PERU-ECUADOR: PROSPECTS FOR A PEACE DIVIDEND

Created: 2/1/1999

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Intelligence Report

Office of Asian Pacific and Loan American Analysis Pern-Ecuador: Prospectseace Dividend

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Presidents of Peru and Ecuador are playing up potential benefits of the peace 3ats: apt* :oo$ heycloberff0rt t0 pgrsuaat their pieties to support it

are looting promises of increased bilateral trade, interaatioQal development aid, and plans to reprogram defease spending lor social programs.

Each President needs to be able to point to some tangiblethe border accord for political reasons:jimorianother run at tbe presidency, and Ecuador's Mahuadto push through unpopular economic reforms.

While both countries will see some immediate payoffs, many benefits will become apparent only in the longer term.

Trade expansion may occur only gradually given the similarity of the two countries' main exports.

Both Presidents appear committed to cutting defense spending, but are Ukety to move slowly to avoid alienating their militaries.

Despite what will probablylow pace, development plans for the border region provide opportunities for US companies.

The two countries plan to solicit bids for ambitious road, irrigation, and other infrastructure projects.

US firms could provide expertise and technology to develop potentially lucrative industries near the coastal border.

Mixed Reactions to Border Accord

Negative pnblic reaction in Ecuador has been largely eclipsed by tbe debate over taxation and other economic reforms.

Many public commentators have lamented the loss of Ecuador's historical

territorial claims, but most agree mat the accord is the best that Quito could have achieved. I-

The Peruvianby President Fiijimori'soverwhelmingly approved the deal, but the peace accord has at best lukewarm public support in Lima and some sectors have rejected it virulently:

The opposition American Revolutionary Alliance Parry expelled its

congressional representatives who voted to ratify it, and residents of Loreto Department, which abuts the border area most affected by the agreement, have staged violent protests against the terms of the accord.

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Both Sides Trying To Sell Ihe Border Agreement

After more than three years of tortuous negotiations to resolve their longstanding border dispute, Peru and Ecuadoromprehensive peace accord inlthough the Congress in each country has signed off on tbe deal, which requited compromises oa bothome popular opposition to the agreementin Peru. In an effort io sell the peace accord to their respective constituencies, Ecuadorian President Mahuad and Peruvian President Fujimori are each touting the "peace dividend" that could result from the deal.

Mahuad has emphasized the prospects of large-scale foreign aid to helpesigned citizenry to support the border settlement with Peru:

Quito's expectations received ao early boost the week the accord was signed when the Latin American Reserve Fund1 millionlargesthelp Ecuador finance its balance-of-payments deficit and support its monetary pohcy, according to press reports. Although granted to address macroeconomic needs, the timely assistance from the Reserve Fund frees the Mahuad government to allocate other resources to development of the border area.

In early November, die Inter-American Development Bank (TUB) lentillion on soft terms for reconstruction along the EI Niflo-bartered coast; Mahuad may cast projects funded by this money as part of tbe "peace

Mahuad announced in January lhat the military budget would be cm, including money for any new arms purchases,21

Quito appears to have put on hold

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Peru-Ecuador: Leaders Wasting No Tune on Demarcation

Presidents Fujimori and Mahuad. who are under pressure from their constituencies to produce the promised peace dividend, arc anxious to complete border demarcation and finalize the peace process in order to focus on pressing economic problems and other domestic concerns. Both presidents are actively lobbying foreign governments and international rtnunnal institutions for aid and other visible signs of support, which they say will help to attract foreign investment

Mahuad, who has focused almost exclusively on border issues since taking office in August, has turned his attention to Ecuador's dire economic situation.

The Presidents have appointed highly qualified career diplomats to lead the border demarcation commissions in an effort to expedite and facilitate die process.

plans lo acquire any advanced weapons systems. Ecuador could realize substantial savings by trimming military expenditures;^

Defense Minister Gallardo has said publicly that the military will cut personnel by reducing conscription, while at the same time increasing its role in the fight against narcotics trafficking and crime, as well as doing more to support economic development

Peru's Fujimori, meanwhile, has been heralding the potential for payoffs resulting from increased trade between the countries and is seeking to palliate scattered opposition to the agreement through tangible policies. At his behest, Fujimori's supporters have rushed through Congress an Amazon development law, which is intended to promote investment in select provinces (see map) by means of tax breaks and other incentives, according to press reports. The President has also publicly promised to redirect much of the money previously spent on defense to buuding new schools, roads, and other infrastructure:

Fujimori announced shortly after signing the border deal that Peru

would suspend purchases of big-ticket military hardware.

claims pubbcly that cuts in the defense budget in coming years will save "tens of millions" of dollars.

Ambitious Border Integration Agreement

The Agreement on Border Integration, Development and Neighborly Relations-one element of the comprehensive peacethe former disputants to cooperateumber of areas, and calls for them to:

Integrate and improve their dectricity, transportation, telecommunications, and other infrastrncture in the border region.

Collaborate on public health and sanitation programs, anti-crime and countemarcotics efforts, environmental protection and sustainable

: development, improving living standards for indigenous communities, and natural disaster prevention and response.

Open three new border crossings to supplement the current two and simplify regulations for the transit of people and vehicles between the two countries.

Reduce tariffs gradually so that1 most products are duty free, except for those products slated for liberalization within the Andean Community

Under the rubric of the accord, Quito and Lima also agreedlueprint for several bilateral commissions to implement these plans, including the Bmational Fund for Peace and Development The Fund is to solicit grants from foreign governments and international organizations and distribute funds for regional development, including:

Credits fornd medium-sized enterprises.

Need and feasibility studies for development projects.

Social and service infrasttucture development, mchxhng for projects initiated by border communities.

The two countriesentative ten-year budget for these projects totaling S3 billion, someercent of which is projected to come from grants from foreign governments, multilateral institutions, and other donors.

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Both Presidents have touted the peace deal's plans for integration of the border regions as springboards to increased development (seehese plans, however, are predicated on significant assistance from international institutions and foreign governments. So far. Lima and Quito have received pledges forraction of the S3 billion required to implement their plans:

The Peruvian Foreign Minister announced in December that Japan has pledgedillion for border developmenL P

Mahuad and Fujimori will visit Washingtonebruary to hold what is being billedfinancial summit" with officials of the BOB and the World Bank to mark those institution's contributions to the bilateral "peacerazilian and other guarantor officials may also

attend.

Continuing public assurances by Peruvian officials that the White House willeremony in which the US President blesses the agreement and pledges funding have raised public expectations of such an event.

Anticipating Increased Trade

Both countries are publicly hailing opportunities for expanding bilateraltotaling0 millionccording to CIAtbc terms of the peace accord. The Agreement on Border Integration, Development and Neighborly Relations contains several provisions designed to expand trade,cheduled reduction of tariffs on most goods over the next five years, and the governments and private businessmen are already seeking to take advantage of the new atmosphere of friendliness:

A delegation of Peruvian businessmen mat visited Ecuador in mid-November came home withiflion worth of deals, according to press reports.

Countries Unlikely To Meet Ambitious Goals

Although both countries will probably see some payoff from the border agreement in the form of foreign aid, increased trade and investment, and decreases in defease spending, the short-term benefits are likely to fall short of the promises that Fujimori and Mahuad have made. The two countries may have trouble raising money io the short term for their planned ten-year,illion joint "peacefinanced by foreign donors:

Peru and Ecuador intend toonors* conference later this year, but may have trouble securing further pledges of financial aid so close on the heels of Peru's successful conference last November which solicited donations for alternative development programs in coca growing regions.

The border mlegration agreement's mandates for decreased tariffs and other steps toward riitmnniing trade barriers will help to stimulate some augmented trade immediately. Planned improvements in border-areaupgrades tohelp to increase cross-border commerce, although such expansion may be apparent only over Ibe longer term:

similarity of many of the two countries' traditionalincluding raw materials such as oil and agriculturalthe prospect for immediate expansioa.

countries will probably continue to rely heavily on the United States and Europe to fulfill their demands for consumer and other manufactured goods, which neither country has the capacity to produce at present

The benefits to Ecuador of its access to the Amazon River and its tributaries and the export-processing zones near those rivers may also take some time to manifest themselves. The source of financing for tbe construction of the centers is unclear. Moreover, in our view, the road infrastructure in the Amazon area will have to be upgraded before it can handle the substantial amounts of commercial vehicular traffic that will be necessary for Ecuador to use its export-processing centers effectively.

Altbemgh tbe border accord's benefits will probably fall short of theopposition to the deal in either country is unlikely to derailthe agreement, including border demimanon. Ecuador's economic troubles arepressing issue in that country. Public unhappmess in Peru is unlikelyinto pohtical opposition, especially given the compliant nature ofwhich Fujimoriajority. Moreover, implementation of the borderis unlikely to affect the daily life of citizens in either country, providingincentive for active opposition.

Nonetheless, both Presidents want to be able to point to tangible benefits from the border deal for political reasons:

Fujimori's popularity remains near its nadir even as be continues to weigh the possibility of runningontroversial third consecutive teem next year.

Mahuad's plans to confront Ecuador's deepening economic troubles with austerity measures and increased taxes have prompted strident public protests, i

Opportunities for die United Starts

The plans for increasing investment and trade in the border regions and for improving border infrastructure provide abundant opportunities for US investment once Peru and Ecuador secure adequate financing:

The border integration agreement's plans for construction of new roads and border crossings and improvements to existingworth an0ompetitive bidding process in which US firms could compete.

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PERU: Departments Included in Amazonian Investment Law

PERU-ECU ADOR: Prospects for

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