WEEKLY SUMMARY SPECIAL REPORT CENTRAL AMERICA: REGIONAL INTEGRATION AFTER THE FIGHTING
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Publication Date:
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DIRECTORATE OF
INTELLIGENCE
WEEKLY SUMMARY
Special Report
Central America: Regional Integration After the Fighting
Secret
N9 44
8 August 1969
No. 0382/69A
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CENTRAL AMERICA: REGIONAL INTEGRATION AFTER THE FIGHTING
The hostilities between El Salvador and Honduras derisively described as the "soccer
war" produced tens of thousands of refugees and hundreds of casualties and left a legacy of
bitterness between the two countries that is likely to have very serious consequences for
Central America. The feeling of Central American brotherhood upon which regional integra-
tion had been based has been undermined, and a decade of effort to build viable regional
institutions has been jeopardized. The Organization of Central American States (ODECA) was
powerless to act, and the mediation efforts of the Nicaraguan, Guatemalan, and Costa Rican
foreign ministers were unavailing. The Central American Defense Council (CONDECA) was
clearly revealed as a sterile, even irrelevant organization. Most important, however, is the
threat to the Central American Common Market (CALM). Past difficulties will be exag-
gerated, and plans to speed the pace of integration will be delayed.
THE PSYCHOLOGICAL IMPACT
OF THE CONFLICT
One of the most persistent elements of Cen-
tral America's political mythology has been the
belief that regional federation was both natural
and desirable. The five Central American states
had been briefly joined together after securing
their independence from Spain early in the 19th
Century. Although this union foundered within
15 years, the idea of a single Central American
state has remained a part of the area's political
rhetoric. The Charter of San Salvador [19511
that set up ODECA, for example, spoke of the
Central American republics as disjoined parts of a
single nation united by indestructable ties that
ought to be utilized and strengthened for the
common advantage.
The ideal of union notwithstanding, Central
Americans have not developed a larger national-
ism that could provide the impetus for, and then
sustain, a single political unit. One obstacle has
been the area's uneven constitutional develop-
ment. Costa Rica, for example, which has prided
itself on spending more for education than de-
fense, has looked with suspicion upon its
coup-prone neighbors and has feared that its dem-
ocratic traditions would be undermined by too
close political association with the other repub-
lics.
If political unity has not been feasible, the
functional approach stressing gradual economic
integration has been, up to now, fairly successful.
Tariffs between the five Common Market coun-
tries have been virtually eliminated, and agree-
ment has been reached on uniform external tariffs
for more than 90 percent of the area's imports
from abroad. As a result, Common Market trade
has risen dramatically. In 1960 intraregional trade
was equal to only 6.5 percent of the area's total
exports; by 1967 .the proportion had climbed to
26 percent. In addition, the proliferation of spe-
cialized regional organizations led to increased
contact between the area's businessmen, edu-
cators, government leaders, and even military of-
ficers.
As a result of a decade of increased contact
and trade, the feeling of Central American broth-
erhood seemed to have grown. The Salvadoran
invasion of Honduras on 14 July, however, cast
doubt on the strength and depth of the popular
commitment to regionalism. The five Central
American republics have had sporadic altercations
in the past. Some concerned economic issues and
on occasion led to disruption of Common Market
trade; others involved territorial disputes or bor-
der incidents. These, however, have been rela-
tively minor, and settlement of the problem,
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The Central American Common Market (CACM)
Zacapa,
?Guatemala City
OCEAN
A
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often through ad hoc mediation efforts by the
uninvolved Central American states, has tended to
reinforce the view that appeals to reason and to
the supposed reservoir of Central American good
will could overcome any intraregional quarrel.
Central America reacted in characteristic
fashion as the El Salvador-Honduras imbroglio
continued into its second week. After El Salvador
had broken diplomatic relations with Honduras
and had charged its neighbor with genocide be-
fore the Inter-American Human Rights Commis-
sion, the foreign ministers of Nicaragua, Costa
Rica, and Guatemala attempted to mediate the
dispute. Their efforts, however, extending from
28 June through the beginning of hostilities on 14
July, were unavailing.
The Central American mediators presented
an eight-point plan to prevent hostilities and ease
the way for a settlement. A key provision called
for withdrawal of troops from a five-kilometer
zone along each side of the border. Honduras
accepted this important proposal but El Salvador
refused, and the mediators were unwilling, per-
haps unable, to exert pressure on Salvadoran Pres-
ident Sanchez to moderate his tough anti-Hon-
duras policy. As mediators they were upset by
Salvadoran intransigence, but as foreign ministers
of their respective countries they were, at that
point, reluctant to take any steps that might
jeopardize their countries' relations with the Sal-
vadoran Government.
During this period commercial relations be-
tween El Salvador and Honduras had been sev-
ered. Nicaraguan and Costa Rican trade with
Guatemala was also interrupted after incidents of
harassment and delay made truckers and business-
men afraid that their goods and vehicles might be
seized by one or the other feuding state. The
mediators were greatly concerned with the actual
and potential disruption of Common Market
trade, and appealed for restraint. Regional inte-
gration was then hardly at the top of President
Sanchez's list of priorities, however, and he bit-
terly complained that the mediators were more
interested in the Common Market than in protect-
ing Salvadorans residing in Honduras.
In the period before the outbreak of serious
hostilities, the overwhelming consensus among
the area's leaders had been that the dispute was a
local matter to be settled by Central Americans
without outside interference. In part, this was the
reason Salvador's involvement of the Inter-Ameri-
can Human Rights Commission had seemed inap-
propriate. The view was widely expressed that
bloodshed between Central American states was
unthinkable. This appeal to Central Americanism,
however, carried little weight with the Salvadoran
public and consequently had little impact on Sal-
vadoran Government policy. The confident ex-
pectation that Central American institutions were
strong enough to deal with the problem was pro-
gressively diminished. Even before the fighting
began, the Central American mediators had
started to look to the US and to the OAS for
assistance, and shortly thereafter the facade of
Central American unity had been broken.
By the time fighting had begun in earnest an
important psychological change had occurred.
The earlier belief that Central America could han-
dle its own problems was gone, and the idealistic
appeal to brotherhood and unity had been re-
placed by the pragmatism of balance of power
politics. Thus, on the one hand, any active inter-
est in dealing head-on with the issues underlying
the Salvador-Honduran conflict had been sup-
planted by the more passive desire to see hemi-
spheric efforts bring the crisis to an end. Central
America appeared content, even relieved, at the
possibility of taking a diplomatic backseat. On
the other hand, neither Nicaragua nor Guatemala,
the two countries bordering the belligerent states,
was prepared to look with equanimity on Hon-
duras' precarious military position. There have
been persistent rumors that Nicaragua and pos-
sibly Guatemala provided military assistance to
Honduras, and there were some indications that
they would have intervened militarily if El Sal-
vador had renewed its offensive instead of with-
drawing its troops.
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Nicaraguan President Somoza was particu-
larly worried by the course of events following
the Salvadoran invasion. He began to feel that
Honduran resistance might collapse under Sal-
vadoran military pressure and that chaos would
follow. He also believed that Honduran instability
would directly and profoundly affect his country.
Guatemala was also concerned by the situa-
tion, and-though it too remained officially neu-
tral-it was equally sympathetic to Honduras.
Like Honduras, it has an outstanding border prob-
lem with El Salvador, and the local press caused
alarm with reports of a Salvadoran map allegedly
showing a greater El Salvador that included part
of Guatemala. Foreign Minister Fuentes Mohr
pointedly noted that Guatemala has traditionally
looked upon Honduras as a buffer state and could
not afford to have it become a Salvadoran ap-
pendage. Emphasis was given his words when bor-
der troops were alerted and when Guatemala
stopped shipments of fuel to El Salvador.
By the end of July, therefore, though the
immediate crisis seemed to be over, nationalism
rather than regionalism appeared to be the order
of the day. The delicate fabric of Central Ameri-
can brotherhood had been rent as political align-
ments motivated by suspicion and mistrust took
shape. Certainly, the depth of bitterness each of
the belligerents had built up against the other left
little hope for a quick or easy return to business
as usual in Central America.
THE CENTRAL AMERICAN
COMMON MARKET
It seems certain that the future of the Cen-
tral American Common Market has been dimmed
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by the events of the past two months. The Mar-
ket, formed in 1960, requires a consensus in order
to function. Perhaps even more than in most
similar international bodies, negotiations tend to
be long and complicated. Decisions made by the
Executive Organs must generally be ratified by
each member state-and this is often an even
more difficult and time-consuming proposition.
Finally, even after agreements have been reached
and ratified, disagreements arise over interpreta-
tion, and implementation depends largely on the
willingness of each government to cooperate.
Despite impressive early successes, which in-
cluded progress in eliminating intraregional
tariffs, in creating a uniform external tariff, and
in attracting new industry to the area, the market
had fallen on uncertain times even before the
Salvadoran-Honduran crisis. Beginning in 1966, as
the area's balance-of-payments problem grew, as
export prices tended to stagnate or even decline,
and as government revenues failed to rise rapidly
enough to cover needed expenditures, the two
related issues of balanced development and proto-
col ratification came to the fore.
The principle of balanced development,
which had been accepted as one of the operating
precepts of the market, implied a commitment to
give special encouragement to investment in the
countries that had made the least progress in the
development of manufacuring. This principle had
been recognized in the 1962 Fiscal Incentives
Convention and was written into the charter of
the Central American Bank. Under terms of the
convention, both Honduras and Nicaragua were
given the temporary right to grant additional in-
centives to attract industry, while the bank
granted them a larger percentage of loan money
than was given to the three other member states.
As the market developed, however, the ex-
pected differences in resources and efficiency
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POPULATION
(Millions)
621
Total CACM Population 14.3 Million
among the member states began to stand out
more and more prominently. By 1966, it was
clear that the area was splitting into the gainers
and the losers from integration-those who had
favorable balances of trade within the market,
and those who purchased more than they sold.
The losers were Honduras and Nicaragua, and
they made it increasingly clear that they were
irritated by the way the principle of balanced
development was being implemented.
The problem of protocol ratification was a
second stumbling block that severely retarded in-
tegration efforts. This resulted from the failure of
some member states to ratify key Common Mar-
ket agreements. Three of the most important
were the 1962 Fiscal Incentive Agreement, the
1966 Managua Protocol, and the 1968 San Jose
Protocol.
The Fiscal Incentive Agreement was stale-
mated for over six years because Honduras
refused to ratify it. Honduras, the least developed
Common Market country, asserted that since in-
dustry is naturally attracted to the developed
areas where skilled labor and more adequate
transportation and power facilities are available, it
would be drastically handicapped by any agree-
ment that equalized the incentives that could be
offered to attract industry. The government indi-
cated that the very limited advantages it was
granted under the Fiscal Incentive Agreement
were totally inadequate to bring about balanced
development.
After four years of repeated complaints, fur-
ther concessions were finally granted. Under the
terms of the Managua Protocol, Honduras re-
ceived the right to increase its fiscal incentives to
industry up to 20 percent more than the level of
the other four countires. The signing of the
Managua Protocol, however, did not immediately
resolve the issue because El Salvador refused to
deposit its ratification until mid-March 1969, and
Honduras in turn refused to deposit ratification
of the 1962 Fiscal Incentives Convention.
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GDP *
(Million US Dollars)
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The San Jose Protocol, which provides for a
30-percent tariff surcharge on imports from out-
side the region and allows the levying of the
consumer taxes on a number of nonessential
items, was drafted in response to an obvious need.
Industrialization had not only aggravated the
area's balance-of-payments problems by increas-
ing the demand for imports of capital goods and
raw materials, thus causing imports to rise more
rapidly than exports, but also tended to increase
government revenue problems. Social and eco-
nomic development programs increased govern-
ment expenditures, while revenue collection, al-
ready strait jacketed by an antiquated tax system,
was kept in check because of the increasing quan-
tity of duty-free intraregional trade and the fiscal
incentives granted to industry. In spite of the
need, however, internal political problems in
Costa Rica and bickering between El Salvador and
Honduras delayed ratification and deposit of this
measure.
The problem of balanced development and
the delay in protocol ratification led to a crisis in
February of this year. Nicaragua, like Honduras,
has tended to feel that it was not adequately
benefiting from Common Market membership. In-
deed, President Somoza had been prone to blame
many of his country's economic problems on
Common Market developments. Finding himself
in serious budgetary difficulties even though he
had already resorted to an unpopular austerity
program, Somoza decided to raise additional rev-
enues in such a way as to pressure his market
partners to ratify, deposit, and implement the
outstanding protocols. In contravention of Com-
mon Market rules, he decreed a tax on certain
imports from other members.
The Nicaraguan action was the first major
infraction of integration agreements, and-be-
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cause it struck at the heart of the market, at the
cause
principle of free intraregional trade-it caused
great consternation. Somoza's somewhat impul-
sive policy of bluster and threat risked destroying
the market, but perhaps for that very reason it
introduced a note of seriousness into the negotia-
tions that engendered some forward motion. Both
Honduras and El Salvador agreed to deposit a
number of outstanding agreements including the
Convention of Fiscal Incentives and the Managua
and San Jose protocols. Costa Rica also pledged
its fullest efforts to ratify the San Jose Protocol.
By that time, however, the measure had become
an internal political issue, and President Trejos
had not been able to get the opposition-
controlled legislature to approve the agreement.
President Somoza was not concerned merely
to ensure that previous agreements were imple-
mented. He also wished to negotiate a number of
new agreements designed to deal with problems
that had arisen during the organization's nine-year
history. For example, he renewed his proposal for
a tribunal that could settle integration disputes
and interpret Common Market agreements. The
settlement that ended the crisis on 21 March took
note of Somoza's concern for revitalizing the mar-
ket-though, of course, it was clear that careful
study would have to precede any action. A pre-
liminary plan was drawn up calling for coordi-
nation of industrial, agricultural, monetary, and
infrastructure policies, as well as freer movement
of labor, and regional administration of incentives
to attract industry.
THE CHALLENGE OF THE
SALVADOR-HONDURAS CONFLICT
If Somoza's challenge to the Common Mar-
ket in February provided the right amount of
pressure to engender progress, the Salvador-
Honduran crisis may provide too great a challenge
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and lead to the disruption of the market rather
than to a creative response. Certainly the current
crisis only magnifies the earlier problems. Proto-
col ratification is not going to be easier in the
future. If anything, Common Market matters will
tend to become more politically controversial. In
addition, El Salvador is not likely to emerge from
the conflict with a renewed respect for balanced
development or a very great concern for Hon-
duran or Nicaraguan calls for preferential treat-
ment.
In the short term, domestic political consid-
erations rather than economic factors are more
likely to determine the direction of Common
Market developments. Both the Salvadoran and
Honduran governments will find it necessary to
devote primary attention to remaining in power,
and direct concern for the success or failure of
regional integration will be minimal.
Throughout the conflict, Salvadoran Presi-
dent Sanchez was forced by popular pressure to
maintain a hard-line policy for fear of being over-
thrown. The success of Salvadoran arms appears
to have raised his popularity somewhat, but he is
basically a weak executive and a poor adminis-
trator who can be expected to find himself the
prisoner of public opinion rather than its leader.
The persistent anti-Honduran press and radio
campaign as well as the fighting itself has aroused
deep emotions that cannot be cooled quickly. It
is possible that even after the crisis has abated, a
boycott of Honduran goods will develop. Presi-
dent Sanchez cannot be expected to risk his posi-
tion by opposing anti-Honduran sentiment and
may, indeed, be tempted to pander to it. In this
eventuality Common Market problems will
deepen.
The Honduran side of the coin is hardly
more encouraging. Although President Lopez was
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not under the same pressure as Sanchez and,
consequently, was able to maintain a reasonable
and conciliatory posture before the outbreak of
hostilities, the reverses suffered by the Honduran
Army now make his position difficult. Honduran
embarrassment and humiliation at Salvadoran
hands will make cooperation on economic issues
improbable. Honduras already feels that it is get-
ting relatively little out of the market and may
therefore take the shortsighted view that it has
little to lose if the market collapses.
The possibility that one or the other bellig-
erent state would decide against renewal of com-
mercial relations would, of course, fly in the face
of traditional Central American trade patterns.
Each country provides a natural market for the
other's products, and transportation links be-
tween the two neighboring states are good by
Central American standards. Honduras provides a
market for Salvadoran manufactured goods, and
El Salvador consumes Honduran foodstuffs,
beverages, and tobacco.
Trade with El Salvador constitutes only a
relatively small percent of Honduras' total trade,
but Honduras' commercial relations with El Salva-
dor are nevertheless significant. El Salvador is
Honduras' third largest market, exceeded only by
the US and West Germany. Honduran exports to
El Salvador alone equal those to the other three
Common Market countries together. In addition,
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El Salvador is Honduras' second most important
source of imports.
El Salvador has also valued trade with its
neighbor. It is significant from a balance-of-
payments point of view because the balance of
trade is nearly two to one in favor of El Salvador.
Moreover, Honduras is El Salvador's second larg-
est regional market, exceeded only by Guatemala.
Approximately 10 percent of its total exports and
over 25 percent of its Common Market exports go
to Honduras.
These and other economic considerations,
however, may not now be controlling. Indeed,
under certain circumstances El Salvador or Hon-
duras might consider even more drastic measures
up to and including withdrawal from the Com-
mon Market. Although the market provides Hon-
duras with its only real chance for significant
economic advancement, the fact that 14 percent
of its total exports are absorbed by the area and
that its balance of trade within the Market is
negative could easily undermine the confidence in
regional integration.
A need to distract domestic attention from
the country's poor military performance or to
counter reaction to an unpopular settlement
could cause the Honduran Government to begin
to decrease its dependence on El Salvador and
perhaps on Central America as a whole. Although
transportation difficulties would have to be re-
solved, Honduras might find it relatively easy to
realign its trade away from El Salvador. The three
other Common Market countries could provide
needed imports and might be able to absorb addi-
tional Honduran goods. In addition, if Honduras
decided to withdraw from the market, over 75
percent of its total imports and over 85 percent
of its total exports would be unaffected. The US
alone accounted for 48.2 percent of its total
imports and 44.4 percent of its total exports in
1967.
Although the economic dislocation follow-
ing Honduran withdrawal from the Common Mar-
ket might be manageable because the other Cen-
tral American states have been generally sympa-
thetic, Honduras is perhaps less likely than El
Salvador to leave the market. El Salvador, on the
other hand, would find such a move economically
more difficult but politically more appealing. Ac-
tual or implied condemnation as an aggressor by
the other Common Market states or a feeling of
political ostracism could bring Salvadoran public
opinion to a point where the dictates of national
honor would permit, even require, the rupture of
Market ties-without regard for economic con-
sequences.
Although a greater percentage of El Sal-
vador's export trade is directed toward the Com-
mon Market (38 percent vs. 14 percent for Hon-
duras), it too might hope to offset losses in intra-
regional commerce by increasing trade with its
most important extraregional trading partners-
the US, Western Europe, and Japan. Its chances
of success, however, are slim. Most of El Salva-
dor's exports within the area are manufactured
products that it could not hope to sell overseas.
In addition, El Salvador is not a food-surplus
producer like Honduras and would find it more
difficult to reduce imports. Indeed, even if El
Salvador were interested only in realigning its
trade away from Honduras, it would have diffi-
culty. Aside from the probable political problems,
El Salvador would find it hard to increase its
share of the Guatemalan, Nicaraguan, or Costa
Rican market because these countries are them-
selves producing many competing manufactured
products.
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PROSPECTS FOR THE COMMON MARKET
The continued existence of the Common
Market is thus likely to hang in the balance during
the next few months. Economic realities will con-
tend with emotional and political factors. It is by
no means certain that traditional trade patterns
will reassert themselves and that economic pres-
sures will prevail.
Even if the market is not immediately de-
stroyed, continuation at its previous level of oper-
ation will be difficult, and gradual disintegration
may occur. Diminished cooperation and increased
political problems are likely to lead to renewed
griping and to more crises. Without an overriding
sense of mutual trust and good will, these crises
will be hard to settle and integration efforts may
grind to a halt.
Even if the market is able to continue to
function, a period of stagnation will probably
ensue. Certainly it is not now possible to consider
the kind of innovation and experimentation pro-
posed in March. Institutional tinkering to speed
the pace of integration has been set back-perhaps
for years. Hopes for closer coordination of indus-
trial, agricultural, and monetary policies now
seem misplaced. Attempts at regional administra-
tion of fiscal incentives are likely to bog down in
nationalistic bickering over the relative advantage
accruing to each state. Establishment of an inte-
gration tribunal or agreement on binding arbitra-
tion, seems unlikely at this time. Finally, hopes
for freer movement of labor will have to await
settlement of the more critical problem of Sal-
vadoran migration to Honduras.
For a time it is going to be difficult to
obtain unanimous agreement on practically any
proposal. In part, much of the earlier market
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success can be traced to the professional camara-
derie of the area's economics ministers, and the
willingness of the five governments to follow the
economic advice of these ministers. The distinc-
tion between economics and politics is now so
blurred that even the most purely economic judg-
ments will be subjected to very close national
political scrutiny. Domestic political pressures
and national jealousies now will carry signifi-
cantly more weight than in the past.
Initially more important than restructuring
the market, however, will be restoration of politi-
cal harmony. The settlement of the problem of
Salvadoran immigration to Honduras will be par-
ticularly significant. El Salvador has demanded
special guarantees that Salvadorans would be well
treated in Honduras. It will want to be assured
that all the refugees may return, and in addition
will wish to renew the now-expired 1967 migra-
tion treaty with Honduras.
Even if all the refugees want to return, how-
ever, the state of popular feeling in Honduras
would make any guarantee politically difficult to
grant, and harder to enforce. Certainly, Honduran
resentment against Salvadorans will not diminish
overnight, and any guarantee that appeared to
give Salvadorans special privileges or special status
would be resisted. A possible solution, therefore,
might take the form of a Central American treaty
allowing free migration within the Common Mar-
ket. Although, for economic, demographic, and
geographic reasons the majority of Salvadoran
emigrants would continue to go to Honduras, this
would satisfy Honduran demands for a multi-
lateral solution to the problem of Salvadoran
overpopulation. Such a step would have a salu-
tory psychological effect and would help to re-
store the momentum of Central American re-
gional integration.
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OTHER PROBLEMS
The effect of the conflict extends also to
other regional institutions under the Organization
of Central American States (ODECA). The high-
est ODECA organs, the Meeting of the Chiefs of
State, the Council of Foreign Ministers, and the
Executive Council were further weakened by
virtue of the fact that they were not even used.
The absence of recourse to these organs is
particularly significant because it comes on the
heels of the acrimonious meeting of foreign min-
isters last January. Nicaragua's insistence on im-
mediate acceptance of an arbitration tribunal at
that meeting had prevented election of a secre-
tary-general and caused adjournment without any
decisions on agenda items. Since January, the
ODECA Secretariat has had to operate on an
interim basis with economic, cultural, legal, and
administrative responsibilities divided among the
five Central American ambassadors.
The ODECA organ hardest hit, however, ap-
pears to be the Central American Defense Council
(CONDECA). Based on the concept of collective
security and designed to encourage collaboration
among Central America's armed forces, the organ-
ization seems irrelevant in the wake of the recent
conflict. Ironically, only a couple of months be-
fore the crisis began, the Panamanian observer at
a special CONDECA meeting asked what the or-
ganization would do in the event of aggression by
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one member country toward another. All five
one
Central American delegates had replied that ag-
gression between member states was not con-
ceivable and that CONDECA was designed to
protect the Central American Isthmus from out-
side aggression. Outside aggression now seems the
lesser of the two threats and a considerable period
of time will have to elapse before members of the
Honduran and Salvadoran military would even
consider cooperating with each other.
The inability of CONDECA to foster mili-
tary cooperation or to set guidelines for military
expenditures, as well as the breakdown in regional
unity, increases the probability that arms pur-
chases in the area will mushroom. The argument
that Central American states have no reason to
fear their neighbors and that in any event collec-
tive security mechanisms would protect them
from aggression has been called into question. It
will thus become more difficult to convince these
states that they are ill-advised to divert their
slender resources-more needed for economic de-
velopment-to national defense. For example, the
Honduras minister of economy, who has strongly
and consistenly resisted military pressures for
funds for arms and equipment, stated that he
would "never again" do this and that he did not
see how any future minister of economy could
resist similar military requests for many years to
come. This line of thinking is likely to be echoed
in other Central American states.
8 August 1969
Approved For Release 2006/11/13 : CIA-RDP79-00927A007200070002-6
SECRET
.Approevvd For Release 2006/11/13 : CIA-RDP79-00927AO07200070002-6
Secret
Approved For Release 2006/11/13 : CIA-RDP79-00927AO07200070002-6