WEEKLY SUMMARY SPECIAL REPORT PROBLEMS FACING PERUVIAN PRESIDENT BELAUNDE

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-00927A006500050002-6
• Release Decision: RIPPUB
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• Document Creation Date: December 19, 2016
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• Content Type: SUMMARY

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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
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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)
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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
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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
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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
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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
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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
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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
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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
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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)
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