LATIN AMERICA REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00289R000301620001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 22, 2016
• Document Release Date: March 30, 2011
• Sequence Number: 1
• Publication Date: August 15, 1986
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP87T00289R000301620001-7
Directorate of
Intelligence
D 0 UP- 0 T 4E"- IIT
Review
Latin America
Seer-et
ALA LAR 86-020
15 August 1986
?y 4 3 0
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Latin America
Review 25X1
Articles Mexico: Prospects for GATT Entry and Compliance) 1 25X1
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President de la Madrid apparently has decided that membership in
GATT is in Mexico's best interests and will push the necessary
authorizing legislation through the political system, but the
government probably will have difficulty complying with some
provisions of the GATT agreement. F_~
The official Communist party newspaper has contained graphic
material in at least two issues in recent months that implied strong
criticism of President Castro.)
radiobroadcasts to the United States.
Havana is using the press, foreign journalists, and third country
diplomats to signal its interest in resuming talks with Washington
that the Cubans hope will produce an agreement allowing Cuban
Colombia: Economic Challenges for the New Government I 11
President Barco's new government is benefiting from an improving
economy, but still must confront high unemployment, control
inflationary pressures, and prevent mismanagement of a recent
coffee price windfall.F_~
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The leftist-dominated congress is expected, during its current
session, to try to impeach key cabinet ministers, attack President
Febres-Cordero's free market policies, and seek a moratorium on
foreign debt payments.F_~
Secret
ALA LAR 86-020
15 August 1986
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Uruguay: Weak Export Prospects I
19
Despite President Sanguinetti's efforts to make export growth the
key to domestic recovery, exports are not expected to increase
rapidly for at least several years.
Belize: Factionalism Plagues Opposition Party)
23
Leftists are threatening
the con
--
servative leadership of the country's
major opposition party.
F
]
Cuba: Debt Rescheduling Difficulties
27
Argentina: Nuclear Disarmament Initiatives
27
Guatemala: Private Sector Concerns)
28
28
29
Articles have been coordinated as appropriate with other offices
within CIA. Comments and queries regarding this publication may
be directed to the Chief, Production Staff, Office of African and
Latin American Analysis
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Latin America
Review
Mexico: Prospects for GATT
Entry and Compliance
Mexico is on the verge of joining GATT, overcoming
longstanding objections to membership. The
agreement, signed by Commerce Secretary Hector
Hernandez on 25 July, will go into effect
automatically at the end of this month in time to
allow Mexico to participate in the coming GATT
ministerial meeting as a full member. We believe
President de la Madrid has decided GATT
membership is in Mexico's best interests and, unlike
his predecessor in 1979, will push the necessary
accession legislation through the political system,
allowing little or no further discussion with groups
still opposed to its passage. In our judgment, de la
Madrid is counting on GATT entry to serve as a sign
to the international economic community of Mexico's
willingness to initiate economic reforms. We expect
Mexico will have some difficulty complying with some
of the provisions of its GATT agreement, however,
particularly reduction of its highly protective import
taxes and regulations. In addition, although Mexico
City has endorsed the treaty, the process could still be
sidetracked if debt negotiations with international
bankers become stalemated. A rebuff from the
international financial community, while unlikely now
that Mexico and the IMF have come to terms, would
precipitate a nationalistic reaction within Mexico,
making it more difficult for the President to sell
GATT membership.F-~
Laying the Groundwork
At the beginning of his term in office, de la Madrid
provided clear signs of his seriousness about
liberalizing Mexico's protectionist trade regime to
make Mexican goods more competitive
internationally. The President's official and publicly
proclaimed program hinged on eliminating regulatory
barriers, maintaining a competitive exchange rate,
and moving toward entry into GATT to obtain more
favorable terms from Mexico's major trading
partners. His initiatives also projected a move from
import licensing to tariffs, which he eventually
planned to reduce in compliance with GATT
regulations.
During his nearly four years in office, the President
has made progress, but it has been forged as much by
outside pressure as by voluntary action. Pressure from
the IMF caused de la Madrid to eliminate some of the
more onerous regulations imposed by former
President Lopez Portillo. Permit requirements have
been discontinued for about 90 percent of exports, and
most export tariffs have been reduced or eliminated.
Further prodding from the IMF led de la Madrid to
announce in early 1985 that Mexico would liberalize
its import regime by removing import license
requirements for a number of products. This was
followed up in July 1985 by the elimination of licenses
for 90 percent of all import items. F-~
A need to compensate for falling oil export revenues
over the past year added impetus to de la Madrid's
resolve to join GATT, according to the US Embassy.
Last November he announced Mexico would begin
serious negotiations with GATT member countries in
preparation for entry this summer, in time to
participate as a full member in a new round of
negotiations to be launched in September in Uruguay.
De la Madrid moved quickly to consolidate support
within the Federal Chamber of Deputies, despite
complaints from Mexico's national labor union and
private business organizations. The President also
publicly affirmed that Mexico was negotiating a $500
million World Bank trade liberalization loan that
would be contingent largely on GATT entry. These
Secret
ALA LAR 86-020
15 August 1986
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regulations for temporary import quantity restrictions
in areas where companies become threatened.
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announcements were accompanied by moves to make
Mexico's exchange rate more competitive, a
commitment to remove official reference prices on
imports, and tariff reductions on a number of items.
Marketing GATT Domestically
Anticipating a negative reaction from domestic labor
and some business organizations, de la Madrid and
Commerce Secretary Hernandez have spearheaded a
nationwide campaign to highlight the benefits of
joining GATT and the concessions obtained by
Mexico in negotiations over entry. They pointed out
that entry in August would allow Mexico to join other
developing nations this fall in pressing for greater
access to developed country markets. Mexico City
already has joined a "Group of 20" moderate
developing countries in formulating an agenda for the
coming trade negotiations. Secretary Hernandez
stressed that Mexico City successfully argued for
developing-nation status and special recognition of the
sensitivity of the country's agriculture and energy
sectors.
We expect Mexican officials to soften resistance to
GATT entry among domestic industries by
committing the government's help to ease the
transition. Mexico City already has announced it will
spend almost $5 billion to promote exports of
nonpetroleum products. According to Secretary
Hernandez, the program will concentrate on loans to
increase production, export competitiveness, and
imports of raw materials and industrial equipment.
The Commerce Secretary also has vowed to reduce or
remove taxes and duties that make Mexican products
less competitive abroad. Changes in foreign exchange
rules are slated to allow exporters to use 100 percent
of the foreign currency earned from sales to pay for
imports.
We believe de la Madrid almost certainly is meeting
privately with prominent business leaders to allay
fears their companies may be shut down by
competition from cheaper foreign products. He is
likely to stress that Mexico City will continue to apply
taxes and surcharges on imports that directly compete
with domestic goods. We expect the President also
will promise to push for justification under GATT
Prospects for Passage
There appear to be no major obstacles to joining
GATT this summer, according to a wide variety of
US Embassy sources.
GATT members and Commerce Secretary
Hernandez have signed the agreement, de la Madrid
plans to request immediate ratification by the Federal
Chamber of Deputies when it reconvenes on 1
Mexico's change in attitude toward GATT entry over
the past year, stems
largely from the realization that the country no longer
can depend on petroleum revenues to boost economic
growth. In 1979, in the midst of an oil boom, Lopez
Portillo could easily afford to declare Mexico's
prospective GATT protocol unacceptable because it
would impinge on the country's ambitious
development plans. Now, however, de la Madrid has
stated Mexico's prospects for development depend
almost exclusively on boosting sales of nonpetroleum
products.
Local business leaders, in general, support entry into
GATT. The strongest private-sector support comes
from the large manufacturers in Monterrey, Mexico's
biggest industrial city. Many factories are operating
well below capacity and are counting heavily on
government export loans and the opening of new
overseas markets. On the bilateral front, we believe
that a number of companies are depending on GATT
entry to help gain favorable trade concessions from
Washington. Opposition to entry by small and
medium size firms in the agriculturally based
Guadalajara area may have been at least partially
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neutralized by language in the GATT agreement
recognizing Mexico's interest in protecting its vital
agricultural sector, according to the US Embassy.
Complying With Tough Entry Terms
De la Madrid has agreed to a much stricter
interpretation of GATT principles than Lopez Portillo
had negotiated in 1979. According to members of the
US negotiating team, Mexico City agreed to drop
demands for special concessions when government
officials became convinced that holding out would
delay entry past the August deadline for participation
in the next negotiating round. Mexico eventually
accepted the standard terms of accession. The only
other concession Mexico gained, according to the
draft protocol, was specific note of the country's
present status as a developing country. This allows
Mexico to apply restrictions and raise tariffs on
imports if they threaten domestic industries, the
country's foreign reserve position, or implementation
of the government's National Development Plan or its
sectoral and regional programs. F_~
In our judgment, Mexico City probably will attempt
to comply with most of the basic terms required of
GATT members. Mexico will find it relatively easy to
stay within the 50-percent tariff ceiling imposed by
the accession agreement-most of the country's
tariffs already are at or below this level. The
government has gone far toward reducing the number
of items requiring import permits. We believe, on the
basis of US Embassy eporting,
government officials probably will argue that the
remaining permits-controlling about one-third of the
value of total imports-are needed to protect domestic
industries from excessive competition. Mexico almost
certainly will take advantage of the eight-year time
period allotted to reduce surcharges on imported
goods.
Despite the general willingness to conform to GATT
regulations, de la Madrid will have difficulty adhering
to some of the terms. In our view, Mexico City is
unlikely to keep its reluctant promise to eliminate its
controversial official pricing system-a mainstay of
the government's import restriction policy-without
instituting other protective measures to ensure what
the government considers to be an adequate level of
protection. The government still depends greatly on
official prices to keep imports from undercutting
domestic industries, and has indicated to local
businessmen that it will continue to use pricing
yardsticks, according to the US Embassy. By the
same token, Mexico will find it difficult to comply
with the four nontariff barrier codes (licensing,
customs valuation, antidumping, and technical
standards) and the code for subsidies and
countervailing duties. F__1
Rejection Still Possible
Mexico City, even at this late stage, still could change
its mind at the last moment and refuse the GATT
entry offer. While unlikely to happen now that the
protocol is signed and the IMF and Mexico have come
to terms, should negotiations with international
bankers be stalemated, Mexico probably would be
tempted to use GATT entry as a negotiating pawn.
De la Madrid almost certainly would argue that
Mexico could not be expected to proceed further with
import liberalization without inflows of new money to
finance the resulting increases in foreign purchases. A
rebuff from the international financial community
probably would precipitate a nationalistic reaction
within Mexico, making it exceedingly difficult for the
President to be seen as submitting the Mexicans to
the dictates of the developed countries-particularly
the United States-by joining GATT. In such a case,
de la Madrid could choose to throw the issue open for
public discussion-as Lopez Portillo did in 1979-
encouraging groups within Mexico publicly to oppose
GATT entry.
Implications for the United States
De la Madrid is likely to present Mexico's
membership in GATT to foreign creditors and
government officials as a significant sign of his
country's seriousness about economic reform.
Members of Mexico's foreign bank advisory
committee,
view GATT entry as a crucial test of Mexico's
willingness to adopt pragmatic solutions to the
country's financial problems.
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Mexico City almost certainly will use GATT entry to
push for greater access to US markets. Officials are
likely to argue that US pressure to accede to GATT
will impose a burden on Mexico and that it, therefore,
should be compensated for reversing its trade policies.
Mexican negotiators probably will try to capitalize on
US interest in Mexico's GATT entry by pushing for
liberalized treatment of Mexican exports of winter
vegetables and fruits, a relaxation of restrictions on
meat and textile shipments, or improvement in the US
Generalized System of Preferences, especially in the
competitive need limitations.
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Cuba: Party Newspaper
Embarrasses CastrosL
On two or three occasions since 2 May, Granma, the
official daily newspaper of the Central Committee of
the Cuban Communist Party, has carried precisely
placed graphic material that implied stinging
criticism of President Fidel Castro. One also involved
Armed Forces Minister Raul Castro. The question-
apparently still undecided-of whether the placement
of the material was deliberate or accidental seems to
have had little bearing on the impact of the incidents
on the Cuban people. In a statement at the Central
Committee plenum in mid-July, Fidel acknowledged
two of the incidents and admitted they had caused a
public "uproar." While he downplayed them as
accidental, he can take little comfort in the fact that,
at a time of deepening economic crisis and popular
disillusionment, the country's most influential
newspaper has inexplicably had more than one such
accident after 20 years without any similar incidents.
Skull and Barbed Wire
A reader perusing the 2 May edition of Granma can
see on page six a seemingly innocuous photograph of
Fidel and other top party officials leading the annual
May Day parade into the Square of the Revolution in
Havana. On the reverse of the photograph, however, is
a hand-drawn illustration for an accompanying TASS
article on the "irreparable damage that nuclear
testing has caused in Nevada" in the United States.
The illustration consists of a skull and crossbones
hovering over a cyclone fence topped with barbed
wire. When the photograph of the May Day parade
on page six is held up to a source of light, the skull
and crossbones-precisely placed-shows clearly
through on Fidel's chest, and the barbed wire runs
from one hand to the other.
The effect created by the two graphics is dramatic.
The juxtaposition of the two could, as Fidel told the
Central Committee plenum, be simply the result of an
accident. The degree of precision required to obtain
the striking effect, however, argues that the
placement was a deliberate, calculated attempt to
Fidel Versus Raul
Another incident occurred in the 4 July edition of
Granma. A straightforward, two-line headline on
page one reads in Spanish " `These Are Times of
Work, Efficiency, and Sacrifice'- Fidel." Underneath
is a photograph of Fidel accepting a pledge from a
worker while three onlookers, including Raul,
applaud. When the paper is folded twice in the
customary fashion of most Cubans, however, the
headline is reduced to a segment that reads in Spanish
"Down (with) Fidel" over the picture of Raul
applauding with a wide smile. As with the 2 May
incident, this may simply have been a coincidence,
but, even so, it caught the attention of enough Cubans
to-in Fidel's own words-cause an uproar.
When Fidel commented on the 4 July incident at the
plenum, he mentioned only the truncated headline. It
was Raul who interrupted him to point out the
placement of the photograph and his seemingly
jubilant demeanor. By volunteering the additional
information that put him in a compromising position
vis-a-vis Fidel, Raul tacitly acknowledged that the
incident had embarrassed him to the point of political
discomfort.
Der Fuhrer
A third illustration subtly disparaging Fidel appeared
in Granma on 7 June, according to a Western press
report from Havana. Front page coverage of his
address to Interior Ministry personnel on the
Ministry's anniversary included a photograph of Fidel
in uniform with his arm raised "in a manner that
Secret
ALA LAR 86-020
/5 August 1986
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2 May
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looks unmistakably like a fascist salute." In the
background, the word "ario" (Aryan) is visible-a
remnant of the word "aniversario" (anniversary) that
apparently was cropped during the newspaper's layout
process.n
In Fidel's own vocabulary of derogatory epithets, the
characterization "Nazi" is not used loosely; it is
especially reserved for those political figures whom he
has chosen to portray Cuba's, and indeed mankind's,
most heinous enemies. There can be few Cubans who
are unaware of the depth of feeling he is expressing
when he uses such terminology. A photograph artfully
casting him in the role of a Nazi, therefore, carries a
particularly potent message to the Cuban population.
Implications
Layout gaffes can occur in any newspaper. What is
unique about the three described above, however, is
the fact that all three focused specifically on Fidel and
all did so in a biting, politically embarrassing fashion.
Moreover, if the 2 May photograph caused an
"uproar" and presumably sensitized Granma's editors
to the problem, how could they have allowed two
similar gaffes to escape their scrutiny on 7 June and
Granma has been published since October 1965 and,
until now, had no precedent for political bombshells in
the form of layout mistakes. In light of that record
and given the propensity of Cubans to sense a
conspiracy whenever untoward events occur, it is
likely that many will view the gaffes as a conscious
and remarkably daring effort by sources within the
party to embarrass Castro. Fidel admitted at the
plenum that the public's faith in Granma personnel
had been jolted, and we presume his own trust was
shaken as well. F___1
If the gaffes were accidental, they are likely to have
only fleeting impact. While feeding suspicions during
a time of increasing popular tension over the grim
economic trend, they probably also provided a certain
amount of comic relief that was particularly appealing
to the average Cuban's sense of humor. If, on the
other hand, they were deliberate, they may prove
damaging over the long term. They almost certainly
would represent the work of more than one person,
would be repeated from time to time, and-if
permitted to continue-would acquire a following
among the growing ranks of the disenchanted. In
either event, however, we do not see them as
representing any significant threat to Castro. They
are clever-and no doubt irritating-pinpricks that
twit an otherwise humorless regime, but, even if they
spark emulation in other elements of the Cuban
media, they do little more than cause temporary
embarrassment; we do not see them as the cutting
edge of any organized opposition to the regime.
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Cuba-US: Pressing to
Resume Radio Talks P
Havana apparently is eager to reach an agreement
with Washington that would permit Cuban radio-
broadcasts to the United States. Deputy Foreign
Minister Alarcon has persistently publicized
Havana's desire for such broadcasts, suggesting that
he is under intense pressure from President Castro to
resume negotiations with Washington on the issue.
Alarcon, who headed the Cuban delegation to the
migration/radio talks with the United States in
Mexico City in early July, has used the press, foreign
journalists, and third country diplomats to signal
Cuba's interest in resuming the aborted discussions,
according to the US Interests Section in Havana. One
newsman told the Interests Section that Alarcon
suggested the possibility of buying time for Cuban
broadcasts on a radio station in the midwestern
United States as a way to bypass the problem of
mutual interference.
Alarcon's dogged efforts to focus external attention on
the radio issue are unusual. We suspect he may have
overstepped his instructions in Mexico City when he
broke off the talks without an agreement. On his
return to Havana, he apparently was told to revive the
talks quickly. When his initial press release failed to
draw a response from the United States, he resorted
to indirect diplomatic channels, fully expecting the
word would be passed to Washington. Two days after
President Castro's 26 July speech blasting the United
States, Alarcon met with the foreign press to indicate
the "door is still open" to bilateral talks.
We doubt Alarcon would be so persistent unless he
were under strong urging from Castro to get
negotiations back on track. A solution to the issue
would allow Castro to reverse his cancellation of the
1984 migration agreement without losing face, and
give him a much-needed safety valve to bleed off
popular pressures that are certain to rise as economic
conditions deteriorate. We believe his insistence that
the initiative for a resumption appear to come from
Washington is also a face-saving device.
It is unlikely that Alarcon was serious about leasing
time on a radio station in the midwest. Such an effort
would raise the issue of reciprocity and we see no
indication that Castro would permit Washington to
lease time on any radio stations in Cuba's interior.
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ALA LAR 86-020
15 August 1986
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Chronology of Cuba/US Migration/Radio Talks
14 December 1984
Cuba-US migration agreement reached in New York.
20 May 1985
Castro terminates migration agreement as Radio
Marti begins broadcasts.
8-9 July 1986
Bilateral talks on radio- broadcasts to United States
held in Mexico City; no agreement.
11 July 1986
Cuban Foreign Ministry press release on talks avoids
polemics; notes meeting was held in "atmosphere of
mutual respect."
28 July 1986
Alarcon briefs foreign newsmen visiting Havana,
says:
? Washington lacks political will for an agreement.
? Solution of migration issue hangs on resolving the
radio issue.
? Cuba does not want to interfere with US radio
stations.
? " Door is open" to resumption of talks.
? Cuba needs a clear channel in the present broadcast
band.
? Cuba perhaps could eventually lease time on a US
midwest radio station to resolve the interference
problem.
Havana's Prensa Latina publishes comments of
"high" Cuban official-undoubtedly Alarcon-
signaling interest in resuming radio talks.
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Colombia: Economic Challen es
for the New Government
President Vigilio Barco, who took office this month, is
benefiting from an improving economy. The recent
coffee price windfall and government stabilization
measures have slowed inflation, strengthened the
external accounts, and boosted economic growth. The
new President, nonetheless, needs to tackle high
unemployment, control inflationary pressures, and
prevent mismanagement of the coffee bonanza.
Barco Takes Charge
In his campaign, Barco emphasized the need for
agricultural and industrial development, economic
diversification, and increased foreign investment. He
promised to create jobs, accelerate agrarian reforms,
and improve provision of basic services. He believes -
the expansion of agricultural production could help
offset rural insurgency by offering employment
opportunities for landless peasants who have been
natural recruits for the guerrilla groups that have
plagued the country for nearly 40 years. Barco is also
likely to increase government spending in health,
education, and communications, and at least continue
construction of low-cost housing projects. We believe
Barco will court foreign investors to accelerate
economic growth and facilitate the transfer of
technological expertise. At a recent meeting with
foreign oil company officials, for example, the
President reportedly was receptive to new investment
offers.
Current Situation
Economic stabilization has had significant impact in
stimulating economic recovery from the stagnation
that greeted President Betancur four years ago.
Lower government spending and new taxes cut the
public deficit in half in 1985. Leading Colombian
firms refinanced their foreign debts, reducing the
erosion of foreign exchange reserves by $100 million a
The ailing financial system-which has
long suffered from the private-sector borrowers' lack
of liquidity, and
insider loans made by the banks-is in better shape
than a year ago and domestic interest rates are set by
market forces. Relaxed import controls have reduced
shortages of manufacturing and agricultural inputs.
The subsequent impact on prices has helped keep
inflation at 10 percent for the first six months of
1986-the government's goal is 22 percent for the
year. F__1
The rebound in world coffee prices and lower world
interest rates this year have improved Colombian
external accounts. New oil production has made the
nation self-sufficient, eliminating $300 million in
yearly oil import bills. Moreover, oil and coal exports
will be roughly double last year's level. During the
Secret
ALA LAR 86-020
15 August 1986
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Foreign Financing Gap
Million US $
(except where noted)
Current account balance
-2,885
-2,826
-1,994
-1,305
-320
Trade balance
-2,076
-1,317
-312
9
1,365
Exports, f.o.b.
3,282
3,147
3,668
4,036
5,630
Of which:
Coffee
1,577
1,536
1,799
1,575
2,735
Oil
279
378
445
300
600
Coal
-
-
-
104
240
Imports, f.o.b.
5,358
4,464
3,980
4,027
4,265
Net services and transfers
-809
-1,509
-1,682
-1,314
-1,685
Interest on debt
649
739
1,086
1,112
1,120
429
636
700
767
950
Financial gap
-3,314
-3,462
-2,694
-2,072
-1,270
Direct investment
337
514
411
729
450
New medium- and long-term capital inflows (net)
1,322
983
1,278
1,173
1,870
Short-term capital and errors and omissions (net)
314
-449
-848
73
1,105
Other financial items
External debt at end of year
10,287
11,035
11,035
11,966
13,000
Short-term debt
3,109
2,872
2,230
1,966
2,000
Debt service ratio (percent) c
32
29
33
34
43
Foreign exchange reserves at end of year d
3,861
1,901
1,364
1,595
2,500
a Estimate.
b Projection-assumes Bogota maintains its stabilization program.
c As a share of exports of goods and services.
d Excludes gold.
12-month period ending in May, coffee earnings and
capital repatriation-in response to more attractive
domestic interest rates-have pushed foreign
exchange reserves up 43 percent to about $2 billion.
Nonetheless, Colombia's two-year stabilization
program has slowed the domestic economy. Official
statistics released in March indicate that real GDP
grew only 2.5 percent in 1985, down from 3.2 percent
in 1984, as a result of austerity policies that reduced
consumer demand. Mining and construction revived
this spring, but agriculture and commerce remain
depressed and unemployment is at a record 15
percent. Bogota has issued bonds and accelerated
payments for imports and debt service to regulate the
excessive amount of money, generated by the coffee
windfall, that is circulating in the economy. Although
these effective mechanisms of monetary stabilization
have taken out of circulation an amount of pesos
equivalent to about $260 million since January, the
amount of money circulating in the economy is
growing at an average annual rate of 38 percent-the
highest rate since 1978.F__-]
Prospects
Strong external accounts should facilitate Colombia's
economic growth through next year. Most
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Real GDP Growth Consumer Price Inflation Money Supply Growth Government Deficit as a
Share of GDP
15 20 3
15
10 2
10
I I
Merchandise Imports Real Urban Minimum Wage Unemployment Ratee Gross National Savings and
Gross Capital Formationd
20
Estimated.
b Projected-assumes Bogota maintains its stabilization program.
Unemployment rate at end of year.
dAs a share of GDP.
GNS
GCF
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econometric services forecast GDP growth at 4
percent for 1986, a $1 billion loan is on tap from
international bankers, and a voluntary-and
successful-stabilization program monitored by the
IMF is in place. The new President's greatest fiscal
challenge will probably be to limit inflation and
prevent mismanagement of the coffee bonanza, which
may produce $3 billion in foreign exchange earnings
this year. Despite the government's success in keeping
inflation down during the first half of this year, gains
in wages and a flexible devaluation policy may result
in an annual rate of about 25 percent. The chief
danger is a pattern of short-term planning that has
characterized previous Colombian macroeconomic
policymaking under similar circumstances and
contributed to a serious weakening of the economy
during the last coffee boom (1976-78).F_~
Colombian agriculture has significant potential for
expansion and diversification. The World Bank
recently granted $425 million in loans to strengthen
the agricultural sector. Barco's integrated rural
development program is aimed at increasing food
production and alleviating rural unemployment.
Insurgent activity, particularly in Cauca Department,
has hampered the past efforts of government agencies
to implement rural development projects, however,
and will pose obstacles to Barco's program. F-1
Implications for US Interests
US commercial interests would benefit from a
sustained recovery in Colombia-the third largest US
export market in Latin America. We foresee
increased opportunities for US sales as a result of
Bogota's import liberalization and improved foreign
exchange situation, continuing the upturn that started
Impact of Narcotics and Other Contraband
on the Economy
The US Embassy reports that, as a percent of GDP,
illegal earnings from cocaine and marijuana
smuggling have increased since mid-1985. The
estimated annual value of illegal drugs produced or
processed in Colombia has fluctuated from $400
million to at least $1.6 billion over the past five
years, Illegal
earnings from the drug tra a were equivalent to about
20 percent of total legal exports in 1985, up from 12
percent in 1983, but not all these revenues returned to
Colombia. Illicit drugs do not account for all the
contraband exports, but drug earnings are
Colombia's second most important source of foreign
exchange after coffee. In addition, the US Embassy
reports that illicit imports-mainly smuggled
consumer goods-financed by drug money probably
amounts to $400-500 million a year.
late last year. Because of the need to diversify exports,
the Barco government probably will criticize US
countervailing duty actions on Colombian goods,
including textiles and cut flowers. On the regional
debt front, Bogota's willingness to adopt IMF-
monitored policies and good macroeconomic
management record could serve as role model for
other Latin American debtors. Nevertheless, guerrilla
attacks on oil facilities and other economic targets
will continue to discourage foreign investment, despite
Barco's plans to attract new capital.
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Ecuador: Febres-Cordero
and the Left Square Off
The leftist-dominated congress will confront President
Febres-Cordero with stiff political challenges in the
two-month session that began on 10 August. Several
opposition leaders have said they will try to impeach
key cabinet ministers and attack the government's
free market policies. They also plan to press for a
moratorium on foreign debt payments. The tough-
minded President can be expected to fight back by
rallying his support with the military and business
community, but may be unable to regain the
legislative initiative before his term ends in 1988.
Background
The political system in Ecuador is highly fragmented
with parties and labor groups running the gamut from
far right to far left. Politics are dominated by the
elite, and personal feuds and regional antagonisms are
frequently as important as ideological distinctions.
Febres-Cordero's administration has been marked by
personal and frequently bitter clashes between the
President and his enemies in congress. He has a
longstanding rivalry with his predecessor, President
Osvaldo Hurtado-who heads the center-left Popular
Democracy party-and he has been unwilling to
reach any accommodation with Rodrigo Borja, his
primary opponent in the 1984 presidential election
and leader of the opposition Democratic Left party.
centrist parties.
In the first two years of his administration, Febres-
Cordero employed whatever tactics he deemed
necessary to bypass strong congressional opposition to
enact his conservative agenda. He frequently chose to
circumvent legislative deadlock by using powers that
many charged were extraconstitutional. A temporary
breakthrough was achieved last year, when Febres-
Cordero outmaneuvered the leftists by forming ad hoc
alliances to create a congressional majority bloc-
uniting center-rightists with independents and two
The left waged a hard and well-organized campaign
for the congressional election last June. Most
opposition candidates took advantage of the sharp
decline in oil revenues-which hit early this year-to
accuse the President of mismanaging the economy
and being subservient to Washington, the IMF, and
foreign banks. They also criticized his failure to
implement the housing and employment program he
had promised in his presidential cam aign as evidence
of his lack of social concern.
In an attempt to counter the left, Febres-Cordero
scheduled a national referendum to allow
independents, who he believes contributed strongly to
his 1984 victory, to run for office without party
sponsorship. The opposition, however, turned the
plebiscite into a vote of confidence in the government
by successfully arguing that passage would allow the
President to ignore congress and continue with
authoritarian tactics. Some 60 percent of the voters
rejected the proposal.
The Current Challenge
The new congress is firmly in the hands of center-left
and Marxist parties that won 42 of the 71 seats at
stake. Although ideologically disparate, the leftist
parties have formed a "progressive bloc" and have
coordinated plans to control important congressional 25X1
posts and hamstring the President,
Major leftist objectives include
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ALA LAR 86-020
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The congress also will probably press for a
moratorium on foreign debt payments and may try to
overturn free market economic legislation enacted in
the past two years. Any attempt by the President to
implement new austerity measures would meet strong
opposition in the legislature and could provoke street
riots-given the opposition's ties to radical student
and labor groups.
Febres-Cordero's Response
Although Febres-Cordero has lost considerable
ground, he will probably try to use his considerable
support within the military and the business
community and is likely to make important
concessions to both sectors.
the President may appoint military officers to
key cabinet posts to dissuade the opposition from
harassing and removing ministers. US Embassy
sources have suggested he will use financial
patronage-for example, his power to funnel federal
spending into selected congressional districts-to
divide the opposition and to attract support.
Outlook
Even if Febres-Cordero's tactics succeed, he is
unlikely to regain the political initiative. The chief
danger is that he will resort to the arbitrary use of
presidential powers to protect his administration. The
political backlash against his brusque, high-handed
style of leadership weighed heavily against the
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Congressional Schedule
? Ordinary Session-10 August to 9 October 1986
? Organization of Congress-11-15 August election
of congressional officers and the standing
committees that serve as a "mini-Congress" after
the ordinary session.
? Interpellation of Ministers-late August-not
likely to occur because of notice that must be given
to ministers and the marshaling of majority votes
necessary to remove government officials.
? Consideration of Amnesty-mid-September-with
growing military opposition to this controversial
issue and the probable difficulties to be encountered
in the interpellations, the opposition is not likely to
push this issue until late in the ordinary session.
government in the recent legislative election, and he
risks setting the stage for a leftist victory in the 1988
presidential contest if he continues along such lines.
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Uruguay: Weak Export
Prospects
President Sanguinetti-who last year inherited a
depressed economy and large foreign debt-has
chosen export growth as the engine for domestic
recovery and the key to keeping up with interest
payments. Despite initial steps to improve export
competitiveness, Uruguay still depends on the
fluctuating world demand for its traditional
agricultural products. Therefore, we do not foresee
strong export growth for at least several years-until
world prices for those products recover or Uruguay
diversifies its exports. While we expect the economy
to expand this year, the role of exports in spurring
growth probably will be modest. Beyond 1986,
stymied export development may prompt Montevideo
to heighten demands for trade concessions and
financial assistance from Washington.F__1
Export Performance in Perspective
Falling world demand for its traditional agricultural
exports and an inefficient, highly interventionist
public sector have stalled Uruguay's economic growth
over the past generation. The US Embassy reports
that a brief period of GDP and export growth
abruptly ended in 1982, when the debt crisis and a
world recession caused demand for Uruguayan goods
to plummet in both South America and the OECD
countries. By the time Sanguinetti took office in'
March 1985, GDP had fallen 16 percent in the
previous three years, exports had declined by more
than one-third, and inflation had quadrupled to 80
percent.
Although Sanguinetti soon announced plans to
promote exports, foreign sales (90 percent of which
consisted of agricultural products) declined by 8
percent last year. Government statistics indicate trade
revenues fell most of the year, dragged down by
tumbling meat and wool exports, which for decades
had been Uruguay's main source of foreign revenues.
A surge late in the year led by more diversified
products-rice, fish, and textile manufactures-
recovered part of the lost revenues. IMF reports
indicate these newer products have fared better than
Uruguay: Current Account Trends Million US $
1984-87
a Estimate.
b Projection.
166
130
176
215
925
845
884
959
758
715
708
744
71
92
83
86
beef and wool, and now bring in two-thirds of all
export revenues.
Several external factors have shifted Uruguay's trade
patterns since 1982. Growing protectionism in the
European Community, financial crises in Argentina
and Brazil, and exports denominated in the strong US
dollar, have driven down sales to Europe and to
Uruguay's neighbors. Meanwhile, US purchases have
risen by 70 percent, making the United States
Uruguay's largest customer. Also, Uruguay has
entered into more countertrade agreements to gain
access to new markets and conserve foreign exchange.
For example, according to press reports, a food-for-oil
agreement has made Iran one of Uruguay's largest
trading partners. Further press reports indicate that
growing trade with China may soon be augmented
with countertrade deals.
Export Imperative
Sanguinetti, according to the US Embassy, has
pinned hopes for economic recovery-or at least
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URUGUAY: SUMMARY OF EXPORTS. f.o.b.
Million US Dollars
275 r
1980 1981 1982 1983 1984 1985
continued ability to service the foreign debt-on
export-led growth. Last year Uruguay's foreign debt
reached $4.7 billion-the highest debt per capita in
South America-with principal and interest payments
equivalent to about five times annual exports or 90
percent of GDP. F_~
Montevideo asserts that its floating exchange rate
policy is boosting exports and has criticized the
previous military regime's use of preannounced small
devaluations. According to the US Embassy, Finance
Minister Zerbino claims that the devaluations did not
keep pace with inflation, resulting in an overvalued
exchange rate, a drop in export competitiveness, and
an increase in Uruguay's imports because local firms
were unable to compete. Nevertheless, the
depreciation during Sanguinetti's term has hampered
production in sectors heavily dependent on foreign
inputs. Uruguayan farmers have complained, for
example, that the exchange rate policy makes needed
imports-such as US fertilizers and equipment-too
costly.F_~
While Montevideo has enacted several laws to
encourage exporters, the Embassy reports the
government has not enacted the basic structural
reforms needed for Uruguay to compete effectively in
the world economy. For example, the press has
reported that the State Meat Institute's intervention
in the livestock industry has curtailed rather than
promoted beef exports. The government has done
nothing to redress the industry's chief problems-high
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URUGUAY: EXPORT MARKETS. 1985*
Percent
*Source: Central Bank of Uruguay
**Council for Mutual Economic Assistance
processing costs, obsolete equipment, and poor
management. Businessmen, according to the
Embassy, frequently cite ponderous bureaucratic
regulation, their lack of representation in the main
political parties, and the government's tendency to
change export rules and incentives quickly as
impediments to entrepeneurs. They point out that
Sanguinetti did not even consult business leaders
before launching his national plan for export-oriented
growth. The government, however, has made
marginal progress in this area, and exporters now
benefit from reimbursement of some indirect taxes,
duty-free import of component materials for several
export products, and subsidized trade credits. F___]
Montevideo also has been promoting exports through
trade accords with neighboring countries and with
new first-time trading partners outside of the region.
The press reports that Uruguay has signed accords
over the past eight months with Brazil, Argentina,
and Mexico to stimulate bilateral trade. In addition,
last month Montevideo signed a three-year agreement
with Havana, giving each country most-favored-
nation status regarding trade related regulations,
although the US Embassy reports that Uruguayan
officials expect hard currency shortages to limit trade.
ontevideo may
also establish diplomatic ties to China to increase
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Prospects
We estimate that lower oil prices, falling interest
rates, record tourist receipts, and funds from last
year's accords with the IMF and commercial banks
will ease Uruguay's financial binds and generate
domestic growth of roughly 3 percent over the coming
year. Exports, however, will, in our view, contribute
only modestly to this growth. Prices for commodities
and agricultural products are likely to remain
depressed. Such Uruguayan staples as meat, wool,
and rice will face strong, subsidized competition,
according to Embassy reports. For example, the
European Community, liquidating its overstock of
subsidized frozen beef, recently sold 100,000 tons to
Brazil at below-market prices-equivalent to 80
percent of Uruguay's entire beef sales last year.
Moreover, the glut in world markets for Uruguay's
agricultural exports will largely negate the benefits
Montevideo can expect as a result of the weaker
dollar. Finally, lackluster US growth bodes ill for
increasing sales in the United States.
Over the longer term, Uruguay's export sales, in our
view, are likely to remain sluggish, returning to their
1983 level only by the end of the decade. Both
traditional and newer agricultural products will face
slack world demand and increasing trade barriers.
Furthermore, Montevideo's large sales to historically
unstable markets in Argentina and Brazil will make it
vulnerable to economic downturns in those countries.
Labor agitation in the export sector may also prevent
Uruguay from boosting foreign sales. The US
Embassy reports that $1.4 million worth of fruit
rotted at docks during a strike in June. If Montevideo
accedes to constant union pressure for higher wages,
the resulting inflation will make exports less
competitive. Finally, while international creditors
probably will refinance debt to keep the country
solvent, they are unlikely to lend funds for investment
in more efficient production techniques.
We concur with the Embassy's assessment that
Montevideo will maintain its current export policies at
least through the end of its IMF-supported program
in early 1987. Lethargic foreign sales may erode
enthusiasm for the strategy, but Sanguinetti probably
will see no alternative but to stay the course and
intensify calls for market access at meetings of the
GATT and the Cartagena Group. The Embassy
reports Uruguay already plans to link trade to finance
issues and will try to focus condemnation of
protectionism on the United States during the GATT
ministerial meeting in September. Montevideo is
likely to intensify complaints against US agricultural
export subsidies and textile quotas before the
conference, although Sanguinetti's desire to maintain
friendly relations with Washington will temper the
rhetoric.)
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Belize: Factionalism Plagues
Opposition Party
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The deepening ideological split between the leftist and
conservative factions of the opposition People's United
Party (PUP) is threatening party leader George
Price's authority and making it easier for the leftists
to maneuver for domination of the party. Encouraged
by recent gains in their representation in the party
executive, pro-Cuban leftists are trying to keep
conservatives on the defensive and take advantage of
increasing divisiveness to improve their position
within the party. Although the conservatives remain
in control for now, continued infighting could
undermine their ability to limit further leftist gains. A
strong leftist showing in December's Belize City
Council elections could give the leftist faction
momentum as it looks to national elections in 1989.
The PUP governed Belize throughout its 17 years as a
self-governing British territory and the first three
years of independence until its decisive defeat by the
United Democratic Party (UDP) in December 1984.
the PUP's defeat-in
party's defeat.
which only six incumbents were returned to the 28-
member House-was in part due to its inability to
overcome divisions between the leftist and
conservative factions and its failure to win the support
of Belize's increasingly young electorate, the majority
of whom perceived the PUP as corrupt and inefficient.
According to the US Embassy, the PUP was viewed
as a closed organization, whereas the UDP vigorously
recruited young supporters and encouraged
participation, especially at local levels. The country's
economic problems-including a recession in the
sugar industry and more than 14-percent
unemployment-also contributed to the former ruling
Vying for Party Leadership
The PUP's loss of power has exacerbated the divisions
between the conservative and leftist factions and
made it difficult for it to define its role as an
opposition party. Each faction continues publicly to
blame the other for its electoral losses. The leftist
faction, headed by former ministers Said Musa and
Assad Shoman, is trying to recover from its electoral
setback-no leftists were returned to office-and
increase its influence in the party by charging that
Price and other conservatives are corrupt. The
conservatives, headed by Price, have attempted to
portray Shoman, Musa, and their supporters as
Communists, according to US Embassy reporting.
Within the left itself, two factions are competing for
influence. Although Shoman and Musa share similar
political views, they
are divided over how to wrest control from party
conservatives and move Belize farther to the left.
Musa maintains a moderate public posture, tempers
his leftist rhetoric, and appears willing to work within
the party to take control. Nonetheless, he is pro-
Cuban, advocates the establishment of diplomatic
relations with Havana, and would clearly move Belize
to the left should he ever head the government,
Recognizing that the largely conservative Belizean
population is staunchly democratic and not receptive
to radical solutions, Musa's strategy-which for now
appears to have the most support among leftists-is to
work within the PUP and reach power through the
electoral process
For its part, the more radical faction within the
PUP-headed by Shoman-is increasingly frustrated
with Musa's moderate approach. Shoman is becoming
more overt in his leftist views and his sympathies for
Cuba and regional insurgent movements, according to
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PUP candidate in future elections.
party, he reportedly realizes that he does not have the
necessary support outside his own district, and he
probably is not willing to give up the chance to be a
socialism. Shoman is the most active in maintaining
foreign radical ties.
Meanwhile, leftists were able to exploit divisions in
the conservative wing to make limited gains in the
25X1 party executive during the PUP convention last
January. Musa was elected party chairman, and a
close ally of Shoman was named to the influential post
of youth organizer.
probably concluded that the influence of the leftists
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selection of the more pliable Musa as a concession to
the left wing. Price's apparent cooption of Musa at the
expense of Shoman also probably has increased the
rivalry between the leftist leaders. Nonetheless, most
PUP leftists agree that Musa's new position is an
important first step toward their goal of dominating
the party.
Within the conservative faction, Price, who has
headed the party since its birth in 1950, is under
increasing criticism from his supporters, who want
him to limit the influence of leftists in the party
executive. over the
years he has been willing to make concessions to the
left to foster party unity and to gain control over their
actions, especially their dealings with Cuba.
Nevertheless, dissatisfaction with Price's leadership
on this issue caused conservative party leaders and
former PUP cabinet ministers Louis Sylvester and
Fred Hunter to leave the PUP to form the Belize
Popular Party in January 1985.
The Cuban Connection
Taking advantage of a weakened conservative wing,
PUP leftists are taking steps to strengthen their long-
standing ties to Cuba and Nicaragua in order to seek
advice and financial assistance for future projects.
Shoman and Musa have had difficulty recruiting
significant numbers of students for scholarships to
study in Cuba-reportedly some 60 Belizeans are
studying there-and plan to sponsor courses and
seminars at local Belizean colleges on the merits of
Society for the Promotion of Education and Research
(SPEAR) for leftist purposes. Through debates and
seminars sponsored by SPEAR-under the direct
control of Shoman-organizers spotlight leftist ideas
and politicians and hope to foster a sense of solidarity
with countries that have strong anti-US biases,
according to US Embassy
While Shoman promotes open ties to Cuba
and Nicaragua, Musa reportedly sees contacts at this
time as a potential liability that, if made public, could
be used against the leftists by the government.
For its part, Cuba keeps a low profile in Belize but
maintains close links to the PUP left wing.
Havana probably fears that a higher Cuban profile
would raise British concern
Outlook
In our view, continuing intraparty divisions and a
conservative wing weakened by defections are likely
to further undermine Price's authority over the longer
term and improve the prospects for an eventual leftist
takeover of the PUP. Although Price is unlikely to
step down as party leader in the foreseeable future,
his efforts to paper over factionalism by making
concessions to the left wing will enhance its position
while further weakening the conservative wing.
Unless Price and his supporters take decisive steps to
limit further leftist gains within the party, leftists
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could make a strong showing in the Belize City
Council election in December and gain momentum as
they look ahead to the national election in 1989. F-
Shoman and the radical faction of the PUP left wing
probably will seek increased Cuban assistance for
their organizational activities through SPEAR and
perhaps attempt to persuade labor and youth groups
to serve as Cuban front organizations.
our judgment, will remain reluctant to provide more
than token assistance to Belizean leftists until the
PUP, under control of either Shoman or Musa,
regains control of the government. F-~
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Cuba Debt Rescheduling Difficulties
Cuba has met with only limited success in rescheduling official and commercial
hard currency debt, and apparently is facing a severe hard currency shortage. In
July, Havana was forced to agree to tough performance targets-including a
current account surplus and a cut in real imports-before rescheduling current
maturities and official debt coming due from the 1983 rescheduling. The Paris
Club creditors committed no new lending and refused to refinance debt due from
the 1984 and 1985 reschedulings. Negotiations with commercial creditors have
been even less successful. the creditors have called
Havana's requests for new lending excessive and have insisted that interest
payments be kept current during rescheduling talks.
The recent defaults reflect the rapid erosion of Havana's hard currency reserves,
which we believe total far less than Havana's claim of $150 million. President
Castro may believe that delays in payments will cause commercial creditors to
cave in to Cuba's rescheduling terms, but the suspensions are more likely to
alienate other creditors and essentially freeze Cuban access to critical Western
imports this year. Japanese traders threatened to halt shipments to Cuba and
publicize Havana's untrustworthiness after Havana suspended payments on short-
term commercial credits last month, according to the US Interests Section.
President Alfonsin has become increasingly vocal on nuclear disarmament issues
in recent months. US Embassy and press reports indicate that he has stepped up
his efforts within the nonaligned "Group of Six"-an ad hoc body comprising
Argentina, India, Greece, Sweden, Tanzania, and Mexico-to pressure the
superpowers to adhere to existing arms limitation treaties and ban nuclear
weapons testing. Alfonsin has publicly stated that he will soon propose that the
Group of Six establish a permanent committee in either New York or Geneva to
monitor US and Soviet nuclear activities.
Alfonsin also intends to promote a Latin
American conference on disarmament in Argentina this fall.
We believe that Alfonsin's initiatives are designed to support key foreign and
domestic policy objectives. His public stance on disarmament reflects Argentina's
traditional independence on nuclear issues and establishes Alfonsin as a strong
opponent of nuclear weapons. He probably hopes that his statements will counter
international concerns about nuclear proliferation in the region and ease pressure
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ALA LAR 86-020
15 August 1986
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on Argentina to sign the Nuclear Non-Proliferation Treaty. In addition, his
leadership within the Group of Six and new activism on disarmament issues may
temper opposition criticism of his administration's fundamentally pro-Western
foreign policy and could bolster his standing with leftist critics both within and
outside of his own party.)
President Cerezo's efforts to regain private-sector confidence have been hurt b
the government's monetary policy and by uncertainty about land reform.
The President's inability to deal effectively with the private sector is likely to
increase investment jitters and hamper efforts to capture export earnings that
remain outside of the country. Guatemala's huge budget deficit and heavy debt
service probably will make continued monetary expansion necessary, fueling
inflation and highlighting the government's inability to manage the economy.
Widespread knowledge of this practice is likely to encourage merchants to ignore
exhortations to limit price increases. Cerezo's credibility could be further harmed
by his ambiguous handling of the sensitive land reform issue. While he is unlikely
to institute a radical program, he may hope to use popular protests to push for less
drastic measures-such as a tax on unused farm land-later in his term.
Colombia A Break With Tradition
Members of the opposition Conservative Party have refused three minor Cabinet
posts in President Barco's new administration. Barco, whose Liberal Party won
landslide victories in both congressional and presidential elections, had offered the
posts in compliance with a Constitutional provision requiring minority party
participation. Over a period of years, Colombian political scientists and leaders of
both parties have gradually come to share the belief that the 28-year-old provision
has stifled debate and restricted the ability of the opposition to challenge the
government. Consequently the Conservatives' decision to abstain is more a
reflection of this perception than a display of anger over the relatively minor posts
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Barco offered them. The Conservatives, mindful of the need to maintain party
unity in the face of the reluctance of some members to forgo the benefits of
patronage and governmental exposure, are likely to accept some non-Cabinet-level
administrative positions in the Liberal government. Nonetheless, their withdrawal
from a formal partnership role could foster a more open political environment.
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