Created: 10/28/1967

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special memorandum






SUBJECT: ilitary Government tn Peru?*


The Belaunde adminiitration, long considered one of tho model government! in Latin America, baa cone upon difficult tinea. During the paat few soothe, It baa been facedegislativerowing Inflation, signs of unrest ln several towns, acute budgetary and balance of payments probleoa, and the need to acquiesceevaluation of tbe sol. In view of hla weakened political base and growing economic troubles, Belaunde obviously feels that he oust give high priority to maintaining good relatione with Peru's military leaders. This, In addition to his own conviction that Peru must now begin to replace lta antiquated military holdings, Ilea behind thefor purchase of supersonicircraft from Franceand behindefused to abrogate It.

This memorandum was produced solely by CIA. It waa prepared by the Office of Notional Estimates, coordinated with the Office of Economic Research and discussed with the Office of Current Intelligence.

xcluded from automatic downgrading and declassification


Belaunde's relationship with tbe OS has already cone under strain; the emergenceew irritant in the long-standing dispute between the Peruvian government and the US-ownedPetroleum Company la adding to this strain; andwill worsen further If the US Government proceedsajor cut in economic aid.

We see some danger that Belaunde might be overthrown within the next few weeks, and we believe that the chancesilitary take-over will subsequently Increase. Whether or not theof Peru comes under the acknowledged control of the military establishment, lta policy is likely to Include two of that establishment's firm resolves: (l) to carry out its program of modernizationi.e. procurement of advanced militaryabroadmpervious to argument, pressure or reprisal,o maintain public order no matter what diagruntlement the country's economic troubles produce.


Tine was when Peruvian military leaders needed little or no pretert to Intervene politically. In fact, during Peru's centuryaif of independence, three-fifths of thehave been oilitary men or men of recent military background. Only since World Mar II haa thereignificant change of attitude among military manchange whichrowing respect for constitutional procedures, for civilian rule, for social progress. The last military seizure ofaa designed to prevent the election to the presidency of Victor Raul Haya de la Torre, who did not receive enough votes to ba elected outright, but who would have gained control of theif Congress had been allowed to chooae. Host of the military leaders honestly thought Maya's program wouldalamity for the country aa well aa for their lntexesta. They sanctioned new elections for the foil owing year, and, with theirragile party coalition,cattering of Coismunlat aupport, Fernando Bclaunde Terry won aomeercent of the voteix-year term aa president.

Under the Peruvianlurality of more than one-third of the popular vote suffices to sleet tht President. Belaunde hasinority president from the beginning, and

some two-thirds of the members of Congress belong to the two parties whose leaders he defeated the Apristas (Haya de la Torre's American Popular Revolutionary AllianceAPRA) and the Cdriistas (the party of the former president and dictator Manuel OdriaRational Union of CdriistasUNO). When Belaunde won, the populist APRA and the conservative UNO formed an opposition coalition which was none too constructive in the beginning and has become more and more obstructive over time. The government coalition ofopular Action Party (AP) and the small Christian Democratic Party (PDC) is far lesB Belaunde has managed to put through theumber of bills ln keeping with hla moderate reform program, hut the cumulative effect of trying to deal with the opposition majority has caused him increasing frustration and brought Mm close to despair.

3. Belaunde'b program of reform and development has tended to bc over-ambitious in terms of Peru's financial resources, but clearly responsive to aooe of Peru's moat urgent neede. In pressing it, he hashallenge to strongly entrenched economic interests. Despite the repeated opposition andfrom Congress, bis administration managed to accompliah

a good deal. let all along Belaunde has bad much aore success In expanding the spending side of tee budget than ln expanding revenues. This is but one of the practical difficulties which are now catching up with him.

The Pattern of Economic Strains

%. The Peruvian economy was booming when Belaunde came to power and the boom continued eruvian gross national product Increased at an average annual rate ofercent, the highest in South America. Rapid economic growth was baaedapid expansion of exports, especially of fiahmeal and copper, each of which now accounts for about one-quarter of Peruvian exports. owever, production in these fields baa stagnated, and the increase in export earnings came from tbe favorable prices which prevailed until tha latter parthe Belaunde government used much of these earnings for economic development, government investment in Infrastructure rose rapidly, and there was also substantial private investment, both domestic and foreign. With these investawnts Peru took considerable strides In modernization and developed new export and Import replacement Industries. Tne economic advance, however, was rapid enough to cause growing strain. Imports grew faster than exports

imports moreercent, exports aboutercent. With incomes rising snd population growingear, consumer demand rose faster than the supply of goods available and prices Increased steadily, although Inflation was kept under control. The lack of responsiveness of foodesult of both physical and institutional limitations, waa one cause of the inflation. Die Increasing government budget deficit was another. The Inflation, coupledixed foreign exchange rate, slowly eroded Peru's competitive position ln the world market. Growing trade deficit! ware covered thanks to rising assistance from the OS which reached large proportions


5. Peru's economic boom came to an endesult of adecline In the world market pricea of fishmeal and copper In As the trade deficit continued to grow, capital flightigh level ln anticipationevaluation, and official reserves declined ln spite of emergency assistance from foreign banks and the :mt. Devaluation was undertakeneptember, with lta foreign exchange earnings reduced and Its foreign indebtedness increased, Peru has had to curtail Imports. In turn this haseline in consumption and investment.

y raising Import prices sharply, alsout in real wagesessening of public confidence in the Demands by the military both for modern weapons andalanced budget willutback in Beleunde's development program and thin will add to unemployment. Thus the economic problems are creating multiple political strains.

6. Moreover, these pro blame will almost certainly persist for some tlae. At best. Imports will nave to be held downear or ao. If the US cuts its aid to Peru, imports will fall further and the effect on the economy will be severe. If the government balances the budget, many Peruvians will be hurt either by growing unemployment or by increased taxes. If, on the other hand, large deficit spending continues, reel Incomes will be further eroded by inflation. In any caae, the conflicts of Interest between consumers, investors, and the military are bound to become Increasingly acute during tbe next year or so. Thewin probably have tbe effect of stimulating exports, especially of fiahmeal, and ovorroader economic recovery seems likely. But economic growth is unlikely to ba nearly as rapid as in the first half ofa. This will be the caae whether or not the military comes to power. The speed of theand tbe subsequent growth of the eccnomy win, moreover, ba


influenced by US action* affecting the level of official aid, ae well ae by the degree of confidence of foreign private investors in the Peruvian government.*

PoliticsHore Than Usual

7. Since the election3 there haaplintering tendency within each of the major political parties and coalitions. Belaunde's support haa become leas cohesive, and the APRA-UNO coalition, which vaa willing to go alongimited social reform program early in the Belauhde administration, has become increasingly obstreperous. Thus, inelaundehow of strength to bring the Congress more under his control. After his supporters were declared losers in the election of new Senate leadership, he ordered the members of the AP-PDC alliance to boycott the session until the Senate President-elect, Julio de la Piedragreed not to serve. The boycottuorum foraya, and encouraged in therowing lack of confidence in both the legislative and executive branches

One unsettling factor here could be the emergenceew

Irritant in the long-standing dispute between the Belauhdeand the US-owned International Petroleum Cceipany. The new aatter of disagreement concerne prices the company may charge, post-devaluation.


of government, aa evidenced by an Increased drain on Peru's foreign exchange reserves. Three days before the legislative crisis vas ended, with foreign exchange reserves nearly exhausted, the Central Bank withdrew its support of the Peruvian sol,it to soek its own value in open trading.

Throughout the legislative crisis Belaunde publicly took the stanceisinterested executive, although, accordingeliable source, heontingency plan to close Congress and govern by decree with military backing. It la not clear whether he took any action to resolve the problem other than to encourage rumors that there wouldilitary coup If the legislature did not convene. These rumors gained impetus when tbe long-expected devaluation took place. They undoubtedly had some impact, and new Senate leadership, which Included AP-PDC representation, was chosen.

m spite of his success in preventinglegislative quorum, there was to be no clear victory for Belaunde. To avoid legislative censure over the de facto devaluation and theunbalanced budgetla cabinet resigned. Belaunde then appointed Edgardo Seoane Correlea, who la hla chief rival within hla own party allianceresidential aspirant for


o be price mini iter and foreign minister or tbe new cabinet. Tollaneuver to maintain the AP-PDC alliance while exposing Seoanehare of the dlfflcultloi and criticisms which the government is sure to experience In coming months. The new cabinet already includes strong military figures, at least one of whom asserts that Seoanetenure will be brief.

10. However that may be, the new cabinet has emphasized the need for new taxes and stricter collection of revenue as the necos-sary means to finance government expenditures and promote fiscal stability. The APBA-UHO opposition, although more conciliatory on this issue than before the legislative crisis, would much prefer to cut spending. Business interests, too, are opposed to additional taxation; Indeedrief period ln September, Peruvian exporters actually refused to export their products and thus forced Belaunde to withdraw hi* proposalax on such windfall profits as they would gain from the devaluation.effort to improve the overall political cllmata by means of occasional meetings with the top opposition figures, Odria and Baya de la Torre, does not seem likely to gain him mucht least not ln the abort run.

Present Military Attitude.

U. The ccopoaltloD of tha Peruvian ailitary estabilabsent has been changing markedly. Increaaiogly it haaehicle by vhlch members ofer-middle class can advance socially. More and more cadets ln the service academies come from the lover-middle class and from tha families of laborers and peasants. It should alao be noted, however, that views of the wealthy class are still strongly represented in the cctmaand structure,by some naval and air force officers. In addition, there are, of courae, military officers who have personal political ambitions.

12. More enlightened in many ways than it used to be, the military remains determined that no government which woulddiminish its role can be allowed to come to power. It la in this context that tha military haa felt compelled to keep the presidency from the control of Hays, de la Torre. While APRA In general is remembered for its attach upon tbe military garrison at Trujillond for its involvement in the Callao naval mutinyictor Raul Haya de la Torre ia the specific focus of military hatred. It is possible that APRA will be allowed to win tbe presidency when Haya is no longer its candidate.

13. The policies pursued by Belaunde and tbe AP-PDC Alliance have actually been akin to APRA'i traditional demands for social reform; the military has accepted Belaunde because he hss not tried to decrease tbe importance of the military establishment. Ia fact, the military forces have been an active participant In tbe President's social and economic development programs,roads, bridges, and Irrigation projects. They haveolonisation scheme which Joins members of the military and civilians in an effort to open up new agricultural lands ln the interior.

Arms Purchases

Recognizing his need for continued military support and aware of the military establishment's requirement for new equipment, Belaunde has approved the purchase from Prance ofupersonic Jets and several Jet trainera. The coat of the Jets, Including spare porta and trainers, is estimated to0 million. Negotiations are underwayight tanks, anti-aircraft equipment, and rocketry. Delivery of the Jets and perhaps of the tanks is to begin before the endrench training mission will probably arrive with the first sfaip-manta. The decision to purchase French supersonic Jets was made


when it seemed clear to the Peruvian military that the US vould not makeircraft available for aale to Perut the earliest. It waa made despite tha fact that tha US Embassy bad repeatedly told President Belauode that he could notillion program loan if th* deal went through. And Belaund* haa aaid that it ia now too late to abrogate it, even if the US makes its offere more attractive than before.

15. It ia not only the President and the ailitary forces in Peru who feel that new military equipment is required. Amilitary budget of acmeillion was passed by the Congress early7 for arms purchases over the next few years. The Peruvian public also seems generally to favor such purchases. The press recentlyield day with headline allegationsthe threat posed by Chilean armamentlsmo, charging, in particular, that Chile was acquiring guided missiles from both the US and USSR. This fiction waa so widely believed in Peru that even Belaunde and Prime Minister Saoane thought it necessary to query the US Ambassador about the extent of US arms support to Cbila, and the Armed Forces Ministers spoke for eight hourslosed session of Congress about their need for modern arms to counter the Chilean threat.


the military doe* not pretend to haveto Peru's economic problems, it is doubtful thatalone wouldoup. The militaryut In the military budget by the Congress or Its insistence upon more modern equipawnt may result

in the lossuch needed program loan from tbe US. The political opposition is unlikely toilitary budget cut, but will insist upon other governmental austerity. Out-aide pressure on Belaunde to resist military spending will only intensify military Influence in the government. There Is noparticipant in Peruvian politics who would publicly attribute any part of Peru's economic difficulty to military spending.

is unlikely that the Peruvian Congress willlong-range economic measures during the remainderterm. The President's spending for reform andwill come under increasing attack aa tbe cause ofdifficulty. Belaunde will almost certainly try toblame upon the US for such aid cute as amy occur. Hisaction will be to propose new tax measures to raise

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revenues end reduce imports, and perhaps to attempt wage and price controls. such executive-legislative agreements as may bc reached will be intended as much to ward off possible military takeover as to set things straight in peru. the election9 is already too close for the opposition parties to allow the belaunde administration any great success in solving current problems. the military, under these conditions, night prefer to remain as the threat, rather than intervene.

16. if prices rise but wages do not increase accordingly, there will be agitation among the lower and lower-middle class urban workers, and disorders will occur. student groups will also be involved. eneral strike has already taken place in arequipa, and unrest is evident in other towns. such developments increase the likelihood that military leaders will insist at least upon stronger participation in the government. in the event ofdiscontent, including rioting and effective mass strikes. president belaunde would probablytate of siege and call upon the military to support him; if ha did not do so, the military would likely move on lta own, perhaps to govern by junta.

The Argentine example haa not been loet on Peruvian military leaders. If they did take power, however, we think that they would be leas interested than the Argentine military ln retaining it indefinitely. They might even seek to conduct an election close to the9 schedule; however, they would want to assure that the prospective new civilian leadership had enough strength to maintain political stability and to bagin an assault upon some of Peru's enduring economic problems, rinding and agreeing upon auch civilian leadership would not be easy; once having takenilitary regime might find it hard to let go.

Instead of taking over tbe government overtly in the traditional Latin golp=.the military might try to manage Belaundo from behind the scenes. They could relyla agreement with their principal objectives, but, given his deep senseactic might merely Induce him to abandon the etruggle and resign. Or the military might increase thalr already heavy weight in the Cabinet and the administration. They will ln any case hold the keys to power and decision.

Whatever the outward forma of control, we believe that Peruvian politic* and foreign relations for son* tlae to come win evolve out of thl* dominance by the military. Peru i*


unlikely to derlse and execute an econcaic program sufficiently austere, ccetprehensive, long range, and rigorous to solve lta serious problems. With these problems continuing or growing worse, the temptation will grow to blame the us for Peru's troubles, and to look elsewhere ln the Free World for sympathetic support. Whether or not tbe government of Peru comes under the acknowledged control of the military establlBbment, Its policy Is likely to include two of that establishment's firm resolves: (l) to carry out Its program of. procurement of advanced military equipment abroadimpervious to argument, pressure, or reprisal,o maintain public order no matter what dls-gruntleawmt the country's economic troubles produce.



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