LETTER TO JAMES L. MCCULLOUGH FROM JOHN ALLEN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88G01116R000500560005-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: February 17, 2011
• Sequence Number: 5
• Publication Date: December 5, 1986
• Content Type: LETTER

Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R0005y0056p0005-1
U cJiI'/U ?vS ""y
Directorate of Intellig art'
Office of African and Latin American Analysis
Jim,
D/DCI-DDCI Executive Staff
Attached is my draft of the speech for
Bob Gates' 11 December speaking engagement.
If rumors that Dick Kerr has been tapped to
fill in for the DDCI are true, please let
me know and I will send copies up to the
DDI's office.
STAT
STAT
&V(52- Ir
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
Issues and Trends Affecting U.S. Business
in Latin America and the Caribbean
An Address to the Executive Commmitee and Trustees
of the International Center of Florida
by Robert M. Gates
Deputy Director of Central Intelligence
December 11, 1986
It is a pleasure to be here today. I am grateful to the
International Center for this chance to share some thoughts with
you on what those of us in the Intelligence Community see as some
of the salient political, economic and security issues and trends
affecting the business climate in Latin America and the
Caribbean.
The picture I am about to sketch for you will have both
positive and negative elements, for I see both enduring
challenges as well as emerging opportunities for US firms
operating or investing in the region. I'll begin by ticking off
some of the factors that will continue to make doing business in
Latin America difficult.
Let me say as an aside here that I fretted a little about how
much time to spend talking about the negatives we see in the
Latin and Caribbean scene. We spend a lot of time at the CIA
worrying about threats to US interests abroad--and these include
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
business interests. Looking on the gloomy side of things is an
occupational hazard of the intelligence profession. For reasons
that I will come to later I didn't want to be guilty of saying
things to discourage active US business involvement in the
region. Objectivity is something we also cherish at CIA,
however, and so I will be as candid in outlining the continuing
difficulties that will confront US business in Latin America as I
will be later in pointing out the opportunities. This said, I'll
proceed on the challenges.
First, there will be a continuing threat to U.S. commercial
interests in Latin America from terrorist groups, many of them
supported and abetted by the Soviets, Cubans, Nicaraguans or
Libyans. It will probably come as no surprise to many of you to
learn that our statistics show more acts of violence--bombings,
kidnapping and the like--against US business personnel and
facilities in Latin America last year than in any other part of
the world, the Middle East included. Colombia headed the list of
dangerous places followed by Chile, Peru, and Bolivia. On the
other hand, there were no such terrorist attacks in
Argentina--the highest risk country for US business in the early
1970s--or in El Salvador, and a sharp fall off in incidents in
Honduras. To be honest with you, while the threat in .
individual countries will vary over time, I believe that
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
terrorists will continue to target US businesses as a means of
maintaining pressure on governments, obtaining operating funds,
and gaining the publicity they crave. Aside from the human
costs, the dollar value of protecting US personnel and commercial
facilities will remain high.
Second, the security problems caused by the activities of
insurgent groups or by political unrest will continue to hamper
US business operations and discourage new initiatives. Peru,
Colombia and El Salvador are examples of countries where attacks
by large and well-armed revolutionaries on the rural
infrastructure and their actual control of some territory cause
major problems for U.S. companies involved in agricultural sector
enterprises or engaged in the extraction of oil and mining of
other mineral resources. The trend toward closer symbiotic
cooperation between insurgent groups and narcotics traffickers in
South America is viewed by the Intelligence Community as having
particularly worrisome implications for the maintenance of
security in outlying areas. Periodic episodes of turmoil in
countries with chronic instability problems--Haiti is a case in
point here--will also create labor problems for US businesses,
and otherwise complicate their operations. Again, I have to
confess that despite the progress that has been made in
containing guerrilla activities in places like El Salvador and
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
Guatemala and the general decrease in the sort of popular unrest
that marked the region in the past, the root causes of insurgency
and the sporadic leftist-backed political violence that continues
to occur in the Caribbean and in South America are deep seated
and working to overcome them is a long-term proposition on the
part of the affected governments.
Another set of difficulties for Americans doing business in
Latin America flows from the sway that political nationalism
continues to have over economic decision-making. At the most
fundamental level, the statist approach to economic development
in some countries has given bloated and inefficient
government-owned enterprises a virtual monopoly of key sectors,
foreclosing opportunities for US business. In Mexico, for
example, the control state-owned companies have over sectors such
as energy, food distribution and steel production limits
opportunities for US or Mexican private firms to get involved in
these activities. In other countries, domestic private
investment will continue to be permitted, but foreign investment
excluded, in sectors selected for special protection. Brazil,
for example, under its so called Informatics Law, continues to
limit foreign firms from manufacturing or selling products in the
computer and data processing industries. In many countries,
foreign investment will remain limited to 49 percent of company
equity.
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
Beyond direct controls on investment, some Latin American
countries are likely to continue to respond to domestic
political pressure with tactics that discourage foreign business.
Let me list several examples:
-- Political pressure to inflate employment and raise wages,
such as is found in the high-unemployment Caribbean
region, means that US business will have to contend with
laws that make it difficult for companies to lay-off or
fire workers and can cause wage bills to skyrocket.
-- Endemic overvalued exchange rates, often set in response
to consumer pressure, will cause foreign exchange
shortages and bottlenecks that hamper the ability of
companies to conduct international financial transactions
on a timely basis.
-- Moreover, in many countries bribery and corruption will
remain time-honored domestic business practices that can
get in the way of legitimate new investors seeking to
compete within the established business community.
Aside from the problems attendant on economic nationalism, US
businesses will be challenged by the economic hard times that
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
confront most of the region. These hard times both reflect and
contribute to the region's continuing external debt crisis--which
is rooted in the heavy borrowing of Latin governments during the
1970s and early 1980s. Although the record is very uneven, Latin
governments generally have done well in coping with debt and
related problems. Initially, they had no choice but to adjust
their economies through stabilization programs involving the
reduction of chronic budget deficits, the liberalization of
prices, devaluations and wage freezes.
Through such efforts, debt default has been avoided but at a
high cost. Almost without exception, the annual growth of the
Latin American economies has stagnated. Consumer price inflation
throughout the region rose from 85 percent in 1981 to 316 percent
in 1985. Living standards have slipped and per capita income is
still below the levels recorded in the late 1970s for nearly all
countries in the region. Moreover, spending on education,
healthcare, and new infrastructure has been cut back throughout
the region which will impede efforts to expand productivity and
support economic diversification and export promotion.
Nor have world economic conditions been propitious for Latin
American recovery. Despite the salutory effects of declining
world interest rates and the steady growth posted by the US
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
economy, slumping commodity prices--notably oil--the collapse of
intraregional trade and the unwillingness of Europe and Japan to
stimulate vigorous growth have held back the growth in Latin
American exports. Debt servicing requirements remain
high--interest payments alone claimed 35 percent of Latin export
earnings in 1985--causing a heavy outflow of capital to meet
their foreign obligations. On top of this, some $6.5 billion in
private Latin capital left the region last year to end up in US
and Western banks and real estate--the so-called capital flight
problem.
I could continue marching down the list of challenges faced by
potential investors and by the Latin governments themselves but I
want to get on with the good news. I hope in fact that my
listing of some of the region's problems will impress you, as it
has me, with the positive factors that have emerged.
I would begin the good news by asserting that the psychology
of the region is changing and that the change shows signs of
being dramatic. The old feelings of dependence and inferiority
are receding, being overtaken by a can-do, must-do spirit.
Among the more visible indicators of a new mindset is the
turn to democracy. Cycles of military repression and open
politics have occurred before in the region, but the current move
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
into competitive electoral systems has many distinctive features.
The scope is unprecedented. Latin America is more democratic
today than at any point in history. Only five authoritarian
regimes remain--Cuba, Nicaragua, Suriname, Chile, and
Paraguay--representing a minuscule portion of the region's
population. Long-lived regimes have given way to this democratic
wave--a generation of military rule in Brazil has ended and after
two generations of Duvaliers in Haiti, that impoverished nation
may begin a new era. For the first time, normal, elected
presidential successions have occurred in such countries as
Honduras, Ecuador, Peru, and Bolivia. Democracy may be "taking"
this time.
Also notable are the quality and seriousness of the new
leadership. One can hardly fail to be impressed by the boldness
of President Sarney, thrust into office unexpectedly when the
President-elect died before assuming it. We see growth and
flexibility in Bolivia's Paz, who espoused statist policies
during the Revolution but who now, in a new era, is moving toward
free-market prescriptions. We can only admire the leadership of
President Alfonsin, who remains highly popular despite
Argentina's hard times. The region boasts leaders who retained
their optimism in the worst of times, such as Guatemala's
President Cerezo, who survived numerous assassination attempts
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
when he opposed military rule, or President Duarte of El
Salvador, who bears the scars of torture. These are men of
courage and vision, a truly new political generation. Most are
centrists, interested in and receptive to better relations with
the United States.
Their views of the United States are sophisticated; many of
these leaders have spent enough time living in our country or
studying it to know us well. They are not viewing us through
throwback stereoscopes that show a colossus of the north. They
are men of vision who want to advance their nations and are
willing to do business to achieve their goals.
The citizenries of these countries have shown courage and
resiliency as well. The route to democracy was hard; in many
places, it was unspeakably brutal. I think we have reason to
hope that once won, freedom will not be given up by these
populations, who are also increasingly sophisticated and willing
to work for their goals. We can see this in the relative
discipline that labor has shown. Despite hard economic times,
labor has been more willing than in the past to give scope to
national leaders. And in many places, austerity plans
governments have been forced to adopt have meant real tough times
for the people. On other domestic fronts, we see creative new
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
ideas arising to deal with national problems-- many new twists on
economic policy, ways civilians are handling sensitive issues
such as retribution for past military crimes, Alfonsin's plan to
break Argentine fixation on Buenos Aires by moving the capital
south. We see high energy being channeled in positive
directions.
The energy of democratization is also producing a new
cooperative urge among the countries. The new leaders have much
in common and because of the struggle each has been through, they
tend to respect each other. This provides a new basis for
bilateral and multilateral effort. It shows up in various
spheres: economic collaboration, including talk of a common
market among Brazil, Argentina and Uruguay; nuclear and other
scientific interchanges between Argentina and Brazil; some
movement toward unified anti-narcotics programs; and increasing
cultural exchange. The nations in the region are more and more
willing to learn from each other and to pool resources against
stubborn problems.
Another positive trend in Latin America is the change in
attitudes toward capitalism and the free market system. This
change is part of the broad shift in the world intellectual
climate which is moving away from viewing statism as the panacea
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
for economic and social ills. Latin American intellectuals are
not in the forefront of this sea change but they have not missed
the fact that state-owned firms are being privatized from
Bangladesh to Malaysia, from Turkey to Tanzania. Nor have they
missed the fact that public leaders who once pretended that their
countries were more socialist than was actually the case now
pretend that their countries are more capitalist. India, the
largest country in the Third World, and China, the world's
largest communist country, are both seen as increasingly
enthusiastic converts to the market system, and even in Eastern
Europe some communists are speaking up for "market solution" in
developed and developing nations alike.
As I said, Latin America is not in the forefront of this
intellectual sea change and statism remains well entrenched in
the region, but polling data--though limited--indicates that
privitization is generally popular with the people and that the
private sector is being seen with increasing respect. The
leadership in many countries is behind the intellectual curve but
developments such as President Alfonsin's request last May for a
mission of US businessmen to increase the entrepreneurial
attitude and performance of Argentine businessmen indicates that
the decisionmakers are catching on.
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
Why did this come about? There are many reasons, but I would
like to emphasize two which I believe are both very important and
largely unrecognized. First, there is the influence of hard
times. It is significant that the turn towards capitalism came
just as much of the world was suffering recession. In most Latin
American and other Third World countries there is a basic stratum
of free enterprise "penny capitalism" that is submerged in times
of prosperity and comes to the forefront in times of hardship.
This stratum--which includes what economists call the underground
economy--constitutes the family background of almost all Third
World urbanites, except the highest political and commercial
elites. Small merchants, market women, shoeshine boys, cab
drivers, free-lance artisans, self-taught carpenters and
plumbers, these are the people who keep on working when factories
are closing and bureaucrats are losing their jobs. These people,
from their own experience, have an intuitive understanding of the
interconnections between hard work, saving, and getting along.
When times are good, they are quite willing to take whatever
"magical" benefits the freespending state has to give. When
times are bad, however, they are realistic enough to know why.
Second, there is what I call the shadow of the twenty-first
century. The twentieth century--ushered in by revolutions in
Russia, China, Mexico, Turkey, Persia, and elsewhere--was the age
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
of social revolution. Even though these revolutions were not
always successful, no one doubted their importance. Today,
revolution is becoming intellectually old hat, as far from
present day reality as the theological disputes of the Middle
Ages. What does Lenin have to do with microchips? Or Mao's Red
Book with the rise of Japan? The feeling is that the
twenty-first century is almost here--and whatever it turns out to
be, it will not be another Soviet-style revolution!
Sometimes I think we have the Russians themselves to thank
for the declining popularity of statism. They have brought
hundreds of thousands of Latin Americans and others to the Soviet
Union for visits or for study. These Third World citizens are
not dumb. Of course, some are brainwashed or coopted, but others
look around and they don't like what they see. They see a
society that, for all its military power, is grinding to a halt.
They see a rigid class structure in which the elite live very
well indeed while the masses go to the end of the line. They see
racism and shoddy goods and crime and corruption and cynicism.
They see a society where consumers spend twenty billion man-hours
annually just standing in line! Speaking of the hard-currency
stores that exist everywhere in the Soviet Union, one Latin
American commented, "What kind of world power is it that won't
even accept its own currency in its own stores?"
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
At another level US business should be encouraged by the
cooperative and positive approach Latin America's new democratic
leaders have taken in their struggle to resolve economic
problems. While recognizing that their administrations have to
deliver economic improvements to consolidate fragile civilian
rule, they have generally eschewed resorting to radical policies,
such as debt moratoriums, or a return to Peronist-style populist
economic excesses. Instead, these leaders have opted for more
pragmatic and practical solutions aimed at restoring growth.
President Alfonsin in Argentina in 1985 and President Sarney in
Brazil this year, for example, have launched bold economic
programs to arrest hyperinflation that was causing economic chaos
and political discontent. In both cases, inflation was arrested
and the return of price stability has led to strong economic
growth in Brazil--at a projected eight percent, the strongest
performance in the world--and in Argentina which grew by 3
percent during the first half.
In Bolivia, Paz Estensorro, the former populist who
introduced state-led development in the 1950s, is now relying on
the magic of the market to reform the economy. He has broken the
back of runaway inflation, which topped out at 22,000 percent in
1985, by implementing thorough-going public sector reform and
restoring free-market oriented policies. Symbolic of his shift,
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
he recently closed down the country's largest tin mine to stem
losses among inefficient state enterprises and in hopes of
beginning new efforts to diversify the economy.
A number of other countries have also made clear their
intention to seek foreign participation in future economic
reconstruction. Although it is true that such initiatives are in
their infancy in the region, the change in emphasis is
heartening. Let me lay out a few examples.
-- Venezuela has already eased some onerous restrictions on
foreign direct investment and other countries like Brazil
have liberalization plans in the works;
-- Colombia has joined forces with the World Bank in making
structural adjustment;
-- Chile's successful debt to equity conversion program may
lop off $1 billion in external debt this year and has
attracted intense interest in Mexico and elsewhere.
Other Latin American countries have taken more direct steps
to open their economies to US investment.
-- Grenada has lowered the duties on imports by 25 percent,
relaxed foreign exchange controls, revised the investment
code to open all sectors to private investment, and offers
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
lengthy tax holidays to investors in tourism and light
industry.
-- Haiti has liberalized the investment code, improved tax
incentive for foreign investment in agriculture and
industry, opened up to competition sectors of the economy
that were monopolized by Duvalier's family and associates,
and is making progress in the reduction of corruption.
-- The Dominican Republic has set up numerous free trade
zones and streamlined red tape, while Costa Rica has
devalued its currency, reformed the credit system, passed
a new export incentives law, and improved e banking and
currency laws.
-- In a significant policy shift, Mexico recently agreed to
permit IBM 100 percent foreign ownership in a computer
firm to be located there.
An appropriate question to ask here is what can U.S.
business do to capitalize on these positive trends and I'll take
the liberty of going on to suggest some answers. My short answer
is that US business can do a lot to help in Latin America and
make a profit while doing so. One of the keys, in my view, is
the application of technology as well as capital. A detailed
look needs to be taken at the whole range of technology available
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
in the United States and the West in general and an attempt made
to match these technologies with unutilized resources in Latin
America. The range of technologies and applications truly is
enormous.
I'll use Ecuador to illustrate what I mean. Despite being
one of the poorer nations in Latin America, Ecuador has a wealth
of under-utilized resources that could be developed with US
technology and financing. Let's take, for example, wind power.
The country's geography and prevailing winds are ideal for
wind-power generation of electricity. This technology has the
potential to produce some ten percent of Ecuador's needs, thereby
freeing an additional 200,000 barrels of oil a year for export.
And the United States is the world leader in wind technology.
Or take integrated marine shrimp production. Only about
one-fourth of Ecuador's 160,000 acres of ponds used for growing
shrimp are stocked with shrimp larvae. If a commercial hatchery
capable of producing 8-12 million larvae per month were set up to
offset the shortfall in naturally produced larvae, Ecuador could
once again become a major shrimp exporter. Moreover, such a
project would largely free the country from the spasmodic havoc
caused by the El Nino weather pattern. The benefits to
economic--and even political--stability could be very important.
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
Another example would be the production and packaging of
high-value processed vegetables. Of Ecuador's cultivatable land,
only forty percent is currently being used. Much of this land
would be ideal for production of asparagus, artichokes, broccoli,
mushrooms, palm hearts, and tomatoes. With US technology--blast
freezers and the like--and managerial and marketing assistance,
this produce could be frozen or processed into paste, pulp, or
concentrates for export.
I could go on citing examples. Natural gas--Ecuador has
perhaps one of the largest deposits in Latin America--or
tourism--Ecuador's Galapagos Islands are truly unique as a
tourist destination--come to mind. And there is animal feed
production, dairy farming, tissue culture, gold mining,
agrichemicals, hydroelectric power, forestry products, processed
tropical spices, cut flowers, beef cattle, polymetallic ores.
The list is extensive.
Although not all Latin American countries have as hospitable
an investment climate as does Ecuador under the Febres-Cordero
government, most do have wide ranges of underexploited resources
and, as I indicated earlier, increasingly pro-capitalist
attitudes. It would be easy to duplicate Ecaudor's list of
resources and matching technologies in nations such as Costa
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88G01116R000500560005-1
 Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1
Rica, Colombia, Uruguay, and Jamaica. Among the big three of
Latin America--Brazil, Mexico, and Argentina--it is not so much a
question of locating underutilized resources as of stimulating
efficient, privately-owned heavy industry.
These examples of where US business can make a difference
serve to underscore the basic point I want to leave with you.
There are many aspects of the Latin environment that make it a
difficult place for US firms to operate and this will remain the
case. But I hope you will agree with me that there are a number
of encouraging trends in the region. From a policy standpoint,
nurturing effective, popularly supported political systems in
Latin America capable of dealing with local social, economic and
security problems and amenable to cooperating with the US
regionally and globally is a cherished goal. This goal is
perhaps more achievable today than in the past. But the new
civilian governments as well as the established ones need all the
help they can get in grappling with the host of problems that
confront them. Renewed US investment in the region coupled with
the application of technology and the infusion of entrepreneurial
and management know-how is vital. Active US business involvement
can lead to a self-reinforcing cycle of economic improvement and
political and social stability--all feeding back again to
economic advancement and a fertile business climate.
Sanitized Copy Approved for Release 2011/02/17: CIA-RDP88GO1116R000500560005-1