Order Code RS22715
September 6, 2007
Peru: Political Situation, Economic
Conditions and U.S. Relations
Miranda Jasper, Research Associate
Foreign Affairs, Defense, and Trade Division
Clare M. Ribando, Analyst in Latin American Affairs
Foreign Affairs, Defense, and Trade Division
Summary
Peru, a coca-producing country in the Andean region of South America, has had
a turbulent political history. Despite its tumultuous past, Peru has recently taken steps
to consolidate its democracy and pursue market-friendly economic policies. For the past
six years, Peru, a leading mineral exporter, has posted some of the fastest economic
growth rates in Latin America. GDP growth reached 8% in 2006 and, despite damage
caused by a recent earthquake, is expected to exceed 7% in 2007. In June 2006, former
president Alan García (1985-1990) was elected president in a close race. Since taking
office, García has embraced the proposed United States-Peru Trade Promotion
Agreement (PTPA) and launched an aggressive coca eradication campaign. The United
States enjoys strong ties with Peru, with trade issues a key U.S. priority. The proposed
PTPA was ratified by the Peruvian legislature in June 2006, and amended to include
labor and environmental provisions in June 2007. After a trip to Peru in August 2007,
congressional leaders indicated that consideration of the proposed PTPA would likely
occur this fall. See CRS Report RL34108, U.S.-Peru Economic Relations and the U.S.-
Peru Trade Promotion Agreement and CRS Report RS22521, Peru Trade Promotion
Agreement: Labor Issues. This report will be updated periodically.
Background1
Peru has had a turbulent political history, alternating between periods of democratic
and authoritarian rule. Political turmoil dates back to Peru’s traumatic experience during
the Spanish conquest, which gave rise to the economic, ethnic and geographic divisions
that characterize Peruvian society today. Since its independence in 1821, Peru has had 13
constitutions, with only nine of 19 elected governments completing their terms. Peru’s
1 Cynthia McClintock, “Peru: Precarious Regimes, Authoritarian and Democratic,” Democracy
in Developing Countries: Latin America, Eds. Diamond et al., London: Lynne Rienner, 1999;
CRS Report RL30918, Peru: Recovery from Crisis, by Maureen Taft-Morales.

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most recent transition to democracy
occurred in 1980 after 12 years of military
Peru: Key Indicators
rule. The decade that followed was
Population: 28.6 million
characterized by a prolonged economic
crisis and the government’s unsuccessful
Geographic Characteristics: Pacific
struggle to quell a radical Maoist guerrilla
coastal plains, Andean mountain highlands,
insurgency known as the Shining Path
Amazon Basin lowlands
(Sendero Luminoso).2
GDP growth rate: 8% (2006)
In 1985, leftist Alan García of the
American Popular Revolutionary Alliance
Per capita income: $2,650 (2005)
(APRA) was elected president. During his
first term (1985-1990) García’s antagonistic
Ethnic Composition: Indigenous (45%),
Mestizo (37%), European (15%), African,
relationship with the international financial
Japanese, Chinese and other (3%)
community and excessive spending on
social programs led to hyperinflation. His
Languages: Spanish, Quechua, Aymara,
security policies were unable to defeat the
and other indigenous languages
Shining Path. By 1990, the Peruvian
population was looking for a change and
Sources: World Bank, U.S. Department of
found it in the independent candidate
State, “Background Note: Peru,” 2007.
Alberto Fujimori. Once in office, Fujimori
implemented an aggressive economic
reform program and stepped up
counterinsurgency efforts. When tensions between the legislature and Fujimori increased
in 1992, he initiated a “self coup,” dissolving Congress and calling a constituent assembly
to write a new constitution. This allowed him to fill Congress and the judiciary with his
supporters. President Fujimori was re-elected in 1995, but his popularity began to falter
as the economy slowed and civic opposition to his policies increased. He was
increasingly regarded as an authoritarian leader, due in part to the strong-handed military
tactics his government used to wipe out the Shining Path that resulted in serious human
rights violations.
President Fujimori won a third term in 2000, but the elections were marred by
irregularities. Within weeks of taking office, a bribery scandal broke that, combined with
allegations of human rights violations committed by his top aides, forced Fujimori to
agree to call new elections in which he would not run. An interim government served
from November 22, 2000 to July 28, 2001, when the newly-elected government of
Alejandro Toledo took office. Toledo’s presidency (2001-2006) was characterized by
extremely low approval ratings but high economic growth rates; 5.9% in 2005 and 8% in
2006. Toledo was able to push through several reforms, including tax reform and a
pending free trade agreement with the United States. Despite the economic
improvements, Toledo’s presidency was marred by allegations of corruption and recurrent
popular protests.
2 Between 1980 and 2000, armed conflicts between Peruvian government troops, the Shining
Path, and others resulted in some 69,260 deaths and disappearances. See Commission on Truth
and Reconciliation in Peru, Final Report, Annex 2, August 28, 2003. For more information, see
David Scott Palmer, ed., The Shining Path of Peru, New York: St. Martin’s Press, 1994.

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Current Political and Economic Issues
Political Situation. On June 4, 2006, former President Alan García defeated
populist Ollanta Humala 53% to 47% in a close election. García won in the second round
after garnering support from Peru’s business community, which had been reluctant to
support him in the first round. A retired army officer who led an October 2000 uprising
against then-President Alberto Fujimori, Humala espoused nationalist, anti-globalization
policies. Many observers were concerned that Humala had authoritarian tendencies. Now
the opposition leader in Peru’s Congress, Humala was charged in August 2006 with
murder in connection to his military actions in the 1990s. In the legislative elections,
Humala's alliance won 45 of the 120 seats in the unicameral Congress; García's party
APRA won 36 seats, the center-right National Unity coalition captured 17 seats, and
Fujimori supporters won 13 seats.3
President Alan García has taken steps to assure the international financial community
that he is running Peru as a moderate rather than as the leftist he had been in his early
career. Since initiating his political comeback in 2001, when he made an unsuccessful bid
for the presidency against Alejandro Toledo, García has softened his populist rhetoric and
apologized for his earlier errors. During his first year in office, García is thought to have
embraced sound economic policies and the Peruvian economy has continued to perform
well, but his government has faced periods of social unrest and popular protests over
lingering concerns about poverty and inequality. His approval rating dipped to 35% in
mid-July, but has since rebounded to 76% after his leadership in responding to a mid-
August 8.0 earthquake that hit Peru.4 García has made solidifying strong relations with
the United States a top priority of his government. In the past year, García has shown
himself to be a strong U.S. ally and a leading supporter of free trade in Latin America.
Key political challenges currently facing the García administration include
! Counternarcotics policies. The government has increasingly relied on
forced eradication to reach its coca eradication targets, which has in turn
produced violent clashes between coca farmers and police. President
García began a dialogue with coca growers on drug policy and allowed
a temporary suspension of forced eradication in March, but has since said
that his government will not negotiate with radical growers who have
launched strikes to protest government eradication efforts. In 2006, the
government eradicated 12,688 hectares of coca, making it the second year
in a row that they surpassed their goal of eradicating 10,000 hectares.5
! Reducing poverty and inequality. According to the World Bank, the
wealthiest 10% of the Peruvian population control 41% of the country’s
income whereas the poorest 10% control just 1% of the income. In
recent years, Peru has seen rising popular demands for a solution to
3 See CRS Report RS22430, Peru: 2006 Elections and Issues for Congress, by Maureen Taft-
Morales.
4 “Earthquake Relief Effort Becomes First Big Test for Peru’s President,” Financial Times,
August 22, 2007.
5 Eradication and seizure figures taken from U.S. Department of State, International Narcotics
Control Strategy Report, March 2007.

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economic inequality. Poverty is more prevalent among indigenous
households at 63% compared to 43% among non-indigenous
households.6 In July 2007, at his state of the nation address marking his
first year as president, García publically apologized to poor Peruvians for
failing to deliver the material benefits of the country’s recent economic
growth. He has pledged to increase public investment by building
housing for 1.2 million Peruvians by the time he leaves office in 2011.
President García’s approval rating slipped during his first year in office
in response to unmet popular expectations.7
! Earthquake response. On August 15, Peru was rocked by a 8.0
earthquake that killed at least 519 people and destroyed some 40,000
homes. President García has pledged money to rebuild communities and
created 8,000 temporary jobs in order to help with the clean-up effort.
While some have praised the García government response to the
earthquake, humanitarian groups maintain that more aid and better
government coordination are needed to provide shelter and medical
attention to as many as 200,000 Peruvians who are in need of assistance.8
! Fujimori Extradition Proceedings. Charges have been brought against
former President Fujimori, including allegations of corruption and major
human rights violations. Fujimori went into exile in Japan for several
years and tried to return to Peru in November 2005, but was arrested en
route by Chilean authorities. In May 2006, the Chilean government
released Fujimori on bail while processing Peru’s extradition request. In
July 2007, the Chilean Supreme court denied his extradition and the case
is currently awaiting a ruling by the high court on appeal. Fujimori’s
return to Peru could have major political consequences for García’s
government who stands to lose their alliance with the Fujimorista bloc,
which they rely on in order to pass legislation.9
Economic Issues. President García has continued the pro-market economic
policies of his predecessor, Alejandro Toledo, who presided over one of the highest
economic growth rates in Latin America throughout his term, with 8% growth in 2006.
García has embraced the proposed U.S.- Peru Trade Promotion Agreement (PTPA),
appointed a fiscally conservative finance minister, and cut government pay. Economic
growth has been fueled by Peru’s strong exports of minerals, textiles, and agricultural
products like sugarcane, potatoes, and asparagus. Peru is the world’s second largest
producer of silver, sixth largest producer of both gold and copper and provides a large
source of the world’s zinc and lead. The Peruvian economy has also been boosted by
6 Gillette Hall and Harry Patrinos, eds. Indigenous Peoples, Poverty and Human Development
in Latin America: 1994-2004, New York: Palgrave Macmillan,2006.
7 EIU, “Country Report - Peru,” July 2007; “Peruvian President Apologizes to Poor, Vows to
Increase Anti-poverty Aid,” Associated Press, July 28, 2007.
8 “Relief Groups: Peru Still Badly Needs Aid 2 Weeks After Quake,” Dow Jones International
News, August 30, 2007.
9 Economist Intelligence Unit, “Country Report - Peru,” July 2007; “Chile Foreign Minister asks
High Court to Decide on Fujimori,” Agence France Presse, July 30, 2007.

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U.S., Brazilian and Argentine investments in the Camisea natural gas project, which by
2009 is expected to be exporting liquified natural gas to the United States and Mexico.10
President García has sought to reassure poor Peruvians that he is addressing their
needs by pledging austerity measures such as halving the Government Palace’s annual
spending and redirecting the funds to a rural irrigation project. García says he will also
find ways to use trade to reduce the level of poverty in Peru and widen income
distribution. His government is seeking to boost rural development by increasing its
investments in road construction, sanitation projects, and water connections.
U.S. - Peruvian Relations
Peru enjoys strong ties with the United States, characterized by extensive economic
linkages and significant counternarcotics and security cooperation. Since the presidency
of Alejandro Toledo in 2001, Peru has focused on strengthening those ties. Some 200,000
U.S. citizens visit Peru annually and over 400 U.S. companies are represented in Peru.
President García met with President Bush at the White House in October 2006 and again
on April 23, 2007, at which time the leaders discussed their shared commitment to
fighting the production and consumption of illicit drugs and the importance of securing
congressional approval of the proposed U.S.-Peru Trade Promotion Agreement. Issues
in U.S.-Peruvian relations include democratic development, human rights,
counternarcotics, and trade issues, which are at the forefront of the bilateral agenda.
U.S. Aid. The United States provided $141.7 million in foreign aid to Peru in
FY2006, and another estimated $138.9 million in FY2007. The FY2008 request for Peru
is for $93.2 million, with the most significant cuts occurring in counternarcotics funds
traditionally provided through the Andean Counterdrug Initiative (ACI). ACI has been the
primary U.S. assistance program to help Colombia and its neighbors address drug
trafficking and related economic development issues. Beginning in FY2008, alternative
development programs previously supported by ACI funds will be shifted to the
Economic Support Fund (ESF) account. The U.S. Agency for International Development
has four main goals for Peru: strengthening democracy; increasing governance in isolated
areas where drug traffickers operate; reducing poverty; and decreasing maternal mortality
and other health threats. Peru was recently selected to participate in the Millennium
Challenge Account (MCA) Threshold Program. That program will focus on combating
corruption, strengthening the rule of law, and improving resource management in Peru.
Human Rights. The government of Peru has taken steps to expand and enforce
its labor laws and to prosecute those accused of past and current human rights violations.
According to Human Rights Watch, while the Peruvian government has made some
progress in holding those accused of past abuses responsible for their actions, many are
still able to avoid prosecution. The State Department’s Country Reports on Human Rights
Practices covering 2006 says that while the Peruvian government generally respects the
rights of its citizens, ongoing problems include abuse of detainees and inmates by police
and prison guards; poor prison conditions; trafficking in persons; child labor in the
informal sector; and failure to enforce labor laws, among others. Human rights groups
have also expressed concerns that a law passed in December 2006 to regulate the
10 “High Growth Masks Peru’s Two Diverging Economies,” Financial Times, July 28, 2007.

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activities of non-governmental organizations operating in Peru unnecessarily restricts
freedom of expression and association in the country.11
Counternarcotics Cooperation. Peru is a major illicit drug-producing and
transit country, accounting for 28% of global cocaine production. In 2006, according to
United Nations figures, coca cultivation increased by 7% in Peru even though the
government increased its coca eradication efforts by 4% from 2005 levels.12 The United
States and Peru signed a five-year cooperative agreement for 2002-2007 that links
alternative development to coca eradication more directly than past programs have. Peru
is the second largest coca cultivating country in the world after Colombia, but receives
less than one quarter of the funding Colombia receives through the Andean Counter Drug
Initiative. The FY2008 counternarcotics assistance request for Peru is for $66.8 million,
down from the $106.5 million allocated in FY2006 and an estimated $103.3 million in
counternarcotics funding provided in FY2007. Recent aid reductions appear to be due to
overall budget cutbacks rather than any U.S. government dissatisfaction with Peru’s
counternarcotics efforts.
U.S. - Peru Trade Promotion Agreement. The United States is Peru’s largest
trading partner. Since December 2001, exports from Peru have received preferential duty
treatment through the Andean Trade Preference Act (ATPA), later amended by the
Andean Trade Promotion and Drug Eradication Act (ATPDEA) in August 2002. These
trade preferences were scheduled to end on December 31, 2006. However, the acts have
been extended twice, and are now scheduled to expire on February 29, 2008.13 ATPDEA
gives market duty-free access to selected Peruvian goods without requiring reciprocal
trade concessions or addressing issues such as intellectual property rights. The United
States and Peru completed negotiations for a U.S.-Peru Trade Promotion Agreement in
December 2005, which was ratified by the Peruvian legislature in June 2006. Whereas
the ATPDEA provides temporary trade preferences to some goods from Peru, the
proposed PTPA is a comprehensive trade agreement that would permanently eliminate
tariffs and other barriers on U.S.-Peru bilateral goods and services trade. President García
views the PTPA agreement as essential to ensuring Peru’s continued economic growth
and achieving poverty reduction. After several Members of Congress indicated that some
of the provisions in the agreement would have to be strengthened, the Bush
Administration and Congress reached an agreement on May 10, 2007 on a new trade
framework that includes core labor and environmental standards. On June 27, 2007,
Peru’s Congress approved the amendments to the PTPA. After a recent trip to Peru,
congressional leaders indicated that action on the proposed PTPA would be a “priority”
for this fall.14
11 Human Rights Watch, “World Report 2000”; CRS Report RS22521, Peru Trade Promotion
Agreement: Labor Issues, by Mary Jane Bolle and M. Angeles Villarreal; “García Forges Ahead
with his own War on Terror,” Latin American Andean Group Report, January 11, 2007.
12 United Nations Office on Drugs and Crime (UNODC), World Drug Report 2007.
13 See CRS Report RS22548, ATPA Renewal: Background and Issues, by M. Angeles Villarreal.
14 For more information see CRS Report RL34108, U.S.-Peru Economic Relations and the U.S.-
Peru Trade Promotion Agreement; Martin Vaughan, “Peru Visit Sparking Interest in Early
Markup for Trade Pact,” Congress Daily, August 7, 2007.

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