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

PE–7. Memorandum of Conversation, by the Counselor for Economic Affairs of the Embassy in Peru (Linville)¹

Lima, May 8, 1958

PARTICIPANTS

• Mr. Augusto Thorndike, Minister of Finance and Commerce; Mr. Federico Hilbok, Minister of Development & Public Works; Mr. Andres Dasso, President Central Reserve Bank; Mr. Hipólito Larrabure, General Manager Central Reserve Bank; Mr. Fernando Berckemeyer, Peruvian Ambassador to the U. S.; Rud. Carlos Jurgens, Archbishop of Cuzco; Mr. Herbert Havlik, I.B.R.D. Mission to Peru; Mr. Roger Chaufournier, I.B.R.D. Mission to Peru; Mr. Samuel G. Waugh, President Export-Import Bank and Francis A. Linville.

SUBJECT

• PERUVIAN ECONOMIC, SOCIAL AND POLITICAL PROBLEMS.

Mr. Thorndike said that Peru’s need for economic assistance from abroad is very great. Something must be done to improve the economic position of the Indian population, especially in the South of Peru. In that area the Communists have become very strong. He asked the Archbishop of Cuzco, who had played a vital role in maintaining peace and order in Cuzco during the recent Communist uprising there, to describe what had happened.

The Archbishop said that the Communists had been planning to cause trouble in the South. The increase in the price of gasoline was merely an excuse for action.² They had 15,000 people under their control. They had worked out complete plans for seizing and dividing up the large farms of the area and for sacking the homes of the prosperous people of Cuzco. Groups had been chosen for these tasks. It was not, however, possible for the Communists to carry through these plans.

The Archbishop described the way in which the Communist group had used to their advantage the fact that a boy had been critically injured during the rioting by a bullet fired by the police. The boy was carried around by the mob on a large theater sign and permitted to die without medical attention.

The Communists used the common technique of putting women and children in the front of their group during demonstrations.

The Archbishop spoke of his personal difficulties in trying to intervene in the situation. He was not permitted to speak from the cathedral to the 15,000 or more people massed in the central plaza. He had to go to the headquarters of the Labor Union, where he was able to address the people. He offered to serve as an intermediary with the Army, if the people would be willing to go to their homes and behave in an orderly fashion.

After this arrangement was worked out a people’s militia of about one thousand took over the task of keeping order during the period after the police and troops were withdrawn in order to avoid bloodshed.

Since the Army had only about 500 troops in Cuzco at the beginning of the uprising, the Communists thought that they could be smothered by the large group of people which they could mobilize. During the night after the major uprising, however, more troops arrived by plane and overland, and they were able to get the situation under control. The Communists managed to interrupt traffic by cutting ditches across the highways. The troops coming overland had to go the last ten kilometers by foot.

After order was restored by the military the Communist newspaper in Cuzco said that what happened in the city was merely a skirmish; next time the uprising will be on a national scale.

The Archbishop said that the basic cause of the serious situation in the South is economic - too little work and too little income.

Mr. Waugh spoke of the active role being played by Communist groups in Uruguay and Bolivia and of the determined anticommunist activity by the Government in Paraguay. He commented on the need to work against Communism through the schools, labor unions and the church.

Financial Problems of Peru

Mr. Waugh said that the Exim Bank had decided a few years ago that the greatest help it could give to Peru would be by making loans to private companies, especially in the field of mining where large investments are needed. Later the Bank began to make numerous equipment loans to sugar mills, chemical plants, etc. It also made a loan to finance hospital equipment, though it is not particularly interested in loans of this type. He said he believed that more small loans had been made to finance supplies for Peru than for any other Latin American country, except perhaps Mexico or Brazil.

He said he had been discouraged by Peru’s failure to pass legislation which would make it feasible for the Marcona Mining Co. to expand its operation. The Exim Bank is prepared to loan about $10 million for this purpose, while $15 million or more would come from other sources. This would help Peru’s foreign exchange situation both immediately and in the long run. He said he wondered if it had been a good idea to include the legislation for the Marcona project in a bill covering an entirely unrelated irrigation project.

The Minister of Finance said that there was strong political backing for the irrigation project but that it had run into some difficulties since congressmen from other regions had raised objections to the use of all the Marcona royalties for this project. However, he thought the bill in question would have been passed by Congress if the session had not come to end so soon. He anticipates that the bill will be passed quite promptly by the next session of Congress.

Mr. Waugh said that the United States makes funds available through the Exim Bank and, as one stockholder, through the I.B.R.D. The two banks try to coordinate their programs. They exchange information regularly.

Mr. Waugh said that Peru badly needs coordination of its development programs. It is very difficult for the Exim Bank to know what projects to assist because Peru has worked out no system of priorities. It shifts from one project to another in accordance with political pressures of the moment. Peru should have an inter-agency planning group with a small staff. Some of the political pressures to which the individual Ministers are subjected could be eliminated if decissions were made by a high-level inter-agency group rather than by individual Ministers.

Ambassador Berckemeyer said that Peru has legislation providing for a coordinating body but that it has not been implemented.

Mr. Waugh said that he had found during his trip that countries in Latin America are having trouble at the present because of low prices for export products, an effort to carry forward economic development programs at a faster rate than is actually possible and payment of social benefits in excess of economic capacity. Peru is better off than most countries in Latin America, and its long run prospects appear good. However, good development planning is needed, especially at the present time.

Mr. Thorndike said that he is sure that Peru will be in a good position in five or six years but in the meantime does need to obtain large loans from abroad. He gave Mr. Waugh a copy of the attached memorandum outlining Peru’s problems.³ (This memorandum, except for the attachment dealing with minerals, is Thorndike’s rewrite of a memorandum prepared for him by Pedro BELTRAN, publisher of La Prensa.)⁴

As we were leaving the meeting I told Mr. Thorndike that we are very much troubled by the new tax bill which has just been passed involving discrimination against foreign companies. The bill includes, among other things, a 196 tax on foreign loans in Peru which would be unjust and would discourage foreign investment. He professed not to know about this aspect of the bill. He said that it has not yet been promulgated and that either on Saturday or Monday he would ask me to come over and go over the provisions of the law in detail before he takes any action regarding promulgation. I said we should be delighted to have an opportunity to do this.

(The next morning at the airport he said he would wish to include the problem of reconciling Peru’s tariff increases with its GAM obligations in our proposed discussion. He said he would call Monday to arrange a time for such a meeting.)⁵

1. Source: Department of State, Central Files, 823.00/5–958. Official Use Only. The source text was sent to the Department of State under cover of despatch 835 from Lima, May 8.
2. In despatch 772 from Lima, April 16, the Embassy reported on a nation-wide chauffers’ strike, April 7–11, over a new gasoline tax. A violent general strike developed in Cuzco, requiring federal troops to restore order. (823.062/4–1658) In despatch 976 from Lima, June 12, the Embassy transmitted an eyewitness report by Richard P. Schaedel (USOM) on the uprising in Cuzco. (823.062/6–1258)
3. Not printed; in an appendix to its memorandum, the Peruvian Ministry of Finance and Commerce stated that Peru had relied on loans from private U.S. commercial banks but that it no longer could do so. To meet general needs and service the external debt, Peru needed about $40 million a year for the next 5 years.
4. The memorandum by Pedro Beltrán was not further identified.
5. Under cover of despatch 845 from Lima, May 14, the Embassy transmitted a memorandum of conversation between Thorndike and Linville, May 12, on Peru’s new disciminatory tax law, approved May 11. (823.11/5–1458) In despatch 970 from Lima, June 11, the Embassy reported that at the Intersessional Committee meeting of the contracting parties in Geneva, June 3-4, Peru received a temporary de facto waiver of its obligations under the General Agreement on Tariffs and Trade, permitting increases of 50 percent and 100 percent in a majority of its import duties. (823.00/6–1158)