LATIN AMERICA REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00289R000301530001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 32
• Document Creation Date: December 27, 2016
• Document Release Date: July 18, 2011
• Sequence Number: 1
• Publication Date: May 9, 1986
• Content Type: REPORT

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Directorate of Sew
Intelligence
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Ca T BIVIE, OUT
01 MARK ON
Review
Latin America
15;
Seeret
ALA LAR 86-011
9 May 1986
430
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Latin America
Review) 25X1
Articles Latin America: Rocky Economic Road Ahead
With most of the major Latin American economies straining to
meet large debt servicing burdens, we foresee another year of
economic stagnation. Moribund economic conditions already are
creating tougher political and popular opposition to financial policies
and reforms envisioned in the Baker Plan.
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Haiti: Leftist Activity Growing I 7
President Namphy's policy of allowing freedom of action for all
political groups has led to an upsurge in leftist activity. The
Communist Party and other leftist groups are
rying to undermine the government by inciting unrest.
Followed by Clouds
Soviet-Cuban ties have entered a warming trend highlighted by
recent party congresses in Moscow and Havana. Cuba's economic
policies now parallel Soviet emphasis on reform and more efficient
management, but this compatibility is not matched by equally
congruent foreign policy priorities
The leftist Broad Front coalition has grown into Uruguay's third
major political force and hopes to challenge the country's traditional
two-party system. It, however, must first deal with internal frictions.
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Secret
ALA LAR 86-011
9 May 1986
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Secret
The economy is undergoing severe strain from drought, low prices
for commodity exports, and an overvalued exchange rate. President
Stroessner's inadequate response to the bleak outlook is contributing
to increased capital flight, narcotics trafficking, and political
discontent.
Cuba: Punishing the Wayward EliteL
25
Paraguay: Increased Opposition Activity
26
Bermuda: Pressing for Tax Concessions
27
Articles have been coordinated as appropriate with other offices within CIA.
Comments and queries regarding this publication may be directed to the Chief,
Production Ste, Office of African and Latin American Analysis,
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Review
Latin America:
Rocky Economic
Road Ahead
Economic performance in the major Latin American
economies was disappointing in 1985. Growth was
lackluster, inflation remained high, and living
standards stayed depressed. With most economies
straining to meet large debt servicing burdens, we
foresee another year of economic stagnation. We are
already seeing signs that moribund economic
conditions are creating tougher political and popular
opposition to financial policies and reforms envisioned
in the Baker Plan. Thus, most Latin American
countries will continue to press Washington for
political solutions to the debt problem and bargain
with creditors for easier repayment terms to foster
stronger growth.
A Disappointing Performance
According to preliminary data, Latin American
economies grew 3.4 percent in 1985, equaling the
1984 pace. Only Brazil-which accounts for one-third
of the region's output-enjoyed strong economic
growth, expanding at 8.3 percent.
In the other key debtor nations, economic
performance oscillated in a narrow range:
? Argentine GDP fell 3 percent as the government
imposed austerity measures to break hyperinflation.
? In Venezuela, delays in implementing public-
spending programs and stagnant private
investment-exacerbated by sagging oil revenues-
kept growth depressed in 1985 for the seventh
consecutive year.
? Mexican efforts to reflate the economy before the
1985 state elections, however, helped the economy
grow by 2.7 percent and joblessness to post a slight
decline.
Table 1
Latin America: GDP Growth
Percent
Latin
America
-1.5
-3.1
3.4
3.4
0.3
Latin
America,
excluding
Brazil
-2.7
-3.0
2.8
0.9
-1.5
Brazil
0.9
-3.2
4.5
8.3
3.5
Chile
-13.1
-0.5
6.2
2.4
2.2
Colombia
1.0
1.2
3.6
2.0
2.0
Ecuador
1.1
-1.6
4.6
3.2
-4.0
Mexico
NEGL
-5.2
3.7
2.7
-3.5
Peru
-0.2
-12.0
4.4
1.5
1.5
Uruguay
-9.4
-5.0
-1.8
NEGL
1.5
Venezuela
0.7
-5.6
-1.1
NEGL
-2.0
Inflation generally remained high judged by Latin
American historical standards, thereby compressing
purchasing power. Although Argentina and Bolivia
adopted programs to halt hyperinflation-which
peaked at about 1,000 percent and 23,500 percent,
respectively-December 1985 data showed Argentine
inflation running at 46 percent and Bolivian price
increases at a still dangerous 540-percent annual rate.
Official statistics indicate Brazil experienced its third
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Danger of a Debt Crisis
Mexico is fast
approaching its position of August 1982, when it was
unable to meet its debt obligations. On that occasion,
quick action by Mexican finance officials, the US
Government, and commerical creditors averted a
major crisis.
We see substantial differences in the current situation
and believe greatly increased incentives exist for
Mexico and other major debtors to take radical
action to reduce debt service payments. Although
debt policies are driven by each country's balance-of-
payments position and relations with creditors, the
same deflationary pressures that plague Mexico also
affect other Latin debtors. The increasing political
nature of the debt problem makes negotiations
between debtors and commercial creditors more
difficult than in the past. This time, both sides are
not as likely to push for agreement because they
believe that Washington once more will come to the
rescue.
Although the financial crisis is concentrated in
Mexico, it could engulf the region. We are
particularly concerned about the consequences if
Mexico's financial predicament again causes
creditors to "cut and run" by reducing trade credits,
withdrawing interbank deposits, and suspending
disbursement of medium-term credits to the region's
other debtors. In that event, the resulting cash-flow
problems almost certainly would play into the hands
of populists throughout Latin America who believe
that the current debt strategy condemns their
countries to stagnation. A stronger voice for
nationalist forces in the region not only would result
in financial setbacks for US banks but also would
damage other US economic interests and lower the
probability of attaining US political objectives.
year of price increases in the 200-percent range and
Peruvian President Garcia's stimulative economic
policies pushed inflation toward 200 percent a year.
Tighter fiscal policies lowered inflation to less than 10
percent in Venezuela, the only major country in the
Taken together, Latin American living standards
remained depressed. Government statistics indicate
that per capita income throughout the region was still
below the peaks recorded in the late 1970s. Persistent
high inflation caused real wages to fall in 1985 in
every major country except Brazil, where they rose 12
percent. Real wages plunged 20.5 percent in Peru and
9.9 percent in Argentina last year-the most severe
declines-and 8.0 percent in Mexico. Moreover,
stagnant economic growth resulted in rising
unemployment in several Latin American countries.
In Argentina, urban unemployment rose 2 percentage
points to 6.6 percent, while Colombian urban
joblessness averaged 14.2 percent, up from 13.5
percent in 1984.
An Early Look Ahead
On the basis of projections from various econometric
forecasting services, we believe most of the economies
will face another year of lackluster performance.
Although some will benefit from the oil price drop-
notably Brazil and Chile-and all will receive a boost
from the pickup in OECD growth and lower interest
rates, the continuation of economic adjustment
programs will hold recovery in check. For example,
we believe President Sarney's recently imposed anti-
inflation program and the effects of the drought will
more than halve the Brazilian GDP growth rate,
while the drop in oil prices will require new
retrenchment in Mexico, Venezuela, and Ecuador.
Argentina and Bolivia are holding to tough anti-
inflation programs, and fiscal and economic
adjustments policies needed to make significant
progress against inflation are being pursued in Chile,
Colombia, and Uruguay.
Debt servicing requirements and the persistent
problem of capital flight will also limit the region's
growth potential. Capital will continue to flow out of
Latin America in 1986,. albeit at a slower pace than
last year. According to United Nations data, net flows
of profits, interest, and principal totaling $30.4 billion
left the region in 1985, up 18 percent from 1984, as
commercial lenders became more cautious about new
financing. Moreover, net interest payments as a share
of exports of goods and services increased for most
region with single-digit price increases.
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Table 2
Latin America: Consumer Price Inflation
57.6
58.2
Chile
9.5
20.7
23.6
23.0
26.4
Colombia
27.5
24.1
16.5
18.3
23.5
Ecuador
17.9
24.3
52.5
25.1
24.4
Latin American countries, compressing import
capacity and spurring calls for new approaches to the
debt problem. Although the recent decline in interest
rates should reduce debt service by $11 billion,
according to the London-based American Express
Bank, the interest burden will remain high.
As the terms of trade for Latin American debtors
drift lower in the wake of world disinflation, we
foresee little prospect for export windfalls that will
boost economic recovery. Only coffee prices are likely
to rise strongly this year. Official trade statistics
indicate Latin American economies continue to rely
heavily on commodity exports, which are unlikely to
rise significantly in price in 1986, according to most
economists. Although only 45 percent of Brazilian
exports are primary products, two-thirds of Chilean
and Colombian foreign sales consist of commodities.
Primary products account for 80 percent of Argentine
and Mexican exports; and in Peru and Venezuela,
they amount to more than 90 percent of shipments.
Political events and trends in individual countries also
have the potential to threaten economic prospects by
undermining investor confidence and disrupting plans.
In Chile, especially, several years of sustained
terrorist activities and the specter of a Philippine-like
upheaval may dampen investment and slow growth.
Politically motivated shifts in economic policies such
as those in Mexico and Peru have also heightened
perceptions of risk and will continue to discourage
investment and promote capital flight. Even
transistory events such as the insurgent attacks on the
Palace of Justice in Colombia and the recent mutiny
of General Vargas in Ecuador serve to lessen investor
confidence and distract the affected governments
from their economic priorities.
The Fallout
Governments throughout Latin America almost
certainly will remain under popular pressure this year
to back away from austerity, which officials and
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Table 3
Latin America: Interest Payments as
Share of Exports of Goods and Services
Table 4
Latin America: Terms of Trade
(Index: 1980 = 100)
Latin
America
27.6
40.5
35.9
35.7
36.0
Argentina
35.5
53.6
58.4
58.7
54.5
Bolivia
32.1
43.5
44.4
63.1
60.0
Brazil
40.4
57.1
42.4
38.0
40.5
Chile
38.8
49.5
39.4
50.0
46.5
Colombia
21.8
25.8
26.5
23.6
23.0
Ecuador
24.3
30.1
27.4
27.8
24.5
Mexico
29.0
46.0
39.3
40.2
37.0
Peru
24.1
25.1
29.8
34.0
34.5
Uruguay
12.9
22.4
24.8
33.8
35.5
Venezuela
12.7
21.0
21.6
17.5
22.5
public figures increasingly equate with servicing
foreign loans. Earlier this year, Fidel Velazquez, head
of the powerful Mexican Confederation of Workers,
asserted that present debt arrangements impose an
unbearable burden that "cannot last forever," an
indication of the growing political debate within
Mexico over suspending payments on the debt.
Moreover, Argentine unions successfully staged a
one-day general strike in January to protest high debt
payments, and the Peronist opposition to President
Alfonsin is endorsing more confrontational policies on
the debt. In a January interview on Brazilian
television, Finance Minister Funaro mused about the
willingness of the region's leaders to pay foreign banks
while per capita incomes decline, inadequate social
security systems fall apart, and the economic
infrastructure crumbles.
The upper and middle classes will also probably
pressure their governments to avoid the political risks
in undertaking structural economic reforms to satisfy
creditor demands. According to USIA-sponsored
opinion polls made in November 1985, a majority of
the urban public in Brazil, Colombia, and Venezuela
prefer centralized control of the economy by the
Latin
America
92.4 84.2
82.7
86.1
83.6
Chile
80.8 72.8
76.7
71.7
68.9
Colombia
81.0 87.5
89.6
92.8
91.5
Ecuador
90.0 83.2
77.6
76.1
73.8
Mexico
99.7 84.1
81.0
80.4
78.2
government (which was equated with democracy).
Mexicans split evenly between strong government
control and US-style economic policies.
Despite growing internal opposition to continuing debt
service, few Latin American governments are likely to
advocate radical collective or unilateral moves to ease
the debt burden. Neither Castro's call for a debt
moratorium nor Peruvian President Garcia's plan to
limit debt service to 10 percent of export earnings has
attracted support to date, and both would risk further
isolation by continuing to push their schemes.
Statements by leftwing opposition groups throughout
the region favoring the repudiation of at least part of
the debt have garnered virtually no popular support
and have been opposed by every government in the
region.
Throughout the remainder of 1986, however,
individual governments are likely to use growing
domestic support for tougher stances on debt to try to
extract concessions from creditors. We believe that
the Latin debtors that face new financial negotiations
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this year will also continue to look to Washington for
political solutions to their debt problems. As a result,
we believe Latin American governments-
individually and under the aegis of the Cartagena
Group-will press for implementation of the Baker
Plan and lower interest rates and interest rate spreads,
as they did at the Cartagena Group meeting in
February.
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Haiti: Leftist Activity
Growing
inciting unrest
President Namphy's policy of allowing freedom of
action for all political groups has led to an upsurge in
leftist activity. In addition to overt political
organizing, the Unified Party of Haitian Communists
(PUCH) and other leftist groups are working
clandestinely to undermine Namphy's government by
. These groups are not working together,
however, and thus far show little capability for
coordinated action. The ruling council feels compelled
to let these organizations operate openly because of a
desire to avoid losing domestic and international
support. Although the government has made some
effort to monitor leftist subversion, it has little
intelligence capability. Nevertheless, the ruling
council hopes eventually to undercut the effectiveness
of radical groups by exposing agitator activity.
scattered violence. We have no evidence, however, of
Communist involvement in the agitation that
provoked the police overreaction resulting in eight
deaths in the capital on 26 April. Nevertheless,
Haitian officials reportedly are worried that the
Communists might be able to mount continuous
destabilizing antigovernment demonstrations, possibly
by paying agitators to cause disturbances.
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leftist groups in Haiti.
Communist Activities
The PUCH is emerging as one of the more active
many exiled Communists either have
appears to have a structure in place,
returned to Haiti or plan to soon. The Communists
may be gaining support in the south, where the party
The Haitian Communists were not
elements.
noted in the past for developing coherent plans of
action, but they now appear to have a two-track
strategy of subversion aimed at keeping the
government weak and defensive, and political activity
designed to forge alliances with non-Communist
partly responsible for the disturbances that took place
in Port-au-Prince on 24 March. On that date,
antimilitary demonstrators brought the capital to a
halt for four hours with roadblocks, burning tires, and
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 AL I I
Local leftist leaders also have emerged since
Duvalier's ouster in February. Their popularity
results from personal charisma rather than support
for their ideology:
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Other Leftist Players
Several radical groups are acting independently of the
PUCH to incite popular unrest and establish power
bases of their own. Most are led by returned leftist
exiles. far-right
members of Haiti's wealthy elite are paying leftist
elements to create disturbances aimed at destabilizing
the Namphy government. The Embassy says Namphy
and other senior Haitian officials believe the right is
attempting to use leftists to frustrate moves toward
democracy:
? Ruling council member Regala told US officials he
has evidence that members of the Miami-based
Hector Riobe Brigade were responsible for inciting
the crowd during a large demonstration at Fort
Demanche in Port-au-Prince on 26 April. Regala
says he believes the brigade members received
money from an unknown source to provoke the
incident.
? Lucien Pardot, a teacher from Gonaives, is
emerging as one of the most active and influential
leftists in Haiti
~ Pardot reportedly
wide-ranging contacts and influence over
individuals in the Catholic Church, youth groups,
and labor unions. Pardot is
a Marxist who accepts the principles and aims of the
PUCH, but does not belong to the party because of
personal animosity toward Communist leader Rene
Theodore. Pardot reportedly is organizing seminars
on workers' rights in Port-au-Prince as a means of
disseminating leftist views.
several leaders of the Gonaives-based vigilante
group Dechoukage are leftist in orientation. Since
February, Dechoukage members have hunted down
and executed former militiamen and others
members of the National
Democratic and Progressive Party of Haiti are
returning from exile to engage in open political
activity. Last year the US Embassy described this
group as the most radical of Haiti's many exile
organizations. Far left socialist in ideology, some of
its members reportedly received paramilitary
training in Libya. The group, headed by Lionel
Laine before he was killed in a gun battle with
police in Port-au-Prince last October, plans to
appeal to the lower classes by advocating a
redistribution of land and wealth,
associated with the Duvalier regime.
Because returned exiles lead many of the leftist
groups, they may be as unable or unwilling to
coordinate their actions in Haiti as they were when
they were abroad. Haitian groups of all political hues
tend to be built around a leader, and personal rivalries
may be keeping leftist parties from collaborating with
each other. There probably is also some tension
between local and returned exile leftists, as in the case
of Pardot and Theodore. Some local leftists may
believe that they played an important role in the
popular movement that ousted Duvalier, and view the
returnees as interlopers who were safely in exile
during the period of unrest beginning last November.
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Government Response
The ruling council hopes to monitor subversive groups
and expose violent leftist tactics to public scrutiny, but
is severely limited by lack of resources. In the absence
of a domestic intelligence service, the government
decided in March to use a 36-man squad of
undercover police to track PUCH activities,
This unit is ill-
prepared for intelligence work; during the Duvalier
years its main function reportedly was to monitor
tourist movements in Port-au-Prince
that plans for the
new service are still at an early stage of development.
President Namphy personally made an effort to
sensitize Haitians to the dangers posed by subversives
in the wake of the 26 April incident. Namphy
appeared on television the following day expressing
sympathy for the victims and condemning the
agitators who were clearly seen in filmed news reports
to have provoked the disturbance. Namphy appears to
have been at least partly successful in conveying the
idea that agitators are manipulating Haitians to act
against their own interests.
Outlook
Namphy appears prepared to continue allowing
leftists to operate openly in order to avoid appearing
repressive.
=the ruling council has decided to allow complete
freedom of action for all political groups and
unrestricted right of return for all exiles. The council
reportedly hoped this would serve as a sign of progress
and reconciliation. Although the ruling council
reportedly is uneasy with open Communist and leftist
organizing and the return of many radical exiles, we
have no evidence it plans to alter its policies.
For the near term, the left in general views the present
weak transitional government as providing an
opportunity to propagate their views openly and build
their organizations without harassment. We believe
leftists will lack the capability to make a bid for power
any time soon because of their weaknesses and
shortcomings. The Communists in particular still are
largely bereft of capable and imaginative leaders and
organizers. Should the Namphy government collapse
and a political vacuum ensue, however, the prospects
for the left could brighten considerably. Although
individuals rather than groups historically have
wielded more influence in Haitian politics, we believe
the Communists and other leftists will garner some
support by appealing to popular expectations of a
better life and exploiting frustration with slow
economic progress. In addition, the novelty of free
political activity will probably attract new members to
the leftist parties.
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Cuban and Soviet Party
Congresses: Spring Thaw,
Followed by Clouds
Party congresses earlier this year in Havana and
Moscow have underscored a warming trend in Soviet-
Cuban ties following the earlier chilled relations
during much of 1984-85. The high points in the
congresses were the presence in Havana of the
number-two man in the Politburo, Yegor Ligachev,
who praised Cuba and said it could depend on Soviet
friendship, and President Castro in Moscow, who
lauded Soviet-Cuban ties in more slavish tones than
he had used at the last CPSU Congress in 1981.
For some two years prior to the Havana and Moscow
party congresses, Cuban-Soviet relations were
strained by frictions over economic relations and
foreign policy. Soviet economic aid had leveled off,
ending a more open-ended arrangement dating back
to the early 1960s. Moscow's oil flow dropped, in part
because of declining oil production in the USSR.
Kremlin technicians in Cuba were complaining
bitterly about Havana's lack of economic efficiency,
especially in sugar production, and Havana's nagging
inability to meet sugar export promises to the Council
for Mutual Economic Assistance (CEMA).
Soviet leaders, however, were disenchanted with
Cuba's persistent food rationing, which gave socialism
a black eye. Gorbachev's drive for economic reform
magnified Moscow's ire over Cuba's poor economic
management and flawed sugar industry. Castro,
under Soviet economic pressure, was responding with
his own program to meet export promises to CEMA
and improve Havana's record in economic
efficiency-largely by limiting imports and increasing
overall austerity.
Cuba's recent accommodation to Soviet economic
pressure had begun to produce a thaw in relations
with Moscow before the Havana Congress in
February. While Castro's refusal to attend the funeral
of Konstantin Chernenko in March 1985 and meet
with Gorbachev accentuated Castro's displeasure with
the state of relations, his moves toward economic
reforms signaled sensitivity to Soviet pressure. The
Soviets responded positively by sending Politburo
member Mikhail Solomentsev to Cuba in May 1985
for ceremonies commemorating the 25th anniversary
of the renewal of diplomatic relations between Cuba
and the USSR. When Soviet Foreign Minister
Shevardnadze stopped over in Cuba in October, he
conveyed Gorbachev's "warm wishes."
In foreign policy, Moscow and Havana have been at
odds over Soviet insistence on East-West priorities
and Cuba's Third World preferences. The Soviets
glossed over Maurice Bishop's death in October 1983
in Grenada, where they supported his main rival in
contrast to Cuban support of Bishop. In Nicaragua
during 1984-85, the Soviets tended to keep a low
profile in the context of East-West gamesmanship,
while the Cubans were more hawkish in their verbal
support and physical presence. Moscow has been
playing down North-South issues, stressing the limits
to Soviet aid and the need for Third World self-
reliance. Cuba has been proclaiming the importance
of the debt issue and the need for Latin American
countries to repudiate their debts to Western
creditors. Still, Cuba in other respects has stayed in
tune with Moscow by:
? Strengthening diplomatic ties to the new
democracies in South America.
? Advocating a negotiated settlement of Nicaragua's
Central American problems, while still supporting
Sandinista consolidation.
? Working closely with the Soviets in Angola and
Ethiopia.
The Party Congresses Compatible
Economic Strategies
Like Gorbachev's report to the 27th CPSU Congress
and in those of the Soviet republic party congresses,
Castro devoted much of his long speech to the Havana
Congress to criticizing economic shortcomings and
calling for reform. He criticized Cuba's social
services, industrial stagnation, central planning
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failures, agricultural inefficiency, bloated government
bureaucracy, and poor tourist system. Like the
Soviets, Castro spoke of future increased reliance on
market mechanisms, improved quality of output, and
worker incentives to stimulate production. He stressed
the need to meet Cuba's export commitments to
CEMA, adopt new technologies, improve
management, and continue austerity-all music to
Soviet ears.
Castro's assault on Cuba's economic system has been
accompanied by personnel changes in the state
ministries and-as announced at the Third Party
Congress-in the Central Committee and Politburo of
the party. Following Moscow's lead, Castro has
replaced older, less efficient managers-many of
whom date back to Cuba's revolutionary days and are
devoted followers of the lider maximo-with younger
and better trained technicians who may provide the
kick needed in the economy. New full members in the
Politburo, for example, include Vilma Espin Guillois,
Raul Castro's wife and the first woman named to this
level. Castro, unsurprisingly, remains the party's First
Secretary, and his brother, Raul, Second Secretary.
By calling for accelerated economic development and
reforms in the Cuban economy, Castro earned Soviet
praise and set the scene for repairing strained
relations. Pravda gave unusual prominence to
Castro's main report in Havana, suggesting special
efforts to signal fraternal warmth. Ligachev's speech
to the Havana Congress praised Cuba for its alleged
international prestige, its social accomplishments on
behalf of the Cuban people, and its example in
defending socialism against aggression. Ligachev
noted that the Soviet Union has fulfilled and will
fulfill undeviatingly its commitments to Cuba. In
words that must have warmed Castro's heart,
Ligachev said that Cuba can rely on the Soviet Union.
Castro's speech to the Soviet Party Congress in late
February underlined the warming trend. Adopting
more slavish praise than he used in 1981, Castro cited
Moscow's "colossal political, economic, social, and
scientific successes" and the "immense glory" of its
defense efforts. Castro in 1981 described Leonid
Brezhnev's speech as "calm and firm;" he termed
Gorbachev's main report as "brilliant and valiant."
Cuban media attention to the Soviet Party Congress
was enormous. The party daily Granma devoted an
entire front page to large excerpts from Castro's
address and included a box the width of the page:
"We place our trust in the great fatherland of Lenin,
in the Soviet people, in its glorious party, in its
leadership, in you, comrade Gorbachev, in your ideas,
in your dynamic style, in your tireless struggle for
peace, Leninist principles, and communism. We trust
you, and we support you."
Compared to Castro's speech to the 26th Party
Congress, his 1986 version reflects Cuba's growing
preoccupation with economic issues. Castro argued
that only economic development can remove the
contradictions between capitalism and socialism, and
he called more directly for Soviet economic assistance
to the Third World. Behind this focus on Third World
economic development-a struggle Castro described
as "no less stimulating" than that of avoiding nuclear
war-lies unrelenting Soviet pressures: leveled off
economic aid, declining petroleum supplies, and
criticism for Cuban economic inefficiency. These
pressures-not likely to disappear in coming
months-help account for what Western diplomatic
observers describe as the "toadying" tone of Castro's
remarks in Moscow.
Out of Tune on Foreign Policy
Castro's alignment with Gorbachev's economic
approach is not replicated in foreign policy. Moscow
remains keyed to an East-West focus essentially at
odds with Cuba's North-South agenda. Signs of this
running disagreement appeared at both congresses.
Cuba's party leadership adopted a hastily crafted
resolution approving-and explaining-Castro's
remarks on foreign policy during his main report to
the Cuban congress. The resolution-not previously
distributed to the delegations and read by Vice
President Carlos Rafael Rodriguez rather than by
Castro-is more explicit in its support for detente
than Castro's own report. While we do not know
precisely why the party leadership determined to issue
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this resolution-a practice not followed in the Second
Party Congress-it appears that the Soviet delegation
was not entirely delighted over Castro's:
? Faint praise of detente and glossing over Soviet-US
strategic issues, like space-based defensive systems.
? Concentration on Latin America more than on
recent Soviet efforts at arms control.
? More hawkish views on confrontation with the
United States, rather than emphasizing the need for
all socialists to struggle for peace.
The new foreign policy resolution rectified these
differences by emphasizing the importance of East-
West strategic issues, peaceful coexistence, dialogue
and constructive negotiations, general and complete
disarmament, and unity in opposing the US policy of
confrontation.
But the matter did not end here, because Castro once
again underscored his foreign policy differences with
the Soviets in the final two sessions of Havana's
Congress. Speaking without notes, tired, and highly
emotional, Castro espoused his more hawkish views on
confrontation with the United States, calling
capitalist society a "world of vampires that lived on
the blood of other people and its own sons." Again
demonstrating his skepticism about Soviet-US
detente, Castro said if the United States increased aid
to the "Somozistas" (Contras) in Nicaragua, Cuba
would do "everything possible" to step up aid to the
Sandinistas. As for Angola, Castro castigated
mounting US support for UNITA, pointing out that
Cuba is prepared to back the Popular Movement for
the Liberation of Angola for "10 years, 20 years, 30
years, if necessary." Nicaragua's Ortega immediately
reported these glad tidings back in Managua. The
Soviet media did not. When asked to approve Castro's
assistance to Nicaragua and Angola by a show of
hands, the congress delegates did so. But no text of
this oral resolution has appeared subsequently.
Persistent differences between Moscow's East-West
priorities and Castro's Third World focus carried over
to the 27th Soviet Congress. Where Gorbachev's main
address virtually ignored the Third World-focusing
instead on Soviet-US arms control issues-Castro
centered his remarks on the Third World. To the
possible discomfort of his Soviet colleagues, he
explicitly asserted that the nations of the Third World
"expect and are certain they will receive maximum
solidarity from the socialist community in their
struggle for just economic gains."
Havana's focus on Third World economic issues
probably reflects Castro's growing uneasiness over
Moscow's long-term economic commitments to Cuba.
It also suggests a disagreement with Moscow over the
relevance of the US-Soviet dialogue in light of the
threat to Cuba posed by the United States.
Castro probably is concerned that Gorbachev's lack of
discussion of familiar topics like the Middle East and
Central America portends a downgrading of
revolutionary objectives in the Third World in the
context of new domestic economic and East-West
priorities. Castro attempted to use the 27th Congress
to remind his Soviet patrons of Cuba's credentials as a
Third World leader and thereby gain leverage to
ensure Moscow's economic and military commitments
to Havana
Prospects
In view of the Soviet and Cuban interests served by
their close ties, the relationship almost certainly will
remain intact during the next five years. Still, it will
not be friction free, and the key questions are how
serious will be the strains developing during this
period and under what conditions are they likely to
sharpen? In bilateral economic relations, pressures
are mounting on Cuba's middle-age revolution:
? Current sugar production is likely to be just short of
disastrous, given the combination of drought and
damage wrought by Hurricane Kate last autumn.
? The drop in sugar production means Havana again
will be unable to meet its commitments to supply
the USSR and other CEMA members.
? Cuba's economic performance still is not improving
at a time when Gorbachev is emphasizing economic
efficiency.
? This year's hard currency earnings from sale of
excess sugar on the open market-originally aimed
at US $230 million-could be nearly wiped out by
the need to supply CEMA.
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? Without hard currency from sugar sales, Cuba will
have to borrow more from Western creditors in
order to import needed Western technology and
consumer goods.
The slide in international oil prices reduces Cuba's
hard currency even more, because Havana has been
selling unused Soviet oil on the open market. The
result is that Cuba's hard currency earnings from oil
sales, which bring in nearly half of its hard currency
revenues, will be greatly reduced. Pressures to borrow
from the West will grow, probably increasing Cuba's
outstanding debt of $3.2 billion with Western
creditors.
In foreign policy, current differences in world view
and foreign policy priorities could be aggravated if:
? Soviet-US arms control moves ahead while Cuba
perceives Moscow backing away from its
internationalist duties-as implied by 27th
Congress speeches of Angola's dos Santos and
Ethiopia's Mengistu.
? Cuba's more hawkish views on support for
revolutionary regimes and movements, especially in
Central America, lead Havana toward policies too
far out front for Soviet comfort.
? Castro perceives that Moscow may sacrifice its
interests on the doorstep of East-West issues.
Indicators of these potential sources of friction
include:
? Soviet-US agreement on a date for the second
summit meeting; and inclusion of regional issues
discussion at that time.
? Increased Cuban personnel sent to Nicaragua and
Angola as a response to heightened US support of
the Contras and UNITA; widening evidence of
direct Cuban involvement in fighting side-by-side
with the Sandinistas.
? Sharpening complaints from Angola, Ethiopia, and
Nicaragua over the level of Soviet economic
support.
Nevertheless, it is premature to predict sharp stresses
in the Soviet-Cuban relationship. Soviet economic and
military aid to Angola, Ethiopia, and Nicaragua
indicate that Gorbachev-thus far-is not shying
away from key foreign commitments. Current
relations between Moscow and Havana exude
warmth-signaling that both leaderships are eager to
demonstrate the value they place in each other's
contributions. Perhaps in response to Castro's public
concern with the level of Soviet economic aid,
Moscow and Havana followed the 27th Party
Congress with the announcement of new Soviet
development aid to Cuba over the next five years
amounting to a 50-percent increase over the previous
five years. Development aid accounts for about 10
percent of total Soviet aid to Cuba.
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Uruguay: Prospects
for the Broad Front
within the labor movement.
The leftist Broad Front (FAU) coalition has grown
into Uruguay's third major political force and hopes
to challenge the country's traditional two-party
system. The Front, however, must first deal with
internal frictions that could hamper the coalition's
ability to present itself as a viable alternative by the
1989 election. Nevertheless, we believe that under the
leadership of former Gen. Liber Seregni the Front
will continue to expand its popular support and will
maintain considerable influence in Congress and
civilian rule.
Background
In the early 1970s, a group of leftist political parties
and factions formed a coalition to challenge the
traditionally centrist Blanco and Colorado Parties.
The coalition, known as the Broad Front, captured 18
percent of the national vote and almost won the
mayoralty of Montevideo in the 1971 election. The
military took control of the government in 1973,
banning all political parties and arresting the Broad
Front's leader, retired Gen. Liber Seregni. The Front
remained inactive until Seregni's release from prison
in March 1984. Seregni then quickly reestablished the
coalition and became involved with the Colorado
Party in negotiating with the armed forces to return
Uruguay to democracy, signing an accord that
established conditions for a smooth transition to
Despite a decade of political inactivity, the FAU
improved its standing in the 1984 election. Although
the military proscribed the charismatic Seregni from
running for president, the Front won 20 percent of the
congressional vote-not far from the second-place
Blanco Party's 33-percent tally-and, according to
press reports, was supported by over two-fifths of
first-time voters.
Coalition Members
The Broad Front consists of a variety of parties,
including Christian Democrats, Socialists,
Communists, and independent leftists. Although the
health.
Liber Seregni
Leader of
the Broad Front
Moderating force within the leftist Broad Front
coalition ... polls show him to be one of the most
popular political figures in the country ... retired
general officer, known as the people's general ... has
eyes on 1989 presidential election, according to US
diplomats ... longtime friend of President
Sanguinetti ... former assistant military attache to
the United States ... resigned from the military in
1969 to protest government crackdown on subversives
... imprisoned in early 1970s for protesting military
takeover ... reinstated as general by Sanguinetti in
1985 to the displeasure of the military, who consider
him a leftist traitor ... 70 years old and in good
Front's components differ widely in ideology, they all
fall to the left of the Blanco and Colorado Parties.
The biggest and most moderate faction in the FAU is
the Movement for the Government of the People
(known as List 99), headed by Senator Hugo Batalla.
List 99 split off from the Colorado Party and,
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Uruguay: Strength of
Broad Front Members a
Faction
FAU Vote (percent)
Number of
1971
Election
1984
Election
Plenum
Seats
Advanced Democracy
(including Communist
Party)
33
28
18
Independent
Democratic Left
23
6
15
Uruguayan political scene and is jockeying with the
Communists for influence in the labor sector. The
Independent Democratic Left has led the Broad
Front's attacks on US policy in Central America and
on Sanguinetti's moderate economic program.
The remnants of the Tupmaro guerrilla movement are
interested in joining the Front
Tupamaro leader Raul Sendic claims to
support democracy and asserts that his group has
repudiated violence. His efforts to join the Front have
been hampered, however, by the Christian
Democrats, who fear open association with the
Tupamaros would hurt the Broad Front's public
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a Statistics vary slightly, depending on the source, because of the
complexity of the Uruguayan voting system.
according to the US Embassy, lacks both the well-
defined ideology and disciplined internal structure of
most FAU parties. Nevertheless, it is becoming
increasingly influential: Batalla, for example,
represented the FAU in the negotiations with
President Sanguinetti and the Blancos that recently
produced the "National Accord"-a three-year plan
to reactivate Uruguay's economy.
The Communist Party also plays a leading role in
FAU activities. According to US Embassy reporting,
the Moscow-line party is the best organized and
disciplined of FAU parties.
its membership has increased threefold
since Sanguinetti legalized the party in March 1985,
and that much of this growth stems from an infusion
of younger, more militant members. The
Communists-long a dominant force in organized
labor-have played a significant role in labor
demonstrations and strikes that have plagued
Uruguay over the past year.
The Broad Front's most radical faction is the
Independent Democratic Left, a loose confederation
of far-left splinter groups. Although relatively small
and divided, it has carved itself a niche on the
image.
Divisions Within the Front
FAU leader Liber Seregni plays a decisive role in the
Front, imparting a measure of unity to what, in our
view, might otherwise be a completely unwieldy
coalition. The former general has largely divorced
himself from internal factionalism and, according to
the US Embassy, considers himself independent of the
FAU's component groups, and thus able to focus on
the Front's common goals. His leadership skills and
political savvy have won him popular support from all
FAU factions, according to the Embassy.
The press reports that one of Seregni's goals is to
reorganize the Front's decisionmaking structure. The
coalition's far-left groups have more votes in the
Front's governing board, or plenum, even though the
FAU's moderate forces have been more successful
electorally.' For example, List 99 won 40 percent of
the FAU vote in 1984, but only has six of the 57 votes
in the plenum, while the Independent Democratic
Left-which captured only 6 percent of the coalition's
votes in the last elections-has 15 plenum seats. The
leftist factions oppose reform and fear they will lose
influence to moderate sectors during the Front's
coming national conference.
' This anomaly exists because seats on the governing board are
apportioned according to each faction's showing in the 1971-as
opposed to the 1984-election, in which the far-leftist elements
within the Front generally outpolled the more moderate sectors.
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Control over Uruguay's labor confederation is also a
source of acrimony within the Front. The
Communists have dominated labor in the past, but
recently have lost some support to the Independent
Democratic Left
last year the Communists adopted a more
militant stance, dividing both the FAU and the labor
movement. Moreover, various FAU factions walked
out of the labor congress last November when the
Communists tried to monopolize the meeting. Seregni
has called for a new labor congress later this year to
preserve labor unity
human rights and foreign debt.
The Front and Sanguinetti's Government
The FAU's internal differences are reflected in the
coalition's dual approach to the government. Sectors
such as List 99 are trying to portray the Front as a
viable, responsible party that will mount a serious
challenge to the Colorados in the 1989 election, while
ultraleftists in the FAU are more concerned with
undermining the Sanguinetti government and
thwarting his moderate policies in areas such as
human rights question.
Human Rights. We believe the Supreme Court will,
decide sometime over the next six months to give the
military courts jurisdiction over possible trials of
officers for human rights violations. Sanguinetti
would strongly support such a move because it would
calm military fears of Argentine-style trials. The
FAU, however, is demanding civilian prosecution of
officers accused of abuses during military rule. The
Front will probably continue to push for trials
whatever the Supreme Court's decision, thereby
aggravating the armed forces and obstructing the
administration's efforts to close the book on the
Economic Policies. The Front, according to the
Embassy, seeks economic revitalization through
increases in purchasing power and real income, versus
Sanguinetti's push for increased export markets. The
Front also proposes increased state planning, the
nationalization of banks and key industries, and price
controls. The more leftist factions support Fidel
Castro's call for nonpayment of the foreign debt.
the
Communists-worried that their rhetoric is becoming
counterproductive-may shift their focus from the
foreign debt to internal economic policy issues.
The National Accord. In April the FAU joined the
Colorados and Blancos in signing a vague national
agreement to support democracy and revitalize
Uruguay's economy. Nevertheless, according to
Embassy reporting, the FAU has reservations on
crucial economic sections of the accord-the proposal
for a balanced budget, for example. The FAU
submitted its own more leftist proposals for social and
economic reforms and criticized certain aspects of the
agreement. In our judgment, the FAU signed the
accord primarily to avoid congressional isolation and
to not appear obstructionist in light of Sanguinetti's
efforts for national cooperation and unity. We believe
that the Front has not altered its basic economic
perspective and that it will not give carte blanche to
Sanguinetti's initiatives.
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Outlook
We believe the Broad Front will be too consumed by 25X1
internal problems over the next year to challenge the
Sanguinetti government. Seregni will probably
expend his energies on reorganizing the FAU plenum
and keeping the peace between factions in the
coalition. FAU longer term prospects, in our view, are
clouded by the two-party tradition that is so ingrained
in Uruguay's political culture. Moreover, the
traditional parties have some attractive prospects for
the 1989 presidential election, including Blanco leader
Wilson Ferreira and Colorado Vice President Enrique
Tarigo.
The FAU, in our view, will probably maintain its
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The Front could expand its popular support if the
electorate-spurred, for example, by the failure of
Sanguinetti's economic reform program-were to
shift away from the Colorado Party. We believe,
however, that the prime beneficiary of any serious
misstep by Sanguinetti would be the Blanco Party,
which has successfully articulated political opposition
to the dominant Colorados over the past half century.
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There is an outside chance , however, that the Blancos
may not be able to play this traditional role if the
Colorados fall on hard times. Party leader Wilson
Ferreira
could die before 1989, leaving the Blanco
Party without a unifying leader or a charismatic
presidential candidate. Under these circumstances,
Seregni-especially if he consolidates the coalition
and maintains his considerable personal popularity-
might become a serious contender for the presidency
and the Front could substantially improve its
representation in Congress.
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Paraguay:
Bleak Economic Prospects
cutting credit lines and withholding loan
disbursements, leaving Paraguay with an
unmanageable foreign payments situation.
Paraguay's economy is undergoing severe strain from
drought, low prices for commodity exports, and an
overvalued exchange rate. We expect the economy to
contract by up to 8 percent this year, with agricultural
production plummeting by almost 20 percent.
Declining exports and investments will increase the
current account deficit and probably force Asuncion
to draw down its nearly depleted foreign reserves and
accumulate more debt payment arrearages. President
Stroessner's inadequate response to the bleak
economic outlook is contributing to increased capital
flight, narcotics trafficking, and political discontent.
Most critically, trade partners and foreign banks are
million interest bill.
Financial Difficulties
Paraguay is one of two South American countries that
have not rescheduled their foreign debt, but we judge
that Paraguay's day of reckoning is fast approaching.
Asuncion has financed its $361 million current
account deficit by drawing down its international
reserves and by accumulating an estimated $250
million in commercial payment arrears on its $1.8
billion debt. According to the US Embassy, foreign
banks are growing increasingly impatient over
Asuncion's continued foot-dragging and are loath to
syndicate new credits. The Embassy estimates that
Paraguay will need to devote 70 percent of its foreign
exchange earnings this year to meet its projected $248
end of 1986.
Paraguay is also facing a severe capital flight
problem. The Central Bank's net foreign reserves fell
by 16 percent to $400 million between September
1984 and December 1985. The Embassy predicts that
reserves may fall below $300 million this year.
Central Bank President Acosta told the Embassy in
late December that under current policies the foreign
exchange reserves would be totally depleted by the
Since 1973 Paraguay has been developing its main
physical resource-hydroelectric power-under
bilateral treaties with Brazil and Argentina. The
projects, which we view as important to the long-term
development of Paraguay's economy, will eventually
make the country one of the world's major energy
exporters. Over the past four years, however, net
inflows of foreign exchange from hydroelectric-
related activity have declined steadily from their
peak of $449 million-13 percent of GDP-in 1981
to about $68 million-barely 2 percent of GDP-in
1985. Asuncion's Central Bank forecasts that the
earnings of Paraguayan workers on hydroelectric
projects will generate only $100-150 million this
year.
It is becoming increasingly clear, in our view, that the
payoff from Paraguay's hydroelectric push will not
come until the 1990s, when the dams will be at full
generating capacity. The largest and most advanced
project-the Paraguayan-Brazilian Itaipu dam-
generated considerable income for Asuncion during
the construction stage. However, as the building
phase of Itaipu nears completion, investment has
centered on capital-intensive tasks-such as the
installation of electricity-generating equipment-that
have not required extensive use of Paraguayan labor,
thereby cutting the country's earnings. Moreover, the
dam's huge generating capacity is underutilized: only
three of the 18 turbines are functional, and low
demand and inadequate transmission lines for
electricity have brought lower-than-projected sales
revenues. Construction delays have also bedeviled the
second-largest dam-the Yacyreta project financed
by Argentina-because Asuncion's maintenance of an
overvalued guarani has forced Buenos Aires to pay
wages three times higher than the Paraguayan salary
for comparable work.
Secret
ALA LAR 86-011
9 May 1986
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Paraguay: Current Account Trends, 1982-86
Million US $
(except where noted)
-444
-409
-336
-361
-334
-272
-220
-209
-379
-100
564
490
530
310
250
-836
-710
-739
-689
350
Debt service ratio (percent)
20
28
26
57
70
External debt (disbursed medium and long term)
1,204
1,469
1,654
1,700
1,800
Estimated.
b Projected.
Shriveling Economy
The drought affecting South America's southern
regions is having a disastrous impact on the
agriculturally based economy and is lowering living
standards for the majority of the population. We
believe that cotton and soybean exports-which
accounted for more than 80 percent of Paraguay's
$310 million export revenues in 1985-may not reach
$200 million this year. Crops primarily produced for
domestic consumption are also suffering. For
example, corn production this season may plummet by
more than 40 percent; it has tripled in price since
December and feed shortages could also drive down
pork and broiler production. Asuncion has recently
responded to the situation by placing price controls on
several staples, but we believe these will only
aggravate shortages in urban areas and increase
black-market activity.
The agricultural decreases will impact heavily on the
rest of the economy. We estimate that industrial
activity may decline 7 percent this year, because it is
agrobusiness oriented and dependent on the farming
sector for raw materials. Shortages are already acute
in fuel alcohol, for example. Construction will almost
certainly contract this year and commercial activity
may decline by 10 percent because farmers-who
make up 44 percent of Paraguay's work force-will
have lower disposable incomes. Employment and real
wages in all sectors are likely to drop.
Finally, the bleak economic performance expected
will reduce the government's revenues and fuel
inflation. The 1986 budget-which provided for a
small surplus-was prepared before the full impact of
the drought was apparent. We believe that the fall in
tax receipts will push the budget into the red and that
the Central Bank will cover the shortfall by printing
money, thereby accelerating the rate of inflation and
further weakening the guarani.
Asuncion's Economic Mismanagement
Paraguay maintains a complicated, inefficient
exchange rate system that penalizes exports,
subsidizes government debt service payments, and
encourages corruption. Since February 1985 the
system has consisted of four basic rates ranging from
160 guaranis per US dollar for public-sector capital
and external debt service payments to the free market
rate of 850 guaranis per US dollar for most imports.
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PARAGUAY: REAL GDP BY SECTOR-1985%
Government
*estimated
Multilateral financial institutions are showing
heightened concern over the gap between the official
and parallel exchange rates. The World Bank
recommended that Asuncion make major changes in
its interest rate policy, abolish multiple exchange
rates, and peg the guarani at 400 to the dollar. Since
mid-1985 the Bank has effectively cut off loans to
Paraguay because Asuncion insists on underfinancing
IBRD projects by applying the official exchange rate.
In August, the IMF-concerned that Paraguay's
deteriorating payments posture would soon force a
rescheduling of its foreign debt-proposed a thorough
adjustment of the national economy, including a
tighter monetary policy, a revised income tax system,
and, most importantly, a devaluation of the guarani.
Asuncion opted instead only to form a commission to
study the Fund's recommendations.
Neighboring countries also have been pressing
Stroessner to devalue. According to Embassy
reporting, Argentina and Brazil-Paraguay's major
trade partners and financiers of hydroelectric projects
along Paraguay's borders-are unhappy with the
unprofitable exchange rate for payments on these
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PARAGUAY: SELECTED FINANCIAL AND
ECONOMIC INDICATORS, 1982-1986
Percent
80 r
1984
Years
1984
Years
:estimated
::projected
Average Exchange Rates:
Public Sector Debt and Free Market.
1984
Years
Years
:x,,,, a percent of registered merchandise
orts plus fore Ign exchange earn Inge
from hydroelectric projects
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projects. Unless Paraguay reduces the value of the
guarani, we expect further delays in dam construction
and substantial revenue losses for both Argentina and
Paraguay. In addition, press reports indicate angry
creditors have embargoed Paraguayan ships in three
countries and Tokyo has cut financing for the airport
at Ciudad Presidente Stroessner.
Most recently Paraguay's normally reticent business
community has spoken out. In February, the
Federation for Production, Industry, and
Commerce-the umbrella organization for business
associations-called for an economic reactivation
program. The Federation specifically proposed a free
market exchange rate to stimulate legal trade, reduce
incentives for corruption, and attract foreign
investment. The Paraguayan business sector has
usually been hesitant to criticize the Stroessner
regime for fear of jeopardizing profitable dealings
with the government. Business leaders, however,
apparently now feel that monetary, fiscal, and credit
policies are so inappropriate that they must make
their views heard before the economy slides into a
deep recession.
President Stroessner has rejected all proposals for
economic reform. Stroessner's grasp of economics, in
our view, has never matched his political savvy; his
refusal to devalue appears to be based partially on his
reported belief that political stability is directly
related to the stability of the currency. According to
the Embassy, the President fears a devaluation might
unleash a spiral of inflation, leading to more
devaluations, severe economic difficulties, and
political discontent. Stroessner also recognizes that a
devaluation would raise the cost of servicing the
foreign debt. Rather than increase taxes to boost
revenues, he prefers to keep the exchange rate low and
tax exports.
While many high-level Paraguayan officials seem to
recognize the net costs of the overvalued guarani,
none have managed to get Stroessner's ear. He flatly
rejected a recommendation by Central Bank
President Acosta to devalue in order to slow the drain
on Asuncion's foreign exchange reserves. According
to the Embassy, Stroessner pays more attention to a
group of economically unsophisticated sycophants.
A final factor reinforcing the current exchange rate
policy is the corruption that permeates the
government. According to the Embassy, informed
businessmen believe that government officials
personally profit from the guarani's artificially low
rate. For example, the press exposed a scandal at the
Central Bank last year in which officials created 25X1
dummy corporations that purchased dollars at the
official 160 guarani rate and then resold them at the
black-market rate of 800 guaranis per dollar. The
Embassy estimates that such schemes may have cost
the Bank about $100 million over the past five years.
The Impact of an Overvalued Currency
Failure to adjust the exchange rate is undermining
domestic confidence in the guarani, spurring large
dollar withdrawals from banks, and increasing capital
flight. This skittishness was dramatically
demonstrated in July, when, according to the
Embassy, rumors that the government might
nationalize dollar deposits precipitated a $50 million
run on the banks.
accelerate as long as the exchange rate remains
unchanged, putting pressure on Asuncion's already
depleted foreign reserves.
The current value of the guarani also is reducing
Asuncion's exports, discouraging foreign investment,
and making it more difficult for Paraguay to manage
its foreign debt payments. The overvalued currency
will further depress declining revenues for cotton and 25X1
soybeans. Without an exchange rate adjustment, we
expect that both export value and the trade surplus
will continue to shrink, aggravating the existing
problems of arrearages in debt servicing.
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The overvalued exchange rate is also encouraging
smuggling and narcotics trafficking. The Embassy
reports that such illicit activities may involve as much
as 15 percent of the work force and some of the
country's most powerful political and military
officials. They generate roughly one and one-half
times the revenues of registered foreign trade and
account for about a third of the country's real GDP,
according to press reports. Smuggling and drug
trafficking, according to the Embassy, buttress
Stroessner's political stand in the short run by
enriching powerful elites who might challenge a more
intrusive administration. In the long run, however, we
believe that the proliferation of such practices
corrodes the government's legal and moral authority
and virtually destroys its ability to direct or regulate
any significant aspects of the national economy
Outlook and Implications for the United States
We believe Asuncion will be hard pressed to tackle
current economic problems without undertaking
major monetary adjustments, preferably as part of a
wider economic stabilization program. We doubt,
however, that Stroessner will bend to pressure for
devaluation over the next few months. Under these
circumstances, we expect that the payments position
will become so untenable that Paraguay may be
forced to abandon its current policy mix by early next
year and seek debt rescheduling with foreign banks in
the context of an IMF-supported stabilization
program.
Unless Stroessner changes his course, we believe the
recession and export disincentives will increase
contraband activity and enlarge the underground
economy. The major impact on US interests will be
rising narcotics trafficking, which is also promoted by
official corruption and an ineffective drug
enforcement apparatus. Paraguay is already a major
transit site for Bolivian cocaine destined for Europe
and the United States, and is also a significant
marijuana grower. The persistence of current
economic and political conditions, in our view, will
increase the country's role as a trafficking nation and
may spur the emergence of significant cocaine
cultivation and processing on Paraguayan soil.
Festering economic problems are also increasing
political discontent and uncertainty-already on the
rise because of 75-year-old Stroessner's failure to lay
the groundwork for an orderly succession.
elements within the
Colorado Party, the military, and the business sector
are concerned and divided by the corruption and
economic mismanagement of the Stroessner regime.
The President, however, remains fully in command
and has responded to demonstrations and protests
with sharp limits on civil rights. We believe that he
will step up the use of such repressive measures,
thereby courting more frequent confrontations with
Washington over human rights violations in the
coming months.
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Latin America
Briefs
The assignment of Antonio Perez Herrero to Ethiopia as ambassador, in our
opinion, is one more example of Havana's tendency to punish officials for
incompetence, misbehavior, or other failings by dispatching them to unattractive
posts abroad. Perez Herrero, who recently presented his credentials in Addis
Ababa, was stripped of his seats in the party's Politburo and Secretariat at a
special plenum of the Central Committee in January 1985 because of his
"deficiencies and repeated mistakes." His downfall apparently stemmed from
unacceptable personal behavior, shortcomings in his performance as the party's
Secretary for Ideology, and his uncompromising hard line in foreign policy F
Secret
ALA LAR 86-011
9 May 1986
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Because his bureaucratic comeuppance is
public knowledge, there is a risk that some observers will view his assignment as a
sign that Havana has put relations with Ethiopia on the back burner.
Ethiopia apparently also served as a purgatory for Perez Herrero's immediate
predecessor, Ambassador Francisco Cabrera, who was in charge of Cuba's Air
Force when its MIGs, in an embarrassing and costly overreaction, sank a
Bahamian gunboat in May 1980. Cabrera at the time was a vice minister of the
armed forces with the rank of Division General and presumably had to shoulder
the blame for the incident. It probably was also the deciding factor in causing him
to lose his seat in the Central Committee during the party congress earlier this
year.
Perez Herrero's performance in Addis Ababa so far suggests his chances for
readmission to the Politburo and Secretariat are dim. He has made a poor first
impression on his Spanish-speaking colleagues in the diplomatic community,
according to the US Embassy, and has not visited them on normal protocol calls or
shown any genuine interest in Ethiopian-Cuban relations. The Venezuelan
Charge, who has been in Addis Ababa more than four years, describes Perez
Herrero as the weakest of the three Cuban ambassadors who have served in Addis
Ababa during that period.
The National Accord-a coalition of fragmented opposition parties-has become
increasingly vocal against President Stroessner's regime in the past few weeks. The
Authentic Radical Liberal Party has been the most active party, sponsoring a
number of rallies and demonstrations calling for a national dialogue aimed at
moving Paraguay toward democracy. The government has reacted with growing
forcefulness to restrain protestors. During a rally on 13 April, police wielding clubs
injured 30 participants and detained 13 party members, according to US Embassy
reporting. Later in the month police used tear gas to break up a large student
demonstration in downtown Asuncion. The press reports the Authentic Radical
Liberals are planning another rally in Asuncion later this month.
Paraguayans are openly challenging the President's authoritarian rule for the first
time since he took power in 1954. We expect further unrest as uncertainty and
criticism intensify regarding the succession question-Stroessner's term ends in
1988-and the worsening economy. As opposition grows, we believe Stroessner
will clamp down even harder against the opposition, increasing the likelihood of
serious violence and human rights abuses.
Meanwhile, a leader of the ruling Colorado Party has told US officials of
discontent in the Paraguayan military below the senior ranks. He believes that
Paraguay is facing a leadership crisis and that change without violence is unlikely.
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are increasing on Swan to find a solution.
The recent push for independence from Britain and threats to charge rent for US
military installations largely reflect Premier Swan's growing frustration with
stalled negotiations for a new bilateral tax treaty with the United States. Swan
wants a treaty that would eliminate US federal excise tax on insurance premiums
paid to companies based in Bermuda, similar to the US-Barbados accord in effect
since February. At the same time, Swan is pressing for US tax deductions for
American businesses that hold conventions in Bermuda, a concession enjoyed by
several other countries, including Jamaica. According to US officials in Bermuda,
one large insurance firm will leave next month, and several others are seriously
considering relocating to Barbados, a move that would put the country's second-
largest industry at risk. Hotel industry officials claim to be losing millions of
dollars in convention bookings because of the convention tax deduction exclusion
for Bermuda. Generally weak earnings from tourism-a sector that supplies some
30 percent of GDP-lend support to hoteliers' assertions, and political pressures
concerned about the economic costs of independence.
In a meeting last February with members of his United Bermuda Party caucus,
Swan explicitly announced that he intends to press for independence-necessary
before base rents could be charged-if tax relief efforts fail. He probably would
drop his independence move for now if both his government and the United States
could reach agreement on the final draft of the tax treaty, according to US
officials in Bermuda. Swan probably has ambitions to be the first leader of an
independent Bermuda, but he failed to get the support of his party's caucus for the
proposed independence referendum because key members reportedly are
spending.
Despite the caution in the ruling party, proindependence sentiment is strong in the
colony. Members of the opposition parties are likely to support independence,
according to reporting from the US Consulate. As a result, the issue is likely to
resurface and could pass, particularly if lackluster economic performance
continues. Proponents of independence would work to persuade others that the
financial benefits-particularly US base rents-would outweigh additional costs,
including establishment of a foreign service and possible declines in US tourist
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