RESPONSE TO NSD-2-85: ECONOMIC DEVELOPMENT FOR CENTRAL AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP93T01142R000100140009-9
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 35
• Document Creation Date: December 23, 2016
• Document Release Date: January 3, 2012
• Sequence Number: 9
• Content Type: REPORT

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THE WHITE HOUSE
WASHINGTON
RESPONSE TO NSSD-2-85:
SYSTEM LI
90247
ECONOMIC DEVELOPMENT FOR CENTRAL AMERICA (U)
I. Introduction
The troubled situation in Central America has no single
cause, but poor economic performance over the past few years
has been a major contributing factor to political instability.
Since 1979, the region has experienced a steady decline of per
capita income, a decline of regional trade, the loss of
international credits and foreign investment, and the erosion
of private sector business confidence resulting from domestic
economic, political and security problems. (C)
To reverse this trend, the Kissinger Commission called
for substantially increased military aid to meet the problem
of externally-assisted insurgency in El Salvador and greatly
expanded economic assistance to improve the quality of life of
the people and encourage democracy, and support essential
structural economic transformation. (U)
U.S. economic aid to the friendly.Central American states
is an integral element of our response to the current crisis
in the region. Our response is driven, in the first instance,
by a potential threat to the security of the United States.
In its report, the Kissinger Commission identified the issue
precisely: "the intrusion of aggressive outside powers ex-
ploiting local grievances to expand their own political
influence and military control is a serious threat to the
U.S., and to the entire hemisphere." (C)
At the same time, military, political and economic
objectives cannot be viewed independently of each other.
Humanitarian interests as well cannot be underemphasized as a
motivation for .giving aid, As the Commission observed, "the
requirements of Central America are a seamless web. The
actions we recommend represent an attempt to address this
complex interrelationship in its totality, not just i its
parts." (U)
nrcLacTry nm. /lam)
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The U.S. response is comprehensive:
-- military aid to meet the externally-assisted
insurgency in El Salvador and reinforce the security posture
of the "Core Four" states;
diplomatic efforts to fashion a workable settlement
to conflict in the region; and
-- economic assistance to promote economic and social
progress to improve the lot of the people, encourage democracy
and decrease the probability of destabilizing discontent. (U)
The crisis in Central America is regional. It cannot be
treated solely through assistance to one or two countries. (U)
In implementing the economic recommendations of the
Bipartisan report, Secretary Shultz has called for a develop-
ment strategy that works through an open economy, one that
rewards initiative, investment and thrift. Four key elements
include:
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First, growth should be based primarily on domestic
savings and investment, requiring the retention of
capital domestically;
Second, foreign and domestic investment should
receive equally fair treatment;
Third, foreign resources should be used to supple-
ment domestic savings, not to supplant them. Too
strong a reliance on foreign assistance or foreign
capital can foster dependence and undermine produc-
tivity; and
Fourth, trade must be the engine of development.
Domestic economies that are open to international
competition can raise this standard of living. (U)
Progress in economic policy reform and the buildup of
U.S. economic assistance to Central America over the past
several years -- which culminated with the appropriation of
the first tranche of the Kissinger Commission recommendations
last August -- have begun to yield positive results on both
the economic and political fronts. A vicious circle of
worsening economic conditions and political instability was
halted in 1984, when the region had positive economic growth
for the first time in five years. This improvement in econom-
ic prospects has been accompanied by an encouraging movement
toward democracy in the region. (U)
Nevertheless, the region's economic, social and political
problems have not yet been resolved. Unemployment and under-
employment have grown. The debt burden is high. Export
revenues depend upon only a few basic commodities. Large
public sector deficits are commonplace. Lpvels of infant
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mortality and illiteracy are unacceptably high. In short, the
crisis continues and, as pointed out by the Kissinger Commis-
sion, sustained economic growth in Central America is a
long-term process requiring difficult policy changes and a
sustained high level of support from the U.S. (U)
Our analysis indicates that major improvements in basic
economic and social conditions in Central America are possible
over the medium term if policies are improved and complemented
by an appropriate U.S. foreign assistance program. Chart 1
summarizes the major goals that we believe can be achieved by
1990. (U)
CHART 1
MAJOR GOALS OF THE CENTRAL AMERICAN INITIATIVE (U)
Target Concern
1984 1990
Level Goal
GNP Growth Rate 1.2% 5-6%
Agricultural Production Growth Rate 0% 4%
Manufactured Exports to the U.S. $314 Million $950 Million
Infant Mortality (per 1,000) 65 50
Primary School Enrollment (%) 80 95
Family Planning Prevalence (percent
of fertile women) 24% 40%
The purpose of this NSSD is to assess progress to date
and to provide an analytical framework for implementing U.S.
objectives toward economic development in Central America in
support of U.S. national security policies. It aims to:
- analyze economic prospects over the medium and
longer term;
- review economic assistance and U.S. interests in
Central America; and
- present a framework for monitoring progress toward
achieving economic objectives. (C)
II. Central America - the Economic Backdrop (U)
During the past few years Central America has been
buffetted on the economic front. Since 1978, the region has
experienced a decline of regional trade, the loss of interna-
tional credits and foreign investment, and the steady erosion
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of private sector business confidence resulting from domestic
economic, political, and security problems. (C)
From a regional standpoint, the adverse events of recent
years have been mutually reinforcing. Indeed, political
turmoil and economic development problems are interrelated.
For example, political instability and inappropriate economic
policies in the face of the adverse external environment have
combined to cripple economies in a number of ways:
11?MD.M.
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MID M.
- -
41?11, AIM
Insurgency has seriously damaged much of the produc-
tive infrastructure in several countries. Even now,
road transportation, electrical transmission sys-
tems, and dams are regular targets of the
insurgents.
-Compromising economic policies that provide a
short-term cushion for political expediency have
fueled inflation and discouraged investment in
export and other industries.
Political instability and intransigent economic
problems, coming at a time of global financial
difficulty, have made the region too risky to
attract external financial flows.
Intimidation of rural workers, especially in El
Salvador, has reduced the traditional movement of
laborers among farming regions, cut harvests sharp-
ly, and boosted food import needs.
An unfavorable economic environment and political
instability have spurred capital flight to safe
havens in the United States and elsewhere.
Depressed economies and the real prospect of phys-
ical violence have greatly reduced tourism, another
source of foreign exchange.
Intraregional trade has fallen off rapidly, particu-
larly within the Central American Common Market
(CACM), which had been the basis for the region's
nascent industrial development. (C)
III. Economic Growth -- Short and Medium Term (U)
After steadily declining over the 1979-83 period, gross
national product in the Central American countries we are
supporting grew. in, 1984 by_1.2%. Chart 2 summarizes recent
growth. Improvements in policy and U.S. assistance were
critical to this turnaround -- helping to stabilize the
financial situation and to increase confidence in political
stability. This is demonstrated by the trend in short-term
private capital movements. The substantial capital flight that
occurred during 1980-82 has been checked, and private funds
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Encouraging Signs of an
Economic Turnaround in Central America
Chart 3
Short-Term Private Capital Movements
Short-Term
400
300
200
100
0
?100
?200
300
?400
?500
?600
?700
?800
?900
Capital Movements (Million $)
11111111
1977 78 79
80 81
Year
82 83
84
Chart 2
Growth in GNP
Growth Rate (%)
2
1
0
?1
?2
3
1
.4=1?11.11
1980 1981 1982 1983 1984 1985
Year (Proj.)
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began to flow back into several countries in 1983 and 1984
(see Chart 3).
This improvement in economic conditions in Central
America will only be temporary unless structural changes in
their economies lead to economic growth. To assure a proper
climate for long-term growth, we have sought to link our
assistance to economic policy improvements by the governments
we are assisting. A good start has been made in some coun-
tries:
- ?=?
- -
exchange rates in Costa Rica, El Salvador and
Guatemala have been realigned to encourage exports;
government budgets have been reduced and fiscal
deficits have been cut in Costa Rica;
government controls inhibiting private sector
investment have been reduced in all countries; and
governments are actively considering divestment of
inefficient public enterprises through sale to the
private sector, particularly in Costa Rica and
Panama. (C)
In charting a course for the future, it is important to
take into account the international economic conditions that
will directly and indirectly affect the economies of Central
America. Among the external conditions Central America will
face, Western economic growth is the most important. At
present, most forecasters expect annual OECD growth to be from
3 to 4 percent during the period, and even higher in the
United States, Central America's main market. Nonetheless,
given current policies, this is not enough to substantially
boost the region's export earnings because demand for agricul-
tural commodities, which constitute nearly three quarters of
the region's exports, are relatively unresponsive to growth in
the industrial countries. (C)
Indeed, despite record 6.9 percent economic growth in the
United States in 1984, exports by the region to the United
States rose by less than 10 percent, while sales to the United
States from the rest of the world were up 30 percent. More-
over, even if OECD growth is unexpectedly high, there is
likely to be a lag of about two years before such growth shows
much effect on commodity prices. Without some increase in the
price of agricultural commodities, export earnings may even
fall as businesses, such as the multinational banana produc-
ers, decide to .cut their losses and leave the area, as has
already-oacurred in Costa Rica. (C)
The key to faster export growth, then, is changing
Central America's export base, and this in turn depends on
improving policies to encourage the private sector to develop
new products. In some cases necessary policy reforms, comple-
mented by CBI incentives, are already having an impact.
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Exports of non-traditional products from Central America to
the U.S. were up sharply in 1984. Such products can become an..
important source of export earnings and employment in the
medium term. (C)
Besides these two major determinants of Central American
export growth -- OECD growth and policy reform -- a number of
secondary factors can also play an important role. Export
growth to the United States has been weak in part because
foreign producers and U.S. importers have been slow to react
to CBI incentives. Part of this was because the interim
customs regulations that were in effect during the first ten
months of the CBI were extremely hard to use. Of the major
non-petroleum and non-traditional exports from the region,
only exports in the category of "sugar, syrups, and molasses"
used the CBI preference for more than one-third of shipments,
and most Central American exporters virtually ignored the CBI
preference in favor of the GSP and the general U.S. import
schedule. (C)
There is hope for increases in exports from the region
under the CBI preference. Most importantly, the customs
regulations that discouraged use of the preference have been
replaced by more functional rules. Beyond this improvement,
the opportunity presented by the U.S. market for
non-traditional sales of produce and fruit from Central
America during the U.S. off-season is enormous, and has given
rise to plantings of truck garden vegetables, cut flowers,
annual quick-maturing fruits, and citrus products (which take
several years to reach market). (C)
Moreover, emphasis on increasing exports through pro-
motion of private sector investment in labor-intensive ag-
ricultural and industrial enterprises is crucial. All coun-
tries assisted by the U.S. Government have undertaken steps to
encourage exports (e.g., information systems, simplification
of forms, access to foreign exchange, preferential credit
access reduction of import tariffs). Partly as a result,
exports of non-traditional products from Central America to
the U.S. were up sharply in 1984. Such products can become an
important source of export earnings and employment in the
medium term. Assuming the insurgency situation continues to
improve, Central American exports of manufactured goods can
replace bananas as the second largest export grouping by 1990.
So far, a number of specific promotion activities (e.g.,
vegetables, free-zone investments) supported by AID show
encouraging results. (C)
As far as internal factors are concerned, the most
importaritrare the state of regional insurgency and the local
policy climate in individual countries. On the first score,
the status largely depends on the position the Sandinista
government takes toward regional aggression. As far as the
policy climate is concerned, the debate will be between
improving the investment climate and market place versus
protecting urban consumers and other politically-powerful
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groups. Before private investors -- foreign or domestic --
will make a commitment to Central America's future they must
be convinced that the government can sustain favorable
policies. We expect it will take two or more years of demon-
strable policies and political peace before investment would
pick up appreciably, especially so long as profitable and less
risky ventures exist in other regions of the industrial and
developing world. (C)
IV. Economic Growth -- The Longer Haul (U)
While preliminary data suggests that aggregate economic
growth picked up in 1984, the CIA estimates that with an
absence of appropriate local policies and enhanced foreign
financial flows would almost certainly result in real growth
that is unlikely to exceed 2-3 percent annually for the region
as a whole over the next several years. This GNP path, which
assumes OECD growth in the 3 to 4 percent range, would, of
course, not be enough to stem the decline in living standards
or create anywhere near the number of jobs needed to satisfy
the demands of the expanding labor force. For regional
leaders trying to regain political stability and steady
economic development, this would mean even harder times ahead
for Central America's 22 million people. (C)
Given this, it is clear that getting back to the economic
performance of 1961-1978 would require substantial policy
reform supported by a high level of external resources. The
Kissinger Commission report estimated that the six countries
would need a strong commitment to economic reform and some $20
billion in net foreign capital inflows through 1989 to
gradually boost their aggregate economic growth to the 6 per-
cent range. This would raise per capita income growth to about
3 percent by 1988 and largely return personal consumption to
peak 1979 levels by 1990. (U)
As the Kissinger Commission noted, however, this progno-
sis is highly sensitive to economic and political develop-
ments. Specifically, it requires that:
projected financial flows materialize;
domestic economic policies are improved; and
regional security is achieved and maintained. (U)
If these conditions fail to be met, it is almost certain that
growth will fall short of the rates projected by the Commis-
sion. _As it is, the setting of regional peace assumed by the
Commission has failed to emerge and is unlikely to materialize
in the future as long as Managua continues to march down its
current policy path. Furthermore, the pace of economic reform
has been somewhat slower than originally hoped. This has had
a double impact on Central America prospects. First, resource
inflows are reduced as financing associated with economic
reforms -- IMF and some IBRD lending, new bank money, direct
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investment, and official reschedulings -- is not forthcoming.
Second, the resources which are available are less efficiently
used, and growth suffers. (C)
It is extremely difficult to make long term projections
with any confidence. Nevertheless, given the aid and policy
moves to date, the region's economic performance will likely
range somewhere between a 2 percent steady-state growth path
and the more optimistic Kissinger scenario. Under the as-
sumptions that: (1) U.S. net financial flows to the region
run $1.3 billion per year; (2) the Central American countries
maintain the economic policy changes taken to date; (3) IMF
programs are not phased in; and (4) instability remains a
problem, an economic growth path that returns per capita GNP
to its 1978 level by 1995 is not unrealistic. Under such a
scenario, the CIA estimates that the rate of real GNP growth
might approach 5 percent early in the next decade. (S)
Moving above this middle scenario is, of course, possi-
ble. From an internal standpoint, there are steps that Central
American governments can take to help foster growth and
improve the economic climate. Appropriate exchange rates, for
example, will help make exports more competitive and allocate
imports more efficiently. Likewise, the elimination of overly
protective tariffs will reallocate domestic resources away
from inefficient uses. Growth-oriented credit and tax pol-
icies, coupled with sustainable government budget positions,
will aid in improving savings and investment flows, which in
turn will underpin economic resurgence. In this regard, an
appropriate foreign investment climate can only help. An
additional area in which local policies can stimulate growth
focuses on inefficient use of state firms. If the size and
control of these state enterprises can be pared, the range of
possibilities for private sector involvement -- be it local or
foreign -- will further open. Furthermore, improved policies
supported by IMF programs would increase financial flows to
the region by 30%. In addition to local economic policy
moves, achieving a strong growth performance will hinge
critically on peace within the region. If Managua, for
example, opted to shift for a policy that ensured true
regional peace, the multiplier effect of U.S. aid would be
greatly enhanced. In such a setting:
M. Min
MID SIM
New and existing economic infrastructure would be
safe from insurgent attacks;
Foreign and domestic entrepreneurs would be more
willing to invest in the region;
'A rebound in regional trade -- particularly in the
manufacturing sector -- would boost local business;
and
Such an environment would be conducive for a return
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of at least some flight capital as well as a gen-
eration of an increased level of domestic savings.
(S)
If such changes occurred, the region would likely see its
growth trajectory rise until the pace of economic activity
began to approach the level envisioned in the Kissinger
report. (C)
These three alternative growth scenarios can be
summarized as follows (see Chart 4):
High Growth: A combination of high levels of U.S. aid,
major reforms in local economic policy and a reversal of
Managua's aggressive regional stance could provide rapid
economic growth. This outcome would require a strong
commitment to market-oriented policies to stimulate financial
flows and to private investment, particularly in
non-traditional export sectors. (C)
Moderate Growth: A combination of high levels of U.S.
aid, inadequate economic reforms, and political instability
will lead to only moderate growth in per capita incomes. The
lack of stabilization programs would reduce net financial
flows from other agencies, including debt rescheduling. (C)
Low Growth: Without the Jackson Plan U.S. assistance, a
continuation of current policies would be likely to lead to a
continued downhill slide in per capita income. Because of the
likely political unrest and poor economic climate, potential
foreign investors or commercial lenders would be generally
unwilling to provide resources to the region, and capital
flight would continue. (C)
V. Economic Growth: The Human Aspects (U)
At a more personal level, the difference in possible
growth rates translates directly into jobs and changes in
living standards. As it is, studies show that in El Salvador,
Guatemala, and Honduras about half the urban population and
three quarters of the rural residents could not meet their
basic needs for nutrition, shelter, and health care. While
urbanization and industrialization, especially in the mush-
rooming cities, created some new middle class citizens, the
gulf between rich and poor remained or widened. (C)
Unemployment problems have worsened in each country, and
are at critical levels in El Salvador and Honduras. While the
population explosion of the 1960s is now pouring 250,000-
300,000 Central Americans into the labor force each year, few
new jobs have been created during the past six years. As a
result, the bulk of new job entrants are unemployed or
underemployed. Official estimates place the rate of
unemployment in the region at about 20 pekcent, with some 1.3
million workers without jobs. Nearly half those with jobs in
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Dollars
1,600 ?
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Chart 4
Central America: Per Capita Income Trends
High Growth
CD
? Full US assistance a
CD
m
? Improved economic
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-0
a
>
(7
Peace )
policies
/ <
(D
1,400
/ a
-n
?
/ 7)
(D
/ Moderate Growth aT
CD
/ ? Full US assistance (i)
(D
/to
? Inadequate economic r\.)
c)
_.
1,200
adjustment 0.)
....a.
?1
? Political instability 0
R3
?00?. -P
400.... 0
/ ?00.1 ??...
71
1,000 ?00,0?0?. 0
00? .... 0
-0
ad* Cx)
H
.....?,?,, Low Growth 0
_1
aiftisie
iimmamiss? Reduced US assistance r,
......ft r\.)
I 1 1 I I I I I I I 1 I I 1 I I I I I ITh I ? Inadequate economic 7)
0
800 I 0
1978 1980 1985 1990 1995 adjustment 0
2000 0
?1
? Political instability 0
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0
0
0
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El Salvador, Honduras, and,Guatemala are underemployed because
they can find.only seasonal and part time jobs. (C)
Economic growth will help reverse these trends,
reinforced by efforts now under way to broaden the
distribution of the benefits of growth are under way. Land
reform in El Salvador has been supported through our
assistance. Progress in building up the base of education and
health in the poorer Central American countries -- Honduras,
El Salvador and Guatemala -- is being made, but improvements
will require long-term efforts. Projects based on the
recommendations of the Kissinger Commission are being
developed and funded, but success in these areas will require
improvements in institutions that can only occur gradually
over time. An important step in the institution-building
process is strengthening of human resources through higher
education,. A Central American scholarship project based on a
Kissinger Commission recommendation has been approved for this
purpose, and the first entrants into U.S. training should
begin before June, 1985. (C)
The quality of life is not simply limited to health care
and jobs. Considerable progress has been made over the past
several years toward strengthened democratic institutions.
Only Costa Rica has had a solid tradition of democratic
government in the region, but significant positive progress
has occurred in each of the other countries supported by U.S.
assistance. El Salvador and Panama have both completed demo-
cratic elections for president after a decade or more of
military rule. Guatemala, where a constituent assembly has
been writing a new constitution, may make this transition
later in 1985. In Honduras, a democratically-elected govern-
ment is expected to complete its term next January and turn
power over to another democratically elected government -- the
first peaceful transition of power in three decades. (C)
An important element of U.S. support for strengthened
democracy in Central America is assistance for the improvement
in the administration of justice. AID has been working with
the Government of El Salvador in this area, and a regional
project to provide the same kinds of training, advisory
services and support to other governments in the region is now
being developed. (C)
VI. Projected Financial Flows to Central America, 1985-89 (U)
Projections of financial flows to Central America for the
period 1985-1989 illustrate the importance of comprehensive
economic adjustment programs in the six countries. We esti-
mate $11 billion in net financing will flow to the region if
there is economic reform supported by IMF programs throughout
the period. However, this amount drops sharply to $9 billion,
if these six countries choose to forego IMF programs. Central
America will lose IMF resources of about $615 million and an
additional $3.4 billion of financing associated with IMF
programs. In the absence of IMF programs, we assume no Paris
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Club reschedulings, no net new commercial bank lending, no
IBRD structural adjustment loans, and reduced foreign direct
investment flows. We assume that the regional political
situation for both scenarios will see some improvement over
the five-year period. (C)
Net U.S. government financial assistance to the six
countries, assuming adoption of IMF programs, will essentially
meet the Kissinger Commission target of $8 billion. Without
IMF programs, USG financial flows drop by over $1.4 billion to
$6.6 billion, because Paris Club reschedulings will not be
available. (C)
The U.S. Government is the major source of financing to
the region throughout the period -6- providing 61% of total
flows, followed by the multilateral financial institutions
(including IMF) with 17%, and other official bilateral flows
providing 10%. This assumes: (1) IMF Standby programs for
three of the five years; (2) Paris Club reschedulings of
payments due official creditors; and (3) commercial bank
reschedulings of principal and some modest net new bank
lending of $1 billion over the period. (Costa Rica and Panama
account for $600 million of this.) We have also made the
optimistic assumption that commercial bank willingness to
reschedule will be unaffected by the absence of IMF programs.
(C)
In the absence of IMF and linked financial flows, the USG
share rises to 75% and the multilateral share (including IMF)
drops to 13%. The already limited role of commercial finan-
cial institutions (8%) decreases to 3%. (C)
It should be noted that even with new IMF programs over
the period, net flows from the IMF are negative because of
high utilization of IMF resources by Central American coun-
tries over the past five years. However, outflows to the IMF
would be considerably higher in the absence of new IMF pro-
grams. (C)
The share of other official bilateral sources of financ-
ing assuming adjustment to the region remains small throughout
the period. Without Paris Club reschedulings, however, the
share of other bilateral flows is almost halved. Disaggre-
gation shows that a large part of bilateral funds come from
Mexico and Venezuela, not Europe or Japan. (C)
Finally, even assuming economic adjustment measures, the
$13 billion we estimate in total net financial flows to the
region- is only about 60% of what the Kissinger Commission
estimated as necessary to reach target economic growth
rates. (C)
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VII. Economic Assistance and U.S. Interests in Central
America (U)
Based on the diagnosis of the Kissinger Commission
Report, the U.S. Government has developed a four-pronged
strategy for Central American development:
Economic Stabilization: The essential first step -- for
which $2.6 billion is programmed -- is to provide financial
assistance to end the decline in production, incomes and
employment by allowing continued imports of necessary raw
materials and intermediate goods. This assistance buys time
for the governments of the region to establish a sustainable
development strategy. (U)
Economic Transformation: The second step (requiring $1.7
billion in U.S. assistance) is to promote the transformation
of the region's economy to a self-sustaining basis. Produc-
tion of labor-intensive agricultural and industrial products
for export markets provides the best hope for creating this
kind of economic dynamism. Implementation of an export-led
growth strategy requires a variety of changes in government
economic policy. The most important of these is a broadening
of opportunities for the private sector through ending of
?excessive regulation and use of market forces to provide
appropriate incentives. Exchange rates are particularly
important in stimulating increased exports. Major investments
in productive enterprises and in economic infrastructure are
also needed. Development of indigenous energy resources is
also critical to relieve the burden of oil imports. (U)
Broadening the Base: In some countries of Central America
-- notably Guatemala, El Salvador and Honduras -- a restora-
tion of economic growth is not sufficient to achieve our
goals. The disparities in income and opportunity are so wide
within those countries that a more direct attack on such
problems is needed. We have established a series of specific
goals, including increasing primary school enrollments to all
primary-aged children, sharply reducing infant mortality,
increasing access to modern family planning, and improving
access to agricultural technology, that address these goals.
Programs have been designed and are being implemented to carry
them out. We have programmed $1.7 billion for this purpose,
not including $1.2 billion in local currency counterpart gen-
erations from the balance of payments assistance. (U)
Democratic Institutions: A number of actions are under
way to promote democratic institutions in the region,
including strengthening of judicial administration, support
for fair elections'and strengthening of understanding of U.S.
institutions through scholarships for U.S. education. A total
of $0.3 billion in activities in this area have been programmed.
The support for scholarships is a particularly noteworthy
element of the Kissinger Report, which calls for 10,000
scholarships for U.S. study during the next five years. This
program, which was induced in part by the large numbers of
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Soviet-bloc scholarships for study in Soviet-bloc countries,
is under way, with candidates now being selected for entry
into U.S. universities later this year. (C)
Altogether, the cost of implementing the four elements of
the program is $8.4 billion, including $6.4 billion in appro-
priated funds and $2 billion in guarantees. The mix of funding
requirements gradually changes over the five-year life, with
stabilization assistance receiving the bulk of funding in the
early years, followed by a later phase-over to support for
economic transformation. (C)
VIII. The Criteria for Economic Aid
The total amount available for the region is set both by
our estimate of the need (e.g., balance of payments gaps,
capacity for absorption of aid) and the constraints of the
U.S. domestic budget process. Allocation among the countries
of the region must reflect the level of resources needed to
achieve economic growth (or at least prevent economic deteri-
oration), and each nation's willingness to cooperate with us
on the overall goals, both political and economic, that will
ensure security. The relative levels of aid should not neces-
sarily be interpreted as absolute rankings of the importance
of each Central American country to the U.S. (C)
Our experience since the initiation of the Central
America Initiative illustrates the criteria for allocation of
economic aid.
-- El Salvador and Costa Rica received the largest
shares of the total because their economies were in the
greatest danger of collapse, El Salvador because of the
ongoing insurgency and resulting damage to its economy, Costa
Rica due to critical foreign exchange shortages caused by the
problems of servicing a massive foreign debt.
-- We have judged that democratic Costa Rica also
deserves continuing support to reward its progress, most
significant of all in the region, in adopting and implementing
the type of free-market reforms we advocate for sustained
economic growth.
-- Honduras, highly cooperative on security matters,
has received less economic aid because it has demonstrated a
lower potential to take necessary economic reform measures.
-- Our aid to Guatemala has been constrained by Con-
gressional concerns over the human rights record of the
current-military government and a reluctance to take adjust-
ment measures.
-- Assistance to Panama and Belize have increased
markedly under the Central America Initiative, albeit less
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than to the Core Four because of less immediate need, higher
living standards in Panama and lower absorptive capacity in
Belize.
Nicaragua, of course, receives no U.S. economic aid
because of its continuing and growing relationship with the
Soviet bloc and its adoption of marxist and state controlled
economic policies. Should these circumstances change, our aid
policies and requirements would change accordingly. (C)
IX. What We Get For Our Aid: The Issue Of Economic
Conditionality (U)
The imposition of conditions or guidelines on the use of
U.S. economic assistance is mandated by our responsibility to
ensure that the assistance promotes, rather than delays, an
economic foundation for political and social stability. As
U.S. Government financial assistance increases, we must avoid
making economic growth dependent on massive inflows of U.S.
aid. We have no desire to create dependencies. On the
contrary, our interest in long-term stability in the region
in returning Central American problems to Central American
dimensions, in the words of the Kissinger Commission --
requires that we ensure that the region prepare for the day
when U.S. assistance markedly declines or terminates.
Linking our aid to economic reforms --
conditionality -- is the principal tool we have to
see that this goal is accomplished. (C)
As the Kissinger Commission noted, "in too many other
countries, the increased availability of financial resources
has undermined reform by relieving the immediate pressure on
policymakers. This must be avoided in Central America."(U)
The development of appropriate conditionality for U.S.
assistance must take into account the local political and
security situation. Sometimes these objectives come into
conflict.
U.S. policymakers need to make careful assessment
of, and conscious decisions about, the likely
consequences for various interrelated U.S. objec-
tives, including political and economic stability,
bilateral cooperation, and security interests, of
imposing more or less rigorous conditions (or of
withholding and/or reprogramming aid). (U)
Rigorous conditions designed to set the stage for the
improved econortiic growth and employment prospects and the
revitalization of the private sector over the medium-term, may
be perceived as threatening by incumbent governments. They can
cause severe internal disruption and strain our bilateral
relations. Such strains may be sufficiently severe to under-
mine a principal motive for our aid: elimination of the
potential threat to U.S. security. (C)
?
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Conversely, delaying economic adjustment exacerbates the
underlying economic problems, requiring larger and more
dramatic adjuStment efforts down the road. This may translate -
into calls for greater levels of U.S. Government resources
with less conditionality as imbalances and capital flight
worsen and other sources of finance, particularly routine
trade financing, dry up. If our assistance levels cannot keep
pace in cases of ever-increasing dependency, the risk of
economic stagnation and resulting instability will increase.
(C)
The policymakers' task, therefore, is to fashion an
assistance program with conditionality that maxi-
mizes the chances for achieving the desired economic
results without unacceptable damage to other objec-
tives.(U)
We must provide a basis for cooperation on military and
security requirements consonant with economic objectives.
Conditionality on balance of payments support, particularly
ESF, is often the most effective and appropriate tool for
accomplishing macroeconomic policy reforms to bring about
economic stabilization and ensure sustainable growth. At the
same time, our insistence on conditionality has sometimes
strained relations and diluted the political benefits of ESF
support. (C)
X. Options for Conditionality
Our general policy has been to use U.S. balance-of-
payments assistance to encourage negotiation and compliance
with comprehensive economic stabilization programs, often
supported by IMF standbys. (U)
The development of, and compliance with, comprehen-
sive economic-stabilization programs are the optimal
way to ensure the successful application of U.S.
financial assistance toward the objective of
sustainable growth. (U)
IMF-supported comprehensive stabilization programs have
several substantial advantages over a strictly bilateral
approach. The IMF provides significant financial resources of
its own and opens the way for a Paris Club rescheduling of
debt to official creditors. An IMF program may also stimulate
IBRD structural adjustment loans and increased financial flows
from other donors and commercial banks. (U)
Until recently, our ESF balance of payments assistance
progrims in Central America were tied, at least initially, to
compliance with comprehensive adjustment programs in the form
of existing IMF standby arrangements. Some difficulties have
arisen with this approach. (C)
First, the countries of the region have had
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??? .1=1,
difficulty maintaining their relations with the IMF.
(Only Belize currently has an operating Standby,
although Costa Rica is expected to receive Board
approval soon, and Panama's negotiations with the
Fund may result in a Standby in the next few months.
El Salvador's standby program expired at the end of
1982 and Honduras fell out of compliance in
mid-1983.) (C)
Second, measures taken by governments to achieve the
principal IMF Standby objective of restoring balance
of payments equilibrium in the short run may not
always precisely coincide with other U.S. objec-
tives. (C)
Finally, implementing strict linkage to IMF programs
.
has been complicated by the Kemp-Kasten amendment to
the FY 84 supplemental aid bill and FY 85 Continuing
Resolution, prohibiting the withholding of economic
assistance disbursements solely based on the pol-
icies of multilateral institutions. The amendment
reflects concern about the impact of IMF adjustment
policies and the type of measures governments often
choose to meet Fund targets (e.g., tax increases).
(C)
While the USG has continued to disburse funds (although
under different timetables and conditions) to the Central
American countries in the absence of IMF programs, we do not
view an indefinite absence of the IMF from the countries of
the region as desirable. We should continue to encourage
countries to resume an IMF-supported adjustment program. (U)
Without IMF Standbys in place, the U.S. has been forced
to consider bilateral approaches to conditionality, or suspend
disbursements until the Fund relationship was restored. The
bilateral approach does not replace the substantial resources
lost from the IMF and other sources because of the lack of a
standby arrangement, or provide the basis for sustained
growth. But it does have the advantage of continuing the
policy dialogue and support for policy reforms. It minimizes
the loss of momentum in the adjustment process, although it
places extra stress on bilateral relations. (C)
Several alternatives to IMF-supported economic reform
have been considered and/or employed in Central America over
the past two years. The first retains as its objective
adoption of a comprehensive adjustment program without an IMF
standby designed to remove impediments to sustainable,
non-inflationary growth (e:g., overvalued exchange rate,
overly protective tariffs, excessive government deficits,
extensive inefficient public sector). When we develop a
"shadow program" independent of the Fund, our efforts to
enforce directly comprehensive conditions'by granting or
holding back ESF places strains on our bilateral relationship.
Moreover, U.S. Government efforts in the absence of the Fund
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have not produced the confidence among official and private
lenders and investors necessary to sustain the same levels of
external loan and investment flows. It should also be
recognized, however, that Central America's peculiar
socio-political situation has been another primary determinant
of capital flight and reduced private investment. (C)
A second option, development of a less-than-comprehensive
"short list" of specified economic reform measures, may lessen
the risk of strain and confrontation because the recipient
government must meet fewer conditions. However, if we wish to
maintain a realistic prospect of progress toward the desired
economic goals, the short list would logically include the
most painful and often most politically difficult measures.
The short list option, therefore, is likely to differ little
in its initial political consequences from a comprehensive
program, and will not mobilize financial resources from other
lenders. The short-list approach may be more palatable in
encouraging countries to bite one bullet at a time and, over
time, allow a more distant, less obtrusive U.S. monitoring of
their economic policy and performance. (C)
In situations where 1) comprehensive conditionality
proves impractical because of recipient government hostility
to reform and/or overriding foreign policy or security consid-
erations, and 2) it is impossible for political reasons to
reprogram the aid elsewhere, a measure of real economic impact
may be preserved by converting ESF balance of payments support
into projectized aid. The advantage of this approach over
weak conditionality is that the assistance can be directed
toward productive sectors and supporting infrastructure rather
than underwriting inappropriate and potentially damaging
short-term policies. This option has not so far been used in
Central America. It could impose significant administrative
burdens and overhead costs. It may likely be of limited value
in countries where there exists a significant pipeline of
undisbursed project funds. (C)
The final option is to impose no significant economic
policy conditions. Under this approach balance-of-payments
support is used explicitly or implicitly to offset or pay for
the host country's costs of cooperation with the U.S. on
security and other non-economic objectives. These costs may be
considerable. Even with U.S. military assistance programs,
the costs of coping with internal rebellion and economic
sabotage (as in El Salvador) or of supporting freedom fighters
and maintaining defense against potential aggression (as in
Honduras), may be more than local budgets can reasonably
bear. AC)
This strategy presents the lowest risk of short-term
strain on our bilateral relationship or threat to the govern-
ment in power's popularity and overall political stability.
But it postpones to the future any consequences, economic or
political, of distortions in the economy created by continued
inappropriate policies and of the risk of increased dependence
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on external assistance. Furthermore, such distortions tend to
worsen over time, increasing the costs, either in terms of
painful internal adjustment, or of foreign assistance. (C)
Tactical Considerations for Conditionality
Any conditionality strategy implies a number of tactical
decisions. The recipient country may be required to meet all
conditions before any ESF funds are disbursed, or installments
may be set up either for payment as each condition is
progressively met or to ensure continued compliance with the
program over time. The "all-or-nothing" tactic and both types
of tranching have been used in the past in Central America.
The projectizing option may be applied for all or a portion of
the total ESF available. (C)
-- The proper mix of tactics must be determined by the
peculiar circumstances of each case and our judgment
of how we may best balance our overall objectives.
(U)
There is scope for a range of conditionality associated
with different types of assistance. U.S. assistance agreements
related to concessional aid programs, Development Assistance,
PL 480, and Economic Support Funds (ESF), have in the past
included three types of conditions: project-related financial
and technical requirements; project-related economic policy
conditions; and conditions which require changes in the
macroeconomic policies of the recipient country. (C)
Project conditions usually involve such issues as reorga-
nization of implementing agencies, improvements in planning or
budgeting processes, or the adoption of new technologies. The
potential impact of such sectoral conditions on the balance of
payments and/or host-government budgets should not be underes-
timated. As previously noted, balance of payments support
through ESF programs have most often been used to promote
broad macroeconomic policy reforms. Food and other commodity
aid funded under Public Law 480 also represent balance of
payments support, but conditionality associated with PL 480
aid has been primarily used to achieve significant policy
modifications within the agricultural sector. (C)
The Central America Initiative also includes financial
assistance from several export promotion programs and a
housing-guarantee program which do not fall under the category
of concessional economic assistance. These include the Trade
Credit Insurance Program (TCIP), the Export-Import Bank
worldwide credit-guarantee program as available for Central
America; ousing Investment Guarantees (HIG) and export credit
guarantees extended by the Commodity Credit Corporation (CCC).
The TCIP, created to alleviate problems with U.S. trade credit
flows in the region as a result of a legislative requirement
that all Eximbank support provide reasonable assurance of
repayment, is administered by Ex-Im Bank and backed by an
ESF-funded reserve. The normal terms of Ex-Im Bank credit
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guarantees (other than reasonable assurance of repayment) will
apply to the TCIP. Conditions linked to allocation of HIG's
have been primarily related to the housing sector. (C)
CCC export credit guarantees are designed to develop and
maintain markets for U.S. agricultural products by providing
guarantees of commercial bank lending at market interest rates
on terms of up to three years. Neither Congress nor the
Executive Branch regards CCC as principally a foreign-
assistance program. Because of the commercial nature of the
CCC program, recipient countries are expected to provide
reasonable assurance of repayment. However, the maximum
three-year length of the program offers a degree of
concessionality. Many foreign governments, therefore, do not
make a clear distinction between CCC and bilateral economic
assistance; they see CCC as another manifestation of U.S.
support. The conditionality issues raised by economic assis-
tance may in such cases apply to the granting of CCC credits.
(C)
The urgency of our national security objectives in
Central America and the greatly expanded level of financial
assistance mobilized to achieve those objectives necessitate
close coordination of the various programs in applying
conditionality. (C)
1=0.1=D
We need to ensure that the conditions attached to our
financial assistance programs are logically consistent
and complement one another. (U)
We also must ensure that sectoral reforms and investment
plans are consistent with the requirements of macroeconomic
stability and economic liberalization. We must be flexible in
our approach and eliminate pre-set notions of what are
appropriate linkages between various programs and economic
reforms. We must assess the impact of financial assistance
carrying market terms on future economic prospects. (C)
XI. Regional Aspects of the Central America Assistance Effort
The recommendations of the National Bipartisan Commission
included strong support for regional solutions to the ills of
the Central American region. The Commission warned against
attempts to resolve the crisis piecemeal; it asked for "local
effort and external support, integrated into a comprehensive
approach." The Central America Initiative incorporated the
Commission's view of a regional approach in several areas
funded by economic assistance, including projects on a
regional basis to promote development of education, health and
social services, the administration of justice and development
of democratic institutions. (U)
Three major recommendations of the Commission to promote
regional cooperation have not yet been implemented. They are
a fund to help revitalize the Central American Common Market
(CACM), a contribution to the Central American Bank for
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Economic Integration (CABEI), and the establishment of a
Central American Development Organization (CADO). The U.S.
Government study of these three regional activities may lead
to the conclusion that one or more would not represent the
best use of our assistance resource or, in the light of
changing circumstances in Central America, would not
adequately promote the objectives attached to the regional
ideal by the Commission. If this proves to be the case, we
should not be reluctant to abandon any of these specific
projects while maintaining the high priority in the Central
America Initiative for activities appropriately pursued on the
regional level. (C)
The Commission's call for regional solutions to the
crisis in Central America also included a challenge to other
extraregional donors and to the multilateral institutions to
join the U.S. and the Central American countries in the
effort. Specifically, the Commission estimated that gross
flows of resources into Central America required to restore
1980 living standards in 1990 would need to total at least $29
billion by that year. The judgment that such a level could
suffice was based on very optimistic assumptions about capital
flight and about the Central American countries'. willingness
to forego consumption for investment. (C)
As the statistics developed in this study point out, the
U.S. effort may fall somewhat short of the Kissinger Com-
mission's $8 billion target. Every effort should be made to
ensure that the full $8.4 billion effort over five years is
implemented. In addition, friendly nations should be urged to
contribute more. Only Mexico and Venezuela, through the San
Jose Oil Facility, have provided resources to the region in
targeted amounts. The Europeans, except for a $19 million
pledge to CABEI, have so far contributed only vague promises
made at last September's conference in San Jose. The World
Bank has the capacity in its structural adjustment loans to
provide substantially more resources, but the Central American
governments except Costa Rica (and perhaps Panama) have been
reluctant to consider the adjustments required to tap this
source of financing, a fact that highlights the vital role
which policy reform must play in achieving our objectives. (C)
IMM.
The U.S. should increase its efforts to enlist
greater support from its allies, and continue to
review the lending programs of mulilateral insti-
tutions to ensure development of the region. (U)
Equally important and perhaps most critical to the
prospect of sustainable growth in the region independent of
official aid is the mobilization of funds for investment from
private external sources, which are projected in this study to
be practically non-existent throughout this decade in some
Central American countries. The U.S. Government can make
special efforts to bring encouraging political, security and
economic developments to the attention of potential investors,
but the success of our overall program to achieve peace,
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security and sustained growth in the region will be the
primary catalyst of greater investment flows. (C)
On MID
Failure to achieve totalresource flows near the amounts
recommended by the Commission will mean failure to
capitalize on the initial successes brought about by our
increased assistance and close cooperation with
international financial institutions. (C)
XII. Implementation, Timing and Monitoring of Assistance
Programs
The implementation of the President's Central American
Initiative (CAI) is one of the two top program priorities in
AID. Specific program proposals are developed by AID field
missions, identifying proposed uses of the funds and con-
ditions under which assistance is provided. These program
documents are reviewed in Washington by the Development
Assistance Executive Committee (DAEC), an interagency group
including representatives of State, Treasury and OMB. Where
issues arise concerning conditionality, a policy-level commit-
tee chaired by AID Administrator McPherson and Under Secretary
of State Schneider has been established to resolve them. (U)
An AID/State task force is providing guidance to the
field missions on the implementation of the CAI and to monitor
and evaluate progress, identify and help resolve problems and
to generally expedite the implementation of the program. A
two-tiered, computerized tracking system is being installed to
provide the task force with up-to-date information on U.S.
Government concessional assistance and to monitor progress
toward the achievement of our goals in Central America. It
includes two components:
a/M
a financial monitoring system which tracks regional
and country funding data by funding source, proj-
ects, NBCCA recommendations, and fiscal years, which
is ready for installation; and
a goal trackin7 system, with data on major economic
and social indicators, which is expected to be on
line by the end of August. (U)
Because of the program's high priority, AID has increased
its staff in Central America by 34 positions, increased
backstopping support for Central America in Washington, raised
the authority of Mission Directors to approve projects in the
field for up to $20 million, and delegated new contracting
authority to the AID Regional Contracting Office. (U)
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? EL SALVADOR: COUNTRY PROFILE
Primary U.S. Objectives
-- Promote development of democratic institutions and the
electoral process. Support dialogue and negotiations within
Salvador to expand participation in the democratic process.
-- Promote economic adjustment measures to ensure
economic development.
-- Ensure that El Salvador has the means to fight
supported and often directed from abroad.
ongoing
El
an insurgency
Recent Economic Performance and Prospects for Growth
-- Real GDP dropped 25 percent from 1978-82 while per capita GDP
and personal consumption dropped by a third. Investment fell 45
percent in 1980 and 20 percent in 1981. Industrial production
dropped 40 percent from 1978-82.
-- Economic decline was arrested in 1983, largely due to foreign
assistance. 1984 growth is estimated at 1.6 per cent, supported
by increased government services and a small boost in exports.
-- Economy still burdened by insurgency and lack of private
sector confidence, with political violence a main deterrent to
growth. Without improved security climate growth is unlikely to
exceed 2-3 percent per year through the end of the decade.
-- Political and military stability combined with government
policies conducive to investment and export production could lead
to real per capita growth exceeding 2-3 percent.
Economic Assistance Strategy
-- Stabilize the Salvadoran economy by promoting
policies and programs that will lay the basis for
sustainable, non-inflationary economic growth and
employment opportunities;
macroeconomic
resumption of
greater
-- Consolidate the agrarian reform program and improve
agricultural production;
-- Assure adequate supplies and logistical management of health
care; improve the quality of education; provide family planning
and improved housing and community services;
-
Conditionality Issues
-- El Salvador's IMF standby expired at year-end 1982; the
Magana government was unwilling to commit to a new pact during
its last months in office. The Duarte government has indicated
readiness to begin talks on a new standby after March elections.
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-- FY 84 Supplemental ESF was conditioned on a timetable by
which 40 percent of total import/export transactions would be
moved to the parallel market, the exchange rate unified, a high
level economic analysis group formed, and a GOES request to the
IMF to begin standby discussions. Suspension of disbursements
may be considered if these conditions are not fully met.
- Conditionality on FY 85 ESF may include a comprehensive
adjustment package or several key elements, e.g., adjustable
exchange rate system, decreased fiscal deficit, reduction of
regulatory and legal constraints to investment, agrarian reform,
and conclusion of an IMF standby arrangement.
-- Additional CCC and PL 480 assistance may be linked to
elements of or conditionality strategy.
Basic Economic Facts
Units
1982
1983
1984(Est.)
Gross Domestic Product
$Bn
3.35
3.81
4.36
GDP Per Capita
$US
650
770
872
Real GDP
%Ch
-5.6
0.0
1.6
Real GDP Per Capita
%Ch
-7.9
-2.2
-0.9
Cent Govt Balance/GDP
%
-5.9
-3.9
-5.0
Unemployment Rate
%
30
33
30
Total Publ. & Priv. Debt
$Mn
1.70
1.80
1.99
Debt Service Ratio
%
17
22
24
CURRENT ACCOUNT BALANCE
$Mn
-130.8
-74.5
-144.3
Merchandise Exports
$Mn
699.6
736.3
816.0
--Exports to U.S.
$Mn
318.8
348.0
408.0
Merchandise Imports
$Mn
883.0
891.5
1011.0
--Imports from U.S.
$Mn
266.8
342.7
376.0
TRADE BALANCE
$Mn
-183.4
-155.2
-195.0
CAPITAL ACCOUNT BALANCE
$Mn
127.8
164.7
56.6
BALANCE OF PAYMENTS
$Mn
-3.0
90.2
-87.7
U.S. Assistance Levels
(millions of dollars)
FY 83
Actual
FY 841
Alloc.
FY 85
Alloc.
FY 86
Request
DA
58.8
64.6
74.7
89.8
ESF
140.0
210.0
195.0
210.0
PL 480
46.7
54.0
47.3
50.8
Total Economic
245.5
328.6
317.0
350.6
Housing Guarantees
N/A
5.0
0.0
0.0
CCC
25.5
22.8
26.5
N/A
Total milita-ry
81.3
196.5
128.2
132.6
1/ FY 84 figures
include FY 84
Supplemental
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COSTA RICA: COUNTRY PROFILE
Primary U.S. Objectives
-- Strengthen our traditionally cooperative bilateral
relationship that is a critical element in developing broad-based
U.S. domestic and international support for our Central American
policy.
-- Preservation of Costa Rica's democratic political
institutions and social values.
-- Support Costa Rica as an effective spokesman in regional and
global fora for an informal democratic regional alliance as a
counterbalance to Soviet penetration.
-- Promote continuing economic reform leading to a more
equitable and market-oriented economy.
-- Assure through military assistance that Costa Rica will have
minimal self-defense capability against Nicaraguan aggression.
Recent Economic Performance and Prospects for Growth
-- Recession which began in the early 1980's bottomed out in
1982; GDP dropped by 9%, hitting hardest the manufacturing,
construction and commercial sectors.
-- Slow recovery began in 1983, Costa Rica posted a 2.4 percent
decline; the economy rebounded to 3.4 percent growth in 1984.
-- To maintain recovery Costa Rica will need to expand and
diversify its exports and slow down growth of imports. Under
these assumptions the economy could grow 3-4 percent in 1985.
Economic Assistance Strategy
- ESF finances imports required to maintain production and
employment. Local currency generated by ESF are primarily used
as credit for private sector development and divestiture of
public enterprises.
-- Combined with economic adjustment measures taken by the GOCR,
ESF funds will help the government maintain reserve levels and
meet conditions set under a new IMF stand-by arrangement.
-- In FY.86, AID will continue to support the government's
stabilizatian.-progeam with ESF-and PL 480 resources. Development
assistance will fund industrial expansion.
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Conditionality Issues
-- A $55 million IMF standby is scheduled for Board approval in
March.
-- FY 84 Supplemental and FY 85 ESF are conditioned on the
ongoing comprehensive adjustment program undertaken by the Monge
Government and supported by the IMF program, a World Bank
Structural Adjustment Loan, and commercial bank rescheduling.
-- Potential conditionality issues appear limited to prospects
for suspension of tranched ESF disbursements should the GOCR be
unable to maintain its obligations under the comprehensive
program.
Basic Economic Facts
Units
1982
1983
1984(Est.)
Gross Domestic Product
$Bn
2.82
3.06
3.19
GDP Per Capita
$US
1215
1300
1332
Real GDP
%Ch
-7.5
-2.4
3.4
Real GDP Per Capita
%Ch
-10.0
-3.6
1.0
Cent Govt Balance/GDP
%
-9.1
-3.4
-2.5
Unemployment Rate
%
14
16
16
Total Publ. & Priv. Debt
$Mn
3.84
4.45
5.03
Debt Service Ratio
%
54
35
31
Current Account Balance
$Mn
-234
-356
-390
Merchandise Exports
$Mn
866
870
960
--Exports to U.S.
$Mn
358.3
387.4
495
Merchandise Imports
$Mn
893
991
1090
--Imports from U.S.
$Mn
329.6
382.0
398
TRADE BALANCE
$Mn
-28
-121
-130
CAPITAL ACCOUNT BALANCE
$Mn
80
430
308
BALANCE OF PAYMENTS
$Mn
-314
74
-82
U.S. Assistance Levels
(millions of dollars)
FY 83
Actual
FY 841
Alloc.
FY 85
Alloc.
FY 86
Request
DA
27.2
20.9
13.8
14.4
ESF
157.0
130.0
160.0
150.0
PL 480
27.7
22.5
28.0
23.0
Total Economic
211.9
173.4
201.8
187.4
CCC
3.0
N/A
0.0
N/A
Total Military-
2.6.
9.1
9.2
2.7
1/ FY 84 figures include FY 84 Supplemental
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GUATEMALA: COUNTRY PROFILE
Primary U.S. Objectives
-- Promote a stable, democratic government, friendly to us,
respectful of human rights, capable of dealing effectively with
the Marxist insurgent threat and responsive to the economic and
social needs of its people.
-- Ensure that economic growth and the needs of the people,
particularly the rural Indian population, are met through
Guatemalan government policies, particularly concerning its
utilization of external assistance.
-- Support economic reform through our economic assistance which
will also assist the embryonic democratic process, and set the
basis for recovery and development to enable the next GOG to
better address the nation's pressing economic problems.
Recent Economic Performance and Prospects for Growth
-- Guatemalan economy grew in real per capita.terms through 1980
while those of other Central American countries declined. By
1981 regional political problems and declining terms of trade
reduced growth; real GDP has declined since 1982.
-- Early 1984 estimates put growth at zero to one per cent. Real
per capita income in 1984 was 16 percent below that of 1980.
Export earnings fell by 40 percent from 1980-83 due to depressed
sugar and coffee prices.
-- Economy is likely to expand modestly in 1985, with U.S.
assistance expected to grow if Presidential elections go smoothly.
Economic Assistance Strategy
-- Extension of economic development to the rural poor,
particularly the Highland Indians. AID programs (DA and ESF)
emphasize small farmer agricultural development and basic health,
education and family planning services -- programs essential to
address the rural poverty and related inequities which breed
insurgency.
-- DA funds support projects and related policy reform to
improve the savings and credit delivery systems which directly
serve small farmer agricultural cooperatives, and promote and
finance tbe voluntary sale of farm land from large landowners to
small land-poor fatmers.
-- Resumed ESF funding in FY 85 was projectized due to a
restriction in the appropriation. It will be used to promote
rural development, especially in the Highlands, and ESF-generated
local currencies will finance domestic lines of credit for the
non-traditional export sector.
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Conditionality Issues
-- Guatemala fell out of compliance with its 1983-84 standby in
mid-1984 due to lack of progress in the exchange rate and fiscal
policy areas. GOG is unwilling to negotiate a new program until
after the Presidential election.
-- Current conditionality issues in Guatemala involve primarily
project design questions because of the Congressional restriction
against use of ESF for balance of payments purposes. A broader
issue considered in obligation of FY 85 ESF was the role of the
Central Bank in the administration of U.S. funds intended for the
private sector.
-- Macroeconomic conditionality, including the nature of a
comprehensive adjustment program and the role of the IMF in
Guatemala, will arise for obligation of FY 86 ESF if Congress
does not reimpose the current restriction.
-- Linkage of CCC allocations to COG willingness to implement
comprehensive economic reform may also be at issue.
Basic Economic Facts
Units
1982
1983 1984(Est.)
Gross Domestic Product
$Bn
8.73
9.05
9.61
GDP Per Capita
$US
1134
1146
1180
Real GDP
%Ch
-3.5
-2.8
0.8
Real GDP Per Capita
%Ch
-6.4
-5.7
-2.0
Cent Govt Balance/GDP
%
-4.7
-3.6
-4.4
Total Publ. & Priv. Debt
$Mn
2015
1960
2200
Debt Service Ratio
$Mn
15
23
28
CURRENT ACCOUNT BALANCE
$Mn
-404.6
-251.4
-340
Merchandise Exports
$Mn
1170.4
1205.0
1300
--Exports to U.S.
$Mn
335.7
371.3
N/A
Merchandise Imports
$Mn
1388.0
1487.0
1679
--Imports from U.S.
$Mn
389.3
315.3
N/A
TRADE BALANCE
$Mn
-217.6
-282.3
-379
CAPITAL ACCOUNT BALANCE
$Mn
88.5
N/A
N/A
BALANCE OF PAYMENTS
$Mn
-316.1
N/A
N/A
U.S. Assistance Levels
FY 83
FY 841
FY 85
FY 86
(millions of dollars)
Actual
Alloc.
Alloc.
Request
DA
12.2
18.2
40.0
33.0
ESF
10.0
0.0
12.5
25.0
PL 480
5.3
12.0
20.5
19.2
Total EconomiC
27.5
30.2
73.0
77.2
CCC
54.6
72.0
50.0
N/A
Total Military
0.0
0.0
.0.3
10.3
1/ FY 84 figures include FY 84
Supplemental
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HONDURAS: COUNTRY PROFILE
Primau U.S. Objectives
-- Support the consolidation of Honduras' new democracy, and the
strengthening of its progressive political institutions.
-- Assist Honduras through a difficult period of economic
adjustment, promote social equity, overcome economic stagnation
and establish a sound basis for resuming sustainable,
non-inflationary economic growth.
-- Encourage Honduras to continue its consistently creative and
helpful role in seeking diplomatic resolution of the conflict
afflicting Central America.
-- Retain Honduras' support in countering the security threat
created by Soviet and Cuban support for regional subversion and
the military buildup in Sandinista Nicaragua.
Recent Economic Performance and Prospects for Growth
-- Honduras maintained positive growth through 1981. Real GDP
declined slightly in 1982-3, while investment declined by 40
percent over the 1981-2 period. Real per capita income in 1983
was 12 percent below 1979 peak level.
-- Real growth in 1984 is estimated by the government at 2.8
percent, stimulated by government spending backed by greater
assistance by the U.S. and by aid from multilateral
institutions. Government revenues posted a 20 percent gain, but
the fiscal deficit rose to 12 per cent of GDP.
-- Government policies and an overvalued exchange rate continue
to discourage foreign investors. The IMF forecasts slow growth
throughout the decade in the absence of exchange rate reform;
expected export growth of 6 percent per year is just enough to
maintain constant GDP.
Economic Assistance Strategy
-- Help the GOH address serious deficiencies in foreign
exchange, investment capital and development resources through
trade policy liberalization and exchange system reform.
-- Encourage the GOH through a continuing policy dialogue to
make needed reforms which would increase revenues, reduce
expenditures and stimulate private sector production,
particularly onnon-traditional export goods.
-- Increase private sector participation in the development
process while supporting the efforts of the GOH to provide
tangible benefits to the rural population.
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Conditionality Issues
-- Honduras was unable to maintain compliance with its 1983 IMF
standby targets, and did not reach agreement on a replacement
program during 1984.
-- The current dialogue with the GOH on economic adjustment
measures to be taken in connection with FY 84 Supplemental ESF
and FY 85 ESF has not yet led to agreement on a comprehensive
program or major elements of such a program. The GOH and the IMF
also have been unable to resume consultations toward a standby
arrangement.
-- Issues now under consideration include disbursement of a
portion of FY 84 Supplemental ESF funds based on the measures so
far agreed upon in the USG-GOH dialogue, degree of conditionality
on the remaining Supplemental ESF, and timimg and criteria for
obligation of FY 85 ESF.
- Conditionality on CCC guarantees and PL 480 may also be
coordinated with our overall economic reform strategy.
Basic Economic Facts
Units
1982
1983
1984(Est.)
Gross Domestic Product
$Bn
2.80
3.00
3.19
GDP Per Capita
$US
708
735
771
Real GDP
%Ch
-1.8
-0.5
2.8
Cent Govt Balance/GDP
%
-10.1
-9.8
-11.5
Total Publ. & Priv. Debt
$Bn
1.90
2.00
2.10
Debt Service Ratio
%
28.0
35.0
40.0
CURRENT ACCOUNT BALANCE
$Mn
-57
-234
-396
Merchandise Exports
$Mn
677
694
738
Merchandise Imports
$Mn
765
814
956
TRADE BALANCE
$Mn
-89
-27
-182
CAPITAL ACCOUNT BALANCE
$Mn
90
114
165
OVERALL BALANCE
$Mn
-138
-39
-32
U.S. Assistance Levels
FY 83
FY 841
FY 85
FY 86
(millions of dollars)
Actual
Alloc.
Alloc.
Request
DA
31.2
39.3
41.5
45.0
ESF
56.0
112.5
75.0
80.0
PL 480
15.5
19.6
18.3
17.9
Total Economic
102.7
171.4
134.8
142.9
Housing Guarantee
N/A
25.0
0.0
0.0
CCC
7.0
3.0
3.0
N/A
Total Military
37.3
77.8
62.5
88.2
1/ FY 84 figures include FY 84 Supplemental
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BELIZE: 'COUNTRY PROFILE
Primary U.S. Objectives
-- Strengthening democratic government; Belize became
independent in 1981 and held its first general elections in late
1984.
-- Encouraging settlement of the border dispute between Belize
and Guatemala. Support the presence of the British garrison in
Belize as essential to stability in the area.
-- Combatting drug production; Belize is estimated to be the
US's fourth largest supplier of marijuana.
-- Assisting sound economic development through implimentation
of the IMF standby program.
Recent Economic Performance and Prospects for Growth
-- After average annual GDP growth of 4.5 percent from 1960-80,
the economy crashed in 1981-2; terms of trade declined by 25%
-- Real growth was 1 percent in 1981, and declined 6 per cent in
1982. The 1982 devaluation of the Mexican peso sharply reduced
commercial earnings from foreign products resold abroad.
-- The economy recovered with slightly positive growth of
1-2 percent in 1983-4, with foreign investment increasing sharply
in 1984.
-- If the government complies with their IMF agreement and
continues to promote foreign investment and private enterprise,
Belize could return to 4-5 percent annual GDP growth within two
years and regain its 1980 peak by 1988.
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Economic Assistance Strategy
-- Helping Belize to diversify its economy, develop an
infrastructure, improve basic health and social services and
manage its domestic and foreign debt.
-- Over the near term, AID's economic assistance will be
targetted on fiscal stabilization, agriculture production and
diversification, improved health services, and manpower training.
Conditionality Issues
-- Belize is currently in compliance with a 16-month IMF
agreement approved in December 1984. Our ESF conditionality
involves efficiency improvements
better resource allocation,
state marketing board.
Basic Economic Facts
in the electric power sector,
and reform or divestiture of the
Units 1982 1983 1984(Est.)
Gross Domestic Product
$Mn
166.2
175.9
184.7
GDP Per Capita
$US
1,093
1,142
1,176
Real GDP
%Ch
-5.7
2.0.
2.0
Real GDP Per Capita
%Ch
-8.2
-0.3
+0.1
Cent Govt Balance/GDP
%
-9.6
-7.7
-6.0
Unemployment Rate
%
N/A
N/A
N/A
Total Publ. & Priv. Debt
$Mn
N/A
N/A
N/A
Debt Service Ratio
%
5.4
8.4
7.1
CURRENT ACCOUNT BALANCE
$Mn
-18.4
-11.0
-15.8
Merchandise Exports
$Mn
59.8
65.1
70.0
--Exports to U.S.
$Mn
27.9
28.3
Merchandise Imports
$Mn
114.2
110.3
117.4
--Imports from U.S.
$Mn
TRADE BALANCE
$Mn
-54.4
-45.2
-47.4
CAPITAL ACCOUNT BALANCE
$Mn
18.2
2.0
9.7
BALANCE OF PAYMENTS
$Mn
-0.2
-4.3
-6.5
U.S. Assistance Levels
(millions of dollars)
FY 83
Actual
FY 841
Alloc.
FY 85
Alloc.
FY 86
Request
DA
6.7
5.4
6.0
6.8
ESF
10.0
10.0
4.0
4.0
PL 480
0.0
0.0
0.0
0.0
Total Economic
16.7
15.4
10.0
10.8
'Total Military_
0.1
0.6
0.6
1.1
1/ FY 84 figures
include FY 84 Supplemental
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PANAMA: COUNTRY PROFILE
Primary U.S. Objectives
-- Ensure unimpaired exercise of U.S. rights and responsi-
bilities under the Panama Canal Treaties and related agreements.
-- Support constitutional civilian rule, and sound economic
growth and development, to sustain a social, economic and
political environment conducive to U.S. objectives and resistent
to instability, social unrest and Communist penetration.
-- Promote comprehensive structural economic adjustment to
overcome economic stagnation by diversifying the economy.
-- Enhance the ability of Panama's military to relieve the U.S.
of exclusive responsibility for Canal defense, contribute to
national economic and political development and maintenance of
civil liberties and order; and facilitiate Panama's contribution
to preservation of regional peace and security.
-- Develop necessary conditions for Panama's cooperation in
studies and preparations for exploitation of Panama's geographic
location after termination of the Canal Treaty in 1999, including
continued U.S. military access in Panama at that time.
-- Ensure Panamanian support for U.S. policies and objectives in
Central America.
Recent Economic Performance and Prospects for Growth
-- Services earnings compensated for a falloff in primary
product exports to give the Panamanian economy a boost during
1979-80 while other countries entered recession. In 1981-2
construction projects boosted annual GDP growth to over 4 percent.
-- Panama's economy experienced sharp recession in 1983 when the
government could no longer obtain adequate external financing to
compensate for a sharp drop in private sector consumption. In
1983 total investment dropped by 21 percent . In 1984 government
spending fell and the economy contracted nearly 2 percent.
-- The newly elected government faces a serious financial crisis
and a split between the executive and the legislature as to its
solution. Panama's use of the dollar limits monetary policy
options; the government's inability to obtain increased external
financing has strained the liquidity of the national bank.
Economic Assistance Strategy
-- Stimulate rapid and sustained economic growth by encouraging
the government to carry out economic policy reforms and by
providing financing to the private sector; assist the government
?
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to carry out its stabilization'program; revitalize the
construction sector through. policy reform and financial
assistance; and strengthen the democratic system.
-- Promote through U.S. assistance economic policy adjustments
and economic stabilization, aid small business development,
provide low-income housing, generate employment, and fund ongoing
agriculture and rural development projects.
Conditionality Issues
-- Panama remained in compliance with an IMF agreement that
expired at end 1984. A new agreement will be linked to GOP
control and reduction of its burgeoning fiscal deficit.
-- The conditionality issues which may arise this year will
likely depend on Panama's success in grappling with its fiscal
problem and maintaining agreements with the IMF and IBRD.
Basic Economic Facts
Units
1982
1983
1984(Est.)
Gross Domestic Product
$Bn
4.21
4.27
4.32
GDP Per Capita
$US
2147
2133
2176
Real GDP
%Ch
4.7
-1.7
-2.0
Real GDP Per Capita
%Ch
3.7
-2.7
-3.0
Cent Govt Balance/GDP
%
-11.0
-5.8
-6.2
Unemployment Rate
%
18
20
20
Total Publ. & Priv. Debt
$Bn
4.61
4.86
5.11
Debt Service Ratio
%
40
30
34
Current Account Balance
$Mn
-439
-185
-270
Merchandise Exports
$Mn
488
437
428
--Exports to U.S.
$Mn
135
160
N/A
Merchandise Imports
$Mn
1497
1353
1302
--Imports from U.S.
$Mn
477
393
N/A
TRADE BALANCE
$Mn
-1009
-916
-874
CAPITAL ACCOUNT BALANCE
$Mn
80
430
308
BALANCE OF PAYMENTS
$Mn
-359
245
38
U.S. Assistance Levels
(millions of dollars)
FY 83
Actual
FY 841
Alloc.
FY 85
Alloc.
FY 86
Request
DA
6.2
15.0
20.0
22.6
ESF
0.0
30.0
20.0
40.0
PL 480
1.0
1.3
0.0
0.0
Total Economic
7.2
46.3
40.0
52.6
Housing Guarantees
N/A
0.0
0.0
25.0
Total Military
5.4
13.5
10.6
19.1
1/ FY 84 figures include FY 84 Supplemental
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