NSC MEETING ON NSSD 2-85: "ECONOMIC DEVELOPMENT FOR CENTRAL AMERICA"

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87B00342R000100100003-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 69
• Document Creation Date: December 27, 2016
• Document Release Date: November 9, 2010
• Sequence Number: 3
• Publication Date: May 23, 1985
• Content Type: MEMO

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TRANSMITTAL SLIP I GO May OJ
TO: ..' Executive Secretary
ROOM NO.
BUILDING
REMARKS:
---D 1- C )
STAT
STAT
FROM: NIO/Econ (David Low)
ROOM NO.
7B42
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NNW Na_ REPLACES FORM 36-8 (47)
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1 FEB 56 41 WHICH MAY BE USED.
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DrA.AL4
?
The Director of Central Intelligence
Washington, D.C. 20505
National Intelligence Council
MEMORANDUM FOR: Director of Central Intelligence
Deputy Director of Central Intelligence
NIC 02669-85
23 May 1985
FROM: David B. Low
National Intelligence Officer for Economics
SUBJECT: NSC Meeting on NSSD 2-85: *Economic Development
for Central America?
1. In January 1985 the President commissioned a study to provide an
analytical framework for building US policy toward economic development
in Central America. This study was an interagency effort led by Bill
Martin, Special Assistant to the President on the NSC Staff. The summary
of the final report is attached as Tab B. The full report is attached as
Tab C.
2. The CIA contribution to this effort, which is summarized in
Tab D, consisted of an economic review of conditions in the region over
recent years as well as a projection of the potential for economic
growth, given varying assumptions in coming years. In addition, the CIA
contributed a country-by-country analysis, which is summarized and
updated in Tab E.
3. Bill Martin, who will conduct the briefing for Mr. McFarlane, is
seeking to renew the momentum for one of the President's top priorities
which has gotten bogged down on the Hill. We are in the second year of a
five-year program, spearheaded by AID, to mobilize US resources in a
fashion consistent with that recommended by the Kissinger Commission
Report. While the Kissinger Commission recommended US flows amounting to
$8.4 billion over the five years, it is likely that the amounts will fall
well short. AID is presently having alot of trouble obtaining its gross
levels of assistance as requested, and might consider itself lucky to get
a continuing resolution at this point. The Senate has passed a bill
which contains money for Central America, but House action needs a shot
in the arm.
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. . ?
SUBJECT: NSC Meeting NSSD 2-85: 'Economic Development for Central
America'
4. Attached as Tab A are talking points. They seek to make two
points. First, while this study is an excellent format for constructive
examination of what is needed for Central America to realize its economic
potential, I think the security situation needs to be emphasized. It is
not that the report doesn't recognize the impact that instability has
had, but rather that we must not allow ourselves to be unduly optimistic
about the ability of these countries to prosper in the face of continuing
instability. Secondly, I would propose that you take advantage of this
forum and opportunity to touch on the need for US aid to reach the
private sector.
David B. Low
Attachments:
Tab A: Talking Points
B: Summary Report
C: Response to NSSD 2-85
D: Summary of CIA Contribution
E: One-Page Summary on Each Country
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SUBJECT: NSC Meeting on NSSD-2-85: 'Economic Development for Central
America'
NIO/Econ(David Low):rr 23 May 1985
Distribution:
Original - Addressees
1 - DDCI
C__1-,--En-Eutive Secretary
1 - Executive Registry (w/o Tabs B-E)
1 - C/NIC
1 - VC/NIC
1 - Nb/LA
1 - DD/OALA
1 - NIO/Econ
1 - A/NIO/Econ
1 - NIO/Econ Chrono (w/o Tabs B-E)
1 - NIO/Econ File
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NIC 02669-85
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Economic Development for
Central America (u)
NSSD 2-85
March 1985
8
to
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Central America
MEXICO
Villahermosa
Tuxtla
,Gutierrez
?
?
i
925i
*Quezahenaligo-----
a
Guatemala
.Flores
GUATEMALA
North
Pacific
Ocean
Chetumal '
Belize ?
City. ,
. ,
*Belmopan
BELIZE
Islas de
in Bahia
Puerto
Berriosx-'
?San Pedro Stria
HONDURAS
anta Tegucigalpa*
?rkna
: San
Salvador* San
? Miguel
EL SALVADOR ? .
...i,-
Scale 1 9.500.000
O 100 290 Kilometers
O 100
Lambed Conlorrnal Conic Projectfon,
standard parallels 9.A1 and IA
200 Nautical Miles
1
Cayman Islands
n
Georgetown?
. Swan Iskinds
(H?o,,N, as
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Puerto
-Cabezas
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y 6,
Cif
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Managua -- Bluefields
Granada ??,_
Lagode
Nicaragua
Csyns
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? COSTA Limon
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Summary and Conclusions
1. Good progress is being made in implementing the Central American Initiative
recommended by the Kissinger Commission a year ago. The principal objectives we seek
through economic assistance -- rapid growth through exports and private investment --
are still appropriate.(U)
2. Central America is in the initial stages of an economic recovery, fueled by the
increased U.S. economic assistance, an improving political climate, better policies and
world economic recovery. (U)
3. Because progress toward regional peace has been less than hoped for, the region is
still unlikely to achieve the economic goals set by the Commission. The region holds
little interest for foreign investors, and even Central American entrepreneurs are
hesitant to invest. Consequently, per capita incomes in Central America are unlikely to
even return to the pre-crisis level by 1990.(S)
4. We reaffirm the need for the $8.4 billion five-year assistance package recommended
by the Bipartisan Commission a year ago. The trade credit guarantee program should be
extended until the security situation has improved sufficiently to restore private
credits. Up to now, we have received most of what we requested, but increased efforts
may be needed in the future to assure adequate funding.(S)
5. The United States is shouldering the great bulk of the assistance burden in
Central America, followed by the multilateral banks. Very little assistance has been
forthcoming from Europe or Japan. We will want to monitor the contributions of other
donors carefully.(S)
6. Economic stabilization assisted by the IMF is important to Central American
governments: it generates additional amounts and sources of financial flows, and it
promotes more efficient resource use.(U)
7. The security situation remains threatening, increasing the difficulties of
implementing our economic assistance program. Governments are reluctant to adopt
unpopular measures in an unstable political environment. Yet improved economic policies
-- which usually have some short-term political costs -- are, in addition to political
stability, the key to the effectiveness of our aid and to rapid economic growth.(S)
8. This dilemma of tradeoffs between our economic and strategic objectives will
continue to pose difficult choices for U.S. policymakers. Close coordination among U.S.
Government agencies will be important in properly balancing these objectives to achieve
an optimal mix. This is likely to require increased policy-level discussion.(S)
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OADR
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The Decline in Per Capita Income
Per Capita GNP (Dollars)
1,100
1,080
1,060
1,040
1,020
1,000
680
960
940
1979
1980 1981 1982 1983 1984
Year
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2. Central America: The Economic Backdrop
Since 1978, Central America has been buffetted by security threats, declining regional trade,
the loss of international credits and foreign investment, and erosion of business confidence.
S)
These events have been mutually reinforcing, with political turmoil leading to loss of
confidence, capital flight, and economic decline, which then increases political turmoil.
? Insurgency has seriously damaged much of the productive infrastructure in El
Salvador. Even now, road transportation, electrical transmission systems, and
dams are regular targets of the insurgents, and intimidation of rural workers has
cut into agricultural production and exports.
? The region has been too risky politically and economically to attract external
financial flows.
o Inadequate economic policies used to strengthen political support have fueled
inflation and discouraged investment in export and other industries.
? The economically and politically risky environment has spurred capital flight to
safe havens in the United States and elsewhere.
? Tourism has declined dramatically as a source of foreign exchange. (S)
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UNCLASSIFIED
KEY QUOTES FROM THE BIPARTISAN REPORT
u . . . whatever the costs of acting now, they are far less than
the long-term costs of not acting now." (U) ,
H . . ? the intrusion of aggressive outside powers exploiting
local grievances to expand their own political influence and
military control is a serious threat to the U.S. and to the
entire hemisphere." (U)
"Ultimately, the effectiveness of increased economic assistance
will turn on the economic policies of the Central American
countries themselves. . . . We agree with what many experts
have told us: that unless these reforms are extended economic
performance will not improve, regardless of the money foreign
donors and creditors provide. In too many other countries,
increased availability of financial resources has undermined
reform by relieving the immediate pressure on policy makers.
This must be avoided in Central America." (U)
". . . the crisis in Central America cannot be considered in
solely economic or political or social terms. The requirements
of the development of Central America are a seamless web." (U)
UNCLASSIFIED
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UNCLASSIFIED
3. Highlights of the Bipartisan Report
The report of the National Bipartisan Commission on Central America, chaired by
Henry Kissinger, concludes that the current crisis is the result of the failure of
political systems in Central America during the early 1970s to become more open in line
with economic progress and a rise in political consciousness. The 1979 oil price
increases, Cuban-Soviet-Nicaraguan intervention, and the world recession then
overburdened the weak political institutions. (U)
The Report has two principal recommendations:
'--The security situation must be improved through substantially increased military
assistance to help El Salvador win the war and negotiation with or isolation of
Nicaragua.
--An $8.4 billion economic assistance program should be launched to address the
interdependent economic, political and social problems facing the region. Three
elements are involved: creating sustainable economic growth; building democratic
political structures; and attacking extreme poverty. (U)
Other Recommendations
--Support for Export Development through financial support for export and investment
promotion in the region and reduced U.S. trade barriers.
--Scholarships to bring 10,4)00 Central Americans to the United States over five years, a
.level of effort comparable to that of Soviet-bloc governments.
--Creation of CADO, the Central American Development Organization, an umbrella
organization to oversee the progress of economic, social and political reforms in the
region and to control one-fourth of the total U.S. assistance for the region.
--Accelerated Health and Education Programs including use of Peace Corps Volunteers for
literacy and teacher training, expanded technical education, new approaches to health
programs, and expanded family planning programs.
--Strengthened Judicial Systems. (U)
UNCLASSIFIED
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Major Goals of the
Central American Initiative
1984 1990
Target Concern Level Goal
GNP Growth Rate
Agricultural Production
Growth
1.2% 5-6%
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
(% of Fertile Women)
24%
40%
Central American Population
by Age, 1960-2000
Number of People (Millions)
34
32
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
1960
1980
Year
2000
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UNCLASSIFIED
4. U.S. Economic Assistance Strategy in Central America
Based on the diagnosis of the Kissinger Commission Report, the U.S. Government has
developed a four-pronged strategy. The program would achieve major social and economic
goalsi it would also address the massive increase in the labor force over the next 15
years that is the legacy of high birth rates during the past.two decades. (U)
--Economic Stabilization. The essential first step is to stop the downward spiral
in production, incomes and employment by policy reforms to halt capital flight and
by financing necessary imports. This buys time for the governments to establish
sustainable development strategies. (U)
--Economic Transformation. Over the medium term, the region's economy must be put
on a self-sustaining basis. Production of labor-intensive agricultural and
industrial products for export markets is needed. An export-led growth strategy
requires changes in government economic policy -- broader opportunities for the
private sector, an end to excessive regulation, appropriate exchange rates, major
investments in productive enterprises and in economic infrastructpre, and
development of indigenous energy resources to reduce the burden on imports. (U)
--Broadening the Base. In Guatemala, El Salvador and Honduras, disparities in
income and opportunity are so wide that a direct attack on poverty is needed.
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 are all necessary. (U)
--Democratic Institutions. Democratic institutions should be promoted through
strengthening of judicial administration, support for fair elections, and increased
understanding of U.S. institutions through scholarships for U.S. education. The
planned 10,000 scholarships for U.S. study during the next five years would raise
U.S. support to the level of the Soviet-bloc countries. (U)
UNCLASSIFIED
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5. U.S. Assistance Has Produced Some Encouraging Signs
The buildup of U.S. economic assistance to Central America, coupled with economic
reforms and an improved international economy, has 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 four years. There is also an encouraging movement
toward democracy in the region. (S)
--Economic Stabilization. After plummeting steadily over the
national product grew by 1.2% in 1984 in the Central American
supporting -- the highest in five years. U.S. assistance and
key elements in this turnaround -- both through the financial
1979-83 period, 'gross
countries we are
economic reforms were the
resources we provided and
through the increased confidence in political and economic stability that our support
generated. Private sector confidence is also returning, as evidenced by short-term
private capital movements -- which became positive in 1983 and 1984 after large amounts
of capital flight in the prvious three years. Much more remains to be done, but
progress has been made in policy reform:
--exchange rates in Costa Rica, El Salvador and Guatemala have been realigned to
encourage exports;
--government budgets have been reduced and fiscal deficits cut in Costa Rica;
--government controls inhibiting private sector investment have been reduced; and
--governments are actively considering divestment of inefficient public enterprises
through sale to the private sector, particularly in Costa Rica and Panama. (S)
--Political Stabilization and Democratic Institutions. Considerable progress has been
'made toward strengthened democratic institutions. Only Costa Rica and Belize have solid
traditions 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 democratic 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 government is expected to complete its term next January and turn
power over to another democratically-elected government -- the first peaceful transition
of power there in three decades. (S)
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Central America: Per Capita Inc Itne :r
Dollars
1,600 -
1,400 -
1,200
1,000
800 I I I
1978 1980
oft
High Growth
? Full US assistance
? Improved economic
policies
? Peace
/
/
/ Moderate Growth
/ ? Full US assistance
? Inadequate economic
adjustment -
/
? Political instability
...
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1985 1990 1995
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Low Growth
? Reduced US assistance
I ? Inadequate economic
adjustment
2000
? Political instability
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6. Illustrative Economic Growth Paths
The Kissinger Commission made four key assumptions:
--OECD economic growth of 3-4%, with higher growth in the United States.
--high levels of U.S. assistance.
--economic policy reform by Central American governments ko increase private sector
investment and exports.
--declining violence, followed by peace within the region within 1-2 years.(U)
There are three critical variables which will affect growth:
--the presence or absence of peace;
--the level of foreign assistance; and
--economic policies of the region's governments.(U)
With these variables, several alternative growth paths are possible:
o 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 strong commitment to market-oriented economic policies to
stimulate financial flows and private investment, particularly in non-traditional export
sdctors. (S)
o 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 sources, including debt
rescheduling. It would be the mid-1990s before the 1978 level of per capita income was
re-e.tablished. (S)
O 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. (S)
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Level (Million $)
400
350
300
250
200
150
100
50
U.S. AID Allocations by Country
(Million Dollars)
Actual FY 1984
2 k 2
0
e 0
b (11 (11
J
2 A o b
,1/4. ? ,1/4. cic
co qr (zr
o co
0 0 ?2--
0
Requested FY 1986
Level (Million $)
400
350
300
250
200
150
100
50
0
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UNCLASSIFIED
7. Allocation of U.S. Economic Assistance
--The total amount available for the region is set both by our estimate of the need
(based on balance of payments gaps and absorptive capacity) and the constraints imposed
by the U.S. -budget. Allocations among countries must reflect relative needs, each
government's commitment to sound policy, and its willingness to cooperate with us on
broad goals, both economic and political, that will ensure security. Thus, title relative
levels are not absolute rankings of the importance of each country to the United States.
(U)
.Our current assistance levels illustrate the criteria used:
--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 insurgency, and Costa Rica because of a massive foreign debt. (U)
--We have judged that democratic Costa Rica also deserves continuing support to
reward their progress -- the most significant in the region -- in adopting and
implementing the free-market reforms we advocate for sustained economic growth. (U)
--Honduras receives less because its needs and absorptive capacity are less, even'
though the country is highly cooperative on security matters. (U)
--Aid to Guatemala has been constrained by Congressional concerns over the human
rights record of the successive military governments, and a lack of strong
economic policies. (U)
--Assistance to Panama and Belize has increased markedly under the Central
American Initiative, albeit less than to the Core Four, because of lower immediate
need, higher living standards and lesser threats to their security. (U)
--Nicaragua, of course, receives no U.S. economic aid because of its relationship
with the Soviet bloc and its adoption of marxist and statist economic policies.
Should these circumstances change, our aid policies would change accordingly. (U)
UNCLASSIFIED
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Projected Sources of Net Financial
Banks,
Suppliers
(7.8%)
Direct Investment (4.5%)
Multilateral
Agencies
(16.6%)
Note?
This Projection Assumes Agreements With the IMF.
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Total Net Flows: 1985-89
By Country ? $ Billion
Without IMF
Other
Multilateral
USG
Guat CR Hond Panama El Belize
With IMF Salv
Guat CR Hond Panama El Belize
Salv
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8. The U.S. Faces Potentially Difficult Choices in Central America
The major vehicle for assisting Central American governments -- economic aid -- could be the
means by which they can postpone difficult steps. We therefore sometimes face problems in
effectively using our economic assistance. Moreover, governments in the region may view our
economic assistance as payment for their role in supporting U.S. strategic or political
objectives rather than as conditioned economic aid. (S)
An International Monetary Fund-supported program is the best assurance of an adequate
short-term economic adjustment program and of the availability of funding from other
sources. However, implementation of the economic reforms associated with IMF programs is
sometimes politically unacceptable to the government in question. Since the U.S. Government
is deeply concerned about political stability in the region, we face difficult decisions
regarding the level of conditionality we believe is achievable. U.S. policymakers need to
make careful assessment of, and conscious decisions about, the likely consequences for
various interrelated U.S. objectives. (S)
In the recent past, our policy responses have tended to fall into three categories:
--An IMF Agreement. We have generally sought to provide balance of payments assistance i
support of IMF programs. Structural reform conditions are often included as well. (S)
--Set our own conditions. Where conditions have precluded an IMF agreement, we have
continued to disburse funds in some cases, using our own conditions to ensure their effective
use. This approach involves two complications:
--the U.S. can be seen as imposing onerous conditions on our aid, thereby potentially
damaging bilateral relations.
--lack of an IMF program would mean foregoing other resources. Over the next 5 years,
the net cost to the Central American countries with no IMF programs is estimated to be
as high as t4 billion, or 30% of projected net flows to the region. (S)
--Waive conditionality. This alternative maintains the best bilateral relationship, and goes
furthest to support political stability in the short run. However, lack of needed economic
reforms may slow growth, which will tend to increase dependence on U.S. support and could
threaten long-term political stability. (S)
No single choice is likely to produce an ideal outcome. Therefore, there will be a
continuing need to tailor our conditionality to the specific factors at play in any given
country, including the political and security environment. Getting the mix right is likely
to require considerable understanding of the tradeoffs and attention at the policy level. (S)
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U.S. Economic Assistance
Millions of Dollars
1,200
1,100 ?
1,000 ?
900 ?
800
700 ?
600 ?
500 ?
400 ?
300 ?
200 ?
100 ?
0
(Obligations & Expenditures by FY)
Total Obligations
Total Expenditures
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
11. III 1M IN IN III vow um mr im uff
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9. Implementation, Timing and Monitoring of Assistance Programs
--Economic progress in Central America demands a long-term commitment.
--Implementation of the President's Central American Initiative is presently being carried
out primarily by AID. Program proposals are developed in the field and reviewed in
Washington by an interagency group.
--A two-tier computer tracking system is being developed to monitor implementation and
progress toward the achievement of our Central American goals. These efforts help to
track progress toward our long-term economic and political objectives.
--To assure that policy issues relating to assistance requirements are met, a special ad
hoc group chaired by AID and State has been created.
--This NSSD underscores the need for timely and systematic review of both ongoing and ad
hoc funding requirements. (S)
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Dollars
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
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Economic and Social Indicators for re".1frgiiPmrir
? Per Capita Income, 1982
- 7777'7"
Costa Rica El Salvador Guatemala Honduras Belize
Rate per 1,000
90
80
70
60
50
40
30
20
10
Panama
_ Infant Mortality, 1981
Costa Rica El Salvador Guatemala Honduras
Belize
Panama
Population (Million)
8
7
6
5
4
3
2
1
0
_ Population,
1982
-^
Costa Rica El Salvador Guatemala Honduras Belize
Persons per Km2
260
240
220
200
180
160
140
120
100
80
60
40
20
0
Panama
Population Density, 1982 ?
Costa Rica El Salvador Guatemala Honduras
Belize
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--
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UNCLASSIFIED
10. Country Profiles
Central America is usually treated as largely homogenous. Yet diversity and uneven
progress among the countries are historical facts. For example, infant mortality in
Costa Rica, Belize, and Panama is at the level of the United States during the early
1970s; for the rest of Central America, the rate parallels that in the United States a
half-century earlier. (U)
Costa Rica has had a long tradition of democratic government, mass education, and
stability. Excessive borrowing during the late 1970s fueled massive growth in the
public sector, creating a financial crisis. The government has come to grips with this
problem and is divesting government enterprises. Nevertheless, working off the debt
overhang will require most of the rest of the decade. (U)
El Salvador is the smallest and most densely-populated country. The country grew
rapidly during the 1960s and the political system appeared to be opening, but most of
the progress was reversed after 1973. (U)
Guatemala has the largest population of any Central American country, and the largest
industrial sector. Nevertheless, it also has great cultural divisions between the
largely Indian highlands (many Indians do not speak Spanish) and the rest of .the
society. Governments have tended to be conservative and to lack a development
orientation. (U)
Honduras is the poorest of the countries. Though having ample land and other natural
resources, lack of human resources and leadership have gradually widened the gap between
Honduras and the other countries. (U)
Belize, originally a British enclave, is a sparsely-populated country with a solid
democratic tradition, and high education and health standards. With a large resource
base, its economic problems are the least severe of any of the countries in the region.
(U
Panama is a middle-class country that has gradually emerged as a Latin American banking
and service center. The current government is addressing the foreign debt and bloated
public sector that pose the most serious challenges to economic recovery. (U)
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UNCLASSIFIED
ANNEX
ECONOMIC ASSISTANCE TOOLS OF THE U.S. GOVERNMENT
--ESF., Economic Support Funds, the most flexible form of U.S. assistance, are usually
not tied to specific projects; allocations are determined by U.S. security interests,
but usually tied to economic reforms by the recipient.
--DA. Development Assistance funds administered by AID are for specific development
projects, mainly in agriculture, health, education and family planning.
--PL 480. PL 480 provides grants and long-term loans at concessional interest rates for
purchase of U.S. agricultural commodities.
The Commodity Credit Corporation provides guarantees for 3-year credit at
near-market interest rates. The purpose is market development for U.S. agricultural
exports.
--Eximbank. The Export-Import Bank provides short and medium-term insurance and
guarantees at near-market rates of interest to promote U.S. exports.
--MDBs. Multilateral Development Banks draw funds from the U.S. and other governments
and raise funds in capital markets, using member-government guarantees, to provide
long-term finance, primarily for development projects.
-? -IMF. The International Monetary Fund provides temporary balance of payments
assistance in conjunction with stabilization programs.
--Paris Clubs. Rescheduling, or postponment of repayment, of debts to the U.S.
government -- done in concert with other bilateral creditors -- provides breathing space
to governments facing imminent default. An IMF agreement is a precondition for such
reschedulings. (U)
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SYSTEM II
90247
THE WHITE HOUSE
WASHINGTON
RESPONSE TO NSSD-2-85:
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 living 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 in its
parts." (U)
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2
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:
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 bpen 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. 44vels of infant
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SECRET 3
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
Level
1990
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:
1??? SIM
IMO
??? 1=ik.
Mik
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 Capital Movements (Million $) Growth Rate (%
400 2
Chart 2
Growth in GNP
300
200
100
0
?100
?200
?300
?400
L500
?600
?700
?800
?900
^
^
1977 78 79
80
Year
81
82 83
1
1
?2
?3
84 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:
.M1,111?1
NM MO.
IMM, =ID
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 occurred in Costa Rica. (C)
The key to faster export growth, then, is changing
Central America's export base, and this ip 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 haying 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
importarit'are 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:
1M1. 1=1,
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 prospets. 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:
ORO
1??????
New and existing economic infrastructure would be
safe from insurgent attacks;
Foreign and domestic entrepreneurs would be more
willing to invest in the region;
--- rebound in regional trade -- particularly in the
manufacturing sector -- would boost local business;
and
??? MEP
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 percent, with some 1.3
million workers without jobs. Nearly half those with jobs in
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Dollars
1,600
1,400
/ p
p
>
/ 8
<
(D
/ Moderate Growth 0_
/ ? Full US assistance ?:
1,200
7)
?
? Inadequate economic (D
aT
/ adjustment - Da
(.1)
(D
0
? Political instability
N.)
_1
OD
0
/ N.)
_1
1,000 0.)
..
0
No
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Chart 4
Central America: Per Capita Income Trends
High Growth
? Full US assistance
(D
(1)
(1)
r/ ? Improved economic
(D
policies
? Peace 0
-0
Low Growth
ci
3
? Reduced US assistance 1
eftifte OD
800 1 1 1 1 1 I I I I 1 I 1 1 I I I I I I I 1Th I ? Inadequate economic
0J
0
1978 1980 1985 1990 1995 adjustment 0
0.)
2000
? Political instability
n.)
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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 $13- 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 program, 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 ip 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.
1=1, MO
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 economic 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 adjuitment 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)
OMB MM
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 Iritst 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
progrdms 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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????
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 impedimentsto sustainable,
non-inflationary growth (e.g., overvalued exchange rate,
overly protective tariffs, excessive government deficits,
extensive inefficient peiblic 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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?
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; .Housing Investment Guarantees (HIG) and export credit
guarantees extended by the Commodity Credit Corporation (CCC).
The TCIP, created to alleviate problems vith 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 insuch 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)
?I?
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 D.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)
??? .111??
The U.S. should increase its efforts to enlist
reater su..ort 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)
?1?1?11.
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 arereviewed 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:
1M1
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)
SECRET
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SECRET
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.
SECRET
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SECRET
-- 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 our 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 Military
81.3
196.5
128.2
132.6
1/ FY 84 figures
include FY 84
Supplemental
SECRET
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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
counterbalanae 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
stahilizaticia-program With ESF'and PL 480 resources. Development
assistance will fund industrial expansion.
SECRET
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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 Militaty,
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 the voluntary sale of farm land from large landowners to
small land-poor farmers.
-- 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.
SECRET
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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. COG 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 GOG willingness to implement
comprehensive economic reform may also be at issue.
Basic Economic Facts
Gross Domestic Product
Units
1982
1983 1984(Est.)
$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 Economi-c -
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
Primary 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 on non-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.
SECRET
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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.
SECRET
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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 in the electric power sector,
better resource allocation,
state marketing board.
Basic Economic Facts
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 tlie 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
likely depend on Panama's
problem and maintaining agreements
Basic Economic Facts
which may arise this year will
success in grappling with its fiscal
with the IMF and IBRD.
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
SECRET
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CONFIDENTIAL NOFORN
TAB D
Summary of the CIA Input into NSSD 2-85
The economies of the region have been hard hit since the late 1970s by the
combined effects of a dramatic deterioration in the international terms of
trade, generally inadequate domestic economic policy adjustments, and
unprecedented political turmoil.
On the international front, the fall in the region's terms of trade
was touched off by sharply lower coffee prices in 1978 and a doubling
of imported oil prices during 1979-1980. Relative trading prices stea
dily worsened through 1984.
Internally, governments have not been able to reduce spending in the
face of an eroding foreign trade tax base and the need to increase
defense spending. Efforts to maintain consumption levels have boosted
public budget and foreign trade deficits, aggravated inflation, and
undermined currency stability.
With Nicaragua as the backdrop, regional instability has skyrocketed.
Insurgencies have shaken El Salvador and Guatemala while Honduras and
Costa Rica suffered the spill-over effect.
From a regional standpoint, political turmoil and economic development
problems have been mutually reinforcing.
Insurgencies have damaged transportation networks, power and water
systems, and other infrastructure in El Salvador and, to a lesser
extent, in Guatemala.
Intimidation of workers in much of the region has reduced traditional
movements of laborers, cut harvests, and boosted food import needs.
Compromising economic policies that provided a short-term cushion for
political expediency have worsened foreign trade positions, fueled
inflation, and discouraged investments.
Intra-regional trade has fallen sharply, particularly within the
Central American Common Market (CACM), which had been the basis for
the region's earlier industrial development.
As a result of these factors, per capita incomes and living standards in the
region have steadily declined since 1978.
During 1978-84, the region's average per capita income fell over 20
percent.
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Deterioration was most severe in El Salvador where real per capita
income is now one third less than it was in 1978.
Onry Panama bucked the trend for a while showing some expansion in
living standards through 1982 because of aggressive public spending
programs supported by higher canal revenues and strong foreign
investments. Since 1983, per capita incomes there have dropped as
regional contagion effect caught up with Panama.
There are a number of potential economic economic growth tracks that Central
America might follow during the rest of the century. The exact path will depend
on a number of internal and external considerations.
A low growth path could become a reality if US aid falls off,
responsive economic policies are not developed locally, and political
instability remains high as Managua sticks to its present course.
A high growth path that would return living standards to previous peak
levels by 1990-as called for by the Kissinger Commission report--would
require the combination of regional peace, full US financial
assistance, and domestic economic policies that encourage investment
and export expansion.
In reality a medium path seems more likely, the peace setting assumed
by the Commission has failed to emerge and is unlikely to do so as
long as Managua continues to march down its current policy pith.
Moreover local governments have been unable to adopt the policy
changes envisioned by the Commission.
t ?
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Dollars
1,600 --
1,400 -
1,200
1,000
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SECRET
Central America: Per Capita Income Trends
High Growth
? Full US assistance
I ? Improved economic
policies
? Peace
/
/ Moderate Growth
/ ? Full US assistance
/ ? ? Inadequate economic
/ ???*?. adjustment
? Political instability *
. .?
.01?.
I 0?01.1?.
00.?,..????
?????
eftee1/40
Ilftems,e
800J 1 1 1 1 I 1 I 1 I I 1 I I I 1 I I I 1
1978 1980 1985
1990 1995
Low Growth
? Reduced US assistance
? Inadequate economic.
adjustment
2000
? Political instability
SECDFT
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Sao
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6 -0
Belize
TAB E
The economy grew by only 2 percent in 1984 for the second consecutive year,
but longer term prospects are expected to be somewhat brighter.
-- The new Prime Minister inherited a lackluster economy with a large and
inefficient public sector.
- Esquivel's free-market orientation has sparked widespread optimism in the
private sector and among foreign investors.
-- An IMF agreement was finalized late in the year and should improve financial
flows.
-- The balance-of-payments improved slightly on the strength of exports to the
United States.
-- Inflation was held to only 3 percent while unemployment held steady at 14
percent.
Stronger growth is expected in 1985 as new investments in export industries
begin to bear fruit.
Esquivel already has moved to improve government finances by limiting
spending and raising taxes, and he intends to adhere to IMF guidelines.
-- Further expansion of trade to the United States is expected as a result of
export-oriented investment encouraged by the CBI legislation.
-- Larger US aid will increase foreign exchange availability and help maintain
productive imports.
-- A reduction in the US sugar quota and depressed world sugar prices, however
will take their toll.
t ?
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Costa Rica
Costa Rica's economy performed better than any other in the region during
1984.
-- As of January we had estimated 1984 GDP growth at 3.4 percent. Based on
subsequent US Embassy reporting, we now believe economic growth may have been
high as 5.5 percent.
-- The strong performance was led by export expansion, which grew by 10 percent
, as coffee and nontraditional exports did well. The higher exports allowed
imports to increase apace.
-- Higher imports allowed domestic inflation to hold steady at 12 percent.
-- Dynamic growth, however, renewed pressures on the budget and foreign
payments by yearend and required San Jose to go back to the IMF to get financial
support needed to catch up with debt payment obligations.
We expect export problems and austerity requirements to slow the economic
recovery this year.
-- In April the IMF endorsed Costa Rica's new austerity program that features a
reduction in public spending and imports.
-- Banana sales will fall $30 million to $50 million this year because poor
world prices and high Costa Rican prices encouraged international producers
substantially to scale back plantings. At the end of 1984, one major company,
in fact, curtailed operations and has since agreed to sell out to the
government.
Costa Rica's success in restoring self sustaining economic growth will
continue to be challenged by a number of obstacles.
-- San Jose's large debt will keep pressures on balance of payments for the
forseable future; its debt is currently over $4 billion. Previous large public
deficits have made Costa Rican debt service problems the most intractable in the
region.
-- Growing numbers of refugees streaming into the country from Nicaragua
complicate budget problems by straining existing resources.
-- Efforts to encourage private investment by reducing production controls and
continuing to adjust exchange rates will have to be reinforced to boost export
capability.
t ?
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El Salvador
The Salvadoran economy grew by a modest 1.5 percent in 1984, arresting a
steep decline that began in 1979.
-- Inflation remained at about 13 percent despite strong budget pressures
imposed by the war.
-- The balance of payments benefited from higher US aid and worker remittances,
but nevertheless deteriorated slightly as import expansion outpaced export
growth.
-- The level of unemployment remained about 30 percent and much of the
industrial capacity was underutilized.
Various independent estimates suggest real GDP is likely to grow 2-3
percent in 1985.
-- The improved military showing against the insurgency is lowering the
principal barrier to growth and raising confidence in the economy.
-- Nevertheless, Duarte will have to deal with unpopular economic adjustments
including tax reform and currency devaluation to meet disbursement conditions
for US economic aid during the rest of this year.
Long term improvement of depressed living standards will come slowly as
sustained growth on a per capita basis still faces many obstacles.
-- As insurgent fortunes have waned, the rebels have intensified attacks on
economic targets that prove difficult to defend.
-- Spending for defense and security takes nearly 30 percent of the national
budget, aggravating inflationary pressures and squeezing out funding for public
investments.
-- Wage demands to restore eroded living standards will intensify and be
encouraged by leftist agitators.
-- Despite recent improvements, continued poor government-business relations
constrain repatriation of capital and large-scale investment by either local or
foreign businesses.
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4
4
Guatemala
The economy stagnated in 1984 and registered the fourth consecutive year of
declining per-capita income and living standards.
- Foreign trade and financial accounts substantially worsened.
-- By mid-year, Guatemala had fallen out of compliance with IMF standby
conditions; during 1984 tax revenues covered only one-half of spending and a
growing share of the public deficit had to be financed internally.
We expect little or no real growth in the economy again during 1985.
Foreign exchange shortages continue to worsen as the government struggles to
meet petroleum payments and foreign debt obligations.
-- Fuel shortages and electricity brown-outs are cutting productivity, and
inflation is on the rise.
-- One bright spot is the export sector which has been stimulated by the
exchange movement.
Failure to achieve a national concensus on economic policies is likely to
make growth even more difficult.
-- Chief of State Mejia has already yielded to domestic pressures and withdrawn
the austerity program announced in April.
-- National consultation to establish an alternative set of austerity measures
is proceeding slowly, probably will emphasize budget cuts rather than tax
increases, and will fail to reduce the deficit significantly or pave the way for
an IMF agreement.
The civilian president will inherit a faltering economy, but can expect some
relief.
-- Multilateral and bilateral aid flows will likely pick up once the transition
to civilian rule takes place, particularly if some austerity measures are
adopted.
-- A major hydroelectric plant is scheduled to open next year, substantially
cutting fuel imports and providing more reliable electricity supplies.
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Honduras
The ecoriomy grew by 2.8 percent in 1984, supported by a sharp increase in
government spending and foreign economic assistance.
-- Revenues rose 20 percent from a mid-year tax increase and higher trade
volumes, but was outpaced by spending as the deficit expanded to 12 percent of
GDP.
-- The balance of payments deteriorated in the current account but was largely
offset by an infusion of funding from non-commercial sources.
The government continued to postpone currency adjustment, despite effective
devaluations by Central American trading partners.
Inflation fell to 5 percent, but no dent was made in the 25 percent
unemployment and 50 percent underemployment.
Growth of 2-3 percent is likely again in 1985, but overdue economic
adjustments will be further delayed in this election year.
-- Honduras will receive US aid disbursements with minimal conditions for
policy reform.
-- Economic advisors are unwilling to lobby an unreceptive president for policy
changes that entail political costs.
Domestic borrowing to finance the deficit will help accelerate inflation
The balance-of-payments will be helped by reduced fuel imports following the
opening of a major hydroelectric project, but the trade deficit will grow as
export earnings stagnate.
Tough choices will confront the next president as a result of Sauzo's
inaction on the economy.
-- Public sector spending will have to be trimmed to reduce growing budget
pressures.
-- Currency controls will have to be loosened to revive employment-generating
industries and to encourage new investments.
-- Improved incentives for non-traditional exports will be needed to compensate
for the stagnation of agricultural-based exports.
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Panama
Panama's economic situation has deteriorated rapidly since the current
recession began in 1983. Recent IMF estimates and US Embassy reporting indicate
that in 1984 Panama's GDP fell by 1.2 percent.
Lower export earnings and higher debt service obligations caused Panama City
to cut imports substantially, trim public works projects, and reduce domestic
credit for the private sector during 1982 and 1983.
-- Panama's banking sector--which in recent years has provided nearly 10
percent of GDP--was hard hit by the fallout of the Latin American debt crisis.
Banks operating in Panama began to cut their Latin American exposures and reduce
local staffs. .-
-- As regional political and economic problems mounted and Panamanian resources
began to dry ,up, the military government--which had been in power since
1968--belatedly adopted austerity and scheduled elections to turn control over
to a civilian government.
We expect a further decline in economic activity this year.
-- President Barletta's early attempts to ram an austerity package through the
legislature failed, and subsequent protacted and indecisive budget negotiations
have delayed an IMF standby program and World Bank Structural Adjustment loan.
Commercial bankers are waiting for these steps before they reschedule $600
million in debt due during 1985-86.
-- Business is suffering from the lack of action. Domestic credit has fallen
and the government is delaying payments for goods and services received from the
private sector.
-- International banking continues to cut back. The US Embassy reports that
within the past several months the Bank of America has laid off 400 workers
while Chase Manhatten has reduced its workforce by 200 slots.
A number of obstacles will hinder economic recovery over the longer term.
-- Until economic decisionmaking is sorted out, Panama will be unable to regain
normal access to international financial markets or encourage private investors
from developing export capacity.
-- Traditional exports are largely agricultural and will likely continue to
suffer from weak international prices.
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