THE IMPACT OF PUNITIVE SUSPENSION OF US ECONOMIC ASSISTANCE IN LATIN AMERICAN COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00429A001200040025-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 19, 2016
• Document Release Date: May 11, 2005
• Sequence Number: 25
• Publication Date: October 18, 1963
• Content Type: IM

2040025-6
OCI No. 2369/63
CENTRAL INTELLIGENCE AGENCY
Office of Current Intelligence
18 October 1963
CURRENT INTELLIGENCE MEMORANDUM
SUBJECT: The Impact of Punitive Suspension of US
Economic Assistance in Latin American
Countries*
1. US aid to Latin America under the Alliance
for Progress--about 1.50 billion dollars over the
past two years--is designed less for immediate im-
pact than for creating by 1970 the conditions for
rapid economic development. The curtailment of
typical aid projects--highway construction, techni-
cal training, low-cost housing, and other "infra-
structure" programs--would therefore not necessarily
be critical for short-term economic prospects.
2. In some cases, however, US funds have been
helping to shore up Latin American economies. The
amount involved is not large by comparison with over-
all GNP figures, but it has been important for tiding
a country like Brazil over balance-of-payment diffi-
culties and averting default on international obliga-
tions. The economic squeeze resulting from curtail-
ment of such aid is now a factor affecting the polit-
ical attitudes and stability of the Goulart government.
3. Curtailment of assistance over an extended
period of time would have a "multiplier" effect be-
yond the amount of US Government funds left unexpended.
It would, for example, presumably affect the invest-
ment guaranty program administered by AID to encourage
US private personal and corporate investment abroad.
Since the beginning of the year, AID has received
guarantee applications to cover nearly one billion
dollars of investment in Latin America. Apart from
* h s memoran um has been coordinated with ORR and ONE
USAID, State reviews completed
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the US investment guaranty program, financing by
the World Bank and other international inst.itu.-
tions, along with an indeterminate amount of non-
US private investment, would be discouraged by any
shrinking of US aid.
4. With the unique exception of Cuba, there
is no good example of a Latin American country
that has been cut off from Alliance for Progress
aid for any extended period of time. The durabil-
ity of Duvalier in Haiti and Goulart in Brazil, at-
tests to the limited effectiveness of aid suspen-
sions or reductions over the short run. Suspension
of aid is not the equivalent of a quick knock-out
punch but is rather part of a sequence of blows in
a contest that has to go many rounds.
5, A related point is that Latin Americans
do not find a lasting US policy of aid suspension
to be completely credible.. In the Peruvian expe-
rience described in the appendix, aid was restored
within months after a military coup had led to its
suspension. The historical record weakens the po-
litical. leverage that the US can apply by cutting
off assistance, since the chances for a reinstituted
aid program seem reasonably promising.
6. The three countries examined in the appen-
dix illustrate some of the political effects of US
aid retrenchment--.such as the possibility of coun-
tercoups and the opportunities at least in some
countries for enlarging bloc political and economic
inroads. However, generalizations about the effects
in Latin America of punitive suspensions of US aid
are unjustified. Some countries like Haiti are
geared to subsistence-level living standards which
are not likely to fall much lower than they already
are. For more advanced countries like Brazil, US
aid policies affecting such matters as the adequacy
of Brazilian financial reserves are important. The
one flat statement we would make is that in no case
has cessation of US aid been followed by quick col-
lapse of the regime. Given enough time, withholding
of US aid would almost certainly force Latin American
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rethinking about prospects for economic develop-
ment. It would also entail considerable belt-
tightening, and in a case like Brazil's, could
well generate a serious financial crisis with at-
tendant political repercussions.
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PERU - A CASE HISTORY
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1. Prior to the coup d'etat on 18 July 1962
in which a military junta overthrew the constitu-
tional regime, US Government economic assistance
to Peru was programmed at approximately $71 million
under the Alliance for Progress for the balance of
the calendar year. This sum was exclusive of tech-
nical and "humanitarian" aid programs, such as PL-
480 and the Peace Corps. The amount of military as-
sistance for the next fiscal year was at the time
still under review in Washington, but some 9.6 million
dollars in materiel had been scheduled for shipment
to Peru under a previous authorization.
2. The overthrow of the Manuel Prado regime,
although precipitated by the results of the national
elections of June 1962, was an outgrowth of the mili-
tary's long rankling and bitter hatred of the leftist
but anti-Communist American Popular Revolutionary Al-
liance (APRA) headed by Haya de la Torre. When Haya
de la Torre emerged as the winner in a three-cornered
presidential fight even though he did not gain the
constitutionally necessary one-third margin of the
popular vote, the armed forces leaders acted. They
apparently feared that the new congress, which was
to meet in late July to settle the presidential race,
could be controlled by a coalition which would give
APRA a major voice in government. The coup occurred
in spite of the fact that as early as November 1961
the US Ambassador personally warned a contingent of
high military leaders that the US would suspend dip-
lomatic relations and economic assistance if the
armed forces refused to accept the outcome of the
elections. The warning was made repeatedly during
the intervening months, but the military leaders
chose to ignore the warning.
8. In response to the military coup, the US
suspended diplomatic relations along with its eco-
nomic and military assistance programs on 18 July.
Diplomatic relations were resumed on 17 August, but
the economic and military assistance programs were
not completely restored until October 1.962.
4. The impact of the US aid suspension on
the Peruvian economy probably was slight,, There
apparently was little loss of confidence on the
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part of Peruvian businessmen, and no perceptible
drop in economic production occurred--possibly in
part because the Peruvian business community esti-
mated that suspension of US assistance would be
short-lived,
5. US suspension of aid may have had a some-
what greater political impact on the junta leaders.
They clearly were ned when the US refused to re-
sume normal diplomatic relations, but they could
not have been surprised at either this action or
the abrupt suspension of economic and military aid.
Indeed the US Ambassador's clear advance warning
that US aid would be suspended may have prompted
the junta leader, General Ricardo-Godoy, only a day
after the coup, to promise new elections within a
year,.
6. By and large it would seem that Peruvian
considerations, rather than US policy, largely dic-
tated the responsible conduct of the junta, which
lived up to the promise to hold free elections in
June 1963 and subsequently handed over the govern-
ment to a popularly elected civilian regime on 18
July. It quickly became obvious that the motivat-
ing factor behind the coup was not avarice on the
part of the junta leaders. Similarly they demon-
strated no desire to establish a traditional mili-
tary dictatorship. The junta was apparently moti-
vated almost solely by a hatred and fear of an APRA-
dominated government which could be expected to try
to minimize the traditional role of the military in
the country.
7. Throughout their rule the junta members
displayed a sincere desire to return the government
to responsible, constructive, but non-APRA civilian
government, at the earliest possible moment. In ad-
dition, the junta was interested in laying the ground-
work for long-needed social and economic reforms in
Peru, and in November decreed the basis for the ini-
tiation of a land reform program. The junta may also
have been influenced toward moderation by an influ-
ential group of young officers who, unlike their
chiefs, were middle class in origin and did not share
in the interests of the oligarchy. These ??Naserites,9e
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while
ednever Positively identified, were nationalist-
, and were interested in reforms and in re-
turning to constitutional processes of government,
8. In summary, in view of the relatively
short period of suspension of normal US diplomatic
and economic relations--probably cut even shorter
by considerations relative to the October 1962 Cuban
crisis--it would seem that the aid disruption was
not a principal factor responsible for the return
to constitutional government in Peru p of the suspension may have contributed
to an early declaration of intentions by the junta.
Indeed, it would seem that
m an fscthem
purely the character of Junta Peruviors$
selves, were largely responsible forthemorrderllyem~-
return to civilian government,
however, to assume that the Peruvianeexis no .,
periencesmight
be analagous to any present or future military coups
d'etat in other Latin American countries.
-6-
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DOMINICAN REPUBLIC
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1. During its brief seven-month tenure prior
to the 25 September coup, the government of Dominican
President Juan Bosch had gradually shifted from an
attitude of professed antipathy toward one of heavy
reliance on US economic assistance. In addition to
authorizations of over $36 million from AID and IDB
for FY 1963, the government had requested an emer-
gency loan of $17 million which was under study at
the time of the coup. The Dominican government was
also purchasing large amounts of rice under PL 480
to meet severe and growing food shortages. Apart
from some PL 480 and a peace corps mission these
programs have been suspended.
2. The US economic assistance program in the
Dominican Republic has been focused on long range
industrial and agricultural development, with some
additional concentration on programs in education
and low cost housing. Approximately $4 million in
military assistance was programmed for FY 1963, al-
though only slightly more than half of this amount
had been disbursed at the time of the coup. The
military Assistance Program was geared toward improv-
ing the country's capabilities to withstand possible
Castro-Communist aggression and toward civic action
projects. Most Dominican military equipment is of
US manufacture--except some European-made aircraft--
and the US has provided replacement parts. In ad-
dition to military training for Dominican officers,
considerable progress in training the large Domini-
can police force had been made under the AID public
safety program. These developments had substantially
increased internal security capabilities, but they
are still only minimal.
3. In order for the Dominican Republic to at-
tain any significant rate of economic growth, large
infusions of foreign capital and technical assistance
would be required. Bosch was successful in negotiat-
ing a $150 million development loan from private
European sources, although the terms were unfavorable
and no funds have yet been received. Also, France
has shown some interest in long range development
projects and might now be contacted if US aid were
suspended indefinitely. However, Dominican political
instability, the problems of servicing the existing
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foreign debt that has reached an all-time high, and
general European disinterest in Latin America would
be likely to deter most vest European nations from
providing extensive assistance. The militant anti-
Communism of the present regime's military backers
precludes its seeking aid from the Sino-Soviet bloc
or Cuba.
4. Lacking US support, the ruling triumvirate
faces uncertain prospects. Efforts to economize will
be frustrated by corruption among leading civil and
military officials, by opposition to reduction in
armed forces and police expenditures, and by unrealis-
tic popular expectations of popular advance. In addi-
tion to lack of funds to pay military salaries and
meet other government expenses, the regime faces food
shortages before the end of this year, if US rice
sales are not continued. On the other hand, deter-
mined efforts to reduce inefficiency in sugar pro-
duction--the number one source of foreign exchange--
coupled with effective distribution of the former
Trujillo properties, could give the regime at least
at temporary breathing spell.
5. In the immediate aftermath of the coup, the
conservative backers of the triumvirate have been
somewhat surprised and angered by the US refusal to
recognize and support their regime. Other influential
business and professional elements who disliked both
Bosch and the coup display considerable anxiety and
talk of the need to reach an early accommodation with
the US. Leaders of the moderate leftist political
parties--which polled 70 percent of the vote in the
1962 election--are encouraged by the US position. How-
ever, their attitude may soon change if the junta re-
mains in power.
6. A prolonged absence of US aid, coupled with
economic deterioration and political instability,
could be exploited by extreme leftists to generate
anti-US sentiment. In this context, the withholding
of US aid over time could be a two-edged instrument
in the Dominican Republic, encouraging the polariza-
tion of forces into extreme right and extreme left.
The vulnerability of the populace to extreme leftist
appeals would be heightened by the fact that unem-
ployment, food shortages, etc,--which would be at-
tributed to US aid cuts--would strike hardest among
lower class Dominicans.
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7. The longer the triumvirate remains isolated,
the greater becomes the threat of a counter coup
against it. The extreme leftists seem to have been
making gains during the past few days--gains that
might increase markedly should a student be killed
in demonstrations and present the left with a martyr.
Then, too, the failure of the regime to arrest key
Castro-Communist leaders adds to this danger. Mean-
while, the extreme right military might use any gains
by the left as a pretext to oust the civilian tri-
umvirate. This could result in a bloody repressive
military dictatorship.
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CHILE*
1. There is as yet no parallel in Chile to
the Peruvian experience, where the overthrow of
constitutional government led to the suspension of
US aid. The contingency of aid suspension could be-
come reality, however, if Salvador Allende, candi-
date of the Communist-dominated Popular Action Front,
won the presidential election next year and embarked
on a fidelista policy that included expropriation of
US investment s totaling $800 million. Alternatively,
a military reaction against Allende might raise ques-
tions of US aid to a regime that had overthrown the
constitutional government.
2. US aid to Chile this year is programmed
at $75 million, not a large figure by comparison
with the government's domestic expenditures for de-
velopment, but fairly important in view of Chile's
limited foreign exchange holdings and pressures on
the country's balance of payments. Inflation and
payments deficits have discouraged private savings
and investment, while stimulating capital flight and
speculation.
3. The psychological impact in Chile of US
aid has been limited, and popular reaction to with-
drawal of aid might therefore not be decisive at
first. However, the withdrawal of US aid could con-
tribute to capital flight, deficit financing, new
inflationary pressures, and deterioration of the in-
vestment climate. The Chilean Government would be
forced to draw down reserves and seek other Free
World sources of assistance. Chile obtained loans
from Britain and Germany this year totaling over
$15 million. Japanese and Canadian interests have
made some new investments in the country. Bloc aid
*Chile as been c osen as a hypothetical example, not
because we consider that the events depicted here
are necessarily likely to take place, but rather
because it is possible they could. If power should
pass to Allende and the Communist-dominated Popular
Action Front, the US could be confronted with the
decision of whether or not to suspend aid to a con-
stitutionally legitimate government.
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would also be accepted. There is a persistent pop-
ular belief in the country that the Communist coun-
tries could absorb large amounts of Chilean copper;
Allende would probably hope to capitalize on his al-
liance with the domestic Communists to negotiate
favorable terms for copper sales to the bloc.
4. Chile is one of the few Latin American
countries with a long-term plan of economic devel-
opment. The fairly widespread mystique of develop-
ment in the country makes US ai a"n strument of
important, even though not decisive, leverage.
Rather than precipitate a suspension of US aid, an
Allende or other left government, particularly if
it were experiencing heavy weather with its program,
might seek an understanding with center parties. A
cautious course of understanding with the center
would be promoted by the consideration that the Com-
munists and Socialists would not amass sufficient
congressional support to govern constitutionally by
themselves and by the apprehension that certain meas-
ures would provoke a coup by the military in alliance
with the political opposition.
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