Foreign Relations of the United States, 1958–1960, Volume V, Microfiche Supplement, American Republics

PE–29. National Intelligence Estimate¹

NIE 97-59

Washington, 13 October 1959

THE OUTLOOK FOR PERU²

THE PROBLEM

To estimate the outlook for political and social change in Peru through mid-1962.³

CONCLUSIONS

1. Peru has long been ruled by an oligarchy which until recently has shown little regard for the welfare of the majority of the population. This political system is being increasingly subjected to pressures for change. APRA, a social revolutionary (but anti-Communist) mass party, has been the principal advocate of such change.⁴ APRA is feared and distrusted by the oligarchy in general; it has at times been driven underground and might be again if it were to seek direct control of the government. APRA, however, can deliver a decisive vote to that faction of the oligarchy which offers it the most favorable terms, and can thus exercise significant political influence. The incumbent president, Manuel Prado, was elected with APRA support in 1956. (Paras. 7–12, 14–15)

2. After Prado’s accession and until mid-1959, the Peruvian economy encountered increasing difficulties attributable primarily to worsening terms of trade. Until recently, the Prado administration’s attempts to cope with this adverse trend were vacillating and ineffective. Now, however, a new Prime Minister, Pedro Beltrán, has announced a vigorous program of fiscal reform and a long-range program of economic development. Barring a general worsening of Peru’s terms of trade, which we consider unlikely, we believe this program will succeed over the short run, especially if Beltrán obtains foreign assistance. (Paras. 24–32)

Under these circumstances it is likely that the Prado government will serve out its term and that there will be reasonably free elections and an orderly transfer of power in 1962. All the presidential candidates in such an election will be likely to be members of the oligarchy, but the candidate supported by APRA will almost certainly be elected. (Paras. 33–34)

4. If, on the other hand, Beltrán’s program should fail, he would probably resign, and another serious effort to curb inflation and to deal with long-range problems would be unlikely prior to the elections. Under these circumstances, Prado would have to rely more heavily on military support to serve out his term. Should there be severe and persistent economic difficulties, the outcome would probably be a return to at least provisional military rule. (Paras. 35–36)

5. Even if the Beltrán program succeeds, it will only provide a basis for long run development measures. In the long run the dominant position of the politico-military elite will probably come under increasing attack from the lower classes. If basic measures for economic development and accommodation to popular pressures are delayed indefinitely, it is probable that violent social revolution will eventually take place. (Para. 38)

6. Since 1956 the Communist Party in Peru has grown in membership and in influence in student and labor organizations, especially in the south (Cuzco and Arequipa). During the next few years the Communists are likely to play an influential but not decisive role. However, the Communists are still far weaker than APRA in strength and influence, and the latter will remain the more effective competitor for mass support. (Paras. 17–18, 37)

DISCUSSION

I. Background

7. Peru is the fourth largest country in Latin America in area and the fifth largest in population. Its area is about twice that of Texas and its population of about 10.5 million is increasing at a rate of about two and one-half percent a year. Over half of that population is Indian, making Peru one of the three states of South America which is predominantly Indian. Over half of its people are illiterate—most of these being Indian.

8. Peru is characterized by sharp geographical, economic, and ethnic contrasts. Along the narrow coastal plain, and particularly in the Lima-Callao area, a relatively modern, predominantly Hispanic society of commercial agriculture, petroleum production, manufacturing and trade has developed. With about a quarter of the population, this area accounts for slightly over half Peru’s GNP. In contrast, the two other major divisions of the country, with their predominantly Indian population, are largely outside the modern society. Although the Sierra or Andean high-land lying parallel to the coast is an important producer of copper, lead, zinc, and other minerals and contributes some wheat, wool, and other products to the cash economy, most of its six million inhabitants carry on subsistence agriculture and herding, much in the manner of their pre-Hispanic ancestors. The sparsely populated Montaña, a region of tropical forest east of the Andes and including over 60 percent of the area of the country, is also for the most part economically and socially backward.

9. These social and economic disparities have helped perpetuate a traditional political society from which the Indians have been largely excluded and in which high political and military office has been a near-monopoly of the upper class of the coastal region (less than one percent of the population). Revolutions have been frequent during Peru’s 138 years of independence, with only about a quarter of the governments resting on a constitutional basis. Such revolutions have almost always reflected struggles for power within the ruling politico-military elite. Political parties, often no more than working alliances among individual politicians, have generally been short-lived. Regional parties reflecting the middle class interests of the provinces have been consistently overshadowed by the powerful political interests of the coast and have not been able to overcome the latter’s neglect of other sections.

10. However, traditional military-upper class dominance has been progressively challenged by the economic and social changes which have taken place over the past generation. Increasing numbers of Indians have migrated to the coastal cities and farms over the years, there to be assimilated into the modern economy or left on its fringes as a body of partially employed unskilled workers. As a result the traditional elite is being confronted with increasingly serious competition from liberal and radical elements which draw on middle class and provincial dissatisfaction but derive their strength primarily from labor support.

11. The most important and broadly representative manifestation of this popular pressure is APRA.⁵ APRA, Peru’s largest and best organized party, is a moderately leftist and anti-Communist organization led by middle class intellectuals. Over the last decade or two, Peruvian politics have largely centered around the efforts of the elite (and particularly the military) to cope with APRA—with the Communists and other forces playing secondary though sometimes important roles.

12. After 12 years of official suppression, APRA was legalized as a political party in 1945, by outgoing President Prado. His successor, President Bustamante,⁶ owed his election to APRA’s organized political support. APRA also elected a congressional majority and gained representation in the cabinet. However, its alliance with the Bustamante faction of the elite soon broke down as a result of growing conservative fear that APRA was becoming too strong. In 1948 APRA was again outlawed and soon thereafter a military regime headed by General Manuel Odria seized power. However, Odria’s authoritarian methods resulted in growing opposition, first at popular levels and eventually within the military and the upper class. Under pressure from these elements for a return to constitutional rule, elections were held in 1956, in which APRA and most of the upper class leaders supported the election of ex-President Prado. Upon his election, Prado again legalized APRA, which had before this been able to seat significant minorities in both chambers by running its candidates as independents.

II. Political Situation

13. The Prado government, essentially conservative in leadership, has proven until recently to be a weak administration, even though it has managed to preserve constitutional order. The 70-year old Prado has become increasingly unpopular because of his failure to assert firm leadership in the face of deteriorating economic conditions which have led to considerable labor discontent and subversive activity. To cope with unrest, the government has suspended constitutional guarantees on several occasions and made a series of cabinet changes. In the most recent of these—in mid-1959—Prado felt obliged to appoint Pedro Beltrán, one of his strongest critics and a forceful leader among less conservative elements in the oligarchy, as Prime Minister and Finance Minister. Beltrán’s determined approach to Peru’s economic difficulties has restored confidence, to some degree offsetting his lack of organized political support, and is a major stabilizing factor in the current situation.

14. The Prado government is basically dependent on the cooperation of the country’s diverse political forces and on the acquiescence of the military. The political base of Prado’s government is an uneasy working relationship of political opposites: APRA and the Movimiento Democratico Peruano (MDP), which is a loosely organized group of conservatives and other Prado supporters. The principal bond between them is the common desire to avoid a return to military rule. Fearing repression and seeking respectability, APRA has followed a policy of moderation and cooperation with Prado, even though this policy has placed increasingly heavy strains on party unity and has caused a drain on its popular support. At the same time, the government and the MDP have depended on APRA’s support in Congress to give them a working majority and on APRA’s strong influence in organized labor to give the administration an advantage in dealing with this force.

15. The military are more reluctant than formerly to intervene in political affairs but remain the ultimate arbiter of political power.⁷ As elsewhere in Latin America, they are increasingly inclined to concern themselves only with professional interests and with the maintenance of constitutional order. Military leaders have been generally critical of the Prado administration’s vacillating policies, but they have themselves little desire to assume the responsibilities of government. They have pressed Prado to take a stronger stand against labor disorders and Communist agitation. Prado’s political modus vivendi with APRA has restrained the military from taking a strongly antagonistic position toward that party. Some of them may appreciate its utility as a counterforce against communism and a check on labor unrest. Nevertheless, the military leaders probably remain fundamentally apprehensive about the government’s dependence on APRA, which many still consider to be a greater threat than the Communists. Moreover, APRA’s sympathy with Castro’s Cuban revolution has disturbed military as well as civilian officials and has hampered APRA’s efforts to convince the military of its new moderation. In circumstances of great political tension it is conceivable that military rule would be established to maintain order and to suppress radicalism.

16. [text not declassified]

17. In the climate of political toleration of recent years, the influence of the Communist Party (PCP), which was outlawed in 1948, has been growing. Its membership is now upwards of 6,000 and may be as high as 12,000, with a considerably greater number of sympathizers.⁸ Its strength is concentrated in the cities, principally in the Lima-Callao area and in southern Peru, where there is normally discontent with the central government. At the important San Marcos University in Lima, the Communists in combination with independents recently broke APRA’s control of the student federation. Communists have been most successful with disaffected mestizos and migrant Indians in urban areas, particularly in Arequipa and Cuzco, where the party controls the departmental labor federations. In these two cities the Communists also control university student federations. With these assets the Communists are capable of taking over one or two southern urban areas for a day or two until the government can bring in additional security forces. They demonstrated this capability in Cuzco in 1958.

18. Communists have been less successful elsewhere. They have had little direct influence on the government, although there are a few Communists in Congress and a number of Communists hold secondary or minor government positions. Most of Acción Popular’s congressional representatives have or have had Communist ties. However, the PCP has publicly broken with Acción Popular’s leader Belaunde. While they control a large minority in the labor movement, Communists have failed to break APRA’s hold on the central labor confederation. They have demonstrated only limited capability for gaining influence among the rural Sierra Indians in central and southern Peru, largely because of the isolated and self-contained nature of the rural Indian society.

19. The major area of political agitation in Peru is organized labor. This force of roughly 400,000, mainly affiliated with the central labor organization (CTP), is overwhelmingly urban and is largely engaged in white collar and service activities, principally in the Lima-Callao area. APRA supporters control the executive committee of the CTP and the majority of its most vigorous member organizations. However, APRA’s entente with the government has resulted in a weakening of its revolutionary coloration and a reduction of APRA’s freedom to press labor demands. This has been of direct benefit to the Communists, who have been able to consolidate their position in Arequipa and Cuzco and have also made some progress, in competition with APRA, in organizing miners in central Peru. The Communists have also benefited from upper class disposition to encourage them as rivals to APRA.

20. Another, though less important, arena for political agitation is among university student groups, principally those in Arequipa, Cuzco, and Lima. Although Peruvian student groups, like their counterparts in other Latin American countries, are generally a breeding ground for radical ideas and action, they suffer from factionalism and generally have little voice in national politics. However, they have contributed substantially to political and social unrest, and with the decline in APRA’s traditional popularity among student groups matched by a rise in Communist influence, the potential for Communist-inspired student agitation is on the increase. This potential was manifested in the riots attending Vice President Nixon’s visit in May 1958.

III. Economic Situation

21. Despite the abundance and variety of its resources, Peru is a largely undeveloped country in which up to two-thirds of the population (including most inhabitants of the Sierra and Montaña) live at a bare subsistence level outside the money economy. Rail and road links between the coast and the interior are few and far between and even these along the coast are limited. However, the modern sector of the economy centered in the Lima-Callao area is a vigorous one, including a growing small-scale consumer goods industry and one major industrial enterprise—the government-sponsored iron and steel plant at Chimbote—as well as extensive commercial agriculture, petroleum production, fish canning, and mining. About a quarter of Peru’s total population is urban, and the proportion is growing.

22. Peru’s economic growth and prosperity depend heavily on foreign (especially U.S.) trade and investment. Exports are equivalent to about a fifth of GNP, with imports providing for over a quarter of all goods absorbed into the economy. The production of U.S. and other foreign-controlled and operated firms accounts for about a quarter of GNP and for over half Peru’s foreign exchange receipts. Foreign investment is concentrated principally in mining, petroleum production, and public utilities.

23. The initial postwar decade was one of notable prosperity and growth for the Peruvian economy. The general trend in world raw material prices was upward, and the relatively diversified nature of Peru’s exports⁹ cushioned the economy against downward fluctuations in demand for individual items. Spurred on by a substantial government development program (contributing about a quarter of total investment for the period) and by a sustained high level of foreign investment (amounting to another 15 percent), the level of gross investment rose to an estimated 22 percent of GNP in the latter part of the decade. Along with advances in mining, manufacturing, and construction, over-all agricultural output increased by about 50 percent—though per capita output of foodstuffs for Peru’s fast-growing population increased very little. Over the decade GNP grew at an average real rate of over five percent annually.

24. However, signs of trouble began to appear before the present Prado government took office in 1956. The previous Odria regime’s ambitious efforts to spur development, to improve social welfare and education, and to support the military involved increasing dependence on deficit financing. This resulted in inflationary pressures which increased prices by about eight percent a year. In 1957, moreover, world prices for most Peruvian exports fell and the dollar value of exports declined by about 15 percent. At the same time the costs of imports increased.

25. Although the government was able to obtain substantial credits from the International Monetary Fund (IMF), the U.S., and private U.S. banks.¹⁰ its efforts to maintain purchasing power and consumption in the face of this worsening of the terms of trade led to a progressive depletion of Peru’s foreign exchange reserves—a downward trend accelerated by a weakening of the position of the Peruvian sol and a consequent flight of capital. By the end of 1958 official gold and foreign exchange reserves had fallen to less than half of the $67 million on hand at the end of 1956, and by mid-1959, when Peru halted its borrowing from the IMF, reserves were reportedly down to $20 million. Although Peru still had $25 million in unused EXIMBANK credits, the availability of all but $5 million was contingent upon restoration of Peru’s credit with the IMF.

26. Meanwhile, the government and most private employers were forced to yield to labor demands for higher wages to counter increasing living costs. Inflationary pressures were further increased by the liberal credit extended by the banks in an effort to maintain business momentum and by the fact that the government, faced with increased costs and lowered revenues, increased its borrowings from the Central Bank. Although the government made some efforts to check these inflationary trends, it made little headway in the face of continuing heavy demands for private credit and the government’s need to pay its own bills.

27. With the appointment of Beltrán as Prime Minister and Minister of Finance in mid-1959, Peru is now committed to a far more vigorous attack on these problems. Emphasizing the need to balance the government’s budget, stabilize prices, and restore Peru’s international credit and exchange position, Beltrán has called for the cessation of government borrowing from the Central Bank, more rigorous tax collection, the restoration of the 18 percent legal reserve requirements for commercial banks, and other measures to curb inflationary private lending. He has already embarked on some curtailment of government payrolls and military purchases abroad, has removed costly food subsidies, and has permitted increases in prices for petroleum. Previous low ceilings had contributed to a decline of oil production in recent years to a level little over that of domestic requirements. Longer range objectives include road construction, housing construction, and attention to land tenure problems.

28. In the short run, Beltrán enjoys certain advantages. Although collection of back taxes will irritate some propertied interests, the general objectives of Beltrán’s program are clearly to the benefit of the elite group. An increase in exchange reserves (from $20 million to $33 million as of mid-September 1959) and a strengthening of the sol (from 31 to 28 per dollar) since Beltrán’s appointment reflect the confidence of business groups in his program and some improvement in trade prospects. Furthermore, wage increases decreed in May and extended to government workers since Beltrán came into office have quieted labor demands. The inflationary pressure stimulated by these wage increases, the removal of subsidies, and petroleum price increases will probably be offset to some extent by better crop prospects and expected increases in food production. In general the outlook for export of Peru’s minerals has improved.

29. Beltrán’s program is, however, currently hampered by the need to find financing for budget deficits estimated to equal as much as $40 million in 1959 and at least $20 million in 1960. Various proposed budget management devices may reduce the 1959 deficit by $5–10 million, but retrenchment efforts may be limited by the following political and economic factors: over half the government’s budget represents wages and salaries and further cuts in the already reduced development program would mean abandonment of plans for expansion of production in the coastal areas, an important element in current as well as future employment. Moreover, gains derived from the drive on delinquent taxes and other one-time reforms available in 1959 will not be available in 1960. Committed to avoid further Central Bank borrowing in order to regain IMF and U.S. standby support, Beltrán is urgently looking for foreign assistance to achieve his objectives.

30. While no firm bill of financial needs has been formulated, Beltrán is seeking currently to renegotiate certain outstanding obligations as well as to secure new sources of funds. Among the measures mentioned are: (a) the use of frozen counterpart soles accruing from the sale of dollars drawn against the EXIMBANK credit to finance the government budget deficit; (b) the use of sol deposits voluntarily set aside by the Peruvian Government against the maturity (in 1961) of payments due on CCC rice purchases; and (c) the use of required sol deposits against the already postponed principal payments on purchases of submarines in the U.S. Beltrán has also proposed a customs and tax bond issue of 600 million soles in 1960 and has received a $20 million loan offer in the form of advance tax payments from the International Petroleum Company—an offer Beltrán hopes to accept if he can avoid giving the impression that the loan is tied to recent petroleum price increases. In addition, the Peruvian Government is negotiating: (a) a PL 480 Title I Agreement which would make available local currency for development purposes; (b) a DLF loan to provide initial capital for a savings and loan association, which will make loans to finance housing construction; and (c) IBRD and DLF loans for various road building and irrigation projects. This group of loans could total as much as $20 million.

31. Foreign assistance for this program may enable Beltrán to appease most significant political and economic elements and to succeed in his monetary stabilization effort, thus preserving the country’s free exchange system, which has been a model for similar efforts in other Latin American countries. Under these conditions he could move on to developmental measures and take some steps toward resolving the long-range problem of the social and economic integration of Peru. An important problem is that of increasing agricultural output of the country, which will require heavy investment in transportation and irrigation in order to open presently unsettled lands. Execution of such measures would create favorable conditions for a resumption of growth in the modern sector of the economy, thereby providing additional employment opportunities for Indians from the Sierra.

IV. The Domestic Outlook

32. Barring a general worsening of Peru’s terms of trade, which we consider unlikely, we believe that Beltrán’s program will succeed over the short run. The measure of Beltrán’s success will in part be related to his ability to obtain the foreign financial assistance he seeks. There will probably be some rise in the production of Peru’s food supplies and exports, and prospects are good for increased efficiency in fiscal management under Beltrán’s guidance. Hence, the outlook for foreign and domestic investment will be favorable.

33. Under these circumstances, it is likely that the Prado government will serve out its term and that there will be reasonably free elections and an orderly transfer of power to a duly elected successor government in 1962. Although APRA may feel compelled to press its social and economic demands more vigorously in order to avoid loss of lower class support to Acción Popular and the Communists, it will probably seek to avoid going so far as to invite military repression. The military, for the most part, will probably be reluctant to return to authoritarian rule unless it believes this necessary to maintain the dominant position of the elite.

34. The result probably will be an electoral campaign in which class lines are blurred. All the presidential candidates will probably be members of the conservative elite. The real contest will be between the candidate supported by APRA and the one supported by Acción Popular. The more reactionary elements of the elite, lacking strong support of their own and bitterly opposed to APRA, will probably continue to support Acción Popular and will give at least covert encouragement to the Communists in an effort to cut down APRA’s strength. However, the presidential candidate favored by APRA will almost certainly win.

35. If, on the other hand, Beltrán’s economic program failed, any progress toward solution of Peru’s longer range economic problems would be seriously impaired. With the growth of inflation and unemployment, the chance of serious strikes and riots would greatly increase, probably leading to Beltrán’s resignation. It is highly unlikely that another man of his stature and vigor could be found, and Prado would probably have to rely more heavily on military support to serve out his term.

36. In the event of a severe and prolonged economic relapse leading to widespread privation and discontent, the eventual outcome would probably be a return to at least provisional military rule. This would probably lead to the suppression of APRA and other popular political movements, thereby forcing them to turn to more violent and extremist tactics.

37. During the next few years the Communists are likely to play an influential but not decisive role. As long as constitutional order is maintained, APRA will continue to compete effectively with the Communists for mass support. On the other hand, it the economic situation deteriorates seriously and APRA is suppressed, Communist prospects would obviously improve.

38. Even if the Beltrán program succeeds, it will only provide a basis for long run development measures. In the long run the dominant position of the politico-military elite will probably come under increasing attack from the lower classes. If basic measures for economic development and accommodation to popular pressures are delayed indefinitely, it is probable that violent social revolution will eventually take place.

V. Foreign Policy

39. Peru has maintained a policy of close and friendly ties with the U.S. and has been firmly pro-West in orientation. Of the major Latin American countries, Peru has the least contact with the Soviet Bloc. The only bloc mission, a Czech legation, was expelled in 1957 for engaging in subversive activity. While Peru now has generally friendly relations with the other Latin American countries, its boundary dispute with Ecuador continues to cause sporadic periods of strained relations with that country.

40. Peru is generally dissatisfied with U.S. commercial policy, and the U.S. imposition of lead and zinc quotas in 1958 provoked widespread criticism of the U.S. In the National Congress there was demand for an increase in Peru’s minimal trade with the Soviet Bloc. A similar reaction against the U.S. would probably occur, especially in Congress, should Beltrán fail to obtain the U.S. and international financial assistance which he seeks. Should APRA or Acción Popular gain strong influence in a successor government, Peru probably would be more assertive in its dealings with the U.S. and more prone to take an independent position in international bodies. However, in neither case would there be likely to be a major change in Peru’s relations with the U.S., with which Peru has its strongest trade and investment ties.¹¹

1. Source: Department of State, INR–NIE Files. Secret.
2. The title of this estimate, when used separately from the text, should be classified “FOR OFFICIAL USE ONLY.” [Footnote is in the source text].
3. According to a note on the cover sheet, the Central Intelligence Agency and the intelligence organizations of the Departments of State, the Army, the Navy, the Air Force, and the Joint Staff participated in the preparation of this estimate.
4. Alianza Popular Revolucionaria Americana. [Footnote is in the source text].
5. For further details on the party, see Appendix A, “Major Political Parties in Peru.” [Footnote is in the source text; Appendix A is not printed.]
6. José Luis Bustamante y Rivero, President of Peru, July 28, 1945-October 27, 1948.
7. For a description of armed forces capabilities, see Appendix B. [Footnote is in the source text.]
8. The Partido Obrero Revolucionario (POR), a Trotskyite Communist Party, has about 2,500 members. While it adheres to a more radical line than the PCP, it and other small Communist splinter groups on occasion provide support for the PCP. [Footnote is in the source text.]
9. In order of importance: cotton, sugar, copper, lead, silver, iron and zinc. [Footnote is in the source text.]
10. In 1954 Peru obtained an IMF and U.S. standby credit of $25 million. In February 1958 the IMF agreed to increase Peru’s borrowing capacity from $12.5 million to $25 million on the basis of the latter’s acceptance of certain monetary and fiscal requirements laid down by the Fund. Peru also obtained a $17.5 million U.S. Treasury commitment, and another $17.5 million credit from three U.S. banks. With the subsequent agreement of the EXIMBANK to provide $40 million for balance of payments support, Peru had $100 million in stabilization assistance available. However, by September 1959, all but $25 million of the EXIMBANK credit had been exhausted, and of this $20 million cannot be touched until the IMF permits further borrowings. [Footnote is in the source text.]
11. A map of Peru in the source text is not printed.