(For other news from the Reuters Latin America Investment Summit, click here) (Adds investment grade, paragraph 7)
By Marco Aquino and Terry Wade
LIMA, April 4 (Reuters) - An ideological battle has split Latin America between open democracies embracing free markets and leftist regimes opposing them, Peru President Alan Garcia said on Friday.
Garcia, a former leftist whose first term in the 1980s ended in economic chaos, now fervently supports free trade and mainstream policies that helped Peru's economy grow 9 percent last year, one of the fastest paces in the world.
"South America looks like it's in a type of Cold War, like the big ideological blocs of the 20th century," Garcia said at the Reuters Latin America Investment Summit.
Chile, Peru, Colombia, Mexico and Panama favor open markets and are generating more jobs than leftist governments, he said, in apparent reference to Bolivia, Ecuador, Venezuela and Nicaragua.
He did not mention Latin American giants like Brazil, which tends to support policies favored by investors but lacks a major free-trade pact, or Argentina, which has blocked some food exports to keep local prices low.
"The only way to grow is to have markets," he said. "The worst recipe in this fast-moving, modern world is to shut yourself off, like Robinson Crusoe on an island."
Peru's leader, who once favored nationalizing the country's banks, now spends much of his time luring foreign investment, and on Wednesday Fitch Ratings became the first major credit rating agency to lift Peru to investment grade, a change that will attract more capital.
"The best (development) instrument there is today is the global market, big investment, and modernity," he said. "Old concepts of each country building itself up with its own resources or defending its market are totally obsolete."
Peru, which signed a free-trade agreement in December with the United States and hopes to clinch one this year with China, is lining up more deals and has slashed import barriers.
"All free-trade deals that we can possibly have we will sign," Garcia said.
Garcia, who was wearing a tie clasp with the Great Seal of the United States on it, has emerged as a regional counterweight to Hugo Chavez, the president of oil-rich Venezuela, who has been accused of trying to export his socialist policies to neighboring countries.
"The president of Venezuela has a different point of view, but it would be interesting to see if he could have those views if oil only cost $20 a barrel," he said.
Garcia said he did not want to be part of any effort to isolate Chavez, a fierce critic of the United States.
"Newcomers to politics always want to be examples, the shining lighthouse of what's new. Maybe I had that temptation in my first government, but I'm in my second, 20 years later, so I no longer have this vain desire," he said.
Garcia has stayed mostly quiet while Chavez has tried to boost his international standing by helping free hostages held by Colombia's FARC rebels, or by defending Ecuador after Colombia struck a FARC camp inside Ecuador last month.
But on Friday, Garcia urged the FARC to free Ingrid Betancourt, a French-Colombian citizen and former presidential candidate who was kidnapped in 2002 and is now ill.
"The FARC are managing, diabolically, not the life of Ingrid Betancourt, but maybe, how her death could hurt (Colombian President) Uribe," he said.
Though Peruvian politics have stabilized since 2000, when a two-decade-long civil war ended, analysts say Peru faces two threats -- illegal drugs and far-left political groups.
As the world's second-biggest cocaine producer, Peru constantly finds itself struggling to fight corruption fueled by drug money, and low-level violence between the police, coca planters, and traffickers.
But drug seizures are up and new anti-money-laundering laws are stopping illicit cash from reaching the real economy, Garcia said.
Meanwhile, Ollanta Humala, a far-left nationalist politician who spooked foreign investors by nearly beating Garcia in 2006, is expected to run for office again in 2011.
Garcia cannot run for a second, consecutive term and his centrist party lacks an obvious heir.
Still, he said there was little chance that a figure like Humala could be elected as six years of economic growth have lifted many Peruvians out of poverty.
"People realize that the best path is the path that has been chosen," he said.
To avoid having someone like Humala gaining power, he said the government must spread the benefits of growth by taking roads, water and electricity to the poor provinces outside Lima, the capital.
"This would block the temptation of the population to look backward for a messianic savior that can multiply bread and fish without investing," he said. (For the summit blog: summitnotebook.reuters.com/) (Editing by Braden Reddall)