CONDITIONS AND TRENDS IN LATIN AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79R01012A006100040005-7
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 31
• Document Creation Date: December 23, 2016
• Document Release Date: May 20, 2013
• Sequence Number: 5
• Publication Date: December 6, 1955
• Content Type: NIE

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NIE 80/90-55
6 December 1955
NATIONAL INTELLIGENCE ESTIMATE
NUMBER 80/90-55
(Supersedes NIE 70)
CONDITIONS AND TRENDS
IN LATIN AMERICA
Submitted by the
DIRECTOR OF CENTRAL INTELLIGENCE
The following intelligence organizations participated in the
preparation of this estimate: The Central Intelligence Agency
and the intelligence organizations of the Departments of
State, the Army, the Navy, the Air Force, and The Joint Staff.
Concurred in by the
INTELLIGENCE ADVISORY COMMITTEE
on 6 December 1955. Concurring were the Special Assistant,
Intelligence, Department of State; the Assistant Chief of
Staff, G-2, Department of the Army; the Director of Naval
Intelligence; the Director of Intelligence, USAF; and the
Deputy Director for Intelligence, The Joint Staff. The Atomic
Energy Commission Representative to the IAC and the Assist-
ant Director, Federal Bureau of Investigation, abstained, the
subject being outside of their jurisdiction.
COPY NC
***1161/W NO CHANGE iN ASS. 1
DOCUtV:ENT NO.
C LADSLS C
C. LP;Z:ZiE7.-Dr) TO: IS S C
NEXT REV:a GATE:
ALITH: HR 70-9
DATE: jSl REVIEWER:1
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CENTRAL INTELLIGENCE AGENCY
DISSEMINATION NOTICE
1. This estimate was disseminated by the Central Intelligence Agency. This copy
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June 1953.
WARNING
This material contains information affecting
the National Defense of the United States
within the meaning of the espionage laws,
Title 18, USC, Secs. 793 and 794, the trans-
mission or revelation of which in any manner
to an unauthorized person is prohibited by law.
DISTRIBUTION:
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irA
MEMORANDUM TO RECIPIEBTS 0E' NATIONAL INTELLIGENCE ESTIMATES
SUBJECT: NIE 80/90-55, "Conditions and Trends in Latin America,"
6 December 1955'
NIE:
Please make the following correction in your copies of subject
At line 5 of page 2, the first word "posed" should read "pose".
CENTRAL INTELLIGENCE AGENCY
21 December 1955
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TABLE OF OF CONTENTS
Page
THE PROBLEM
1
CONCLUSIONS
1
DISCUSSION
2
I. Introduction
2
IL Basic Social Trends
2
III. Basic Economic Trends
4
IV. Basic Political Trends
5
V. Basic Military Trends
7
VI. Communism in Latin America
7
VII. Cooperation with the United States
8
Political Cooperation
8
Economic Cooperation
9
- Military Cooperation
10
VIII. Probable Future Developments
10
General
10
Cooperation with the US in a Situation Short of General
War
11
Cooperation in the Event of General War
11
ECONOMIC APPENDICES
(The appendices summarize the economic situation in seven
selected countries)
A. Argentina
13
B. Bolivia
15
C. Brazil
16
D. Chile
18
E. Guatemala
20
F. Mexico
22
G. Venezuela
24
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.41$111NIS
CONDITIONS AND TRENDS IN LATIN AMERICA'
- THE PROBLEM
To identify the factors affecting Latin American political and economic stability
and to estimate the trends likely to affect Latin American political, economic, and
military cooperation with the United States.
CONCLUSIONS
1. The political instability now evident in
Latin America results primarily from
serious disturbances of the traditional
social order by new economic and social
forces. This instability is therefore much
more fundamental than that which char-
acterized the personal politics of Latin
America in the past. (Paras. 12-19, 32-
33)
2. The postwar trend toward radical and
ultranationalistic regimes has been ar-
rested, at least temporarily. Demagogic
rulers have been overthrown in Argen-
tina, Brazil, and Guatemala, and would-
be.rdemagogues have been restrained in
Chile, Colombia, and Ecuador. Over the
short run, this trend toward more moder-
ate governments is likely to continue.
(Paras. 27, 54)
3. The military have not only continued
to be predominant but have even further
extended, at least temporarily, their in-
fluence over Latin American politics. Al-
though this military predominance gen-
erally tends to have a stabilizing effect,
1 This estimate relates only to the Latin American
republics. European colonies in the area are
excluded from consideration.
we do not believe that, over the long term,
the present Latin American military
leadership has the capacity or means to
solve national problems in an orderly,
progressive fashion. (Paras. 28-29)
4. The economy of the Latin American
region is in transition from dependence
upon raw material exports to a greater
degree of economic development and di-
versification. Industrialization is still
considered an essential goal, although it
has recently slowed down as a result of
forced retrenchment and re-evaluation
of economic policies. In general, the
climate for foreign investment is gradual-
ly improving. (Paras. 20-26, 57)
5. The over-all strength and effectiveness
of Latin America's armed forces are grad-
ually improving. Although military co-
operation with the United States is being
expanded, the arms standardization pro-
gram is being adversely affected by the
increased trend towards purchase of mili-
tary materiel from European sources.
(Paras. 35-36, 52-53, 61)
6. The Communists have no present pros-
pect of gaining control of any Latin
American state by electoral means, nor
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*wow
even of gaining direct participation in
national politics equal to that which they
formerly enjoyed in Guatemala. How-
ever? despite their small numbers, they
22* a threat to US security interests in
Latin America, largely because of the ease
with which a relatively few Communists,
operating through various fronts, can ex-
ploit the widespread social unrest and
existing Yankeephobia. (Paras. 37-41,
43, 55)
7. The USSR and its Satellites have
shown a markedly increased interest in
Latin America in recent years. This has
been reflected in a great increase in Com-
munist-sponsored trips of Latin Ameri-
cans to Communist countries, an expan-
sion of Soviet Bloc diplomatic representa-
tion, and a growing interest in expanding
trade, including arms. (Paras. 42, 51)
8. The trend towards moderate govern-
ment improves the prospects for in-
creased US-Latin American political co-
operation, but the Latin American gov-
I. INTRODUCTION
2
ernments are likely to continue to take an
independent position on matters affecting
colonial and underdeveloped areas. There
will be continuing pressure on the US to
adopt policies which will assist Latin
America in its economic development and
trade problems. (Paras. 44-51, 59-60)
9. In the long run, as social pressures in-
crease and if economic problems remain
unsolved, at least temporary reversion to
demagoguery and extreme solutions for
meeting national problems is probable.
This would in turn subject the inter-
American system to new strains and ad-
versely affect political, economic, and
military cooperation with the United
States. (Paras. 29, 56)
10. In the event of general war, the Latin
American armed forces would not be able
to defend critical areas and sea routes
against serious enemy attack without the
direct participation of US forces, al-
though they would be of value in sup-
porting roles. (Paras. 62-64)
DISCUSSION
11. The disposition, capacity, and orientation
of the Latin American countries with respect
to US security interests is conditioned by the
many complex factors at work in this area of
approximately 170 million people. The social
pattern of Latin America includes a mingling
of colors and a mixture of social traditions of
aboriginal America, Africa, colonial Spain and
Portugal, and modern Europe. Politically,
the Latin Americans pay homage to demo-
cratic and constitutional government, but
have not been able to establish and maintain
effective political democracy. As a conse-
quence, autocratic regimes have generally pre-
vailed. In terms of economics the area offers
the contrast of primitive subsistence agricul-
ture, highly efficient raw material production
for export, and such complex industrial and
commercial institutions as are to be found in
more mature societies which Latin Americans
seek to emulate. They are also desirous of
playing a larger role in international councils,
but lack the economic and military strength,
the political experience, and the breadth of
interest to do so with great effectiveness.
II. BASIC SOCIAL TRENDS
12. In most Latin American countries the old
order of society was dominated by landed gen-
try in alliance with the Church and the Army.
There was also a small professional and com-
mercial middle class, but it identified itself
with the propertied group. The mass of the
population was dependent, inarticulate, and
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politically impotent. Within the ruling group
politics was highly personal and unpredict-
able, but the social order itself was stable.
13. In recent years, however, the traditional
social order has been seriously disturbed by
the accelerated pace of Latin American eco-
nomic change and by world-wide ideological
influences. Although about 60 percent of the
population is still engaged in agriculture, the
development of mining, manufacturing, and
service industries in Latin America during the
past three decades has considerably increased
the importance of nonagricultural labor and
the urban middle class.
14. In many countries, especially the more im-
portant ones (e. g., Argentina, Brazil, Chile,
and Mexico) , the preponderance of political
power is shifting to politicians whose strength
is derived primarily from their influence over
the urban population. They come primarily
from the rising middle class and include in-
tellectuals, officials of the government and
state-controlled enterprises, military, profes-
sional and business men, and trade union
leaders. The most characteristic attitudes of
this new type of political Pleader, who has no
strong ties with the traditional order, are
strong tendencies towards nationalism, stat-
ism, and social reform. This development,
still incomplete and ill-defined, has given rise
to political instability more fundamental than
that which characterized the personal politics
of the past.
15. Urban labor has shown increasing signs
of restlessness and class consciousness. Hard
hit by the continuing inflation, it has engaged
in serious strike action and has increasingly
applied pressure upon governments. It has
greater political potential than any other
group. Even where the demagogic evocation
of labor as a political force has been at least
temporarily checked by the overthrow of lead-
ers like Peron in Argentina, Vargas in Brazil,
and Arbenz in Guatemala, the new adminis-
trations must approach urban labor with cau-
tion and respect. Rural labor, however, shows
few signs of shifting from its traditional char-
acter as an inarticulate mass under the con-
trol of the great landowners.
16. The rising middle class is as yet less co-
hesive than labor as a political force. Al-
though critical of the traditional order. and
generally advocating social, economic, and
political reform, middle class elements hold
divergent views with regard to specific na-
tional issues and have not developed a capac-
ity for united political action. Their most
common characteristic is a strong sense of
nationalism. Recently, however, in reaction
to labor extremism, middle class elements
have tended to unite in support of political
moderation.
17. Older social elements and institutions have
adapted themselves with varying degrees of
success to the rise of essentially urban political
leadership. Intellectuals, who formerly had
their spiritual homes in European capitals and
were attached to the oligarchy by ties of f am-
ily and patronage, are now predominantly
both socialistic and nationalistic. In the
more advanced states, the military have aban-
doned their former role as guarantors of the
traditional social order. At the same time
they are alarmed by labor extremism and its
exploitation by demagogic politicians, and
tend toward a middle class point of view. Still
capable of decisive intervention in political
affairs, they exercise that capability on occa-
sion, but with a new restraint and generally
for the preservation and maintenance of the
fundamental constitutional order. The vari-
ous national Catholic hierarchies have for the
most part striven to preserve the traditional
social order, but in 'a few countries Catholic
laymen have organized Christian socialist par-
ties in an effort to counter anticlerical and
agnostic tendencies of the urban population
and to divert the masses from a more radical
course. Only the landed interests have in
general made no effort to accommodate them-
selves to the new situation.
18. Relations between the masses of the people
and the new leadership are much less well-
defined and less stable than were those be-
tween the people and the landed aristocracy.
Personal politics and "feudal" loyalties are
being modified and in some cases superseded
by the impersonal relations of Capital, Labor,
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and Government. The aspirations of urban
populations, especially those of organized la-
bor, have often been exploited by ambitious
politicians and directed toward objectives in-
compatible with the development of stable and
moderate government. Though this latter
trend has been modified during the past two
years, the masses in general remain illiterate,
poverty stricken, politically inexperienced, and
highly susceptible to demagogic appeals.
19. The degree of disruption produced by the
social forces mentioned above varies from
country to country. Those with superior
physical or human resources, like Argentina,
Brazil, Chile, Mexico, and Uruguay, have ex-
perienced the most profound social, economic,
and political change. But even immature
societies, such as those of Bolivia and Guate-
mala, have responded to the stimulation of
reform-minded leadership. In most of Cen-
tral America, the Caribbean (except Cuba) ,
the North and West Coasts of South America
(barring Chile) , and Paraguay, the old social
order still persists.
III. BASIC ECONOMIC TRENDS'
20. Latin America has traditionally served as
a supplier of raw materials and foodstuffs to
the highly industrialized countries of North
America and Europe, and has depended on
those countries for nearly all of its require-
ments of manufactured products. The Latin
Americans, however, are no longer willing to
accept what they describe as a colonial eco-
nomic status. This attitude is accentuated
by their experience during and after two
World Wars, when, despite large income from
exports of raw materials, they were unable
to buy the manufactured goods they wanted.
They seek a greater degree of economic inde-
pendence and stability through such measures
as protective tariffs, exchange restrictions, im-
port controls, and government-sponsored in-
dustrialization. They see industrialization as
the chief means, not only to lessen the region's
2 For brief descriptions of the economic situations
in selected countries (Argentina, Bolivia, Brazil,
Chile, Guatemala, Mexico, Venezuela) see the
appendices.
4
vulnerability to world trade cycles, but also
to raise income levels and to expand the do-
mestic market.
21. Rapid industrialization was pursued by
all the major Latin American countries during
the immediate postwar years. This policy
was accompanied in many countries by elabo-
rate social and labor programs designed to
achieve a redistribution of income and by
adoption of inflationary wage and credit poli-
cies designed to ease the burden of capital
formation. By drawing upon accumulated
international reserves, by utilizing underem-
ployed agricultural labor in industry and by
capitalizing on generally favorable terms of
trade, Latin America between 1945 and 1951
was able to expand its gross national product
by an annual per capita average of 4.2 percent
and to maintain annual investment at an
average of 16 percent of GNP. Although the
drive for industrialization achieved a signifi-
cant degree of economic diversification in
Argentina, Brazil, Chile, and Mexico, through-
out the area too much public investment was
placed in ambitious projects requiring long-
term amortization in terms of added output
of goods and services or was wasted on un-
productive ventures. Moreover, economic
progress was unevenly distributed in favor of
urban industry and to the neglect of basic
agricultural output.
22. After 1951, as world prices declined fol-
lowing the Korean War boom, virtually static
export volumes proved inadequate to finance
the import demands generated by develop-
ment programs. At the same time lagging
productivity caused an increase in prices
which severely limited effective demand. Hav-
ing dissipated the accumulated international
reserves and the terms of trade having become
less favorable, Latin American governments
generally were forced to retrench on invest-
ment and to adopt more restrictive wage and
credit policies. In the period 1951-1954 there
was a general slowing of the rate of growth of
per capita GNP to a mere .6 percent annually.
During this period only the coffee-producing
countries and Venezuela, which enjoyed favor-
able terms of trade, maintained more satis-
factory rates of development.
stm:maaiVg
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23. Generally, Latin American governments
have attempted to maintain existing living
standards by reducing the emphasis on in-
vestment. Agricultural production for do-
mestic consumption rather than for export
has been encouraged, restrictions on imports
of consumer goods have been relaxed, and
emphasis in imports has been on the raw
materials and equipment needed to maintain
employment in existing manufacture rather
than to increase manufacturing capacity.
This easing of consumption levels at the
expense of new investment has delayed
much-needed investment in agriculture (the
output of which is lagging behind population
growth) , has prevented adequate mainte-
nance as well as overdue expansion of basic
services (especially transportation and pow-
er) , and has aggravated balance of payments
problems (particularly in Argentina, Brazil,
and Chile) . The unwillingness or inability of
some governments to restrict credit or to curb
wage increases has intensified inflation.
24. In facing the problem of renewing eco-
nomic momentum, many of the Latin Amer-
ican governments, though continuing to de-
fend industrialization as an essential goal,
have recently indicated a growing awareness
of the necessity of balanced development, par-
ticularly as between agriculture and industry.
There are also signs of growing recognition
that export earnings constitute the most
readily available means of stimulating domes-
tic capital formation. However, the area's
ability to reap more benefit from expanded
exports is limited by currently declining terms
of trade for agricultural products and by
Latin America's increasingly marginal posi-
tion in world markets as a supplier of both
agricultural products and minerals.
25. There are some indications that the force
of economic nationalism is becoming more
moderate. The tendency toward the expro-
priation and nationalization of foreign owned
industrial enterprises has recently been ar-
rested. Bolivia's losing struggle to maintain
the output of its tin mines and Argentina's
failure to cope with the financial burden of
nationalized industries and services have ap-
parently dampened the enthusiasm of other
Latin American governments for assuming
similar responsibilities. In Bolivia, Chile,
Peru, and Guatemala, there appears to be a
growing receptivity to foreign investment in
petroleum and mining. There is little indi-
cation, however, that Brazil and Argentina
are ready to relax their prohibitions against
foreign development of their petroleum re-
sources. In general, individual governments
determine the area in which such foreign cap-
ital as can be attracted will be permitted to
operate. Basic services, such as transporta-
tion and power development, are increasingly
viewed as the special province and responsi-
bility of the state.
26. Throughout the area, the state continues
to play a major role in the economic devel-
opment. This stems largely from the fact
that private funds are not readily available
to finance long-term development enterprises.
Though perhaps less committed than formerly
to the programs of a welfare state, the central
governments still bear the major responsibility
for improving the economic status of a stead-
ily increasing population. Their ability to dis-
charge this responsibility is currently threat-
ened by present burdens of debt, and in some
cases, by obligations to amortize sizable for-
eign governmental loans. Major relief for this
situation is likely to be sought in long-term,
low interest loans from the US and interna-
tional lending agencies.
IV. BASIC POLITICAL TRENDS
27. The most important political development
of the past few years has been the arrest of
a postwar trend toward radical and ultra-
nationalistic regimes. Demagogic rulers have
been overthrown in Argentina, Brazil, and
Guatemala; would-be demagogues have been
restrained in Chile, Colombia, and Ecuador;
the Bolivian government has become less radi-
cal. Extremist radical leadership has gener-
ally been discredited, at least for the time
being, largely because its solutions for basic
national economic and social problems have
failed to satisfy the popular demand for more
material progress. Political repression and
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deliberate intensification of social cleavages
by such leadership provoked the military to
intervene.
28. The military have not only continued to
be predominant but have even further ex-
tended, at least temporarily, their influence
over Latin American politics. In Argentina
and Brazil, the new middle class military lead-
ership has come to display a concern for na-
tional responsibility which has tended to
overshadow the more traditional emphasis
upon caste, political power for its own sake,
and personal aggrandizement. Though con-
firmed nationalists, these military leaders are
inclined towards moderate and constitutional
solutions of national problems and issues, and
they share the growing resistance of the mid-
dle and upper classes to the emergence of
demagogues and radical labor movements.
Only Mexico, Chile, and Uruguay have apoliti-
cal military establishments. Elsewhere in
Latin America (except in Bolivia, Ecuador,
and parts of Central America) the more tra-
ditional type of military dictatorship with a
generally conservative orientation is the rule.
Though this precludes, in the short-run, left-
ist regimes based on mass support, such lead-
ership's repressive tendencies in the face of
mounting pressure for political change ren-
ders more likely the eventual outbreak of
revolutionary violence.
29. Political control by the military is at best
a holding operation. Because of insufficient
economic progress, the continued absence of
a united and dominant middle class, and
the continued presence of an economically
depressed labor mass without responsible
leadership, the invitation to demagogic and
extremist governments remains. In the more
advanced countries, such as Argentina and
Brazil, the influence of a more enlightened
armed forces leadership reflects the bank-
ruptcy of civilian leadership more than it does
the rise of an effective new instrument for the
solution of pressing social problems. There is
little evidence that military leaders are eager
to cope with the problems of running the com-
plex modern state. Although in the less ad-
vanced countries, generally, continuation of
strong man military rule is likely, the highly
personal and narrow character of these gov-
ernments limits their capabilities, over the
long run, for coping with the growing com-
plexity of governing and meeting the demands
for social and economic change. In sum, we
do not believe that over the long term the
present Latin American military leadership
has the capacity or means to solve national
problems in an orderly, progressive fashion.
30. Of the countries where the military remain
aloof from politics, Mexico and Uruguay have
achieved a relatively high level of social and
political stability. In Chile, however, mod-
erate and democratic traditions hang in a
precarious balance against pressures for social
and economic change.
31. US assistance and guidance helped bring
about a successful political reorientation in
Bolivia and Guatemala. Both countries were
moving in an extreme left-wing direction but
they are presently ruled by moderate govern-
ments which are seeking to build a popular
base which will sustain the present course.
This kind of relationship with the US would
be generally resisted by the larger and rela-
tively more mature countries even were the
US willing and able to make the investment
required.
32. There is little indication of a trend toward
increasing political stability in Latin America.
In the past few years, governments have been
overthrown by force in Argentina, Brazil, Gua-
temala, Colombia, and Paraguay. The labor
unrest in Chile, the insecurity of the Ecua-
doran regime, recurring revolutionary rumors
in Cuba, the assassination of Panamanian
President Remon, and the generally unsettled
political conditions in Colombia and through-
out Central America all attest to the general
instability of the area. Only regimes in Mex-
ico, Peru, Venezuela, Uruguay, and the Do-
minican Republic appear to have a firm grip
on political processes and sources of power.
33. Within the Latin American area, interven-
tion in the affairs of other nations, boundary
disputes, the subversive activities of Commu-
nists and exiles, and personal feuds between
heads of states, have continued to contribute
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to both domestic and international instabil-
ity. Although the Argentine interference in
the affairs of other nations has declined, and
although the Communists have lost their
Guatemalan base for subversive activity
throughout Central America, the peace of
Latin America has recently been disturbed by
a revolutionary invasion of Costa Rica from
Nicaragua (probably aided by Venezuela) and
by new flare-ups in the longstanding Peru-
Ecuador boundary dispute.
V. BASIC MILITARY TRENDS
34. The primary function of Latin American
armed forces has always been the mainte-
nance of internal order. Although interna-
tional wars have occurred within the area,
they are outside of normal expectations. Latin
American military establishments have not
been designed to cope with'invasion by a first-
class military power without the support and
assistance of some other major power.
35. The Latin American governments have
agreed to a coordinated approach to the gen-
eral problem of Hemisphere defense, with the
assignment of tasks to particular states under
an over-all plan and the preparation of their
forces to perform the tasks assigned. Such
planning is proceeding through the agency of
the Inter-American Defense Board. At the
same time various Latin American forces are
being modernized and developed under US
influence. This influence is exerted through
US military missions, the training of Latin
Americans at service schools in the Canal
Zone and the United States, various bilateral
mutual security agreements, and the provision
of calculated quantities of various types of US
military equipment.
36. The over-all strength of Latin American
armed forces has been gradually improving.
Total forces in military and militarized police
organizations rose from 762,000 to 823,000 dur-
ing the past three years. In this same period,
military capabilities improved, partly as a re-
sult of US assistance in organizing, equipping,
and training tactical units under the Mutual
Defense Assistance Program, and partly as
a result of increased military purchases, both
7
from the US under the reimbursable aid pro-
gram and independently from European
sources. An improvement in air and naval
capabilities has also resulted from the pur-
chase of jet planes in the UK and naval ves-
sels in various West European countries.
However, the combat effectiveness of Latin
American armed forces is still low by US
standards. Even in the best circumstances,
the Latin Americans would never expect to
meet attack by a first-class military power
without direct US military support.
VI: COMMUNISM IN LATIN AMERICA
37. Communist Party membership, after
reaching a postwar low of 200,000 in 1952, is
again on the rise. There is estimated to have
been a 25 percent increase in the past three
years. This reflects a doubling of the Brazil-
ian Communist Party membership to about
120,000 and some increase in Chile and Argen-
tina, which has more than cancelled out losses
in other countries. The Communist Party,
now outlawed in 15 of the 20 republics, has no
present prospect of gaining control of any
Latin American government by electoral
means. In Chile, however, the Communist
Party has been able to work successfully with
labor and civil liberties groups seeking to dis-
credit the present government, and in Brazil
it may have contributed the margin of victory
to the Kubitchek-Goulart ticket in the presi-
dential elections of October 1955.
38. The Communist threat to US security in-
terests in Latin America is greater than pres-
ent party membership in the area would sug-
gest, because of the ease with which a rela-
tive few Communists operating behind labor,
intellectual, and other fronts can exploit the
social unrest and Yankeephobia already exist-
ing in the non-Communist population. While
the situations in various countries differ, the
experience of Guatemala, 1944-1954, provides
an example of how a small Communist minor-
ity could penetrate a Latin American govern-
ment and strongly influence its policy.
39. Communist penetration has been notable
in the labor movement. In some countries,
such as Brazil and Chile, Communists have
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succeeded in gaining key positions in strategic
labor unions and in national labor federations.
Though Communist influence in labor unions
has been somewhat curtailed by government
action, such action has also affected and an-
tagonized non-Communist labor leaders. In-
creasing government restrictions on union
activity have thus tended to give Communist
and non-Communist labor groups a common
sense of persecution and a common cause.
Through their influence in labor, the Com-
munists have a capability for interrupting the
operations of strategically important indus-
tries by means of strikes and sabotage.
40. The Communists have also been success-
ful in penetrating Latin American educational
systems, intellectual circles, and those patri-
otic organizations formed to give expression
to a spirit of ultranationalism. In this way
they seek to instill prejudice in the rising
generation, to intensify socialistic and na-
tionalistic tendencies among the intelligent-
sia, to assume a patriotic coloration for their
own activities, and to give such direction to
nationalism as will most effectively hinder
Latin American cooperation with the United
States. In the Latin American armed forces,
however, the influence of Communists and
Communist sympathizers is slight. In gen-
eral, the officer corps constitutes the strongest
opposition to Communism in Latin America.
41. Communist strategy is broadly defined by
the program of the "national liberation front,"
which provides an almost infinitely flexible
standard of operation. Under this program
the Communists concentrate their efforts on
social sectors that are active partisans of
change. These include manual and white
collar workers, writers, artists, teachers, and
youth groups. Though the immediate influ-
ence of these groups has declined as govern-
ments have become more moderate, the Com-
munists continue to cultivate them in accord-
ance with long-term strategy. The Soviet em-
phasis on "peaceful coexistence" has brought
no apparent reduction of attacks on the US
by the Communists in Latin America.
42. The USSR and its Satellites have shown
a markedly increased interest in Latin Ameri-
ca in recent years. This has been reflected
in a great increase in Communist-sponsored
trips of Latin Americans to Communist coun-
tries, an expansion of Soviet Bloc diplomatic
representation, and a growing interest in ex-
panding trade including arms. Argentina,
Brazil, Chile, and Uruguay are the countries
most vulnerable to the expanded Soviet pro-
gram of cultural and commercial intercourse.
43. Official anti-Communist action in Latin
America has increased, especially in Bolivia
and Guatemala. As Communist action in
Chile has become bolder and more successful,
the authorities have been provoked to stronger
measures. Similar action against increasing
Communist activity may also be expected in
Brazil. Nevertheless, the situation continues
fundamentally favorable to Communist opera-
tions throughout Latin America, since few
countries enjoy social or economic stability,
and there is organized Communist strength
in all the important countries.
VII. COOPERATION WITH THE
UNITED STATES
Political Cooperation
44. The climate for US-Latin American politi-
cal cooperation has gradually improved over
the past few years. The improvement has
resulted from the reduction of Latin American
fears of being involved in war, the elimination
or moderation of the more demagogic govern-
ments, and especially the removal of the irri-
tant represented by Peron's essentially anti-
US foreign policy.
45. In the United Nations, the US has normal-
ly had the support of most Latin American
countries on major political issues between
the US and the Soviet Bloc. In the Seventh
and Eighth Assembly meetings, Peron's Argen-
tina, Communist-oriented Guatemala, and
traditionally independent Mexico provided ex-
ceptions, but in the Ninth Assembly, the
United States received solid and consistent
Latin American support, highlighted by re-
jection of Soviet Bloc's criticisms of US Far
Eastern policy. However, on matters pertain-
ing to dependent areas the Latin American
republics continued to express their tradition-
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al anticolonialism in all three assemblies.
There is a growing tendency on the part of
the Latin American states to support the
Arab-Asian bloc in economic and colonial
matters.
46. During the past two years, the Organiza-
tion of American States acted against several
threats to collective security and stability in
the Hemisphere. In response to the Commu-
nist threat in Guatemala, the Tenth Inter-
American Conference at Caracas, in March
1954 adopted, with only one negative vote
(Guatemala) and two abstentions (Argentina
and Mexico) , a "Declaration of Solidarity . . .
against International Communist Interven-
tion." In January 1955, immediate action by
the OAS was a decisive factor in frustrating
a revolutionary invasion of Costa Rica from
Nicaragua. In September 1955, the OAS de-
ferred action on the Ecuador-Peru boundary
dispute but stood ready to preserve peace in
that area. However, the Latin Americans also
used the OAS to demonstrate their opposition
to the continued existence of European colo-
nies in the Western Hemisphere.
Economic Cooperation
47. The role of Latin America as a supplier of
strategic raw materials particularly in time
of war when access to materials in other sup-
ply areas may be denied, makes Latin Ameri-
can economic cooperation essential to US and
Hemisphere defense. Latin America at pres-
ent supplies the United States with over 30
strategic mineral, fiber, and chemical prod-
ucts. Its output of copper, petroleum, and
zinc forms an essential complement to US and
Canadian production. The area is the only
Western Hemisphere source of 12 essential
materials, including tin, cordage fibers, mica,
and quartz crystals, and it is the principal
Hemisphere source of antimony and monazite.
48. Latin Americans have tended to place re-
sponsibility for their development and welfare
squarely upon the United States. They be-
lieve that the United States appreciates
neither the urgency of their economic prob-
lems nor Latin America's importance to the
United States, and they resent the failure of
the United States to give them the financial
assistance comparable to the amounts the
United States has made available to Western
Europe.
49. At the Tenth Inter-American Conference
in March 1954, the Latin Americans demanded
wholesale US commitments on stabilizing ex-
port prices, reducing competition from the US
agricultural surplus disposal program, lower-
ing US tariffs, elimination of US import
quotas, and a US underwriting of public
financing of large-scale development. United
States refusal to commit itself, however, led
to some moderation of Latin America's de-
mands on these points after the Conference
of Economic Ministers at Rio de Janeiro in
November 1954. On economic issues in the
United Nations, the Latin American countries
have supported the other underdeveloped
areas in attempts to increase the scope of
United Nations economic programs, usually
in opposition to the United States. In gen-
eral the Latin American countries in dealings
with the US at the conference level have
shown increasing sense of identity of interest
and a growing solidarity. This consciousness
has stimulated a regional approach to both
foreign trade and development problems.
50. Latin Americans in general do not oppose
the entry of foreign capital for the purpose of
exploiting natural resources, but they insist
on exercising control over the scope and form
of such investment. This insistence stems
not only from a militant nationalism, but also
from the concern of some leaders for conserva-
tion of resources and the desire of all to obtain
a maximum quid pro quo. In the face of
growing realization of the need for foreign
capital for industrialization, a number of gov-
ernments, particularly Bolivia, Guatemala,
Chile, and Peru, have sought to revise legisla-
tion in order to provide a more attractive
climate for foreign investment.
51. Latin America continues to be economical-
ly oriented toward the United States with
which half its total trade is carried on. There
has been a growing interest, however, in in-
creased trade with Western Europe where
dollar difficulties have been less of an impedi-
ment. This has been particularly evident in
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Argentina, Brazil, Chile, and Uruguay where
interest has been stimulated by the compara-
tively easy credit terms offered by European
traders, especially West Germany. Trade
with the Soviet Bloc amounts to as much as
5 to 10 percent of total country trade only in
the case of Argentina and Uruguay. These
and other countries, including Brazil, are pay-
ing increasing attention to the possible ad-
vantages of disposing of surpluses to the So-
viet Bloc despite present Soviet failure to per-
form fully on commitments to supply desired
capital goods. To date, Latin America has
cooperated officially with the US in controlling
the flow of strategic materials to the Commu-
nist area.
Military Cooperation
52. Latin American military cooperation with
the US has generally continued to expand
over the past few years. All countries have
now established their eligibility for reimburs-
able aid under the Mutual Defense Assistance
Act of 1949, and most of them have submitted
requests for such aid. Twelve countries3 have
now signed and ratified bilateral military
assistance agreements with the US making
them eligible for grant aid under the Mutual
Security Act of 1951. All but two countries
(Mexico and the Dominican Republic) have
US military missions. There are 15 US Air
Force, 14 Army, and 9 Navy missions. Gen-
erally the Latin American governments have
been well satisfied with the work of these
missions, but have not made optimum use of
them.
53. Many Latin American military and politi-
cal leaders have been dissatisfied with the
area's low priority in relation to Europe with
respect to US military aid. Rivalries and
mutual suspicions among Latin American
states have also led to complaints about in-
equitable treatment in the bestowal of US aid.
Moreover, arms standardization has been ad-
versely affected by the increased trend toward
purchase of military materiel from European
sources, especially jet planes from Great Brit-
Brazil, Cuba, Colombia, Chile, Dominican Repub-
lic, Ecuador, Guatemala, Haiti, Honduras, Nica-
ragua, Peru, and Uruguay.
am n and naval vessels from Western Europe.
This has occurred partly because desired US
equipment has not been made available or has
been slow in delivery, and partly because of the
advantageous terms and other inducements
offered by European sellers. Continuation of
this trend would not only create severe logistic
problems in time of war but also undermine
the US military mission program.
VIII. PROBABLE FUTURE DEVELOPMENTS
General
54. Over the short run, the recent trend to-
ward moderate governments is likely to con-
tinue, although without a corresponding in-
crease in political stability. Labor, now lack-
ing effective political leadership, is unlikely
to exercise a dominant radical influence in the
orientation of national policy. The middle
class sector of the population is likely to retain
its influence in Latin American domestic and
foreign affairs and will tend to align itself
with traditional, conservative groups in the
face of labor unrest.
55. At the same time, moderate civilian groups
are unlikely to demonstrate the capacity for
effective political organization and leadership.
In the absence of such leadership, the military
will continue to assume the responsibilities of
governing with varying degrees of effective-
ness. Argentina, Brazil, and Chile will prob-
ably undergo continuing political instability.
In addition the prospects for stability are not
good in Colombia, Cuba, and Ecuador. The
prospects are best in the most politically ad-
vanced countries such as Mexico and Uruguay,
and in the countries with strong military
dictatorships, such as Venezuela, Peru, and
the Dominican Republic. Both moderation
and stability of government in Guatemala and
Bolivia will depend upon continuation of close
ties with the United States.
56. In the long run, at least temporary rever-
sion to radical solutions for meeting national
problems is probable in some cases. As long
as the economic position of the working class
continues to stagnate, labor will be easily
aroused by future demagogues. An urgent
sense of nationalism will also continue to be
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available for political exploitation. Mean-
while, with the bankruptcy of civilian rule,
the present military leadership can provide
no more than a braking action to extremist in-
fluences. _
57. Latin American governments will con-
tinue to face the difficulties and problems of
an economy in transition from dependence on
raw material exports to a greater degree of
self-sufficiency through economic development
and diversification. They will probably in-
crease production for export in an effort- to
regain economic momentum, but they will not
abandon industrialization as a goal of eco-
nomic planning. Their ability to reduce pres-
ent imbalances may be improved somewhat by
foreign aid and investment, but fundamental
solution of their problems will depend upon
the adoption of more realistic fiscal and de-
velopment policies. The execution of sound
economic policies will be most difficult in those
countries like Argentina, Brazil, and Chile
which combine strong social pressures with
political instability, and least difficult in
countries like Peru and Venezuela which have
more immature societies, simpler economies,
and strong military governments. The cli-
mate for foreign investors will probably under-
go gradual improvement.
58. Communist strategy is likely to continue
to develop within the "national liberation
front" program and probably will not be basic-
ally affected by the Soviet emphasis on "peace-
ful coexistence." Communist efforts in the
area will almost certainly continue to depict
the United States as the barrier to Latin
American progress and world peace. At the
same time the Communists are likely to make
use of, and to benefit from any relaxation of
East-West tensions by pressing for legaliza-
tion of their political organization and by ex-
panding their propaganda in support of
"peaceful coexistence." In this more favor-
able climate they will probably improve their
capabilities for overcoming some existing bar-
riers to collaboration with non-Communist
groups. However, they will almost certainly
be unable to gain a dominant influence in the
national politics like that enjoyed in Guate-
mala prior to the overthrow of Arbenz in 1954.
Prospects for the Communists to increase
their influence are probably best in Brazil and
Chile.
Cooperation with the US in a Situation
Short of General War
59. As long as the trend toward more moder-
ate governments holds for Latin America, dis-
turbances in the climate of US-Latin Ameri-
can relations, such as those provided by Peron
and the Communist-oriented Arbenz govern-
ment, are unlikely. Political cooperation in
the UN and OAS is likely to be as close as in
the recent past.
60. Latin America will probably continue to
assume positions usually opposed to that of
the US in both the OAS and UN on matters
of "colonialism" and aid to underdeveloped
areas. The tendency in Latin America to
place responsibility for its economic develop-
ment upon the United States is likely to
continue. Issues such as export price sta-
bilization, lower US tariffs, elimination of US
import quotas, and US financing of large-scale
development projects will almost certainly be
raised again at the proposed Inter-American
economic conference to be held in Buenos
Aires sometime during 1956.
61. Latin America will almost certainly con-
tinue to seek US assistance to maintain and
gradually improve its military capabilities.
However, continued expansion of military co-
operation will depend upon a satisfactory solu-
tion of Latin America's problems with respect
to purchasing US equipment.
Cooperation in the Event of General War'
62. In the event of general war, the Latin
American armed forces would not be able to
defend critical areas and sea communications
against serious enemy attack without the
direct participation of US forces, although
they would be of value in supporting roles.
Latin American governments would generally
agree to an expansion of their ground forces,
but would require US assistance in the pro-
This discussion does not take into account the
possible psychological effects of nuclear warfare.
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vision of equipment and training and would
seek to impose as much of the increased ex-
pense as possible on the United States. Ex-
panded Latin American forces, US equipped
and trained, could eventually assume major
responsibility for the defense of continental
areas. It is unlikely, however, that Latin
American air and naval forces could ever re-
lieve the US of the major responsibility for
air and naval defense. Furthermore, it is
doubtful that any significant Latin American
force would be available for operations out-
side of the Western Hemisphere.
63. After the outbreak of general war the
United States could probably obtain anywhere
in Latin America the air and naval facilities
necessary for US participation in the defense
of strategic areas and sea routes, including
consent for the stationing of air and naval
forces at such installations. There would,
however, be great reluctance, to the point of
possible refusal in some cases, to permit the
12
entry of US ground 'forces unless large-scale
invasion appeared imminent. Latin Ameri-
can governments would be even more unwill-
ing to admit to their territories the forces of
other Latin American states.
64. In circumstances of general war it is prob-
able that all Latin American governments
would agree to suppress existing overt Com-
munist organizations and would have the
capacity to do so. The greatest danger from
Communists in Latin America in time of gen-
eral war would be that of sabotage directed
against the production and transportation of
strategic materials. Although it is unlikely
that a large-scale program of sabotage could
be sustained throughout the area, the disper-
sion and vulnerability of key targets, espe-
cially in essential transportation systems, and
the general inadequacy of police and security
forces, would favor sporadic successes, espe-
cially in the period immediately following the
outbreak of war.
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ECONOMIC APPENDICES
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APPENDIX A
ARGENTINA
1. Argentina has the highest level of living
in Latin America. Agriculture is the chief
source of wealth, providing the major field
of employment and 90 to 95 percent of ex-
ports. Together with Mexico and Brazil,
Argentina stands foremost with respect to
.technical progress and the development of its
fiscal, banking, and commercial institutions.
2. Peron's rapid industrialization program of
the past decade merely accelerated a trend
that had begun a generation earlier. By
liquidating domestic and international re-
serves accumulated from agriculture and by
large-scale government borrowing, Peron was
able to make industrial advances and main-
tain an annual average growth rate in real
national product of 4.5 percent between 1945
and 1951. However, his overemphasis on in-
dustrialization exacted a heavy toll on agri-
cultural production. This resulted in a sharp
decline in export earnings, which was further
aggravated by declining export prices after
1948 and brought to the crisis stage by the
crop failure of 1951/1952. This necessitated
sharp limitation of imports and a halt in the
wage appeasement of labor. Such austerity
controls countered inflation and good crops in
1952/1953 enabled output to rise somewhat,
but real national product between 1951 and
1954 actually declined by an average of 0.3
percent annually. During the same period
real per capita GNP declined by an estimated
annual average of 3.6 percent. Investment
dropped from 20 percent of GNP in the 1948-
1951 period to about 13 percent in 1954.
3. The new Argentine government faces both
short and long-range problems in restoring
production and investment levels. Areas
planted in major crops are only three-fourths
of prewar acreages. Transportation and
power services are already insufficient to
maintain output in either agriculture or in-
dustry. The balance of payments problem
inherited from the Peron regime promises to
produce a trade deficit of $200 million for
13
1955. In addition, the country also has gross
external obligations of about $500 million in-
curred under bilateral trading arrangements,
export-import bank credits, mid-term com-
mercial credits, and official loans. Interna-
tional reserves for meeting these liabilities
total $450 million. In addition, the Central
Bank may be able to recover $150 million in
foreign exchange previously loaned by it to
private banks.
4. The new government's program for coping
with accumulated economic difficulties is
designed to encourage agriculture and to
stimulate foreign private investment. It has
devalued the peso in order to expand agrarian
exports. It anticipates that the resulting in-
creased income will enable producers to re-
build savings and expand plantings. The
government will keep for its own use 25 per-
cent of the export revenues. These funds will
be used to arrange a gradual adjustment be-
tween external and internal prices and may
be used to reduce the anticipated balance of
payments deficit and to bolster the free ex-
change market. Although the new govern-
ment apparently intends to continue the state
monopoly on petroleum development, its pro-
posal to establish a free exchange rate to
cover inflow and outflow of capital is designed
to attract some new foreign private invest-
ment. Together with announced government
intent to cease official intervention in the
economy, the devalued free rate may also
provide added incentive to already established
foreign capital to reinvest earnings.
5. The burden of the government's new eco-
nomic policy will apparently fall heaviest on
hitherto favored urban labor. Although prices
will rise as a result of devaluation, the gov-
ernment plan is to resist wage increases and
offset inflationary pressures by increased pro-
duction and savings. This course of action
will put the administration to a severe test,
particularly in the next six months, during
which collective wage agreements come up for
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renewal. The government's success or failure
will be a measure not only of its own capa-
bilities for economic and political stability, but
also of the feasibility of undertaking econom-
ically desirable steps in a politically volatile
situation.
6. Argentina's economic ties with the US stem
mainly from some $425 million of direct pri-
vate US investment. Because of the essen-
tially competitive nature of US and Argentine
exports, it has been difficult to expand trade.
(The US accounts for only 14 percent of Ar-
gentina's total trade.) Argentine imports of
desired US-manufactured goods have been
limited by dollar shortages, aggravated by ris-
ing requirements for imported oil, and by the
limited convertibility of sterling. (The United
Kingdom, which absorbs 18 percent of total
exports but supplies only seven percent of
imports, is able to limit, under its bilateral
trade agreement with Argentina, purchases of
oil by Argentina in the sterling area.) Ar-
gentina will probably continue to search for
alternative markets and sources of supply, in-
cluding those provided by the Soviet Bloc
which accounted for eight percent of total
trade in 1954.
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APPENDIX B
BOLIVIA
1. Bolivia is one of the most economically re-
tarded countries in Latin America. Its eco-
nomic growth is hampered by formidable
obstacles to communication; low levels of lit-
eracy, health, and living conditions; lack of in-
vestment capital; and Indian resistance to
change. At least two-thirds of the population
is engaged in agriculture, and most farming is
on a subsistence level. Since the small amount
of commercial agriculture is increasingly in-
adequate to meet the needs of the nonagricul-
tural population; and since the only developed
industries are mining and petroleum, Bolivia
must import almost half its food requirements
and nearly all its manufactured goods.
2. Since 1952 Bolivia has been passing through
a major economic and social revolution. The
Paz Estenssoro administration has launched
an ambitious long-range program to expand
and diversify the economy, largely by in-
creased production of foodstuffs and consumer
goods. It hopes thereby to lessen Bolivia's
need for imports and consequent dependence
on fluctuating exports of tin. The govern-
ment is stressing development of agricultural,
forest, and petroleum resources in the low-
lands and the Amazon basin. It is attempt-
ing to develop commercial agriculture in place
of subsistence farming, to expand rail and
highway facilities, and to encourage foreign
investment.
3. However, the government has met serious
difficulties in its economic stabilization and
development efforts. Its hope that the reve-
nues and assets gained from the nationalized
tin mines would stabilize its fiscal position
and ease foreign exchange shortages was
nullified by the 50 percent decline in tin prices
between April and August 1953. In addition
Bolivia's tin, which normally supplied 70 per-
cent of foreign exchange and 90 percent of
government revenues, has become increasingly
marginal in the world tin market partly be-
cause of the complexity and poor quality of
most of the ores and partly because of rising
production costs. As tin output declined, all
15
attempts to stabilize exchange failed. The
country's official gold and foreign exchange
reserves, $24.5 million at the end of 1953, were
completely exhausted by 1955. Concurrently,
deficit financing along with governmental in-
efficiency and poor fiscal management in:
tensified the most severe inflation in Latin
America.
4. Nevertheless, principally because it was able
to secure emergency US aid, the government
has been able, at least temporarily, to stave
off economic collapse and begin carrying out
its plans for development and diversification.
The US authorized grant aid in FY 1954 and
FY 1955 amounting to $33 million, three-
fourths of which has been foodstuffs, princi-
pally US surplus agricultural stocks. In
addition, the United States has for a number
of years been supplying technical assistance
to Bolivia (about $2.6 million in 1955) . This
grant aid and technical assistance has already
produced tangible results in increased food
production and improved communications.
The economic respite US aid gave to Bolivia
also encouraged the government to moderate
its policies, particularly with regard to eco-
nomic nationalism. It also permitted the
government to develop petroleum output ade-
quate for national needs. In addition, the
government has shown interest in attracting
foreign petroleum investment.
5. The government will continue to need sub-
stantial US grant aid during the period of
initial developmental efforts. As food produc-
tion is increased and if the mining industry,
which provides 95 percent of foreign exchange
and an estimated half of government reve-
nues, can maintain its present position as a
source of current income, the need for such
aid will probably decrease. However, any
serious deterioration in the precarious econo-
my would probably reverse the moderate and
progressive direction in which Bolivia is cur-
rently moving. Bolivia's balance of payments
deficit for 1955 is expected to be about $28
million.
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APPENDIX C
BRAZIL
1. Brazil has the greatest economic potential
of any country in Latin America. It has the
land, mineral, and forest resources requisite
for economic development. These factors,
combined with a high rate of capital forma-
tion, have produced a marked degree of eco-
nomic progress, particularly since World War
II. In the period 1946-1954, GNP rose 64 per-
cent and per capita output increased more
than one-third. This rapid rise in the amount
of goods and services available was due to
relatively large-scale public and private in-
vestment,' improved terms of trade, and
short-term borrowing abroad. Industrial de-
velopment was encouraged by the mainte-
nance of an overvalued exchange rate and
quantitative restrictions on imports, which
tended to favor internal expansion at the
expense of external equilibrium. The indus-
trial advance was so rapid that the industrial
sector, which before the war was only half as
important as agriculture, by 1951 equalled the
agricultural sector's contribution to real GNP.
2. The national economy, however, still de-
pends heavily upon agriculture. Brazil is the
world's largest producer of coffee and bananas,
ranks second in the production of cacao -and
citrus fruits, and is at least in fifth position
in the production of sugar, tobacco, corn,
cotton, cattle, and hogs. Exports of these
products provide over 90 percent of Brazil's
foreign exchange. During the period 1946-
1954, crops for domestic consumption showed
a steady rise in output (42 percent) while
those for export fluctuated from year to year
and over the entire period rose only 10 per-
cent. The adverse effect which currency
overvaluation had on the marketability of
Brazil's crops was partially offset by rising
The ratio of gross investment to GNP was 16.5
percent in 1951 and 1952 but declined to 12.7
percent in 1954. Higher consumption and the
financial austerity and credit restriction policies
adopted by the Cafe Administration contributed
to the discouragement of investment.
16
world prices until 1951, and during 1953-1954
by de facto devaluations and government sub-
sidies to producers.
3. Nationalistic policies have continued to
prevent foreign capital from developing Bra-
zil's petroleum resources, despite the fact that
domestic capital and technical knowledge
have been inadequate to do an effective job.
As a result, the country spends an amount
equal to about 25 percent of its receipts from
coffee exports for imports of petroleum. Fur-
thermore, the rapid postwar economic devel-
opment has strained existing transportation
and power facilities, the inadequacies of which
are the greatest obstacles to industrial and
agricultural growth.
4. Overvaluation of the cruzeiro has exerted
persistent and growing pressure on Brazil's
ability to export and has encouraged a rising
level of imports. During the past two years
exchange policies aimed to achieve de facto
devaluation have been ineffective largely be-
cause they were predicated on a continued
high level of income from coffee ? a condition
which failed to materialize as Brazil priced
itself out of a good share of the market when
prices were high, and which disappeared as
coffee prices declined in 1954-1955. Brazil
was able to finance only 85 percent of its im-
ports from foreign exchange earnings during
the period 1951-1954. As a result its inter-
national reserves have been eroded and its
borrowings abroad steadily increased. The
trade deficit during the first half of 1955
reached $49 million compared with $19 million
in the same period a year earlier.
5. Brazil's immediate economic problem is- to
find noninflationary incentives for continuing
internal expansion while moving toward ex-
ternal equilibrium. This would involve the
correction of inflationary pressures originat-
ing in budget deficits and the reduction of
credit to the private sector of the economy.
In addition it would require adoption of for-
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SECRET
eign trade policies designed to discourage
imports beyond the country's ability to pay,
and to encourage production for export. De-
valuation and elimination of the cumbersome
exchange rate system would probably help
Brazil regain the share of the world coffee
market lost to other suppliers during 1953-
1954 because of overpricing.
6. While it does not appear likely that all the
above policies will be adopted by the new
Kubitschek administration, the latter will al-
most certainly seek stabilization and develop-
mental aid from the US in order to avoid a
material slow-down in the industrial sector
of the economy. In spite of any reasonable
amount of outside financial assistance which
17
may be forthcoming, Brazil's rate of economic
growth in the next few years will probably not
equal the rate of the recent past.
7. Brazil is strategically important to the US
because of its location with respect to South
Atlantic sea and air routes, and because of its
sources of iron ore, manganese, quartz crystal,
beryl ore, mica, industrial diamonds, mona-
zite, and possibly uranium. It is economically
important because it is a major area for US
trade ($1.1 billion in 1954) and private invest-
ment (over $1 billion in 1954) . Brazil also
has been politically useful to the US by tem-
pering extremist demands and proposals put
forth by various countries at Inter-American
conferences and in the United Nations.
SECRET
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iwk?mcw-
APPENDIX D
CHILE
1. Although the Chilean economy is depend-
ent on mining for the bulk of its foreign trade
and tax revenues, the nation's manpower is
employed primarily in agriculture and, to a
lesser extent, in a nascent industry. Chile's
per capita GNP is fourth highest in Latin
America, but its per capita domestic output,
in contrast to the relatively rapid increase
attained in most of the other countries in the
area, has remained almost constant during
the past decade. Gross domestic product has
increased only at the same rate as that of the
population (1.6 percent annually) . Invest-
ment levels have been equally depressed, ap-
proximating only 12-14 percent of GNP at
their highest level (1947-1949, when consid-
erable foreign investment went into mining
operations) and dropping to 10 percent in
1953.
2. Chile's slow rate of development is ex-
plained by weaknesses found in both external
and internal sectors of the economy. During
the past decade, although terms of trade have
generally improved, export volume has tended
to decline while imports have continued to
increase under the pressure of -industrial de-
velopment, which had to be financed in large
part by Eximbank and IBRD credits. Em-
phasis on industrial development has not only
failed to yield goods and services commensu-
rate with the investment made, but has
diverted scarce resources from agriculture,
the low productivity of which constitutes the
major obstacle to Chile's economic progress.
This lag in agricultural output, combined with
deficit financing, liberal banking policies, and
continued appeasement of wage demands from
urban and mining labor groups, has contrib-
uted to the most severe and chronic inflation
in all Latin America, excepting Bolivia. This
inflationary trend has been such as to dis-
courage rather than encourage domestic cap-
ital formation. Despite the high price of
copper, which normally accounts for about
two-thirds of Chile's foreign exchange earn-
18
ings and a substantial portion of its budgetary
revenue, the nation's currency is steadily
weakening. The cost of living is rising (56
percent between January and September
1955) and credit facilities are overloaded.
3. The Ibanez administration is attempting
to forestall further deterioration in its finan-
cial position by temporizing on insistent wage
demands and by continuing the taxes imposed
on a temporary basis in 1954. It has not,
however, shown a willingness to take a firm
stand on wage or credit policies.
4. During 1956, the Chilean economy will
probably benefit from a rise in exchange reve-
nues from increased exports of copper, pro-
duction of which is being expanded as a result
of more favorable tax and exchange laws.
Output for 1955 will exceed 400,000 tons,
compared to 359,000 in 1954. Already pro-
grammed mining investment will bring an
inflow of at least $100 million during the next
few years. In addition, an agricultural and
transportation development program has been
formulated, with FAO-IBRD assistance, call-
ing for expenditure of $300 million over an
eight-year period.
5. Since developmental investment tends to
be inflationary, improved financial controls
will be needed to reap potential benefits.
Chile has already invited a private US finan-
cial mission to make recommendations con-
cerning correction of its financial problems.
It remains to be seen whether the Ibanez gov-
ernment will prove more able and willing than
in the past to act on such recommendations.
6. Chile has customarily looked to the US as
its major market, source of supply, and pro-
vider of foreign capital, both public and pri-
vate. In its present determination to exact
maximum returns from copper, it has at-
tempted in 1955 to sell two-thirds of its copper
output to Europe, where prices have been
higher than in the US. A general shift of
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WillaMIN*,
trade is also encouraged by the existing ex-
change system which offers premium export
rates on shipments to Europe. Although the
US has lost out to European suppliers on ex-
ports to Chile of some consumer goods items,
it has continued as the major supplier of cap-
19
ital goods. The economic nationalism which
until recently characterized Chile's postwar
relations with the US is now abating. For-
eign capital is being generally welcomed, even
into petroleum development, which was hith-
erto reserved for domestic capital.
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APPENDIX E
GUATEMALA
1. Guatemala is predominantly an agricul-
tural economy which displays most of the
standard characteristics of underdevelop-
ment: low per capita GNP ($181 in 1953) ;
insufficient power and transportation facili-
ties; high rate of illiteracy (70 percent) ; in-
adequate health and educational facilities; a
shortage of skilled labor and investment
funds; and an inefficient and cumbersome
public administration. Subsistence agricul-
ture occupies most of the population, which is
more than one-half Indian. The money econ-
omy is based primarily on the production of
coffee, which in 1954 accounted for 78 percent
of the total value of exports. Attempts to
diversify the economy, chiefly through tariff
protection, tax exemption, and credit assist-
ance, have been only mildly successful. In-
dustry remains confined largely to the simple
processing of agricultural products and the
manufacture of consumer goods and construc-
tion materials.
2. In the immediate postwar period, the
Guatemalan economy benefitted from a re-
organization of the country's banking policies
and institutions (completed in 1946) , which
provided for a single bank of issue, for flexible
and diversified credit operations, for currency
stabilization, and for protection of the domes-
tic economy from external shocks. During
the period 1946-1952, the economy was able
to maintain a rate of real economic growth
of 4.6 percent annually, largely because of
sustained high levels of foreign trade income
from coffee and sharply increased government
expenditures made possible by substantial
borrowings from the Central Bank.
3. After' 1952, the Arbenz government's ex-
tremist, communist-influenced economic and
social policies discouraged productivity and
investment in agriculture and industry. Dur-
ing 1952 and 1953 international reserves
dropped substantially both because of the de-
20
cline in world prices following the Korean
War boom and because of the flight of private
domestic capital. Per capita GNP dropped
5.3 percent during 1953. When the Castillo
Armas administration took over the govern-
ment in July 1954, it was confronted with a
looted treasury, a sizable public debt, and a
stagnation of business and agricultural ac-
tivity. On top of these difficulties came the
drop in world coffee prices in the fall of 1954,
and a drought which reduced food production.
4. The new administration levied emergency
taxes, sought and received financial and tech-
nological aid from the US, negotiated a loan
of $18.2 million with the IBRD to finance com-
pletion of highway projects, and let contracts
to foreign firms for the construction of public
works. It encouraged foreign private invest-
ment by signing an investment guarantee
agreement with the US, by promulgating a
new petroleum law, by repealing laws affecting
remittance and taxation of earnings from for-
eign capital, and by settling the damage
claims of the United Fruit Company.
5. By mid-1955 economic growth had been
resumed in Guatemala. The availability of
official foreign funds, which to date exceeds
$60 million, has permitted the government to
maintain a relatively high level of investment
and consumption. The creation of a favor-
able business climate has brought forth new
investment, both foreign and domestic, so that
industrial productivity has been increased un-
der conditions of stable wholesale prices. In
addition, the maintenance of a satisfactory
volume of exports has brought Guatemala's
foreign exchange reserves to the highest levels
in its history.
6. There are social and political impediments
to long-range economic development in Guate-
mala. The country faces a formidable task
in bringing its Indian mass into the pattern
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of national production. Guatemalan nation-
alism is presently quiescent, but it is likely to
increase in proportion to the government's
economic and political difficulties. The need
for agrarian reform and increased agricultural
21
production for domestic consumption remains.
Also, the Guatemalan bureaucracy lacks the
experience, skills, and impersonal civil service
required for an effective role in economic
planning and administration.
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APPENDIX F
MEXICO
1. Although Mexico is well known for its rich
and varied mineral resources and has made
notable progress in industrialization, 58 per-
cent of the labor force remains engaged in
agricultural, forestry and fishing pursuits,
which together account for only 20 percent
of national income ($5 billion in 1954) . Mex-
ico's postwar economic growth is reflected in
an annual 5 percent rise in GNP in the years
1945 to 1952 against an annual population rise
of 2.8 percent. Although the growth slack-
ened markedly in 1952 and 1953, the upward
trend was resumed in 1954 when GNP in-
creased by nearly 7 percent.
2. The postwar economic growth can be at-
tributed largely to heavy investment. (Ratio
of investment to GNP between 1945 and 1952
averaged 16 percent, 90 percent of which came
from domestic sources.) This diversion into
investment tended to keep down consumption,
but the burden was unevenly shared. Profits,
interest, and rents rose from 34 percent of na-
tional income in 1939 to 51 percent in 1952,
while wages, salaries, and income of small en-
trepreneurs declined from 66 percent to 49
percent.
3. The principal impediment to continued
growth of Mexican industry, whose output is
expanding at 7.5 percent annually, is the low
purchasing power of the agricultural popula-
tion. Government efforts to raise buying
power by encouraging wage increases and con-
trolling prices have had only limited success.
Increased agricultural production is hindered
by extreme parcelization of cultivated areas
and by inadequate rainfall on 80 percent of
the tillable land. Although economic re-
sources dedicated to irrigation and reclama-
tion have appreciably expanded the sown
area, only about five percent of the total land
area is now under cultivation.
4. Government investment activities, which
during the 1939-1950 period represented 40
percent of total domestic investment, have
provided a vital stimulus to Mexico's economic
22
expansion and are important to the mainte-
nance of economic growth. An attempt by
the Ruiz Cortines administration to retrench
on government investment in 1952 and 1953
was immediately reflected in a general slowing
down of economic activity, and the goverment
was forced to resume spending. Government
financing of development has, however, been
a strong inflationary influence. Public defi-
cits together with lagging agricultural output
have led to currency depreciation and has
forced the government to devalue the peso
three times in the last 15 years in order to
correct price and marketing problems.
5. Although Mexico's development was largely
financed from domestic sources up to 1950, in
recent years the country has sought foreign
funds on an increasing scale. The country
has received sizable official loans from IBRD
and Eximbank for such purposes as re-
habilitation of railroads and electrification.
It has also obtained $220 million in foreign
private capital, chiefly from the US, in the
postwar period. The climate for foreign in-
vestors has been improving and foreign com-
panies may now engage in virtually any in-
dustry, except petroleum and lumber. Mex-
ican industrialists have generally welcomed
foreign private investors and have participated
with them in the organization of many new
industries.
6. Mexico's balance of payments position im-
proved considerably following the April 1954
devaluation. A sizable reduction has been
made in the chronic excess of imports over ex-
ports, and this improvement in trade has been
accompanied by a sizable capital inflow. Mex-
ico continues to show a trend toward greater
diversification of exports. Its previously lag-
ging mineral industry has been reactivated
and sulphur production is being developed.
The production of export agricultural crops
has been increasing. This favorable outlook
has, however, been beclouded by the severe
hurricane and flood damage in 1955. Corn
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and bean crops may have been so damaged as
to require additional food imports which could
change the favorable balance of payments sit-
uation and also slow down development of
the country by diverting, foreign exchange
from the importation of producers' goods. In
addition, the federal grants necessary for the
rehabilitation of devastated areas may ad-
versely affect the government's fiscal position
and create an inflationary trend difficult to
control.
7. Mexico's ability to continue development at
rates registered in recent years will depend in
large measure on the ability of the government
to curb excessive inflationary pressures. An
increase in already heavy investment require-
ments will be necessary to meet the higher
standard-of-living demands of the rapidly
23
growing population. The problem will be to
find funds to satisfy these investment needs
while avoiding extreme inflation.
8. Mexico's economic development is creating
a widening group within the country aware
of its community of interests with the United
States. The need for continued inflow of
foreign capital, the $300 million annual tour-
ist business, the operation of the bracero
(migratory labor) agreements, and the close
trade ties (US accounts for three-fourths of
Mexico's total trade) have helped minimize
psychological barriers which created difficul-
ties in the past. Although Mexican national-
ist sentiment continues to be strong, it will
almost certainly remain quiescent with re-
spect to US-Mexican relations in the foresee-
able future.
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APPENDIX G
VENEZUELA
1. Though more than 50 percent of Vene-
zuela's population is engaged in agriculture,
the oil industry holds the key position in the
national economy. Petroleum accounts for
95 percent of exports, 97 percent of foreign
exchange, and more than 60 percent of
government revenue. The foreign owned in-
dustry, which employs less than 5 percent
of the Venezuelan labor force, contributes in
wages and salaries 10 percent of the total
national income, and economic activities
stimulated by the industry are estimated to
account for nearly one-fourth of the GNP.
Venezuela accounts for nearly 14 percent of
the world's oil production. It is the second
largest producer in the world and the world's
leading exporter.
2. The rising world demand for petroleum ex-
ports since World War II has placed Vene-
zuela in a unique position among Latin Amer-
ican nations. It has permitted a rapidly
rising national income (annual per capita
average of seven percent) , an increasingly
high level of imports without balance of pay-
ments difficulties, and a financing of domestic
development out of domestic financial re-
sources. It has also made Venezuela's per
capita GNP the highest in Latin America and
permitted the government to operate on the
highest per capita budget in the area.
3. The utilization of petroleum to accelerate
the growth of other sectors of the economy
has long been the avowed aim of the Vene-
zuelan authorities. Although capital expend-
itures by the government have accounted for
over a third of the national budget and public
investment has represented 50 percent of total
capital investment, the growth in consumer
goods production had barely kept pace with
the population growth up to 1952. Since the
latter year, however, there has been some evi-
dence that domestic products are providing
24
a larger share of Venezuela's requirements
of manufactured goods and agricultural
products.
4. The Venezuelan economy remains vulner-
able, however, because of its extreme depend-
ence upon petroleum exports. Possibilities for
diversification are limited. Iron ore exploita-
tion cannot provide a sizable foreign exchange
inflow in the near future. The production of
coffee, the most important agricultural ex-
port, has been declining. Food production
has not expanded as rapidly as population.
Import requirements for both capital goods
and food are heavy.
5. Venezuela's economic situation for some
time to come can be expected to reflect the
status of the market for its petroleum. Es-
pecially because Venezuelan oil is confronted
with increasing competition from Middle East
oil in the European market, the maintenance
of the US market is vital to Venezuela's eco-
nomic growth. A reduced flow of oil into the
US would immediately cut the Venezuelan
government's spending ability. Its coopera-
tion with the United States, therefore, is likely
to be determined by Venezuela's share in the
US petroleum market.
6. Venezuela has long provided a favorable en-
vironment for private investment. Govern-
ment encouragement of private enterprise in
the form of minimum prices, subsidies, protec-
tionist tariffs, and low income taxes has
attracted foreign capital into fields other than
petroleum. Local capital has not opposed the
entry of foreign capital into domestic industry
and has participated with foreign capital in
the development of new industries. The only
significant expressions of economic national-
ism, thus far, have been the decisions by the
government to pre-empt to itself the develop-
ment of the steel manufacturing and the
petro-chemical industries.
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,
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Chihuahua
Antimeny .Lead:
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