradually move to address
the economic crisis. Agreement with the IMF by the end of 1985 or early 1986 is possible. In any event,
Treasury would expect a new government to end the paralysis in decisionmaking which currently
characterizes the Belaunde administration.
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impose some limits on Soviet arms imports. They also probably will
continue to send Peruvian military personnel to the Soviet Union for
training, thereby offering additional possibilities to the Soviets for
making inroads into the Peruvian military. Diplomatic relations proba-
bly would be quickly restored with Cuba. Nevertheless, neither the
Cubans nor the Soviets are likely to supply the substantial economic
assistance that would be necessary for them to win significant political
influence in Peru
In relations with the United States, an APRA government probably
would be markedly less pro-American than the Belaunde administra-
tion. Nonetheless, while Garcia might place more emphasis on following
a nonaligned foreign policy, we believe he would be unlikely to make
substantive changes that would drastically alter Lima's traditionally
pro-Western orientation. His foreign policy platform is still in the
formative stages, however, and he is a young and inexperienced
politician who may be more subject to radical leftist pressures than
presently seems likely.
Garcia has already assured US officials that he would continue
bilateral cooperation in such key areas as narcotics control, but we
believe he would have no more success in reducing the flow of cocaine
to the United States than has the Belaunde government.
Prospects for resolving Peru's insurgency are also not good. While
the major insurgent group, Sendero Luminoso (Shining Path), has deep
roots in isolated rural areas where the government has long been
neglectful, it probably cannot evolve into a national movement because
its rigid Maoist ideology limits its popular appeal and its chances of
receiving foreign assistance. Over time, its actions may result in an
increasing cycle of violence by both sides that could further polarize the
population. Furthermore, it probably would not come to terms with any
government, even one formed by the IU
There is a chance-which we consider highly unlikely-that
sharply higher levels of leftist influence may occur in Peru over the
term of this Estimate. This would most likely come about:
- If the IU wins and the military fails to intervene.
- Or if, in response to military intervention, widespread violence
and political opposition enabled the radical left to initiate an
insurgency that eventually receives much broader support than
Sendero Luminoso has.
Either of these two circumstances would provide potentially greater
opportunities for growth of Soviet and Cuban influences in Peru and,
perhaps, in the hemisphere.
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Although the above Key Judgments represent the best estimate of
the intelligence Community, there are information gaps which add a
degree of uncertainty to our judgments in three major areas. First, while
reporting indicates the Peruvian military hierarchy remains relatively
conservative and anti-Communist in outlook, much less is known about
the attitudes of younger officers who may have been exposed to Soviet
influence. Secondly, we have little information on popular attitudes and
support for Sendero Luminoso in areas where it has a foothold, so we
cannot be certain about its ability to spread rapidly to other areas.
Finally, we also lack sufficient intelligence on the impact of pervasive
drug corruption on Peruvian institutions and the consequent potential
implications to be confident that this will not become a serious problem
over the period of this Estimate.
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DISCUSSION
1. National elections, including one for the presi-
dency, are scheduled to be held in Peru in April 1985,
with a subsequent runoff election if there is no
majority winner. The country is in the grip of its worst
economic recession in modern times, brought on by
the global recession, massive foreign debt, extraordi-
narily bad weather last year, and many years of poor
economic management. As a result, the popularity of
the present center-right administration as well as the
ruling party's presidential election prospects are in
sharp decline and, at this point, a victory by the center
left in the next year's elections seems likely.F__1
2. There is little chance that the administration of
President Fernando Belaunde, leader of the center-
right Popular Action (AP) party, can engineer a politi-
cal and economic turnaround in time to repair his
party's electoral fortunes. Instead, it now seems likely
that the center-left American Popular Revolutionary
Alliance (APRA) will take over the reins of govern-
ment. Another major political force that will put forth
a candidate for president is the United Left (IU)
coalition, a leftist political front consisting of six
member organizations that backed Marxist lawyer
Alfonso Barrantes Lingan in his successful attempt to
become mayor of Lima in the municipal elections in
November 1983. Luis Bedoya Reyes, leader of the
center-right Popular Christian Party (PPC), rounds out
the field of major presidential aspirants.
3. APRA has traditionally been the largest, best
organized political party in Peru. Until fairly recently,
however, it was perceived by the Peruvian military, its
traditional opponent, as too radical to hold power. This
led the armed forces in 1962 to annul the presidential
victory of the founder of APRA, Victor Raul Haya de
la Torre, and to seize power for itself in 1968 when it
appeared that Haya de la Torre was about to win the
presidency from Belaunde at the end of the latter's
first term in office. Since Haya de la Torre died in
1979, however, the mainstream of APRA has moved
closer to the center, calming military fears.F__-]
4. APRA now consists of a moderate majority led
by Secretary General Alan Garcia Perez, who will be
the party's candidate for president next year, and a
more radical minority wing led by APRA's defeated
1980 presidential candidate, Armando Villanueva del
Campo. Although Garcia has succeeded in revitalizing
APRA since its poor electoral showing in 1980, tensions
still exist between the party's two factions. Neverthe-
less, Garcia is young, popular, and charismatic, and
Villanueva has publicly endorsed his candidacy. More-
over, though Villanueva is attempting to strengthen
the influence of the left within APRA, Garcia proba-
bly has enough support within the party to meet the
5. Garcia's principal opponent in the 1985 race is
likely to be the IU's Barrantes, despite his notable lack
of success as Lima's first Marxist mayor. The groups
that make up the IU-including the Popular Demo-
cratic Unity Front (UDP), the Moscow-line Commu-
nist Party, Maoists, Trotskyites, and Socialists-have
been plagued in the past by doctrinal disputes and
personal infighting. Under Barrantes's leadership,
however, the IU made a good showing in the munici-
pal elections in November 1983. He is probably seen-
correctly-as the only far-left candidate who can keep
the IU from falling apart over its ideological and
personality differences.
6. The third major candidate in the race will be AP
Secretary General Javier Alva Orlandini. The party's
recent failure to form an electoral alliance with the PPC,
however, virtually negates any chances for success next
April. Efforts to reconstruct the coalition that brought
President Belaunde to power four years ago foundered
because both sides insisted that their respective standard
bearers head the ticket. For his part, although the PPC
has no chance of winning in 1985, Bedoya reasons that
his party will emerge as the main opposition force on the
center right if the AP remains divided. We believe the
major beneficiaries of the center's inability to unite will
be Garcia and Barrantes
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7. Another actor of major consequence on the
political scene is the military. Throughout the 20th
century, the armed forces have regularly intervened in
political affairs, often removing presidents or prevent-
ing them from taking office when the officer corps
disagreed with their political orientation or policies.
The intervention of the armed forces in 1968, which
resulted in 12 years of military rule, had several
significant consequences for the current political situa-
tion. First, the government of Gen. Juan Velasco
Alvarado undertook ambitious reforms aimed at in-
creasing popular participation in the political, eco-
nomic, and social life of the country and curbing the
power of the white, urban-based elite. One of the
legacies of the military government is a more militant,
politically conscious rural and urban proletariat which,
in recent elections, has voted in increasing numbers for
leftist parties. A second legacy stemming from these
reformist tendencies was the massive strengthening of
state control over the economy through nationaliza-
tions of foreign enterprises and the wholesale creation
of state-owned businesses and financial institutions.
8. The third important result of the military's 12
years of government was the officer corps' realization
that Peru's problems are intractable and that service as
the country's ruling power had a divisive, corrupting
effect on the military as a professional institution. This
led the armed forces to return power to the civilians
with Belaunde's election in 1980 and has resulted in a
greater reluctance than in the past to seize governing
authority again so quickly. Nonetheless, the military is
maintaining a close watch over the civilian political
process, and top officers maintain that they would
intervene again if they felt such action necessary to
prevent political chaos or a radical turn to the left.
9. A fourth consequence of military rule was that
even though Peru's military leaders are anti-Commu-
nist domestically, their strong nationalism has led
them to raise Peru's profile internationally on Third
World issues and to develop closer diplomatic, eco-
nomic, and, especially, military relationships with the
Soviet Union. Because the United States refused to sell
them advanced fighter aircraft, Peru, in the early
1970s, turned to the USSR as its primary arms suppli-
er. Lima wanted increasingly sophisticated weapons in
order to outclass the military forces of its neighboring
rivals, Chile and Ecuador. Moscow, for its part, proba-
bly expected to gain leverage on Peru's foreign and
domestic policies, earn badly needed foreign ex-
change, and gain a foothold for selling military equip-
ment to other South American countries.
10. Both sides appear to have achieved some of
their aims through this continuing arms supply rela-
tionship. Peru's Soviet hardware has made its armored
and air forces superior to those of its neighbors.
Moscow's gains include the sale of approximately $1.6
billion worth of hardware and technical assistance,
exposure of 2,000 to 3,000 Peruvian military personnel
to training in the USSR, the presence of Soviet advisers
and technicians in Peru, and a virtually captive mar-
ket for spare parts and maintenance services.
11. It is logical to assume that the Soviets have
made some inroads among the Peruvian military over
the past decade, but we lack evidence that this is the
case. In fact, the diplomatic and political impact of
Soviet military aid appears to have been relatively
small. Peru, while still following its nonaligned course,
has taken few pro-Soviet positions in the international
arena. Moreover, Peruvian armed forces personnel
trained in the USSR have not become noticeably pro-
Soviet, and Soviet advisers in Peru have no apparent
influence outside their areas of military expertise.
Regionally, Moscow has been unable to capitalize on
its Peruvian connection to induce other South Ameri-
can military establishments to purchase weapons from
the USSR. (See table 1.
Crucial Problems Facing the Government
12. Economic. The Belaunde administration has
been struggling with a great many problems, but
several of the most difficult are how to reverse the
rapid decline that has occurred in the economy, how
to cope with Peru's giant foreign debt, how to defeat a
four-year-old insurgency, and how to curb a narcotics
industry that is undermining government authority in
large areas of the country. Its inability to address any
of these problems satisfactorily has been a major cause
of its present unpopularity. But any successor adminis-
tration will have a similarly difficult time managing
these problems because they are rooted in longstand-
ing political, economic, and social trends that will not
be easily changed.
13. Economically, 1983 has been called Peru's
worst year of the century. (See figures 2 and 3.) GDP
fell by nearly 12 percent, real wages dropped, unem-
ployment and underemployment rose to possibly as
high as 60 percent, and a large number of banks and
businesses went bankrupt. Some of the causes of this
decline were totally beyond the government's control.
A climatological phenomenon known as "El Nino," for
example, simultaneously caused torrential rains and
flooding in northern coastal areas and drought in the
south, which destroyed agriculture and infrastructure.
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Over the past decade or so, Peru's extensive arms
purchases from the Soviet Union and the West have
enabled it to becom, the dominant military power in
Andean South America. Peru's conventional superiority
probably would enable it to defeat either Chile or.
Ecuador, its principal rivals, in a strictly bilateral
conflict. In the unlikely event of a two-front war-the
basis upon which Peru formulates its plans and require-
nients-it probably has sufficient strength to defend
one frontier while conducting effective offensive opera-
The armed forces' current strength is the product of a
major expansion and modernization effort that began in
the early 1970s. The Army has almost doubled in size
since 1973 to 75,000 men, making it the third largest in
South America-behind Brazil and Argentina-almost
as large as the combined armed forces of Chile and
Ecuador. During the same period the Air Force has
grown from about 7,000 men to its current size of
40,000; it ranks third behind Brazil and Argentina in
total number of combat aircraft. The Navy has kept
pace with the other two services by developing South
America's third-largest surface fleet and the region's
largest submarine force
Peru turned to the USSR as a source of military
hardware following the coup in 1968 that brought leftist
Army officers to power. From 1973 to 1980 the Soviets
became Peru's single largest military supplier by deliv-
ering over $1 billion worth of equipment to the Army
and Air Force, about half of all Peruvian arms pur-
chases. Accompanying this equipment were Soviet mili-
tary and technical advisers, who presently number
about 150, In addition,
we estimate that some 2,000 to 3,000 Peruvian military
personnel have been trained in the
It also further damaged an already-declining fishing
industry. Other external factors which buffeted the
economy in 1983 were high real interest rates and the
world recession, which caused a sharp decline in
demand and prices for Peru's oil and copper exports.
These externally caused problems were compounded
by domestic policy decisions, such as the refusal to cut
back on heavy public expenditures for military equip-
ment and infrastructure improvements, that had no
short-term payoff
14. By early 1984, Peru's debt problem had wors-
ened to the point that its relationship with the interna-
tional financial community is threatened. Peru owes at
least $13 billion to foreign public and private sources
and is having great difficulty servicing its debt obliga-
tions. International financial concern over Peru's polit-
ical situation-as well as general concern about the
debt problems of Latin America-has further eroded
confidence in Lima's ability to meet its obligations and
has caused foreign banks to become extremely reluc-
tant to commit new money. Governments in the Paris
Club and foreign banks have insisted that Peru reach
and maintain agreement on a stabilization program
with the IMF before they will make new money
available or even reschedule existing debt. (See table
15. An agreement with the IMF was reached in
April, but Belaunde has been unable to make the
many politically difficult domestic policy adjustments,
such as reducing government spending, that would be
necessary to comply with the terms of the agreement.
Moreover, pressures from influential interest groups to
relax austerity have already caused Peru's fiscal defi-
cit, currently projected at 10 percent of GDP, to
exceed the 4.1-percent IMF target. (See figure 4.) The
protracted delay in meeting IMF demands has jeopar-
dized the pending debt-refinancing package and has
cut access to foreign credit. Payment arrearages almost
certainly will mount in coming months.
16. Social and Political. The emergence of an
indigenous Maoist guerrilla group in 1980 has imposed
a third costly burden on Belaunde's beleaguered ad-
ministration. The group, which is known as Sendero
Luminoso (Shining Path), engages in rural and urban
terrorism, particularly in the south-central Andean
departments of Ayacucho, Huancavelica, and Apuri-
mac; in and around Lima; and, most recently, in the
north-central departments of Huanuco and San Mar-
tin. Sendero Luminoso has caused considerable death
and violence, and some disruption, in the isolated
mountain areas where it has gained a foothold. These
regions have long been neglected and ignored by the
central government. Nevertheless, the impact of the
insurgency on the general population has been rela-
tively minor, except for some instances of urban
terrorism and sabotage.
17. The impunity with which Sendero operates
outrages most Peruvians, who have demanded that the
government take strong measures to contain it. Be-
launde was extremely reluctant to turn the problem
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USSR-Peru: Military Agreements
Deliveries and Advisers/Technicians
1973-30 June 1984
Year
Agreements
(Million US $)
Deliveries
(Million US $)
Advisers/
Technicians
in Peru
1978
0
237
100
1979
200
23
100
1984
0
137
150
(First half)
Total
1,593
1,356
Not
applicable
Since his return to power in 1980, pro-Western President
Belaunde and many senior Army and Air Force officers
have sought to reduce Peru's dependence on the USSR, but
this effort has had mixed results. After US export restrictions
prevented the Peruvians from acquiring the US AH-1 Cobra
attack helicopter, Lima contracted for almost $120 million
worth of Soviet weapons in 1981. In 1982 the Peruvian Air
Force agreed to buy 26 Mirage 2000 fighters from France,
but delivery of the aircraft has been stalled by Peru's
inability to pay. Although Peru continues to express an
interest in US weapons systems such as Blackhawk helicop-
ters, M 113 armored personnel carriers, and M-60 tanks, lack
of competitive financing remains a major obstacle.
The continued attractiveness of Moscow's concessionary
terms could result in new purchases of Soviet equipment.F
strongly pro-Western Peruvian Navy, which heretofore has
avoided purchasing Soviet equipment, recently has demon-
strated interest in purchasing Soviet equipment.
over to the armed forces because he feared that such
involvement might tempt the military to move back
into politics, possibly ousting him as it did in 1968.
Nonetheless, in December 1982 he declared a large
part of the Ayacucho region an emergency zone,
giving the local military commander civil as well as
enhanced military authority in the area. So far, gov-
ernment and guerrilla forces have fought to a standoff
in the emergency zone, with the guerrillas recruiting
enough new members to replace just about as many as
the government can kill. At the same time, the more
intense counterinsurgency campaign has stimulated a
public outcry against alleged human rights violations
by security forces. Sendero attacks outside the emer-
gency zone also have increased, prompting the mili-
tary to create a new emergency subzone in southern
San Martin Department and Huanuco Department.
Despite this, the Sendero Luminoso movement does
not at this point possess sufficient numbers, resources,
or popular support to threaten the government direct-
18. An additional threat to the government is the
Revolutionary Movement Tupac Amaru (MRTA), a
small, urban terrorist group which first appeared this
year. The organization claimed responsibility for the
attack on the US Embassy in Lima on 28 September,
and its anti-American propaganda suggests that it will
continue to target US installations. The MRTA mem-
bership appears to be drawn primarily from urban-
based middle-class students and, in contrast to Sendero
Luminoso, its actions are focused on political gestures
aimed at gaining publicity. Unlike Sendero, which
shuns all conventional political parties and outside
contact, the MRTA would probably welcome support
from other groups that share its commitment to a
socialist-style revolution. Although there is no evidence
to date of foreign funding for the MRTA, because of
its orientation it might attract support from Cuba and
the USSR.
19. A fourth significant problem that the Belaunde
administration faces is the existence of a large and
powerful narcotics-producing industry. In December
1983 the Peruvian Interior Minister estimated that
enough coca leaf is grown in Peru to produce 250,000
kilograms of semirefined coca paste, most of which is
sent to Colombia to be refined into cocaine and then
smuggled into the United States. Coca paste sales
generate vast sums of money which Peruvian narcotics
traffickers use to buy protection throughout the law
enforcement and judicial systems and to pay off local
politicians. The government has cooperated with the
United States in sponsoring coca eradication and crop
substitution programs, but these narcotics control ef-
forts have made little headway. Coca cultivation
provides a significant portion of the income of most
peasant growers, an income they will not voluntarily
give up. Moreover, the resources and political clout
commanded by the traffickers in the main growing
areas often exceed those available to the government.
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"Table I
Peru's Military Strength
Category
\rm~
Total
Soviet
Origin
Combined
Chile and
Ecuador
Personnel
96,4(X)
Armor
406
306
425
M'C and ARC
450
32
823
lrtiller'
420
72
380
Mortars
714
0
1,195
I lelicopters
31
26
62
'.ir defense artillery
Air Force
154
40
564
Personnel
18,250
Bombers
12
0
3
Fighter interceptors
17,,
0
30
Ground attack
78
51
117
Attack helicopters
14
14
0
Transport helicopters
54
11
33
Filed-king transports
'5asN and Marines
56
15
54
I'rrsonnel
29,300
Submarines
12
0
6
Ilelicopter cruisers
1
0
0
Light cruisers
1
0
2
I)cstro~ers
1
0
8
Frigates
3
0
2
Guided-missile corvettes
0
0
6
Guided-missile patrol
boats
Torpedo boats
6
0
Amphibious assault ships
7
0
11 Tss cuts -six Mirages on order.
20. In addition to undermining the moral and
political authority of the Peruvian Government, the
narcotics problem also complicates the government's
al;ility to suppress the Sendero Luminoso insurgency.
The new front recently opened by the guerrillas in the
Upper Huallaga Valley is in a major coca cultivation
and trafficking area. Most available evidence indicates
that the guerrillas and drug traffickers do not work
together and that Sendero Luminoso does not finance
itself through trafficking. Nonetheless, the guerrillas
are attempting to use the Peruvian Government and
I S antinarcotics programs in the area to enhance their
own fortunes, with peasant coca growers the focus of
Sendero Luminoso recruitment efforts. Although the
narcotics traffickers and the peasants probably would
prefer that guerrillas not be active in coca-growing
areas because their presence tends to attract a military
response, the traffickers may be exploiting opportuni-
ties for violence created by the insurgency. A recent
raid on a US-sponsored crop substitution facility, for
example, appears to have been carried out by narcotics
traffickers and mercenaries disguised as guerrillas.=
21. These severe problems have developed in a
socioeconomic environment that has been one of the
least dynamic in Latin America. Much of the Indian
population remains outside the modern economy, just
managing to subsist. Economic growth has not kept up
with the 2.5- to 3-percent growth of the population.
The per capita GDP in 1983 was at about the 1963
level. Statist economic policies have created inefficient
industries and hampered private activity, except for a
large illegal economy which produces not only narcot-
ics but also a large variety of consumer goods and
services. The Belaunde administration has tried to free
up economic activity, but with only limited success
because of opposition from powerful vested interests.
Outlook
22. The elections in April 1985 will be carried out
against this backdrop of deeply entrenched economic
problems, a severe external financial bind, a stubborn
leftwing insurgency, and a virtually uncontrolled nar-
cotics industry. Most observers believe that the APRA
candidate will finish in the lead in this first round of
voting but that he will not win a majority and, hence,
will have to face the second-place finisher-probably
the IU candidate-in a runoff election. The likelihood
that the congressional vote will be spread among
several parties means that APRA's chances of gaining
majority control of the legislature do not look good. E
23. APRA strategy for winning the second round of
elections-that is, whether it will have to appeal to the
right or the left-will depend in good part on the
political orientation of the other runoff candidate.
Given Garcia's relatively moderate orientation, how-
ever, he is well positioned to elicit support from the
center right if IU makes it to the second round, or
from the left in the less likely event that he faces one
of the centrist candidates.
24. The odds are that the elections will take place as
scheduled and the elected candidate will take office
without military interference. There is an outside
chance, however, that a sequence of events could
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Figure 2
Peru: Selected Economic Indicators
Real Economic Growth Consumer Price Inflation
Percent Change Percent
3.8 3.0 3.1 125.0
0.7
Current Account Balance Excluding Official Transfers
Million US Dollars
662
Total Debt
Billion US Dollars
Foreign Exchange Reserves End of Year
Million US Dollars
Debt Service Ratio
Percent
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Figure 3
Peru: Real Per Capita GDP Trend
Table 2
Peru: Balance of Payments, 1980-84
develop that would abort a democratic succession and,
possibly, even lead to severe instability. The three
most likely causes of military intervention would be an
unexpected victory by the presidential candidate of
the radical left IU, an APRA move toward an alliance
with IU to win a runoff election against a centrist
candidate, or military inability to accept an APRA
victory. We do not believe any of these developments
is very likely. We think, however, that the chances are
good that the military will not permit the government
to fall into the hands of the extreme left, although the
limits of their tolerance for radical government are not
fully known.
25. APRA's present strategy is to portray itself as a
moderate center-left alternative between the right and
the far left. Nonetheless, Garcia has to make some
appeal to the left in order to win the presidency, and
as elections approach, APRA's domestic policy state-
ments are likely to emphasize statist economic solu-
tions and to draw upon national resentment against
foreign banks, the IMF, and the United States. Once in
office, however, most of the worst rhetorical excesses
would probably fade, although the United States
would probably find an APRA government to be a
difficult negotiating partner.
26. One of the areas of greatest difficulty will be
debt negotiations. Peru on 5 July missed an interest
payment to foreign bankers and is taking an increas-
ingly hard position in talks with the IMF and foreign
banks. As the elections approach, the government
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Figure 4
Peru: Government Deficit as a Share of GDP
Percent
15
position is likely to stiffen even further, particularly on
accepting some of the stabilization measures and
economic performance criteria that the IMF and
banks are requiring as conditions for debt negotiation.
The current administration is already moving increas-
ingly toward pressure tactics. How far in this direction
the government goes will depend in part on whether
other Latin American governments take radical ac-
tions and what success they have. A center-left APRA
government might be even more inclined than the
present government to use pressure tactics and, possi-
bly, to coordinate its debt strategy with such similarly
inclined countries as Argentina and Bolivia. Although
formal debt repudiation is highly unlikely, there is
some risk that even the Belaunde administration will
abandon IMF programs, declare a moratorium on debt
service payments, and try to make the best deal it can
by negotiating directly with the major banks. This risk
would become more substantial under an APRA gov-
ernment.
27. In terms of its domestic economic policies, an
APRA government would be severely constrained by
economic realities as well as by the always-present
threat of a military coup if it became too radical.
Despite its statist rhetoric, it would almost certainly
not revert to the statist economic policies of the earlier
military government, which widely nationalized en-
terprises and farms and vastly multiplied state controls
over the private sector, because these policies have
become broadly discredited. An APRA government
would be handicapped, moreover, in its ability to
Status of the Insurgency
The Sendero Luminoso (SL) insurgent movement
was formed in about 1970, but it did not begin an active
campaign of terrorism until a decade later after Presi-
dent Belaunde took power following nearly 12 years of
military rule. Between 1980 and 1982, SL grew from a
force level of an estimated 250 to 500 armed militants
to an estimated 1,000 to 1,500. The SL apparently has
not significantly increased its membership since then,
but fragmentary evidence indicates that the movement
has attracted sufficient new recruits over the past two
years to offset combat losses. The leveling off of SL's
growth pattern probably reflects a backlash among
Indian peasants-the movement's traditional power
base-to the increasing brutality employed by the
guerrillas.
Spawne ind tYe-isolated mountains of south central
Peru, the insurgents continue to focus their activities in
nine provinces of Ayacucho, Huancavelica, and Apuri-
mac Departments, where the government formed its
original Emergency Zone. Earlier this year the insur-
gents established a new front in the upper Huallaga
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River area of San Martin Department, a major coca-
growing region, thereby forcing the military to create a
second Emergency Zone. Insurgent leaders also have
sought to maintain a presence in Lima in an effort to
strike a psychological blow against the government and
to divert its attention from SL's rural activities. Al-
though SL continues to carry out sporadic terrorist
attacks in the capital, the police have greatly weakened
its infrastructure there.
We believe that SL does not receive economic or
material support from foreign countries or organiza-
tions. Although President Belaunde has publicly im-
plied otherwise, we suspect this is intended as a warning
to Havana and other potential meddlers to have no
contact with Peruvian guerrillas. Lacking support from
a foreign sponsor, SL has gathered a heterogeneous
collection of small arms, most of which are captured
from the police or stolen from government installations,
stores, or private owners. The only standard weapon is
dynamite stolen from local mines.
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stimulate the needed growth of private enterprise by
its political philosophy and predisposition to maintain
government primacy over the economy. It also would
be even less likely than the present administration to
make the reforms necessary to stabilize the economy
and restore prospects for growth. As the economic
situation deteriorates further over the next year or so,
military expenditures to combat insurgency almost
certainly will remain a drain on government finances,
labor will press for more jobs and wage increases to
compensate for rising living costs, and businessmen
will demand protection from imports as a relief
measure.
28. With regard to prospects for the insurgency,
Sendero Luminoso will pose a continuing, if limited,
threat because of its deep roots in isolated rural areas
where the government has long been neglectful. The
spread of the insurgency to new areas and Sendero
Luminoso's resiliency against counterinsurgency oper-
ations are causing increased public anxiety and mili-
tary frustration. Moreover, although the guerrillas
have alienated highland peasants through persistent
brutality, recent abuses against peasants by security
forces may also prevent the government from gaining
much support in these rural areas. As a result, an
escalating cycle of violence by both sides may eventu-
ally further polarize the population
29. Nonetheless, Sendero Luminoso is unlikely to
evolve into a national organization. Its rigid adherence
to Maoist ideology severely limits its appeal even to
the left in Peru and creates a major barrier to
receiving support from the USSR, Cuba, or other likely
foreign backers of a radical leftist insurgent move-
ment. It is doubtful it would even come to terms with
any government, even one formed by the IU. With
regard to the MRTA, it does not present a serious
insurgency threat at this stage. Nonetheless, its actions
could complicate the government's counterinsurgency
efforts and adversely affect US interests in Peru.
30. The prospects are also minimal that an APRA
government-or any other administration-will suc-
ceed in greatly reducing the amount of coca paste
produced in Peru or in diminishing significantly the
corrupting influence of narcotics growers and traffick-
ers. The country will not have sufficient resources to
undertake such a mammoth task, nor is any govern-
ment likely to develop the political will or strength to
Treasury believes that an APRA government, with elections
behind, would gradually move to address the economic crisis.
Agreement with the IMF by the end of 1985 or early 1986 is
possible. In any event, Treasury would expect a new government to
end the paralysis in decisionmaking which currently characterizes
the Belaunde administration0
overcome the problem any time soon. At the same
time, we doubt the traffickers will seek much greater
political power than they already have. As long as they
possess enough political influence at the local and
regional levels to protect their trafficking activities-
as they presently do-they are not likely to divert
their resources to attempting to expand their political
reach _1
31. In foreign policy matters, an APRA government
probably would expand contacts with the Soviet Union
and Cuba, and possibly with China, but not in a major
way. It also probably would open diplomatic relations
with North Korea. The Peruvian Army and Air Force
already acquire a large part of their arms from the
Soviet Union, but they do not want to become com-
pletely dependent on the Soviets, as the current agree-
ment to buy 26 Mirage aircraft from France attests. In
fact, the Peruvian military probably would like to
expand their arms purchases from non-Soviet sources,
but the Soviets offer such beneficial financial arrange-
ments that they generally cannot afford to do so. At
the same time, budgetary limitations make it unlikely
that Peru will greatly increase its imports of Soviet
arms. Moreover, neither the USSR nor Cuba is in a
position to provide sufficient economic aid to right the
economy. Furthermore, we have no evidence that an
APRA government would be receptive to a massive
influx of, for example, Cuban teachers or Soviet
military and technical advisers. In addition, an APRA
government probably would be inhibited from accept-
ing such an influx by fear of a military coup. The
Soviets, nonetheless, are assiduously cultivating high-
level APRA officials and apparently are disposed to
providing APRA with considerable financial assistance
in the upcoming elections in the belief that an APRA
government would provide them with greater oppor-
tunities for influence. An APRA government would
probably move quickly to restore full diplomatic
relations with Cuba (they are maintained at the charge
level now because of various bilateral strains), and
those relations are likely to become more cordial.
US Relations with an APRA Government
32. In relations with Washington, an APRA govern-
ment would be markedly less pro-American than the
Belaunde administration. Garcia probably would place
greater emphasis on following a nonaligned foreign
policy and-to bolster his Third World credentials-
would criticize Washington on a broad range of issues.
He also would push to accelerate the currently modest
protectionist trend. The content of Garcia's specific
policies, however, is extremely difficult to predict. He
has been deliberately vague about what he intends to
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do should he win the presidency. Moreover, he is a
very young politician and has a short track record
from which to forecast his likely behavior. Neverthe-
less, our best guess is that he is unlikely to make
substantive policy changes that would drastically alter
Lima's traditional pro-Western orientation. Last June,
support to democratic government in Peru and has
assured US officials that he will continue bilateral
cooperation in such key areas as narcotics control.
33. There is a chance-which we consider highly
unlikely-that the political situation could drastically
worsen, leading to sharply higher levels of leftist
influence and, possibly, to instability and violence.
None of the principal actors-the military, the APRA
party, or even groups on the radical left-are seeking
confrontation. The military, for example, aware of the
disastrous impact of its earlier policies, says it does not
want to take political power again unless absolutely
necessary. The radical left, knowing that the military
probably would accept the legitimacy of a moderate
left government, is content to bide its time, fully
participate in the legal political process, and not
provoke a military reaction. Nonetheless, a sequence
of events that could lead to major gains by the radical
left or a general breakdown is conceivable. Such a
sequence would begin with the same event: the ex-
treme left wins the election or APRA makes a sudden
indications it will follow highly radical policies.
they want.
34. In this worst case scenario, two courses might
occur at this point. The first is that, despite their
statements to the contrary, military leaders permit the
radical left forces to remain in power, either because
the military is too divided to take action, or because
the radical left succeeds in calming longstanding ani-
mosities and persuading military leaders that the
armed forces will continue to receive all the resources
35. The second alternative course that might lead to
higher levels of conflict and, possibly, expanded leftist
influence would be the following sequence:
- The military reacts to an IU victory by launching
a coup and severe fighting breaks out.
- The radical left takes advantage of growing
resistance to initiate a new insurgency that begins
to attract much broader support and participa-
tion than the Sendero Luminoso movement.
- This insurgency develops the potential to create
supportive links with regional leftist insurgents
and to attract Cuban and Soviet support
36. Either of the above outcomes would not only be
disastrous in the long term for democracy in Peru and
for US influence and security interests in the country,
but they also could have a severely destabilizing
impact on other parts of South America-notably
Chile, Bolivia, Ecuador, and even possibly Colombia
and Venezuela. Moreover, they also would provide
potentially greater opportunities for the growth of
Soviet and Cuban influence in Peru and perhaps in the
hemisphere.
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