Peru stands at a crossroads with a new President and Congress. Poised to move beyond the country's recent history of political mayhem, economic contraction, and wholesale corruption, its new leadership is searching for people, policies, and solutions to restore stability and move forward from such persistent ills as its 49 percent poverty rate and stagnant economy. For the United States, this is a moment of opportunity.

With Colombia plagued by political uncertainty and under attack by drug-fueled rebel armies, a fractious government in Ecuador, and an unpredictable populist in charge of Venezuela, Peru could be the key to a successful strategy both to bolster political stability and economic progress and to reduce drug trafficking in a volatile region. Without progress on these fronts, Peru and its neighbors face migration, conflict, and more formidable threats of transnational crime across their borders, jeopardizing the stability of the hemisphere. For its part, the Bush Administration should encourage Peru's efforts to rebuild a more robust democracy, offer incentives for reforms to help revive the economy, and improve working relations on security issues.

HOW A LACK OF STRATEGIC VISION HAMPERED PREVIOUS U.S. POLICY

Throughout the 1990s, U.S. policy toward Peru, and indeed the rest of the Andean region, consisted of piecemeal reactions directed at crisis points rather than implementation of a comprehensive strategy to promote stability, economic development, and a framework for democracy. With the exception of providing counter-narcotics assistance and diplomatic support to help settle a border dispute with neighboring Ecuador, the Clinton Administration engaged Peru reluctantly.

Confronted with the dilemma of whether or not to support the regime of former President Alberto Fujimori, Washington temporarily cut development assistance and occasionally criticized him for his political misdeeds, but nonetheless gave him political support. Ultimately, it acquiesced to Fujimori's autocratic, often arbitrary, rule because of several significant accomplishments: He effectively reduced drug trafficking, defeated two guerrilla movements, and revived the country's economy after 22 years of precipitous decline. Yet, in spite of these achievements, corruption and impunity within Fujimori's regime ultimately brought down his government and led to his exile to Japan in November 2000.

Fortunately, the caretaker administration of interim President Valentín Paniagua was able to pick up the pieces and set the stage for fresh elections in 2001. On June 3, 2001, Alejandro Toledo Manrique, a political novice, was narrowly elected president in a runoff with former President Alan García, an erratic populist who had led the country into bankruptcy before Fujimori took office.

Under this new leadership, Peru is still far from being on solid ground. Shaken by the government's collapse last year, Peru's political institutions and economy need rebuilding, underscoring the need for a renewed, more comprehensive U.S. policy toward this nation of 25 million. Although U.S. diplomats would have been hard-pressed to moderate Fujimori's brand of personal populism, President Toledo appears receptive to new ideas and at least espouses the benefits of government accountability and free enterprise. He thus presents a fresh opportunity to strengthen Peru's political institutions and re-energize its market economy.

The Bush Administration has signaled that it is willing to invest in a new level of relations. The United States recently collaborated in the capture of Peru's infamous spy chief Vladimiro Montesinos and announced an $882 million Andean Regional Initiative for counter-narcotics and alternative development support. At least, these actions show renewed interest in the troubled neighborhood.

Yet, beyond broad gestures, President George W. Bush needs to work with the Toledo administration to develop clear objectives for their relationship. President Toledo is faced with the challenges of restoring Peru's democratic institutions, reforming the government, and reinvigorating the economy. Given Peru's importance in a volatile region of weak democracies that are under attack by terrorists and drug traffickers, the Bush Administration should take action to help Toledo address these challenges through advice, incentives, and improved working relations on security issues.

A 30-YEAR HISTORY OF TURMOIL

While many of the problems facing President Toledo are the result of the excesses of the Fujimori administration, some of their root causes go back as far as the socialist dictatorship of General Juan Velasco Alvarado in the late 1960s. In 1968, Velasco overthrew civilian democrat Fernando Belaúnde Terry and led Peru into public-sector excess and economic decline. Under Velasco's rule, agricultural production was decimated as large coastal agricultural estates were expropriated and redistributed to the people who worked the land. Velasco borrowed heavily from foreign banks and doubled the size of the government bureaucracy. At the same time, he infused the armed forces with Soviet equipment, ideology, and doctrine.

In 1980, democracy was restored with the re-election of President Fernando Belaúnde Terry, who attempted to cut spending and reverse many of the military government's populist programs, but there were disincentives to reform. Inflation and unemployment were soaring, making it difficult to trim public spending. At the same time, two guerrilla movements--the Sendero Luminoso (Shining Path) and Tupac Amaru (MRTA, or Tupac Amaru Revolutionary Movement)--took advantage of mounting unrest to recruit members, protect expanding coca cultivation, and launch terrorist offensives. Belaúnde's attempt to combat them without either an adequately prepared army or an effective campaign to win the hearts of rural inhabitants largely failed.

In 1985, Peruvians snubbed Belaúnde's weak austerity policies by electing charismatic populist Alan García, whose presidency brought back heavy spending, subsidies, and corruption. García's administration left office with the country in a state of crisis. At one point, inflation raged at more than 7,000 percent and the treasury was empty. By the end of his term, the Shining Path and Tupac Amaru insurgencies had demolished $22 billion worth of property and left more than 20,000 people dead.

1n 1990, Alberto K. Fujimori, a university professor and the son of Japanese immigrants, successfully ran for president, campaigning against "traditional" politicians. Aided by a team of skillful economic advisers, he immediately cut public spending, increased taxes, tamed inflation, and opened up domestic markets. But lacking governing experience, Fujimori felt compelled to enter a marriage of convenience with the armed forces and hired Vladimiro Montesinos, a cashiered army captain and lawyer who once represented Colombian drug traffickers, to serve as his personal security adviser and military liaison.

Two years later, in April 1992, Fujimori had the army's support when he overthrew his own government, dissolving and reforming an uncooperative Congress and taking control of the judiciary. Ruling by decree, he moved against Peru's two insurgent groups. In short order, Peruvian police located and arrested the leaders of the Tupac Amaru and the Shining Path. In addition, with the military effectively patrolling the countryside, drug producers fled to less controlled environs in Colombia. These remarkable achievements endeared Fujimori to the rural poor, softened international criticism, and prompted acceptance of his regime in Washington.

While the United States benefited from the Fujimori regime's cooperation against narcotics trafficking, the foundation of Peru's precarious democracy was being undermined. Vladimiro Montesinos became the unofficial head of the National Intelligence Service and reportedly used its offices to bribe or blackmail most of Peru's political establishment, as well as a number of foreign officials. The Clinton Administration's policy of prioritizing stability over reform did little to moderate Montesinos's authoritarian impulses; in fact, U.S. diplomats may have inflamed the situation by going through Montesinos to influence the decisions of others in Fujimori's government.¹ Instead, Washington should have kept its distance from this chain of compromised politicians, businessmen, and military officers and should have regarded it as a threat to the country's governing institutions.

PRESIDENT TOLEDO'S IMMEDIATE CHALLENGES

Inaugurated on July 28, President Toledo faces a number of uphill battles. Above all, he must rebuild the public's trust. He won the election because voters considered his inexperience the lesser of two evils compared to his opponent's record of corruption and mismanagement. A first test of this weak support will be Toledo's efforts to name his cabinet ministers without returned fugitive Vladimiro Montesinos trying to discredit them through disinformation or strategically timed revelations of corruption.

If this takes place, the flow of charges and counter-charges could easily dominate the political landscape, slow the pace of reforms, and create awkward moments for U.S.-Peruvian relations. Political warfare, however, should not be allowed to divert attention from such critical issues as:

Fractured Institutions. President Fujimori's congressional and judicial purges of 1992 and the use of bribery through Montesinos's centralized power within the presidency neutralized institutional checks and balances and corrupted national officials. Although interim President Valentín Paniagua managed to elevate confidence in daily governance, restore freedom of the press, and re-establish the credibility of the electoral process, important matters of institutional reform were left to the next elected administration.

At the top of the list is the question of a new constitution to redefine relations between the Congress, the courts, and the president.² As Fujimori left it, the Peruvian Congress did not respond to local constituents, nor did it have the authority to hold the executive branch accountable for the way it conducted government. Justices in the courts were vulnerable to manipulation because they could easily be dismissed if their opinions were not favorable to the president.³

In addition, traditionally weak district and local governments favored a powerful presidency. Recently, both Toledo and García campaigned in favor of increasing revenue transfers from the national government to provinces and municipalities.⁴ However, even within their proposals, there were no clear mechanisms to improve local decision-making or local tax collection.

Economic Decay. President Toledo has inherited a complex economic situation. On the bright side, inflation is only 3 percent and many inefficient state enterprises have been privatized. Moreover, during his presidency, Fujimori invested heavily in the national infrastructure, constructing rural highways, schools, and health clinics.

But Fujimori's economic reforms did not result from a comprehensive plan, such as the pro-enterprise, low-tax strategy employed in Chile. Nor was there an intent to sustain reform beyond Fujimori's presidency. Instead, Fujimori temporarily adopted piecemeal policies that had been recommended by various advisers during his first administration, including internationally renowned economist Hernando de Soto.⁵ After Fujimori consolidated his powers, many reforms were forgotten. The resulting uncertain political climate, arbitrary application of laws, and a politicized judicial process depressed investment and economic growth. Whereas Peru's economy had expanded in real terms by 27.8 percent between 1990 and 1995, it has increased only 7.8 percent since 1996.⁶ Throughout 2000 alone, tax revenues dropped from $632 billion to $500 billion, even though corporate taxes rates remained the same as in prior years.⁷

Further affecting Peru's economic situation is the size of the country's external (foreign) debt as a percent of gross domestic product: This figure now stands at 62.5 percent.⁸ By itself, and if incurred wisely, such a debt level might not be worrisome. However, Peru's political crisis coincides with a global economic slowdown. Absent any internal problems, Peru's growth prospects would have declined along with those of other developing countries, but its institutional crisis only dims further its near-term growth prospects.

Accordingly, the Toledo administration will need to address the problem of external debt. This becomes all the more necessary should Argentina default and restructure its accounts--a situation that would put heavy pressure on countries like Peru. While unemployment is 7.7 percent,⁹ underscoring the weakness of the economy, underemployment is more than 43 percent,¹⁰ suggesting that half the labor force works in the informal sector (i.e., in small, illegal businesses that evade taxes, pay no benefits, and provide scant income).

Tarnished Military. The Peruvian armed forces and their charter need reform. Defying a regional trend in which most armies now serve civilian elected governments, Peru's military remains socially, if not functionally, apart. Institutional isolation was once a condition common to most Latin American militaries, which were often used to enforce political order. In Peru's case, however, the breach between the military and the civilian sector was prolonged when soldiers ran the country with disastrous consequences during General Velasco's leftist dictatorship.

After Peru returned to civilian government, a new constitution subordinated the military to elected leadership; but when President Fujimori ruled by decree and used the armed forces to curb rebels, bust drug traffickers, and try suspected terrorists in military courts, the military's autonomy increased. In addition, Fujimori dealt only indirectly with the military leadership and communicated with its powerful generals primarily through Montesinos, who allegedly bribed some and conspired with others. Ongoing investigations in Peru and Colombia suggest that Montesinos may have masterminded the diversion last year of 10,000 AK-47 assault rifles from an allotment purchased by the Peruvian Army in 1998 and had them airdropped to Colombia's FARC guerrillas.¹¹

Today, low salaries (a Peruvian recruit earns only $15 a month) continue to render both troops and officers especially susceptible to manipulation.¹² Meanwhile, honest commanders worry that reforms will mean unfair scrutiny of their institution by the Truth Commission (established by the interim government of Valentín Paniagua) or indiscriminate dismantling by civilians not familiar with military missions.

Uncertain Relations with the United States. Finally, Toledo will have to forge a new understanding with the Bush Administration, which inherited poorly crafted policies. While the United States supported President Fujimori's budgetary belt-tightening and applauded his defeat of the Sendero Luminoso and Tupac Amaru guerrilla movements, the emphasis on counter-narcotics was a double-edged sword. To the benefit of both the United States and Peru, joint counter-narcotics programs were effective in reducing coca production and cocaine processing in Peruvian territory. However, the United States forged this policy partly through a reliance on the unaccountable Montesinos without much regard either for the example this relationship set before Peruvian leaders who were aware of it or for the long-term effects it might have on encouraging corruption.

Moreover, after working with Peru to develop an effective program to interdict the airborne drug traffic in the early 1990s, Washington relegated cooperation with the Peruvian military on joint interdiction missions to third-party contractors through the Central Intelligence Agency. Over time, the standards of this program were relaxed, reportedly without the knowledge of any Washington official.¹³ A tragic consequence of that loosely supervised arrangement was the tragic loss of life on April 20, 2001, when a missionary's wife and infant daughter were killed in the mistaken shoot-down of a light plane in Peruvian airspace.

HOW WASHINGTON CAN HELP

Considering the difficulties and opportunities Peru now faces, the United States should support the country in its struggle to get back on its feet. At this time, both the leaders and citizens of Peru are receptive to reforms--particularly those that enhance citizen participation and economic progress.¹⁴ U.S. policy toward Peru should have three goals: to encourage home-grown democratic reforms, help revive the economy, and craft a more responsible security relationship. The following actions would help achieve them.

• Provide advice to bolster democracy. Peru has already had 12 constitutions, and interim President Paniagua called for another one in June 2001.¹⁵ As proposals are developed, Washington should be willing to provide advice based on U.S. experience. Previous charters--influenced by French and Spanish models--go beyond framing the general responsibilities and functions of government to dictate specific laws and business regulations. In this period of consolidating democracy, Peruvians would be better served by a simple, more durable document that frames the relationship between the people and government, restrains the arbitrary use of power, protects property rights, and guarantees civil liberties.

  This is not to imply that the U.S. Constitution should necessarily serve as a model for Peru's new charter, but the Bush Administration should be ready to facilitate Peru's progress by providing such public diplomacy initiatives as international speaker programs and expert exchanges that could advocate the inclusion of such elements as a list of civil liberties, the separation of powers, and a system of checks and balances. Similar programs could be offered to Peru's Congress to help it improve oversight of the executive branch's implementation of laws and spending initiatives and to develop constituent service capabilities to connect lawmakers with the people they serve.¹⁶

  As the Toledo Administration moves forward on campaign promises to reapportion authority among the national, provincial, and local levels of government, Washington should reallocate money from its Development Assistance account to democratic governance programs in order to facilitate exchanges with U.S. public officials who could share their views and experiences with federalism and to support Peruvian non-governmental organizations that are studying how to design these reforms. To the extent that Peru can develop more effective government in its 24 departments and 1,800 municipalities and delegate more authority to the local level, it will be better able to weather the occasional crises that inevitably strike the presidency and, consequently, the central government.

  Finally, experts from the U.S. Justice Department's Administration of Justice program should be prepared to advise Peruvian officials in developing transparent judicial procedures, depoliticizing the courts, and improving the training of community police.

• Help reinvigorate Peru's economy by promoting trade, reform, and fiscal responsibility. Peru's economic growth is flat, and half of all its citizens live below the poverty line. U.S. officials should encourage Peruvian leaders to adopt long-term goals to develop a free-market economy (as Chile has) to stimulate the growth that is needed to sustain the country's recovering democracy.¹⁷ Although the U.S. Congress is already considering the renewal of the Andean Trade Preferences Act, the United States could offer additional trade incentives based on Peru's willingness to re-energize dormant programs to title unregistered property and to streamline procedures for obtaining business licenses.

  While President Toledo has been soliciting credit from European allies and multilateral financial organizations, including the World Bank (where he once worked), the Bush Administration should caution him against taking on additional debt. Huge new loans will only increase Peru's foreign indebtedness and undermine the prospects for economic growth.

  Reliance on development assistance should also be viewed as a questionable crutch. The current U.S. assistance level of $104 million¹⁸ should be audited to determine its effectiveness, and more of the burden of high-dollar programs--such as improving public health ($30 million) and food assistance ($30 million)--should be shifted back to the Peruvian government. U.S. policymakers should help their Peruvian counterparts explore ways to tackle these development challenges through internal reform.

• Rebuild U.S.-Peruvian security ties. Relations with Peru were weakened when Washington relied on unsavory insiders such as Vladimiro Montesinos as intermediaries to provide access to government authorities, and more recently, by U.S. complacency in structuring and monitoring ongoing joint drug interdiction efforts. After Peru's current investigations into Fujimori-era corruption reach their conclusion, the United States should develop healthier ties by establishing broader and more open contact with all of Peru's governing entities.

  The same should apply to the U.S. relationship with Peru's armed forces, where some 40 senior officers have already been relieved of their duties and more may follow. Once that situation stabilizes, the Pentagon and the U.S. Southern Command should offer to help them to improve their capacity to counter contemporary threats and to better understand their role as a public institution in civil society. This is not the time to cut off relations with Peru's military forces, but to support their reform as conditions allow.

  This is vitally important in a country where adequate defenses are needed to address a broad range of critical problems--from disaster relief to drug interdiction and the possible reemergence of terrorism. Peru's security is now threatened both by the Revolutionary Armed Forces of Colombia (FARC), which is expanding operations across the border into northern Peru, and by the Sendero Luminoso, which is beginning to make a comeback, as evidenced by an increase in isolated incidents of violence in the country's rugged interior.¹⁹

  Finally, the United States should help to develop a coordinated regional drug interdiction program in which responsibilities are better defined and supervised. At present, the U.S. military, Coast Guard, Drug Enforcement Administration, Customs Service, and Central Intelligence Agency all have competing roles in different countries. One outcome of this complex ad hoc arrangement is a situation in which the CIA ended up managing a civilian contractor to conduct counter-drug surveillance flights in collaboration with the Peruvian air force.

  Program direction under such conditions is neither easy nor reliably accountable. The Bush Administration should simplify and re-organize the U.S. chain of command throughout the Andean region and base it on military-to-military, intelligence-to-intelligence, and police-to-police working relationships, with appropriate coordination by U.S. ambassadors in their respective countries.

CONCLUSION

Although the United States benefited from Peru's economic stability under Fujimori, as well as from his regime's substantial cooperation in establishing counter-narcotics initiatives, the foundations of Peru's democracy were slowly rotting away. With a new Peruvian president in power, the United States now has a chance to help the country rebuild its political institutions and expand the economic progress that was achieved earlier. President Toledo may lack governing experience but he appears to appreciate the virtues of participatory politics and free-market economics.

Moreover, with Colombia under siege from rebels and drug traffickers, a fragmented government in Ecuador, and an unpredictable leftist populist leader concentrating his power in Venezuela, Peru assumes a critically important role. It may be the linchpin that can hold together the Andean region's fragile political stability, faltering economies, and precarious defenses against transnational crime.

As a leader who considers relations with Latin America to be a priority, President Bush must go beyond the tactical approach of the previous Administration, which focused mainly on counter-narcotics initiatives. As Peru strives to rebuild its political, civil, and economic institutions in a troubled international environment, U.S. diplomacy requires a more comprehensive approach. Only a balanced policy that encourages democratic habits, provides incentives to bolster free market economics, and establishes closer professional contacts to encourage military reforms can provide the support that is necessary to help Peru attract capital, maintain peace, and fulfill its potential as a hub of stability in the region.

Stephen Johnson is Policy Analyst for Latin America in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.

Endnotes