Garcia pledged to save Peru from "social catastrophe" by creating jobs and ending growing inequality to emulate the economic success of neighbouring Chile.

He told congress that he would mix a state-funded drive to reduce poverty and plans to renegotiate contracts with natural gas companies with an open-door policy to foreign investment.

He said: "If Chile achieved economic success, why can't we?"

Quoting Karl Marx, he said he had learned from the mistakes of his 1985-1990 term.

He said: "Peru's economy and its exports have grown, but on the other hand, we face a social catastrophe....Either the poor win this time or we all lose and face social upheaval."

Poverty

Around half of Peru's 27million people are poor and thousands leave the country for Europe and the US every year, many illegally.  

Peru is the world's second biggest cocaine exporter and thousands of farmers rely on growing coca, the drug's raw material, because they are unable to find jobs elsewhere.

Garcia said a cut in public sector salaries would allow his government to invest $1.5billion in Peru's crumbling infrastructure and avoid increasing the country's $30billion debt.

Doubts

Some investors worry that Garcia, who caused Peru's economic collapse in the 1980s, wants to increase state control over the economy.

Henry Dietz, a Latin American expert at the University of Texas, said: "A populist policy and high spending are big temptations for Garcia, but he chose an economy minister who is going to be very tight with the money. That's a contradiction that could cause problems in the long run."

Elena Yanez, a 71-year-old street seller in central Lima, said: "I'm as poor as I was 30 years ago. I've seen many presidents come and go and none have generated jobs."