Notes on Meeting of the
National Bipartisan Commission on Central America

Subject: The Peace Corps

Briefer/Witness: Loret M. Ruppe (Director, Peace Corps)

Date: Wednesday, September 7
Time: 4:10 - 5:00
Place: Room 1105

Summary:

In her presentation, Ms. Ruppe stressed the new vision of the Peace Corps in Central America. She said that, with adequate budgetary support, the Peace Corps could expand its activities in Central America and make contributions to long-term policy. She reviewed the Peace Corp's unique qualifications for contributions on the community level and in rural areas, emphasizing the praise given by U.S. Ambassadors in Central America to the Peace Corps effort. The Peace Corps in Central America concentrates on two basic themes: improvement of standard of living and economic development. According to Ms. Ruppe, the Peace Corps could undertake important new initiatives, such as a major literacy campaign, improved delivery of rural health care, and support of the President's Caribbean Basin Initiative if the budget were increased to allow expanded programs and recruiting. She concluded by pointing out that the Peace Corps is an organization for building bridges between nations and communities. She encouraged the Commission to support an expansion of the Peace Corp's efforts.

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Notes:

There is a potential for further contributions by the Peace
Corps to long term policy goals in Central America. There
is a new vision of the Peace Corps for Central America: an
expanded role in social and economic development and in
public diplomacy. This agency with 23 years experience is
uniquely qualified to contribute in these areas.
Volunteers live and work on the community level, respecting
their customs, and creating lasting friendships with the
people and leaders of these countries.

The Peace Corps recently submitted a report to the
President on its contributions. Several U.S. Ambassadors
in Central America were quoted in the report:

**U.S. Ambassador to Guatemala:** The Peace Corps gives
"the lie to propaganda beamed from Havana and Moscow."

**Another Ambassador:** The Peace Corps is "the most
important evidence we can furnish of our commitment
to peace."

**U.S. Ambassador to Belize:** "The Peace Corps is
ideally equipped to contribute to Belize's
development," making it less necessary for Belize to
call in the USSR or Cuba.

The new vision of the Peace Corps for Central America
introduces today's volunteer of the 80's: older and better
trained. But the Peace Corps continues to emphasize the
human element. It is recommended that strong consideration
be given to the human element, specifically to an expanded
Peace Corps presence.

The Peace Corps concentrates on two basic themes:
improvement of standard of living and economic
development. The Peace Corps specializes in operations in
rural areas. Programs that fall under standard of living
improvement include rural health, sanitation, nutrition
education, and reforestation projects and education. The
primary objective in the economic development programs is
to bring small farmers from subsistence into the money
economy, and standardization and diversification in small
rural businesses. The goal is to increase directly the
incomes of families.

One of the Peace Corps most successful projects is the
housing project in Costa Rica. It is an innovative
self-help project in league with the Costa Rican Housing
Commission and AID. The houses are being constructed in an
earthquake proof design in 6 different regions. Twenty
hours donation of labor per week is required of
participants. This is the Peace Corp's reaction to the
President's Caribbean Basin Initiative.

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The Peace Corps desires to cooperate more closely with other agencies. For example, in AID/Peace Corps interchanges under McPherson, there are three joint program initiatives. Forty thousand dollars has been set aside for village based projects on small farmers and businesses and energy production in every country where there is a joint program. It is the first time AID has been able to go in with small programs on the village level.

The Peace Corps is willing to take a long, hard look at involvement in a literacy campaign for adults. This is something that the Cubans do very well. The pros and cons of export of U.S. values are frequently debated, but there is not time to do that here. The export of certain U.S. values is inherent in literacy programs. Literacy makes a free person, who is free to make political choices. The Peace Corps could conduct a special recruitment effort to get Hispanic or Spanish speaking Americans involved in the program, or Americans experienced in adult education. The Cubans are successful in literacy campaigns because of their facility in Spanish.

Expanded health education is needed in all countries. The Peace Corps could do more in health care delivery, but professional and paraprofessional personnel are in short supply. It could be done with adequate resources. Another possibility is the teaming of an AID private voluntary organization such as Project Hope on a long term basis. The Peace Corps has experience in working with private organizations including UNICEF and CARE.

Another area for recruitment is among mid-career technical and trades workers. Central America has a high need for such volunteers. It is a difficult area for recruitment, particularly since the Peace Corps has not been able to recruit families recently. The Peace Corps is willing to explore a one year teaching program (normal Peace Corps commitment is two years), utilization of links with universities to get the services of professors on sabbatical, and pursuing an already open dialogue with the Community College Presidents to recruit vocational and technical teachers. With augmented funding, recruitment of families would again be possible.

As an example of the possibilities available with augmented funding, $100 million over 4 years ($25 million per year) would pay for tripling the number of volunteers in Central America, expanded Peace Corps support of the Caribbean Basin Initiative, recruitment of Hispanics and Spanish-speaking Americans for a literacy campaign, and improvements in health programs.

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This agency can serve as a bridge. If you wish, we can do even more.

Questions and Answers

Silber: I would like to concentrate on the area of literacy. Which areas would be unsafe for volunteers?

Ruppe: El Salvador and Nicaragua. We must be invited into countries.

Silber: Then El Salvador would be the only one.

Ruppe: Yes. There was a temporary reduction of the number of volunteers in Guatemala. We take people out of unsafe areas. We're turning down Americans who want to work in the Peace Corps every day. We could recruit enough people for a literacy campaign.

Silber: Could you put up to 3,000 volunteers in Guatemala and 2,000 in Honduras?

Ruppe: Yes. We would have to have resources, but we could recruit them.

Silber: This would double the Peace Corps overnight. Could the volunteer structure of the Peace Corps handle this level of expansion? Assuming adequate budget, could you double the Peace Corps over the next three years?

Ruppe: Yes, with budget and recruiting.

Answer by Peace Corps director of Inter-American Affairs:
There is a lot of fertile area for recruitment, especially in Puerot Rico, where unemployment among professionals is high.

Barnes: I have no questions. She already knows of my strong support for the Peace Corps.

Walsh: What is the reason for the inability to change the budgetary downtrend in the Peace Corps?

Ruppe: Vietnam had an impact. The volunteers were seen as draft dodgers, even though they were not exempt. Vietnam era protestors who took over a Peace Corps building contributed to the bad image.

Walsh: And has Congress been vigorous in restoring what OMB takes away?

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Ruppe: The feeling of continuity and direction was lost with the rapid turnover in directors (7 in 10 years). Congress has tried, but we get lost in the Foreign Assistance Account. Right now we're listed as "miscellaneous: 1".

Walsh: In the event you get more funding, would countries raise their requirements for the number of volunteers? Are they sufficiently aware of improvements brought about?

Ruppe: Yes. Increasing the number of volunteers has already been discussed. The government of Guatemala is requesting far more volunteers.

Brady: Could you repeat for me the numbers of volunteers in Central America?

Ruppe: Belize: 66, Honduras: 240, Costa Rica: 132, Guatemala: 130.

Brady: Leaving aside budgetary considerations, if it were a matter of national urgency, could you swing volunteers out of other areas for Central America?

Ruppe: We're stretched very thin, and I would be hesitant. Also, there would be a language barrier, and Peace Corps volunteers only have a two year commitment. (30% reup for a third year).

Cisneros: How much fertile ground are you finding among Hispanic Americans for serving in Central and Latin America?

Ruppe: We have 9% overall minorities, but we have spent just the last 2 1/2 years trying to get into cooperation with Hispanic Community leaders.

Cisneros: Has recruiting been mainly from campuses? Does that decrease numbers of Hispanics who can be recruited?

Ruppe: Yes. We need to do a lot more recruiting in, for example, Little Havana and South Texas.

Cisneros: I would think you'd have more luck with retired couples than with first generation college graduates who are economically motivated.

Ruppe: We have only 67 recruiters, so we do almost all of our recruiting in Texas on the University of Texas campus. It's sad. But a recruiting office in Puerto Rico has been opened.

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Cisneros: The Peace Corps has the advantage of offering good experience and later representation among the leadership of the country.

Ruppe: These are the bridges we need: Americans who are truly interested. We are the nation's finest graduate school in international understanding.

Diaz-Alejandro: The Peace Corps could help other countries set up their own Peace Corps. Why don't more Central American countries do urban-rural outreach, and can you help?

Ruppe: We are interested in this. We had showed Rios Montt, former leader of Guatemala, our plans on VISTA, and we work closely with the Costa Rican Vice President on their domestic Peace Corps.

Diaz-Alejandro: Are local churches doing anything?

Ruppe: I can find out for you.

Walsh: In Brazil and Costa Rica medical graduates must go to the rural areas.

Johnson: Are you familiar with the Small Business Administration's SCORE program? It's more effective in some areas than others. I think there's quite a reservoir there.

Ruppe: They can fill desperate needs, for example marketing skills. We also coordinate with the International Executive Service Corps. Secretary Block now sends a letter recommending the Peace Corps to every retiring USDA employee. We'd like to get more trainers from American private sectors and unions through leaves of absence. There's a tremendous interest in America to serve, especially among retired Americans.

Johnson: We've been able to draw on forced retirees (for example at age 62 or 65) from the corporate structure who are eager to do something.

Bill Doherty, Executive Director AIFLD

Thursday, September 8

HAK
Welcome and thank you for coming. We attach great importance to AIFLD's work in establishing free trade unions not only in Central America, but throughout Latin America.

Doherty:
Thank you for the opportunity to share my thoughts based on 30 years of work in Central and South America as a trade unionist. I'm proud to say that AIFLD was part of the first general strike in Honduras in the 1950's, which lead to the establishment of the unions that now exist in the banana industry in that country. In 1958 AIFLD was thrown out of Guatemala because of our organizing efforts. We were also thrown out of El Salvador in 1973 as communist agitators, and we didn't get back into El Salvador until just before the military coup in 1979. And, of course, our return to that country cost us the lives of two of our people.

Now, we are not allowed to work in Nicaragua and Grenada, which accuse AIFLD people of being CIA agents. So, we have been maligned by both the left and the right, which must make us an authentic centerist institution.

We view the establishment of this commission as an opportunity for a new era between the US and the people of CA, and hopefully, with their governments as well. There have been only two times in history when US policy enjoyed the support of the people in Latin America. The first was under the Good Neighbor policy of FDR, who spent no money, but expended a lot of good will in Latin America. And the second was during JFK's Alliance for Progress, the thrust of which called for the establishment throughout the region of democratic social and political institutions. Even the oligarchies realized that kind of thrust was essential for long-run stability.

What these programs show is that our policy will work if it is on the side of the people and supports the honest politicians. If we can devise a current policy that meets these requirements, it will be accepted in CA and by the US public. The US public generally does not support what we are doing now. I've been booed by US audiences when I've tried to talk about CA.

We haven't been very clear with the US people about what our policy is. On August 15 after the President spoke on CA, Dan Rather posed the kind of questions that I think many people in the US are asking. He asked whether the President has shown that the US approach in CA is not designed to support the status quo? Are we allowing our policy to be perceived as one of supporting the ruling classes?

This Commission also posed some questions to AIFLD and we have tried to answer them in the written report I have prepared. Simultaneously, we have been conducting our own survey of trade unionists in Central America, and some of our questions were very similar to those you gave us. We have included their responses in our report as well. And I must tell you that trade unionists are truly representative of the general public because even in a dictatorship, trade union leaders must stand for election. Also, we have included Panamanian trade unionists in our survey and they have asked that they be included in any program designed for Central America because they have the same problems. Likewise, our survey includes Belize.

About 70% of the top trade union leadership of CA has been trained by AIFLD. Of the other 30%, probably most have been trained in Moscow. This is an important point -- that in the working places of CA, in the cities and in rural areas, the confrontation between Communism and freedom is taking place every day. At our courses for CA unionists, we emphasize the difference between open and closed societies and how the communists use the trade union movement to get power, but repress union activities once they have achieved it.

We in AIFLD work side-by-side with our CA counterparts and I think we know something about them. The people of CA object that while they share a New World history with us and have been greatly influenced by us, they have not shared in our democratic or economic riches. They copied our Constitution and have been influenced by American political thinkers. In fact, the most popular American political figure in LA is Abraham Lincoln.

So the Central American people have a keen desire for the democratic way, despite a 400 year history of dominance by the oligarchy, the

military and the church. The church, of course, is divided now, as was readily shown when the Pope visited Nicaragua. And over the past several years the established church has changed and has become more concerned with issues of social justice.

The CA desire for democracy is clear in El Salvador where there are still only 5,000 guerrillas. For every Salvadoran who has taken up arms in his own country, eight are living illegally in DC. It's true that most are economic exiles, although some are truly frightened for political reasons. But they would rather walk the 1000 miles to the US than 10 miles to the guerrilla strongholds. There is no popular support for the guerrilla movement in El Salvador, although much money is being spent to try to convince the American people that there is.

This doesn't mean revolution won't be successful in El Salvador. It can be because most Salvadorans are not participating in their political system. The reforms that have occurred since 1979, particularly the land reform, have helped, and the people showed they supported these reforms by their turnout in the March 1982 elections--elections for which the labor movement got out an important part of the vote.

While the results of those elections might not have been exactly what we had hoped, there has been important progress toward democracy since then. Earlier this year the rightest forces in El Sa wanted to let the land reform die, but in the best democratic tradition, 10,000 peasants marched on the Constituent Assembly and demanded that the program be renewed. Next week these peasants will be marching again to protest those provisions of the new constitution that would abrogate the land reform and would set up the Salvadoran military as the ultimate arbitrar of whether peace exists or unstable conditions warrant a military takeover.

This shows there is hope even in El Sa, but we must not allow ourselves to believe that a military victory is possible there. If our solution to the conflict results in a return to the status quo before 1979, we and the Salvadorans will have failed.

A true victory in ElSa would mean the defeat of
both the guerrillas and the right wing death
squads, like the one responsible for the deaths
of our agrarian reform advisers. The people who
committed that crime have not been brought to
justice because the Salvadoran judicial system
does not function. And so we in AIFLD do oppose
military aid for ElSa. Until there has been a
conviction of these murderer and until the
system of justice begins to work, we don't want
the military to get more money.

There is some progress toward meeting the needs
of the people in ELSA. In January 1980, 250,000
Salvadorans marched in the capital demanding
reforms. In March of that year, the land reform
program was established, and when the leftists
tried to get out another demonstration in May,
only 2,000 showed up. There has not been another
successful demonstration by the leftists since.

Now, with reference to the questions you posed.
You asked about the need for a program of
economic development. We believe such a program
is necessary; that a sizeable sum of money should
be devoted to it; and that the program should be
implemented in a way that ensures democratic
participation. An effective program must create
new jobs and increase the standard of living of
the people. We can't rely on a program that
calls for development through the trickle down
process because in countries where corruption is
rampant, that process never occurs.

Regarding the role of the IMF, a question
relevant not only to CA but to many countries in
SA as well, the IMF must resist its penchant to
make the workers pay for the mistakes and greed
of bankers and politicians. The workers won't --
can't -- stand for it, as the protest by 1
million workers in Sao Paulo last week proved.

Contrast that demonstration with what is
happening in Mexico, where there is more
stability because the workers have a genuine role
in their government, maybe not a true democratic
government, but one in which the workers have
legitimate representation. There is a social
pact between the CTM and the government in Mexico
and the workers will accept the austerity program
because they had a hand in its

formulation. We recommend that forums for
consultation with the workers on the broad
spectrum of economic, political, and social
issues be held throughout CA.

Regarding Soviet involvement in CA, anyone who
looks at Nicaragua, Cuba, Grenada, or Suriname
and who doesn't believe there are Marxist forces
operating in this hemisphere is blind. You can
argue whether there are Marxists in Nicaragua
today because of Somoza's years of
authoritarianism, but you can't argue that the
Marxists are there. I was in Nicaragua last
November with an ICFTU mission, people who
refused to go to Nicaragua unless the GRN allowed
me to come with them, and we talked to the
independent opposition that still exists in that
country. The revolution these people envisioned
in 1979 has been usurped by nine men. And it's
not true that we are driving these men to
communism, they are already there. They have
said they will hold elections only when their
rule is confirmed because they are the vanguard
of the workers. Yet in Nicaragua today there is
no right to strike and very little room to
bargain collectively. And 47 labor union leaders
are in jail for resisting participation in the
government controlled union.

There may still be an opening in Nicaragua,
because the opposition still exists. But the
truth is that most of those who won the
revolution have left, and most of the opposition
that remains supports ARDE and Eden Pastora, whom
I personally believe is sincere in his intention
to rescue the revolution. We should support
Pastora and should have nothing to do with the
ex-Somocistas. AIFLD opposed Somoza and a
Nicaraguan labor union leader who asked for a US
boycott of Nicaraguan ships got a boycott from
our members. He was later killed in Nicaragua.

There is some link between economic development
and instability, but lack of development is not
the only cause. In 1958 Cuban workers had the
highest standard of living of any workers in LA,
but they were denied political participation.
Likewise, democracy is possible in poor
countries. Honduras is poor, and even Costa Rica
and Panama are not rich countries, but there is
very little guerrilla activity there. In
contrast, Guatemala, ElSa and Nicaragua had
revolutions because the workers had no political
voice.

We need to support political, social and economic freedom in CA because it is right, not just because our national security is at stake, although in the long run this will enhance our security. I believe the American people will support a program that backs these goals as they supported the Alliance for Progress and the Good Neighbor Policy. The problem with other programs is that the technocrats and bureaucrats have gotten hold of them. AID has done a good job in many cases, but AID must maintain a government-to-government relationship which often means its programs benefit mostly the vested interests.

This Commission should recommend a 5-year economic assistance program of $7.5 billion in addition to the aid already being sent to CA. The program should be approved with a one-time authorization and a one-time appropriation. To administer this program, Watchdog Committees should be established in the US and the recipient countries with representatives of Congress, the administration, labor, and religious groups. And each country that wants to benefit from the program must make a commitment to holding free, internationally supervised elections.

The new program should not require a new bureaucracy, but should use the institutions that already exist, and current projects that work should be continued.

HAK:

In our discussion, we on the Commission have found a general consensus about what our objectives are, but we have problems with what specifically to recommend to achieve them. You have given us some of those specifics, and if we do not accept your suggestions, then I believe we have the obligation to come up with some alternatives.

Regarding the war in ElSalvado, you said the guerrillas must be defeated, but others say there should be a compromise between the GOES and the Left. What is your view on this? Is a compromise possible?

Doherty:

Our policy is to support all dialogue that has a chance of diminishing the level of violence, but only if the result will be a democratic government. A return to the old system would be

just as bad as the establishment of
Marxism-Leninism. Our people in ElSa fear the
right wing more than they fear the guerrillas.

HAK: How would you define the kind of negotiated peace
that you would accept?

Doherty: One in which the workers have some voice. We had hoped for worker representation on the Peace Commission, but there is no labor rep.

HAK: How do you solve the problem that economic
development and political stability can only be
established over time and the problem of
insurrection is immediate. Doesn't this mean
that we might have to support some non-popular
governments in the short-run? It appears the
right doesn't have the same potential for causing
long-term upheaval in the region that the left
has.

Doherty: As far as we are concerned, there would have to
be a solid assurance that the government would
take steps toward democracy.

Kirkland: Can you tell us something about the labor
situation in Guatemala?

Doherty: From our point of view, Rios Montt was the best thing to happen in Guatemala in the last two decades. By the time he took over, AIFLD had closed up shop in Guatemala because it was impossible to operate with the Lucas Garcia regime in power, the most vicious dictatorship we have ever seen in Latin America. Lucas went out of his way to kill labor leaders. We had to stop bring Guatemalans up to the US for training at the George Meany Institute because when they went back home -- and of the 5,000 CA students we have had at the institute all but about 10 did return to their countries -- they were killed.

When Rios Montt came to power, we reopened our
office. He put people in the Labor Ministry who
knew something about labor. Now there is a labor
confederation and there is collective bargaining
in Guatemala. The Mejia government promises to
abide by the timetable for elections, but we
would recommend that aid not be reinstated in
Guatemala until a representative group of
Guatemalans tells us that it should be.

HAK: Now that we are talking about the labor situation in the various countries, I want to second what you have said about the people in Panama wanting to be included in a CA program. They have told me the same thing.

Johnson: How much stability does the small business sector provide in CA?

Doherty: There is no question that small business plays a key role. Development of small business broadens the middle class and an honest middle class is the backbone of democracy. Unlike multinationals, the wealth of middle class entrepreneurs stays in their countries. AIFLD, incidentally, lends money to small businesses to help them get started.

Johnson: You say the US people have a distorted picture of the guerrilla movement in ElSa. Can you amplify?

Doherty: I think young people in the US are naturally attracted to the romanticism of guerrilla movements, and, indeed, those in ElSa who have joined with the guerrillas are young. But this romanticism can blind them to reality as it seems to have done in the case of Cuba, where all free institutions have been destroyed. Last year the ILO had a formal complaint raised against Cuba because 5 labor unionists had been sentenced to death for attempting to organizae a free union. That sentence has been commuted, but they are still serving life terms.

The middle aged and older people in the US think in terms of the miserable situation that has prevailed in CA over the past 50 years and don't see the progress now being made. They are also concerned that ElSa will become another Vietnam.

Johnson: So you think we need to do a better job of educating and informing the public?

Doherty: Yes, and this Commission must address that problem. CA should not become a political issue in next year's campaign. I really don't see that much difference between the Carter and Reagan policies in CA, and this issue is too important to be considered on a partisan basis.

Diaz-Alejandro I would like to play devil's advocate. The economies of CA are labor surplus economies. Is the trade union movement really representative of the mass of workers? Who are the union leaders and are they active in the rural areas?

Also, it is generally agreed that to turn the
economic situation around the CA countries must
develop export economies. Countries that have
made a success of this approach in the Far East,
like Taiwan and South Korea, have no unions.
Maybe you can't have a strong export economy
where there is a union movement.

Doherty: I will give you profiles we have done on trade unionists in each of the CA countries, but to respond to your question in part now I will say that in El Salvador, for example, the unions grew even under the dictatorships. The peasant unions have over 140,000 families as members and labor unions are the largest mass organization in that country. Indeed, the labor movement is the largest mass movement in most countries of CA. Labor leaders more than any other group are representative of their societies. Incidentally, many countries have attracted US investment, especially to their free zones, by assuring them they would be protected from union activity. Freedom of union organizing is one of the designation criteria of the CBI, and I can assure you we will be watching closely to see that this requirement is met.

Regarding export economies, this is one area in
which we opposed the CBI because we wanted to
make it a better package for the CA countries.
We don't want to lose US jobs obviously. But we
have found that where trade unions exist, workers
aren't exploited and we did not want the CA
countries to become mere export platforms for
industries operating in countries where workers
have no protection.

Clements: What is the situation of labor in Cuba today?

Doherty: Free labor is in jail. The only labor movement permitted to operate is state-controlled. Before 1959 the labor movement was powerful, but divided. Half supported Castro against Batista.

Clements: Is there no base, even covert, for free labor union activity that is related to the AFL-CIO?

Doherty: If there is, I don't know about it. We were active clandestinely through the mid-1960's, when we were successful in getting some unionists out of Cuba, but we are not active now.

Clements: What is the relationship between labor and the church?

**Doherty:** Throughout the history of CA and of all LA the church has aligned itself with conservative elements. But this attitude began to change with the emergence of liberation theology. That the church is largely now on the side of reform is good. But what some of the church doesn't realize is that there has been no successful experience with Marxism-Leninism anywhere in the world. Some of them cite Scandanavia, but that isn't real socialism.

Many US church figures support the reformist church in LA and have forced the church to rethink its historical position. I think the establishment church today is more of a centerist church than it has ever been.

The church has been somewhat active in the labor movement. At first the unions were largely confessional, but they have come to have more concern for the material needs of the worker. Their unions in CA have about 10-12% of the membership of AFL-CIO affiliates.

**Clements:** So there are two churches?

**Doherty:** In Nicaragua there are, but I would guess the so-called popular church represents only about 20% of the church community. Obando y Bravo, the bishop of the established church, is very popular. He is a progressive who opposed the Somoza regime and is viewed in Nicaragua as Wotyla was in Poland. The Church seems to be stronger in Nicaragua than in many of the CA countries.

**Clements:** Why is the church's position in Mexico different from its position in CA?

**Doherty:** Well, the church in Mexico went through a terrible persecution. Part of the Mexican Revolution was directed against the Church.

**Clements:** Why hasn't this happened in CA?

**Doherty:** The state of political development was never sufficient for revolution until now.

**Brady:** You have talked of the need to build on existing institutions, that not all of what we have now is bad. Would the $7.5 billion aid program you suggest then be in addition to current aid levels? Do you envision this money being available as grant or loan?

Doherty: Yes, it would be additional. As for grant vs. loan, our procedure with AIFLD funds is that if a project will produce income, we provide a loan; if it will not, our input is grant aid. We would recommend this same procedure be followed for the long-term assistance program. Incidentally, the interest that is paid on the loans goes into a revolving fund so that more money is available.

Brady: You recommend a very low interest rate -- 2%. Do you feel strongly that this should be the maximum? If you charged interest of 10% or 15% there would be more money going into the revolving fund and thus more available for other projects.

Doherty: We would not insist on 2%, but we believe the pattern in CA has long been to charge usurous interest rates and the object of our program should be to make credit affordable.

In this regard, we also believe it important that the program insist on some controls on capital flight from the recipient countries. Many US banks are bursting with deposits from CA, and much of this money has been generated from the usurous interest rates being charged in CA. I read a report that 31 Florida banks reported an increase in deposits from LA from $800 million in December, 1982 to $1.2 billion in June, 1983. Eighty percent of this increase came from CA. That kind of capital flight would take a big bite out of any assistance program. So, in addition to economic assistance from outside, the recipient countries must impose some domestic fiscal responsibility.

HAK: Speaking of CA's economic problems, do you, in the report you have provided us, deal with the issue of debt?

Doherty: No, we do not.

HAK: We would appreciate your recommendations in this area as well. In particular we would be interested in knowing whether you believe the debt issue can be treated differently in the CA context than in SA, where the magnitude of the problem is so much greater.

**Doherty:** Dialogue is essential because the problem of CA can never be resolved through a military victory alone. We do not oppose a military victory, but it alone will not be enough. It is quite likely that the guerrilla movement in CA will never disappear entirely; that has been the case in many LA countries, where guerrilla groups continue to operate but do not present a security threat to daily activities. Conceivably, the FMLN could exist in the Salvadoran hills for the next 20 years without posing a threat to a democratic Salvadoran society.

The guerrillas in El Sa realy have little popular support. In the 1972 elections, which Duarte won on a Unity ticket, it is believed that the Social Democrats and the Communists, both of which were included in the unity banner, were responsible for only about 6% of the pro-Duarte vote. This explains why the guerrillas are intransigent. They don't want to enter the political process because they can't win. Don't think that what Ungo and Zamora are saying represents what all the guerrilla groups believe. These men are trying to show that the Left is willing to negotiate, but not all the Left shares that willingness.

**Walsh:** It has been suggested that the Commission's recommendations may run afoul of the Catholic church, both of the US church and of church leaders in CA who are respected worldwide. How can we get church leaders to support our program?

**Doherty:** I don't think you will have trouble with the church. The treatment which the Pope received in the various countries of CA was very instructive for Church leaders.

**Walsh:** What type of reception do you think Congress will give to the proposal of a large US aid program if there are no safeguards on capital flight from CA?

**Doherty:** I think safeguards on capital flight are essential for Congressional support.

**Strauss:** I hope you will be available for continued consultations as this Commission begins to write its report in a few months. I personally attach great importance to the use of capital and hope you will provide some specific suggestions along this line.

Doherty: Generally, I don't believe author times have any interest in bettering the lot of people. Democratic regimes, like we see in CR, are the only solution.

Silber: Yes, but how do you create Costa Ricas?

Doherty: You can do so by raising the standard of living, although I grant that there will be a gap through which we will have to suffer before that is done--before we get from what we have now to the time when the rising standard of living engenders improvements throughout society.

Silber: What political-military system would you like to see in place to cover that gap? Some would probably suggest a kind of Dominican solution where force was used to keep the peace until the situation could be resolved, but I doubt that would work in CA.

Doherty: I don't believe force is the answer. For one thing, times have changed greatly between 1965 and today and that kind of US intervention would not now be acceptable.

Silber: Do you believe social progress can be made fast enough so that the type of coalition government which we have in El Sa now, for example, could survive?

Doherty: Yes.

Discussion continues on issue of land reform

Subject: Health and Nutrition

Briefer/Witness: Dr. Nevin S. Scrimshaw (MIT)

Date: Thursday, September 8 1983
Time: 1:30 - 2:20
Place: Room 1105

SUMMARY:

Dr. Scrimshaw began by discussing the involvement of the Institute of Nutrition of Central America and Panama (INCAP), and its contributions to the improvement of health and nutrition in the region. Malnutrition is a severe, often irreversible problem in Central America. Protein calorie malnutrition must be treated in pregnant mothers and weaning children. Dr. Scrimshaw noted the synergism between health and nutrition. He said that INCAP found that the root cause of the problems is social injustice. He suggested as possible lines of action promotion of strong systems of primary health care, and promotion of regional measures. He emphasized that solutions must come in a package, and that individual actions may be a waste of money rather than being helpful.

-2-

NOTES:

In 1949 I went to Central America to establish INCAP, the Institute of Nutrition of Central America and Panama. I worked closely with the Ministries of Health and other government officials. I left the directorship of INCAP in 1961 to go to MIT, but returned to Central America each year until 1975 for field research. I have continued my association with INCAP through the UN University.

INCAP was founded for three purposes: 1) to identify health and nutritional problems, 2) to find solutions, and 3) to assist in applying the solutions through training. We found that the problems are not introduced from outside, but are due to landlessness, poverty, and injustice.

I worked in areas of El Salvador and Guatemala where 1/3 of the children born alive die before reaching 5 years of age. Protein calorie malnutrition is the most serious form of malnutrition. There is no easy solution because it is rooted in social injustice. Violence and unrest are inevitable with no social progress, and this helped me to understand the limited progress in Central America, including until recently Nicaragua, despite dedicated efforts of health care workers.

INCAP has also shown the synergism between malnutrition and infection. Malnutrition results in infection, and each episode of infection worsens the malnourished condition because of loss of appetite and of stored nutrients. Control of infection is important to prevent malnutrition and vice versa.

INCAP has shown social and economic consequences of malnutrition caused by poverty and underprivilege. Agricultural workers can only work a few hours a day, and then must rest to conserve calories. They are not paid by the hour, but by the task. They have too little energy to spare for activities that improve their homes and communities. The same kind of restriction of play is noted in undernourished children. Also, poor test scores and learning behaviour demonstrate the consequences of malnourishment.

INCAP has been able to make little progress. Surveys in some Mayan Indian villages in 1950 and again in 1975 showed no difference in food intake or degree of growth retardation. There was some improvement in the 60's, but inflation and the dropping price of coffee resulted in the return of 50's era malnutrition. The average nutritional intake is the lowest in El Salvador and getting worse. In El Salvador and Guatemala, there is no improvement in growth retardation among school age children.

-3-

In Somoza's Nicaragua, indifference to malnutrition went up to the highest levels of government. For example, goiter due to iodine deficiency could be overcome at no cost to the government by ordering the iodization of salt. Endemic iodine deficiency goiter was overcome everywhere but in Somoza's Nicaragua. Iodization of salt was one of the first reforms of the Sandinista government.

As INCAP came increasingly under fire for lack of progress, it began to look more closely at social roots. In Guatemala, 80% of the good land is in the hands of a limited circle of people, and unemployment exceeds 30%. Negligible taxes on land allow landowners to use land inefficiently, which contributes to unemployment. Rich land is used for cattle feeding for meat export rather than for food production for domestic use.

In El Salvador, 2% of the population owns 60% of the land. Eighty per cent of the population earns less than what is necessary to purchase required goods. Work remains highly seasonal. AID figures show that there is 64% rural employment, which drops to 8% during the coffee season, and then rises again to 64%. This situation is ideal for landowners but not for the rural population. Recent visitors to El Salvador say that there is a breakdown in the health system. Training of health personnel is at a virtual standstill. There has been brutal treatment of health care workers, as shown partly by the number of physicians leaving the country.

Costa Rica is the one country that stands out for excellent progress in combatting malnutrition. In 1966, 14% of school children were over 25% retarded in growth. In 1982, only 4% were. There has been a decrease in infant mortality, bringing Costa Rica's infant mortality rate in line with that of Western Europe and the U. S. This has occurred in a country with fewer economic resources than any other Central American country. The difference is in political will. Provision of social services has been part of a program to redistribute national wealth. This progress has not been deterred despite current hard times. There is evidence that Nicaragua has also been making progress in the health field despite economic difficulties. It is not resources or GNP that determine progress, but interests of the governments.

Efforts for improvement in malnourishment and health care may just run into government inability or unwillingness to help. U.S. influence should encourage social equity and not to support military forces that repress public opinion and public opinion and slaughter future and past leaders. Assistance should address issues that affect social and economic development.

-4-

Some possible lines of action include:

1. Promoting strong integrated programs of primary health care, especially including health and nutrition education. Preventative measures are the most important. These measures require thousands of community health workers. What matters most is the introduction of the measures as a package. Isolated progress is of little benefit.

2. Promoting and supporting a strong program to address agriculture and rural unemployment. Food storage and processing facilities and services will provide additional jobs.

3. Supporting regional agricultural and economic measures. This would include an agreement with the region to buy minimum quantities of major exports such as coffee and bananas. Also, The establishment of a regional grain reserve program with PL 480 commodities. Finally, regional research and training institutions should be supported. Individual country institutions are too small. Those regional institutions that have already been established are among the best in the developing world, but are threatened by political and social unrest. All merit strong U.S. interest and support.

4. Supporting a regional entitlement plan to provide a safety net for those most impoverished.

## Questions and Answers

Kissinger: What is a helpful regional measure?

Scrimshaw: I was making two points. First, the countries of Central America and Panama can work together. The first unifying activity that got the Ministries of Health together were the annual council meetings of INCAP. This resulted in a series of social and economic arrangements for a period. There is a precedent for regional cooperation. It would be of benefit to all if we worked with the region rather than with the individual countries. For instance, grain reserves would be too costly for individual countries, but started by PL 480 and maintained on a rotating basis, it would be a catalyst for regional cooperation.

Kissinger: Why is there such a high rate of exit among health personnel in El Salvador?

Scrimshaw: The Commission should get a copy of "Health and Human Rights in El Salvador." There is a fear of the leadership roles of health personnel, and therefore repression. This is the major reason for the exodus.

-5-

Kissinger: Social injustice is a complicated problem. How much of an advance can one make even with well run programs?

Scrimshaw: Bangladesh is a good example of how quickly government policy can make a change. A new leader brought progress, and his replacement led to a decline in progress. It showed that despite the underlying lack of infrastructure and education, there could be rapid change in social and health indicators.

Kissinger: Could you submit on paper

1) What can be done in 3-5 years

2) What specific U.S. policies are needed to get there

3) What institutional framework is relevant

Scrimshaw: I'll try.

(Johnson expressed a desire to get a copy of "Health and Human Rights in El Salvador")

Kirkland: Has a school lunch program been tried?

Scrimshaw: It is too late then, and not cost effective, though politically popular. It would be better to provide primary health care and to feed pregnant mothers and weaning children. We couldn't see any benefit from a UNICEF school feeding program over a period of two years. The only effect is to decrease the amount of food the child eats at home so that there's more for the others. The critical, irreversible period is from 6 months to 36 months. In El Salvador, children at age 7 averaged 4 years behind in in weight (they had the weight of 3 year olds). In Guatemala, for example, when you walk through a village you may think the children are normal and there is no malnutrition, but ask the age. Children who look 8 are often 15.

Clements: Is the retardation mental as well as physical?

Scrimshaw: Yes. There is a correlation between weight for age and performance on tests of learning. Also, iron deficiency malnutrition produces a reversible impairment in short term memory and learning. If you improve the survival of young children, you increase the life expectancy of the whole population.

Strauss: Is PL 480 a strong, aggressive program in Central America?

McPherson: The title II feeding program has an important role in backing up primary health care. The availability of Title II through the health system can make a difference.

Strauss: I'd just like to point out that any stepped up PL 480 program has a strong tail wind behind it in Congress. It's very appealing if sensible.

Scrimshaw: It could be useless and even wasteful unless it is part of a package that would address problems such as infrastructure (trucking problems).

Johnson: Is it feasible or practical to think we could increase the number of health workers?

Scrimshaw: Voluntary health workers, members of the communities, are the first line in identifying problems. It makes a tremendous difference, but to do that, you must train supervisors. This means thousands of paid workers. But the health infrastructure is so weak that it reaches only 20-30 % of the population. To be effective, it must reach into the remote areas.

Diaz-Alejandro: How quickly can the health infrastructure be set up?

Scrimshaw: In Chile, it's been building up over a period of 40 years. Five years can be useful, as in Thailand. It can be done in 5-10 years with determined effort and policies.

Walsh: There is an expensive paid, not volunteer, system in Costa Rica. I was surprised to hear about Guatemala. I haven't seen workers get killed, nor supervisors and trainers assaulted by the government. I'm down there often and I don't see it and my people don't see it.

Scrimshaw: It used to be that the highlands were safe, but not the Honduras/ El Salvador border areas. It's reversed now.

Walsh: It's important to point out that they're fleeing from repression by both the right and the left.

-7-

McPherson: We don't find the results found in "Health and Human Rights in El Salvador". Their conclusions are not believed by USAID. We don't agree with ideas they presented in an oped in the New York Times, particularly the recommendation to stop providing health care in El Salvador. The report was written by people who were in the country only a few days and not backed up.

Barnes: I have constituents who don't practice in El Salvador because they are afraid for their lives. Therefore there is some support for these conclusions. One doctor was tortured and interrogated by the government concerning his connection with guerillas. Do UNICEF primary health programs, such as the anti-diarrheal program, have the potential it says?

Scrimshaw: Yes, but there has to be adequate infrastructure and government will.

Barnes: We should look at further support for this program.

Scrimshaw: UNICEF is the most effective of the agencies working in developing countries.

September 9, 1983

RECOMMENDATIONS FOR
SOCIAL DEVELOPMENT POLICY IN CENTRAL AMERICA

We have been presented with a series of sincere and innovative ideas for social development policy in Central America which are responsive to specific issues and problems in the area. On the basis of those suggestions, there appear to be three categories of actions which the Commission can recommend: There are actions that can be taken immediately by administrative action, most requiring no funding. Others are of an intermediate nature - that is, they require action in the next year's budget cycle. Finally, there are actions which might require two to three years to accomplish.

## IMMEDIATE ACTION (between now and February 1, 1984)

1. Have the Peace Corps instructed to prepare an action plan to field at least 1,000 volunteers over the next 12 months (CY 1984) in Central American countries to carry out programs demonstrating our concern for the welfare and opportunities for advancement of low income groups, specifically in literacy and in para-medical and nutritional instruction, in both urban and rural areas. This plan should be ready by late October-early November.

2. Query U.S. embassies in the region (possibly including Nicaragua) to obtain informal opinions on receptivity of host governments to recieving volunteers and, if response is positive, embassy/host government estimates of numbers and categories of PCVs which could be profitably used. It should be made clear to all concerned and publicly that our goals are political as well as humanitarian.

3. Formalize the diplomatic position of the regional roving ambassador, equivalent to the ambassadorial rank of Mexico and Brazil, who will have overall responsibility to harmonize U.S. policy in the region. We should assign him/her a small AID programming staff of not more than three officers who can open liaison with regional Central American institutions and put together a regional program for the Commission to consider before Christmas. Provide this staff with a series of searching questions such as: Why can we not start funding all bilateral activities through the Central American Bank?

4. Instruct the U.S. representative at the Inter-American Development Bank to present a strong position paper to the IDB Board calling for an

2

extra effort to expand small project loan projects for the benefit of private sector development in Central American countries.

5. AID should be asked to contract with a third party, in the name of this Commission, to investigate the pros and cons of government-to-government assistance in Central America. Consideration should be given to contracting with the non-profit agency PAID (Private Agencies in Development) which has been closely monitoring the work of the Carlucci Commission concerned with foreign assistance activities. A report could be delivered to the Commission by Thanksgiving.

6. The Congress and AID Administrator should be asked to remove restrictions on the number of technical advisors, particularly in Panama, Costa Rica, Honduras, and Belize where the security situation is less grave than in some other Central American countries. The restriction should be eased somewhat in Guatemala and El Salvador.

7. Social programs involving the military have already shown some success in Honduras under the direction of Honduras economists trained in the U.S. Consideration should be given to emulating these programs in El Salvador and Guatemala.

8. AID and Peace Corps should hold a week long programming session with all private voluntary organizations working in Central America. The PVOs should include those that receive AID funding as well as those that do not. AID should approach such a session as seeking PVO support for this program and also as a means of finding ways to have these PVOs act as third party executors of U.S. policy in the area, i.e: links with the Central American and U.S. private sectors, job creation, etc.

9. The U.S. Government at the highest level (including the U.S. Treasury and the U.S. Director of the IDB) and perhaps this Commission should be represented at the historic IDB-sponsored Central American consultative group in Brussels next week to ascertain that the multilateral agencies and the Central American governments focus future development dollars on social as well as economic concerns. A major portion of the pie which will be allocated in that meeting comes from the U.S. taxpayer and we should not be passive.

## INTERMEDIATE RECOMMENDATIONS

1. Assuming the Peace Corps action plan and Embassy responses are favorable and acceptable, Congress or the OMB should be asked for a special appropriation to give this program the impetus needed, so that recruitment can begin before the end of CY 1983. As a ball-park figure, $10 million is proposed for a request for the remainder of FY 1984. The municipal government (really?) faculties in the Southwest, Miami, San Juan, and New York (universities?) should be asked to collaborate in the recruitment process.

2. A special session of the Commission should be held on regionalization of US activities in Central America. (Point three of first section here) Note that the IDB papers prepared for the consultative discussion in Brussels next week stress Central American integration, demonstrating that this thrust is not merely a U.S. interest. Bureaucratic passivity (or: inertia and special interest) in AID and our embassies in Central America must be overcome if the U.S. to properly support integration.

3. If analysis of alternatives to government-to-government support indicates benefits (both political and administrative) to dealing through third parties, consideration should be given to diverting more U.S. government funds through PVOs and expediting their ability to program and account for the use of such funds. A great deal more can be done in this area. The national development foundation programs in Belize, Guatemala, Honduras, El Salvador, Nicaragua and Costa Rica are institutions which demonstrate the desire of the private sector to be increasingly involved in the development process. They should be provided with immediate grant support as a means of pump-priming a program of job creation. Roughly $6 million a year, with a 3 to 1 ratio of U.S. to local contributions would be made to their revolving loan funds.

MINUTES OF AID BRIEFING FOR THE
NATIONAL BIPARTISAN COMMISSION ON CENTRAL AMERICA

September 8, 1983

4:00 - 5:00 P.M.

Due to the lateness of the hour, and other scheduled commitments, Mr. McPherson was asked to limit his remarks on social development and his response to the consultants' presentations to no more than one half hour. Other sessions will be scheduled with Mr. McPherson were social development issues can be discussed in more detail.

Mr. McPherson prefaced his remarks/recommendations on social development with the statement that he was more optimistic than several of the prior speakers with regard to what could be achieved in resolving social problems in Central America. He cited Panama and Costa Rica as cases where considerable achievements had been made in improving quality of life, reducing mortality, disease, etc. Six problems/issues in social development were raised by Mr. McPherson for further consideration by the Commission.

## 1. Population Growth

The significance of population growth vis a vis quality of life as well as economic development was noted by Mr. McPherson. A.I.D. has been a leader in the field of population promoting greater access to family planning services. It was mentioned that considerable interest, both formal and informal, in family planning, had been expressed by the governments in Central America, which was not the case 10 years ago. Mr. McPherson stressed the need to confront the population problem directly, and he strongly encouraged the Commission to address this problem in their report.

## 2. Education/Literacy

Mr. McPherson cited A.I.D's priorities in this area for Central America. The primary focus for outside support should be primary and secondary education in order to achieve a more productive labor force (as opposed to cheap labor). As host countries invest more of their own resources in this sector than all donor agencies, Mr. McPherson suggested that donor agencies support teacher training, improved training materials and improved administration. While vocational education was important, Mr. McPherson cautioned that the "users" (employers) should play an integral role in setting priorities and planning curricula. Non-formal education was also mentioned as an area which deserved more attention. Mr. McPherson dismissed U.S. involvement in university education as too difficult and too political. With regard to literacy programs, Mr. McPherson noted the need for follow up so as not to lose the skills attained. He described models of such programs from Venezuela and Colombia as well as Nicaragua which are being used in Honduras.

-2-

### 3. Health

Mr. McPherson concurred with Dr. Scrimshaw on the outstanding quality of UNICEF's work in primary health care. He also noted that A.I.D. was taking a lead role in the promotion of oral rehydration. Malaria was also mentioned as a serious public health problem in Central America, but Mr. McPherson stated that controlling mosquitos was not a long term solution to this problem as resistance to pesticides was already a problem for malaria control in Central America. He described A.I.D.'s lead role in the support for development of a malaria vaccine which should be ready for trials in the next 5 years.

### 4. Urbanization/Urban Development

Mr. McPherson characterized this area as perhaps the most problematic of all of the social development issues. Urban populations are increasing at an alarming rate and urban services (housing, water sewerage) are presently inadequate and declining. While multilateral lending institutions have invested considerable resources in this area, Mr. McPherson cautioned that future investments should be on a financially viable basis, not simply resource transfers which cannot be maintained. Housing and water systems were mentioned specifically.

### 5. Democracy

Mr. McPherson noted that support for democratic processes (elections) and institutions (legal systems) was important not only for human rights, but for delivery of social services and economic growth. A.I.D.'s support for elections and judicial reform in El Salvador was presented as a model for replication in other countries.

### 6. Delivery Systems

The ways in which A.I.D. arranges for the delivery of social services were outlined by Mr. McPherson, including: contractors, private voluntary organizations (AIFLD, Project HOPE), the Peace Corps, etc. In the population field, 92% of A.I.D. funded activities are delivered by PVO's. Mr. McPherson also stressed that increased use of market forces to deliver services and commodities (drugs) should be explored. That is not to say that the governments in Central America are unable or unwilling to provide such services. Mr. McPherson emphasized the need to work with government institutions to make them viable. The recommendation made by one of the Commission's consultants to reinstitute "Servicios" to deliver social services was not heartily supported by Mr. McPherson.

-3-

He cautioned that the present "development" ministries (agriculture, health, education) were the end products of Servicios. To reintroduce Servicios at this time would run contrary to these entrenched bureaucracies and be considered insensitive and imperialistic.

Mr. McPherson concluded his presentation with the statement that more important than what we do in Central America is what the countries of Central America do for themselves. He cited health as an example of how these countries (with A.I.D. as a catalyst) had reoriented their health systems from urban, curative care for the middle classes to rural primary health care for the underserved populations in rural areas.

More information was requested by Dr. Silber on the literacy and health programs of Nicaragua as possible methodologics to replicate in other countries of Central America. It was noted that one feature of the Nicaraguan program is not replicable in other countries, and that is the ability of Cuba to send large numbers of professionals (teachers, doctors, etc.) to provide technical assistance as well as to deliver services. Dr. Walsh mentioned that the lack of health infrastructure, the lack of planning and management capability, and the lack of understanding of health economics were major constraints to providing technical assistance to improve/expand health delivery systems. He also noted that resources to support such planning activities were often not forthcoming as the results of such support are intangible. The issue of health economics was characterized by Mr. McPherson as a need for introduction of user fees into health delivery systems. He noted that people, even the most impoverished, are willing to pay for such services and demand better services when they pay for them.

Mr. McPherson was asked if he thought the IDB was doing enough in the financing of social services. He replied that the IDB was a "Borrower's Bank" which operated without a strong policy framework and without a field staff. This inhibited them from doing more social programming. He also stated that the IDB should be doing more in family planning.

Several questions were asked regarding the relationship/ linkage of A.I.D. programs to IMF austerity programs, and how such linkages affected social development. Mr. McPherson responded that relationships between balance-of-payments support (ESF, PL 480) and IMF agreements did exist, but that development assistance for social programming was not and should not be tied to IMF agreements. He noted that the relationship to IMF was important for creating a climate for economic growth. In Costa Rica, where A.I.D. resources were held up until compliance with IMF requirements was achieved, it was not an issue of adding A.I.D. "clout" to the IMF, but the genuine concern as to how A.I.D. resources would be spent in

CHAIRMAN
DR HENRY A. KISSINGER

COMMISSION MEMBERS:
MR NICHOLAS F. BRADY
MAYOR HENRY G. CISNEROS
GOV WILLIAM P. CLEMENTS, JR.
DR CARLOS F. DIAZ-ALEJANDRO
MR WILSON S. JOHNSON
MR LANE KIRKLAND
MR RICHARD M. SCAMMON
DR JOHN SILBER
JUSTICE POTTER STEWART
AMB ROBERT S. STRAUSS
DR WILLIAM B. WALSH

EXECUTIVE DIRECTOR
AMB HARRY W. SHLAUDEMAN

SESSION ON ECONOMIC DEVELOPMENT

September 12-13, 1983

MONDAY, SEPTEMBER 12

9:15 - 10:00 **Commission - Administrative Matters**

10:00 - 11:30 **Overview**

Mr. Alan Stoga, First National Bank of Chicago

Dr. Sidney Weintraub, University of Texas

11:30 - 12:30 **Economic Development**

Dr. Raul Prebisch, Economic Commission for Latin America

12:30 - 12:45 **SANDWICH BREAK**

12:45 - 2:15 **Role of the Private Sector**

The Americas Society:

Mr. Samuel F. Segnar, Inter-North Corp.

Mr. Seymour Milstein, United Brands

2:15 - 2:25 **BREAK**

2:25 - 3:25 **Role of Foreign Assistance**

Mr. Lawrence Harrison, Center for International Affairs, Harvard University

3:30 - 4:30 **IMF and Conditionality**

Mr. Fred Bergsten, International Institute of Economics

SENIOR COUNSELLORS
REP MICHAEL D. BARNES
SEN LLOYD BENTSEN
REP WILLIAM S. BROOMFIELD
SEN PETE V. DOMENICI
SEN HENRY M. JACKSON
REP JACK F. KEMP
AMB JEANE KIRKPATRICK
MR WINSTON LORD
SEN CHARLES MCC. MATHIAS
MR WILLIAM D. ROGERS
REP JAMES C. WRIGHT

2201 C STREET NW, ROOM 1004, WASHINGTON D.C. 20520 TEL (202) 632-7804

CHAIRMAN
DR. HENRY A. KISSINGER

COMMISSION MEMBERS
MR. NICHOLAS F. BRADY
MAYOR HENRY G. CISNEROS
GOV. WILLIAM P. CLEMENTS JR.
DR. CARLOS F. DIAZ-ALEJANDRO
MR. WILSON S. JOHNSON
MR. LANE KIRKLAND
MR. RICHARD M. SCAMMON
DR. JOHN SILBER
JUSTICE POTTER STEWART
AUB. ROBERT S. STRAUSS
DR. WILLIAM B. WALSH

EXECUTIVE DIRECTOR
AUB. HARRY W. SHLAUDEMAN

SENIOR COUNSELLORS
REP. MICHAEL D. BARNES
SEN. LLOYD BENTSEN
REP. WILLIAM S. BROOMFIELD
SEN. PETE V. DOMENICI
SEN. HENRY M. JACKSON
REP. JACK F. KEMP
AUB. JEANE KIRKPATRICK
MR. WINSTON LORD
SEN. CHARLES MCC. MATHIAS
MR. WILLIAM D. ROGERS
REP. JAMES C. WRIGHT

TUESDAY, SEPTEMBER 13

10:00 - 11:00 Agricultural Development

Mr. Monteagle Yudelman, World Bank

11:00 - 12:00 Reflections on the Alliance for Progress

Mr. Arthur Schlesinger, Jr., Schweitzer Professor
of the Humanities, City University of New York

12:00 - 12:15 SANDWICH BREAK

12:15 - 1:15 Consultants Recommendations

1:15 - 2:00 Ambassador John Negroponte
U.S. Ambassador to Honduras

2201 C STREET NW, ROOM 1004, WASHINGTON D.C. 20520 TEL: (202) 632-7804

0248B

Biographies for September 12 & 13 sessions

Alan Stoga

Alan Stoga is Vice President of the First National Bank of Chicago, where he is the head of the Country Risk Management Division. He has overall responsibility for economic and political analysis relating to the Bank's lending policy. He has traveled extensively throughout Latin America during the recent period of financial and economic crisis.

Sidney Weintraub

Sidney Weintraub is Dean Rusk Professor at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin. He is a former Foreign Service Officer and served as Deputy Assistant Secretary of State for International Finance and Development (1969-1974) and Assistant Administrator for AID (1974-1975). From 1978 to 1979, he was a Senior Fellow at the Brookings Institute.

His current research interests include economic and social studies related to underdeveloped countries. He has co-authored the following works *Economic Stabilization Policies in Developing Countries* (1981) and *The Illegal Alien from Mexico* (1980).

Raul Prebisch

Dr. Prebisch was the Executive Secretary of the United Nations Economic Commission on Latin America from 1948 until 1962. From 1962 to 1969, he was Secretary General for UNCTAD. Since then he has served as an adviser to the Secretary General of the United Nations and as a professor of economics

Dr. Prebisch was born in Argentina, where he was trained as an economist. He was the founder and first Director General of the Central Bank of Argentina from 1935 to 1943.

Samuel F. Segnar

Mr. Segnar has been the President of InterNorth Inc., a natural gas distribution company, since 1961. He is the Vice-Chairman of Caribbean/Central American Action, an organization designed to promote private investment in the region. He also serves as a Vice-Chairman of the Americas Society.

-2-

## Seymour Milstein

Mr. Milstein is currently Chairman of the Board and Chief Executive Officer for the United Brands Company. He was previously Secretary-Treasurer for the Mastic Tile Corp and Vice President for the Ruberoid Company. He is a member of the Advisory Board of the Chase Manhattan Bank.

## Lawrence Harrison

Mr. Harrison has just completed a year's work at The Harvard Center for International Affairs, where he has written a manuscript entitled "Underdevelopment Is a State of Mind." He was a career AID officer and served as mission director in Costa Rica, Haiti, and, most recently, Nicaragua.

## Fred C. Bergsten

He is currently with the International Institute of Economics. He holds a Ph.D. from the Fletcher School and has worked as a member of the National Security Council and served as Assistant Secretary of the Treasury for International Affairs in the Carter Administration.

## Robert D. Hormats

Dr. Hormats is currently with Goldman, Sachs Co. He has served as an economist with the National Security Council and as Assistant Secretary of State for Economic and Business Affairs (1981-1982). Dr. Hormats also served as the Deputy U.S. Trade Representative (1979-1981).

## Arthur M. Schlesinger, Jr.

Dr. Schlesinger is Schweitzer Professor of Humanities, City University of New York. He was a special adviser to John F. Kennedy and is the author of *A Thousand Days: John F. Kennedy in the White House* and *Robert Kennedy and His Times*.

## Monteagle Yudelman

Mr. Yudelman is currently Director for Agriculture at the World Bank. He has also served as Vice President for the OECD's Development Center and as a faculty member at the University of Michigan and the Stanford Research Center. He holds a Ph.D. from the University of California, Berkeley.

Notes on the Meeting of the
National Bipartisan Commission on Central America

SUBJECT: Economic Developments

BRIEFER/WITNESS: Alan Stoga and Sidney Weintraub, Lead Consultants

DATE: September 12, 1983
TIME: 10:00 - 11:30
PLACE: Rm. 1105

SUMMARY

Mr. Stoga began by outlining several factors which have
contributed to the economic crisis in Central America. The
first set of factors included the impact of high oil prices,
world recession, and weak commodity prices. A second set
involves intra-regional tensions and political unrest. A third
set reflects weak economic management, based on an attempt to
artificially cushion the Central American economies from the
decline. Finally, the general retrenchment among banks has led
to a virtual cut off of outside capital. Dr. Weintraub
outlined policy options. His options included the continuation
of present trade policies as embodied in the Caribbean Basin
Initiative; the establishment of a modified Alliance for
Progress; the formation of a Central American Consultative
Group similar to the World Bank's Caribbean consultative group;
or, the formation of a long-term agreement similar to that
between the European Community and several underdeveloped
countries signed at Lome.

-2-

NOTES:

Dr. Kissinger

Today and tomorrow we will discuss economic
development issues. You have your schedules
before you. We will begin with lead
consultants Alan Stoga, followed by Sidney
Weintraub. Sid has had great forebearance.
He is one the few who once attempted to
provide me with economic advice and is still
talking to me. I have learned a lot from
him. I once again want to thank both of you
for your service. I also want to invite you
to participate in the session on October 7.

Mr. Stoga

Began his presentation with a visual display
of the basic growth factors in Central America
[page 2 of consultants report]. The numbers
summarize the situation well. Most of the
region since 1979 has shown substantial
decline. For example, there was a 26% decline
in Nicaragua in 1979. Over the four year
period, the decline in El Salvador has been
between 25 and 26%. By 1982, only Panama
continued to show any real growth, and that
will probably be stagnant for 1983.

The overall trends are weak. For example
there have been real increases in Nicaragua
since 1979, but they are far from recovering
to the levels of the pre-1979 period. There
are also a number of differences in wealth,
income distribution, and structure. Panama
has a strong service economy. Guatemala and
Honduras are primarily agricultural exporters.

Longer term growth figures have been less
adverse and in fact a historical review shows
that all of the countries in Central America
experienced rapid growth in the 1950s and
1960s. These countries were not basket cases
in the 1950s and 1960s. Only in the late
1970s did a substantial deterioration begin.
The cause of this deterioration has arisen
from different sources.

-3-

The first set of causes can be attributed to
high oil prices, prolonged world recession,
and weak demand/prices for commodity exports.
Since each of these countries has a relatively
open economy, in which exports of goods and
nonfactor services account for 25 to 40
percent of GDP, a shortfall in export earnings
reduces the ability to import raw materials,
spare parts, and other capital and consumer
goods. The terms of tade have also been
adverse for the Central American countries.
Overall, there has been a contraction in
imports coupled with a deterioration in trade
performance.

Social and political problems constitute
another causal source of current Central
American problems. Inter-regional trade has
declined. In 1980, it constituted one-fourth
of Central American external trade. It has
declined by one-third since then. The
destruction of the economic infrastructure has
had significant impact in Nicaragua and El
Salvador. Finally, there has been a
fundamental retrenchment on the part of
investors, both among foreign lenders and
among Central Americans. Central Americans no
longer invest; they take resources out.
Between 1980 and 1982, using very soft
estimates, it is believed that as much as $3
billion in capital fled Central America. Such
outflows make it difficult to provide
additional financial assistance.

A third set of factors which must be
considered is the management of Central
American economies. In the last five years,
this management has been weak. As prices for
exports weakened and oil prices increased, the
Central American countries began to run up
higher government deficits and to turn to
foreign borrowing. Governments also began to
spend more as private investment fell. The
impact of this phenomenon has been regional.
It has resulted in significant inflation, the
largest rate, approximately 90% per year, has
occurred in Costa Rica.

Mr. Kemp

Are these economies tied to the dollar.

-4-

Mr. Stoga
Yes, they are. Only Costa Rica has a free floating exchange rate, the rest are in some way or another tied to the dollar. One should, however, draw a distinction between official exchange rates and black market rates which are closer to reality. I will conclude this part of my presentation by reiterating that management of the current economic problems which have been governed by a desire to cushion the impact of the current recession have had their impact.

Dr. Silber
Since much of the current indebtedness is based on foreign borrowing, what was the rationale of the banks that lent money to insolvent clients?

Mr. Stoga
I will come to this later. If I may, I would like to point out a fourth set of factors that determines the current economic situation. This is the retrenchment carried out by foreign banks and the loss of access to the international commercial banking market. In the period 1980-82, there has been very little access to private banks on the part of the Central American countries. Without additional credits to promote economic activity, there has been economic stagnation, a worsening of the unemployment situation, and accumulating debts. The total Central American debt is approximately $14 billion, $3 billion of which is owed by Panama. Private sector lending to Central America has virtually ceased. Yet, the overall numbers and magnitude of indebtedness is less than in many Latin American countries.

Amb. Strauss
Why is there a low debt ratio in Guatemala and El Salvador?

Mr. Stoga
Most of the borrowing of these countries is long term and at low interest rates. Yet, even with these smaller number, Panama, Costa Rica and Guatemala are rescheduling their debts. Nicaragua rescheduled its debt in 1980-81. It pursued a different strategy, stating that it would only pay 7% interest and that the banks lacked leverage since the Nicaraguans stated that they do not plan to borrow again from private banks.

-5-

<table>
   <tr>
    <td>
     Gov. Clements
    </td>
    <td>
     How is the Panamanian debt reflected in terms of public bonds?
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     The debt is mainly public debt in Panama, which has been lent by private banks to the public sector. An important point to understand about Panama is that it has no Central Bank. It cannot print dollars. In fact the use of the dollar may not be a bad, although heretical, idea for the other Central American countries.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Kemp
    </td>
    <td>
     This certainly highlights the interrelation between the dollar and the Central American economies.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     That is a good point. These are small countries. Overall their combined economic weight is approximately that of the Baltimore area. These countries are easily affected by changes in the world economy. Yet as we have seen, when there was an economic downturn, the Central American countries in effect sought to spit in the wind. Had they accumulated less debt, there would be fewer obstacles to recovery. We should not overestimate the prospects for recovery. The World Bank economist currently reject any recovery program that assumes more than a 1% real growth in the next five years.
    </td>
   </tr>
   <tr>
    <td>
     Dr. Kissinger
    </td>
    <td>
     In light of these grim predictions, what can the Commission do?
    </td>
   </tr>
   <tr>
    <td>
     Gov. Clements
    </td>
    <td>
     What is important is the agricultural nature of these problems. We need to focus on them and see how they are tied to the U.S. agricultural economy. There are real parallels. I see nothing in the U.S. economy that would indicate a surge in commodity prices. The same is true for Central America.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     This is basically true, although we are dealing with primarily tropical products.
    </td>
   </tr>
   <tr>
    <td>
     Gov. Clements
    </td>
    <td>
     They are all in trouble and unlikely to be relieved by any immediate recovery.
    </td>
   </tr>
  </table>

-6-

Dr. Kissinger
You said that intra-Central American trade has diminished. Why is this? The Nicaraguan case is one factor, but the other four remain on fairly good terms.

Mr. Stoga
The basic reason is that they are all broke. Moreover, Nicaragua was an important part of the market. But there is an important financial problem for the entire region. Two of the countries in the region are creditors, while the other three have built-up considerable deficits. Nicaragua, El Salvador and Honduras have run up imbalances. The three owe the other two $300 million. Trade is basically frozen because of non-payment. In the current meeting in Brussels, the Central Americans are looking for means to thaw trade relations.

Dr. Diaz-Alejandro
This sounds like a good idea.

Mr. Stoga
In the short term, yes. Sid will discuss the long term implications.

Dr. Walsh
What will it take to persuade commercial banks to lend to the Central American countries?

Mr. Stoga
At this time, very little. I find it difficult to explain the rationale behind some of the lending that was made in the late 70s and early 80s. There have been arguments that it was to support short-term trade financing.

Mr. Kemp
Part of this appears to have been explained by the higher commodity prices in that period.

Mr. Stoga
There are another trend that I would like to discuss. We may conceptualize it in the form of impacts of aggregate changes in major economic factors. A one percent decline in interest rates frees up or increases the burden by $60 million. A 10% change in the price of oil also affects another $60 million. A 10% increase in commodity prices would generate an additional $400 million for the Central American countries. What is basically needed is a major increase in commodity prices.

-7-

<table>
   <tr>
    <td>
     Gov. Clements
    </td>
    <td>
     I find little new in this concept. A similar change in the U.S. is the prescription for an economic boom.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Kemp
    </td>
    <td>
     It also demonstrates how these economies are tied to the U.S. economy.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     There is one final point that I would like to make and that is how do these countries finance themselves. We know that in 1982, the countries needed a total of $2.8 billion to balance the books. The overall financing requirements are large. Without a significant increase in financing imports they will remain depressed and economic recovery will be delayed.
    </td>
   </tr>
   <tr>
    <td>
     Dr. Kissinger
    </td>
    <td>
     Am I not correct that the IMF is not a source of credit, but primarily a source of policy advice?
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     Yes. Also we should realize that private lending to Central America continues to decline in 1983. In essence, the private sector is not a part of the picture.
    </td>
   </tr>
   <tr>
    <td>
     Dr. Silber
    </td>
    <td>
     What is the impact of 20-25% interest rates?
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     Most countries are now paying 11-12% in interest. There rates are for the most part based on current interest rates.
    </td>
   </tr>
   <tr>
    <td>
     Dr. Diaz-Alejandro
    </td>
    <td>
     Is there any realistic way to stop capital flight?
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     Not a great deal. Most of the private capital has already gone. Also to recapture or prevent the outflow of capital will require important changes in government policy with more incentives. Costa Rica, for example, has negative interest rates.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Kirkland
    </td>
    <td>
     Are any of the countries working to establish capital controls.
    </td>
   </tr>
   <tr>
    <td>
     Mr. Stoga
    </td>
    <td>
     Yes, but they are not really effective. When I was in Costa Rica, the Central Bank officials told me they felt that current measures were stopping more outflow than they were creating, but that the margin was small.
    </td>
   </tr>
  </table>

-8-

Dr. Weintraub
Let me begin with a few remarks on the Central American Common Market and whether it is a good or bad idea. Some argue that it creates production incentives, while others feel that the trade barriers increase the cost of goods. It is clear that the small economies of these nations, without industrial capacity are at the mercy of outside forces. There is also an important compensation problem that must be solved if the Market is to work.

Mr. Kemp
Could you clarify a point for me? Is the Common Market designed primarily to stimulate industrial production.

Dr. Weintraub
Yes, it is primarily industrial in orientation. Another point I would make in reference to some earlier remarks is that it is very difficult to predict changes in commodity prices. Look at the price of coffee, bananas and meat; they can all change in rapid fashion.

Dr. Diaz-Alejandro
Can we recommend anything on the side of commodity stabilization?

Dr. Weintraub
I feel that we have a series of options which deal with short term trade financing, adjusting the terms of trade, and the role of OPIC. These are things that need to be addressed. We must also provide a context with which to deal with the issues.

We have a number of options. Our first option is essentially to follow the present course with the U.S. granting a series of bilateral economic concessions and encouraging other countries to do the same. Much of this is in the CBI strategy. Yet, here we see that trade to large degree depends on investment.

Dr. Kissinger
Can you give the orders of magnitude and preferences involved in these programs, since we often hear that U.S. aid moves too slowly to be effective?

-9-

Dr. Weintraub
Yes, I can, but I would like to continue by first outlining the options before us. Under the current CBI type strategy, we can look for tax concessions which encourage more aid and investment, offer trade assistance, and strengthen credit facilities within the Central American Common Market. The advantage of many of these policies is that they can be done without additional legislation. Also nothing is demanded in return. Their major disadvantage is that they are an accumulation of concessions without a structure that translates concessions into sustainable growth.

A second major option is to construct a regional framework. Although analogies are dangerous, this option is closely related to the model of the Alliance for Progress. The broad understanding under which U.S. aid was granted during the Alliance and the conditions imposed on the recipient countries were set forth in the Charter of Punta del Este. A primary disadvantage of this approach is to be found in an attempt to replicate the conditions that existed in the 1960s. I am somewhat sceptical as to the possibility of such an undertaking.

A third set of policies revolve around a consultative group, with the U.S. foregoing a new structure. The Consultative Group for the Caribbean, which has been successful in mobilizing support to assist financial restructuring efforts, is an example of a sub-institution with a special regional focus established within an existing institution. The Consultative Group on Central America, sponsored by the IDB, is a first step in this direction by the 5 Central American Common Market countries.

Mr. Kemp
How is this different from the Alliance for Progress?

Dr. Weintraub
In the Alliance, the U.S. set the conditions, as it did in the Charter of Punta del Este.

-10-

Mr. Stoga
The Alliance also had specific social
development goals, which is not the case in
the Consultative Group approach.

Dr. Weintraub
The fourth option is for the U.S. to go beyond
the aid framework and develop a structure
focused on regular appraisals and
consultations on overall development
programs. The analogy here is that of the
Lome agreement between the European Economic
Community (EEC) and the African-Caribbean-
Pacific (ACP) countries. At periodic
intervals, usually five years, the EEC and the
ACP countries sign an agreement setting forth
mutual responsibilities and EEC aid programs
are then committed over this time frame. Two
aspects of the Lome agreement are aid programs
and stabex or stabilization of export
commodities. If commodity prices decline
there is a mechanism which seeks to offset
these declines and to provide compensation.

Gov. Clements
This appears to function much like the U.S.
farm loan program.

Dr. Weintraub
Yes, it also deals not only with aid, but
provides for regular policy level meetings
between experts on trade, agriculture, etc.

Mr. Kemp
Has the stab-ex program worked.

Dr. Weintraub
It has not worked well, but it has helped.
The main problem is that funding for the
stabilization programs is inadequate. In some
respects it is similar to the IMF's
compensatory financing facility.

Now these are the options: no framework, a
consultative group, a full blown program such
as the Alliance for Progress, and a Lome-like
agreement.

Amb. Strauss
If we had an Alliance for Progress type
framework which sought to do with real
conditions and did it in a multinational
context, along with Brazil and Mexico, and,
finally, was well tied to the private sector
investments and oversight groups, wouldn't
this work. To my mind, this would appear to

-11-

meet the U.S. criterion of getting things done, without U.S. dominance and mouldable into a legislatively acceptable program.

Dr. Weintraub I feel that three of the options - consultative group, alliance for progress and Lome - lend themselves to your position. All of these can include private sector involvement and Latin American participation.

Mr. Kemp Where does CBI fit in?

Dr. Weintraub It is fits in under any of the three. It really constitutes a form of sub-option.

Dr. Kissinger I would like to ask another question while you are talking about structures. William Doherty recommended a watchdog committee in the U.S. and similar committees in Central America to oversee and monitor political, social, and economic development. Is it workable?

Dr. Weintraub Yes, up to a point. I have a feeling, however, that it is more glitter, such as the program of the Partners for the Alliance of Progress.

Amb. Strauss You appear to be down on the Alliance for Progress.

Dr. Weintraub I am not down on the Alliance. I just feel that we must be very careful when we talk about analogies. Also we are talking about bringing in things that were not in the original alliance, such as trade.

Mr. Kemp That is why the CBI is important. It honestly talked about private investment.

Amb. Strauss Sam Segnar and Peter Johnson of Caribbean/ Central American Action feel that there is a lot of private investment interest in a program.

Dr. Weintraub I feel that private investment is still somewhat problematical since in many instances they cannot get into the countries that we are discussing; also there is still a lack of private loans for such investments.

-12-

Gov. Clements There will be no real private sector investment until there is return of the flight capital. There is also a persistent problem of unused capacity.

Mr. Stoga The case of Jamaica seems to bear this out, since there has been little increase in private investment.

Dr. Weintraub It is important to realize that there would have to be different timeframes for the development factors to play out.

Gov. Clements I recommend that you talk with Jarvis Miller of Texas A&M about agricultural stabilization.

Dr. Kissinger Tomorrow would you please attempt to summarize the perspective over the next three to five years. Specifically you should recommend what we can do to make the World Bank more optimistic. If you do this, you will perform a great service.

W 0295B

SUBJECT: Economic Development
BRIEFER/WITNESS: Dr. Raul Prebisch

DATE: September 12, 1983
TIME: 11:30 - 1:00
PLACE: Rm 1105

SUMMARY:

Dr. Prebisch outlined three basic causes of the current Central American crisis: land tenure, inequitable development coupled with the waste of capital inputs on privileged consumption, and the failure of the Central American Common Market to adopt sound development policies. He recommended that free market mechanisms be limited in order to promote balanced and equitable growth. He also argued that the IMF forced import contractions without adequate attention to the consequences. He concluded with a call for the U.S. to accept fundamental structural changes in Central America. He illustrated his point by citing Mexican Revolution as an example where basic upheaval had been necessary to establish a basis for growth.

-2-

NOTES:

Dr. Kissinger
I am honored to greet you here today. You are the first Latin American to meet with the Commission. You were one of that fathers on the Latin American side of the Alliance for Progress and are one of the great men of Latin America. All of us here recognize that we cannot write a program that does not incorporate the views of Latin Americans and it will not be unacceptable unless it is one that Latin Americans feel is in part their own.

Dr. Prebisch
I wish to thank you for the honor of appearing here. Let me begin by looking at few structural factors and then express my views on the present situation.

All of you know of the anachronistic system of land tenure in Central America. I do not need to talk about it at any length. I should also point out that four decades of industrial growth has not contributed to solving the disparities that exist in Central America; in fact they may have encouraged some.

Productivity has increased, but due to social structures, benefits have been distributed to only a small part of society. A great part of the potential for capital accumulation has been wasted on privileged consumption.

Industrial development, as we know it, has not contributed to the solution of poverty.

Industrialization was fostered by the Central American Common Market (CACM). However, the influence of the CACM has diminished. Not just because of the policies, but because of imbalances in the exchange of goods. Maybe an overall factor is the fact that the original concept for the CACM was based on the gradual reduction of duties and special arrangements for specific industries in order to choose areas for future development. But I understand that such a policy of gradualism did not coincide with the policies of the State Department, which emphasized free markets.

Dr. Kissinger
How was the system of arrangements between specific industries to be carried out?

-3-

<table>
   <tr>
    <td>Dr. Prebisch</td>
    <td>Some development could have taken place in iron and steel and implements for construction. Although a high percentage of trade in the region is in manufactured goods, a high percentage is based on imports. Insufficient attention has been given to the need to reduce the coefficient of imports. Naturally no policy should be based entirely on import substitution; we must also look at exports.<br/>Future strategies must contain two things: the export of manufactured and semi-manufactured goods and the development of new forms of import substitution. Central America has not taken advantage of many export opportunities, especially in agro-industry.<br/>Let me recapitulate. There are three factors which are interfering with economic growth in Latin America. These are land tenure, exaggerated consumption and the waste of inputs, and failures in integration policy. To all of this we must add the impact of the world recession. The recession has affected both the terms of trade and exports. The two combined have led to a Latin American economic contraction. In conjunction with high interest rates, we have seen the worsening of the Latin American debt situation. Let me stress this point. I can think of no period in modern history when the world development centers had such high interest rates, with such an extraordinary impact. Realistically, I do not think that any country in Latin America can contract imports, suffer increased unemployment, and forego growth without some form of action.</td>
   </tr>
   <tr>
    <td>Dr. Kissinger</td>
    <td>Are all Latin American nations being forced into this form of economic austerity? What are the political costs?</td>
   </tr>
   <tr>
    <td>Dr. Prebisch</td>
    <td>I don't think that drastic contraction is politically acceptable. What is needed is a long term settlement. I am not optimistic about the ability of many countries to settle</td>
   </tr>
  </table>

-4-

their debts. The IMF is helpful, but most of
the nations cannot pay high interest without
additional loans. Other factors also limit
the prospect for recovery. Even if the
recession abates, the projections are not
brilliant and future seems to hold slow
growth. We must consider lowered growth rates
as a fact.

I understand that you are interested in long
term solutions. For me, the long term
solutions begin when we recognize the problems
in land tenure, inequality and productive
capital flows.

Many see a need to first control inflation.
Yet, I have observed that the rates of
inflation are generally lower than in other
Latin American countries. Where there is no
participation by the people under
authoritarian government, the inflationary
spiral is limited. There is also repression
of the labor unions. Authoritarian
governments can limit inflation at tremendous
social and human costs. The only place with a
real inflationary problem in Central America
is Costa Rica.

Any part of a long term program should take
into account the need for an incomes policy
that includes increases in capital
accumulation and efforts to improve income.
One piece of policy advise is that any program
that does not account of inflation in a
democratic society is not realistic. IMF type
actions often increase political and social
tensions. For 30 years in ECLA, I fought the
policy of contraction as a solution. The
people from the IMF would not discuss
conditionality. A serious discussion of
conditionality is needed. It should be based
either on absolute cuts in imports or
reductions that preserve production.

References are often made to a U.S. policy
that would give preferential treatment to
stimulate Central American exports. I like
the idea. Other countries, such as Colombia,

-5-

Venezuela, and Mexico should also participate. Mexico once had a similar idea which it presented to ALACC. I would have been a good idea. It should be raised again. There should also be a long-term emphasis on resource development.

I have made no mention of the idealogues. Yet, there has been a clash of ideologies for many years. I was attacked by both the Communists and the Capitalist. I felt that my ideas had merit if they were attacked from both sides. I favor a policy that prefers neither the free play of the market nor the suppression of the market. The market does not solve all; there are important structural factors that cannot be addressed by the market. These are my frank opinions of some of the things that the U.S. should do.

I have seen examples of American economic actions that have been harmful, such as the United Fruit Company's suppression of reform. The U.S. has unfortunately, here I am speaking as a friend of the U.S., been identified in the past in Latin American public as concerned with the preservation of anachronistic states. This harms all involved. It is also used by ideological opponents of the U.S. You are associated with an order of things that should be changed.

I was encouraged by the example of Kennedy and his entry into the Alliance for Progress. I would like to see some similar action, but with greater Latin American involvement. The blueprint for the Alliance for Progress did not sufficiently engage Latin Americans.

Dr. Kissinger

Dr. Prebisch you have covered a wide range of issues. Let me raise one or two philosophical points. There is great sympathy on the Commission for your position.

-6-

Revolutions generally occur when things are
starting to get better; not at their low
point. We recognize that there is a need for
change in the system - in politics, economic
development, capital accumulation and other
areas. But how do we avoid replicating
another Iran or Cuba? That is one of our
biggest puzzles.

Dr. Prebisch
It would be irresponsible of me to deny that there is a danger in change. Change, moreover, takes time. Transformations should be indigenous and with U.S. support. Errors have to be made. You have to run risks. But the U.S. should have a clear conception of what needs to be done, both internally and externally.

Dr. Kissinger
How do we connect political evolution with economic policy without it appearing that we are imposing a policy made in Washington?

Dr. Prebisch
Discuss any proposed policy with your neighbors. I feel that there is now in Central America a better understanding of the need for realistic solutions. You may, for example, call for a specific rates of capital accumulation. It should be tied to increased assistance. Your question also reminds me of the Mexican revolution. Fortunately, it happened before the Bolshevik Revolution. Without this structural upheaval, we would not have current Mexican growth.

Dr. Kissinger
Where do you place the Nicaraguan Revolution?

Dr. Prebisch
In Nicaragua, unfortunately, the pendulum went too far. I have not, however, lost hope for a political solution. The situation in Nicaragua is very serious - today there is hunger.

Dr. Diaz-Alejandro
You have given us some valuable insights into the Alliance for Progress years. Would you care to reflect a little more on it and the role of the Committee of Nine?

-7-

Dr. Prebisch
I had a sense that President Kennedy understood the problems of social and economic development. The spirit of the Alliance for Progress cannot be repeated. Even in that time the Bay of Pigs and the death of Kennedy weakened the Alliance. The role of the Committee of Nine was to start a number of conversion measures in order to reach the Alliance's objectives. Unfortunately there was no commitment on the part of the World Bank to follow the recommendations of the Nine. The ideas were good; the ability to carry them out was weak.

Mr. Kirkland
One of the key objectives is capital accumulation. Yet, the history is one of capital expatriation. Is there any hope for capital repatriation?

Dr. Prebisch
Yes, sir. There are political and economic factors involved. In the past the temptation has been to send capital outside. It is estimated that as much as $5 billion in Latin American capital is in American banks. Also present uncertainties are conducive to the transfer of resources. Many companies use their working capital to invest in the outside, often at the cost to their own development plans. The only answer is economic reactivation. But we must first solve the political situation. Stabilization of the political situation is the starting point.

Amb. Strauss
In other words, what you are saying is that the stabilization of the political situation is the starting point.

Mr. Johnson
You have suggested that increases in industrial production create unrest. Should future development plans be labor intensive?

Dr. Prebisch
Not necessarily so. We cannot always limit industrialization solely to develop labor intensive industries. Productivity should be linked to capital accumulation and to the reduction in consumption.

-8-

Dr. Kissinger If you have any positive suggestions on how this may be done, the Commission is anxious to receive them.

Dr. Silber Are there institutions that can aid in this process in conformity with your ideas? How can we be sure that aid goes to those to whom we designate it without sending in U.S. paymasters.

Dr. Prebisch I feel that the Central Banks have improved. They can play an important role. If they are criticized, it is for being too orthodox.

Dr. Silber Can taxes be placed on those who are engaged in the revolution of consumption rather than the revolution of production? Can tax programs be implemented to insure progress.?

Dr. Prebisch That I cannot answer. I do know that a corrupt army cannot be the basis for aid.

Mr. Kirkland Are there measures that we can take through programs which further institutional change and reenforce the evolution of an entrepreneurial middle class, trade unions, and farm organizations.

Dr. Prebisch I think so. I think that if a political solution is found to some of the problems in Central America, all of us, the U.S. and the Contadora Group, should work for a consensus on what is to be done. We must work with the political parties to convince them of the need for programs and to build the institutions to carry out change. We need to know how to deal with tax structures. There should be incentives. Without them, you run the risk that financial cooperation instead of solving the problem, merely adds to it.

Amb. Strauss Do you believe that the Contadora Group welcomes the work of this Commission?

-9-

<table>
   <tr>
    <td>Dr. Prebisch</td>
    <td>Why not, especially if they see that is the basis for political and economic reconciliation. They should be invited to cooperate.</td>
   </tr>
   <tr>
    <td>Mayor Cisneros</td>
    <td>Can we encourage import substitution as a part of a development program. For example can one country be encouraged to produce a product for export to the other four in an item such as steel? What is the forum for such an undertaking? Is there an example?</td>
   </tr>
   <tr>
    <td>Dr. Prebisch</td>
    <td>In this matter the Andean Group failed. Programs were formulated in the Andean Pact without adequate understanding of the need for private sector input and incentives. We must recognize the importance of private initiatives.</td>
   </tr>
   <tr>
    <td>Gov. Clements</td>
    <td>Let me rephrase Ambassador Strauss' question. Are the four countries of the Contadora Group flexible in their thinking? Are they open-minded?</td>
   </tr>
   <tr>
    <td>Dr. Prebisch</td>
    <td>I cannot really tell you. I have not visited them recently. In the 1950s, when the CACM started, there was great support. Cooperation is still possible; but I cannot speak for these countries.</td>
   </tr>
   <tr>
    <td>Gov. Clements</td>
    <td>I am somewhat less optimistic. I believe that they want and need our support for their plans.</td>
   </tr>
   <tr>
    <td>Dr. Prebisch</td>
    <td>We must realize that the end of the long years of prosperity have changed perceptions. The success of import substitution has been limited and export was seen as the way out. Yet, the common market idea and reciprocal trade have lost momentum. It is time to look again at import substitution.</td>
   </tr>
   <tr>
    <td>Mr. Lord</td>
    <td>You oppose many of the IMF conditions. Yet, as we have seen, the private banks will not loan to Central America unless many of the IMF conditions are met.</td>
   </tr>
  </table>

-10-

Dr. Prebisch I agree that when there is a trade imbalance, imports must be reduced. The question is how. The Fund calls for a vigorous contraction. We advocate a selected process of import restrictions, which begin by restricting non-essentials. This, however, is considered to be interference in the market force.

Mr. Kirkland When we talk of conditionality, can we include human rights, if these are worked out in advance.

Dr. Prebisch I believe so if there is a consensus.

Dr. Silber What if there is no consensus, where do we go? The U.S. is opposed to death squads. Do we have an option of not playing. If we quit, then we have another Nicaragua.

Dr. Prebisch You cannot do what God could not do. If you and the Contadora Group cannot force them to some agreement, then let them stew in their own juices. You cannot force reasonableness.

Dr. Kissinger This is a good note upon which to end. I thank you for coming before us. I am glad that I have finally had the opportunity to meet a man that I admire very much.

0295B

SUBJECT: Session on Economic Development: Role of the Private Sector

WITNESSES: The Americas Society
Mr. Samuel F. Segnar, President, InterNorth Inc.
Mr. Seymour Milstein, Chairman, United Brands Co.

Date: September 12, 1983
Time: 1:00 - 3:00
Place: Room 1105

SUMMARY:

Spokesmen for an Ad Hoc Committee of U.S. businessmen with vast
experience in Central America reported that without massive
economic intervention the economics of the region face collapse.
Neither government nor private sector alone can solve problem.
They recommend a structural mechanism be established by Congress
for a limited duration which would allow quick utilization of
resources from both the private and public sectors. An "umbrella
of security" which would facilitate private sector involvement.

NOTES:

Kissinger: Thank Russell Marks and the Americas Society for extraordinary support for Commission. I asked them to look at the role of private sector as central part of any program. They created an ad hoc committee to look into this issue represented by two witnesses: Sam F. Segnar, President and chief executive officer of InterNorth, Vice-chairman of the Americas Society and Mr. Seymour Milstein, Chairman and chief executive officer of United Brands Company.

Segnar: Mr. Chairman, Members of the Commission:

My name is Sam F. Segnar, CEO of InterNorth, Inc.,
Vice Chairman Americas Society, an umbrella
organization founded and chaired by David
Rockefeller to coordinate and maximize the
collective impact of several organizations already
at work strengthening various aspects of U.S.
relations in the Western Hemisphere. I am here
today as chairman of the Americas Society Ad Hoc

- 2 -

Committee on Central America, composed of eighteen senior executives with decades of U.S. business experience in Central America. The purpose of the committee was to develop for the consideration of this Commission recommendations that would reflect the experience and concerns of the members of our organizations.

When our Ad Hoc Committee met a week ago in New York, we found among ourselves a wide range of individual concerns and priorities for action. But a surprisingly strong consensus emerged on the nature of the challenge which this Commission must address.

First, without some kind of massive and immediate economic intervention, Central America's economies face collapse. Second, short-term financial transfers are needed but they are not enough. Third, military confrontation by U.S. troops is not the answer. Fourth, it is essential that we recognize that the situation is not hopeless; the opportunity for overcoming the problems and achieving our objectives without resort to war is real. Fifth, if the U.S. response is to work, it must be massive, immediate, and dramatically new. Sixth, The U.S. stake in the region's economic survival is so important it is worth whatever cost it takes. These points represent the broad consensus of the firms our group represents. We do not come before you with a solution in hand.

Kissinger: Why not, everyone else has.

Segnar: The task now is to frame an appropriate solution. In the remainder of my testimony I would like to examine a range of options we believe the Commission has before it, and to offer some ideas that might serve as a guideline in selecting among those options.

One very broad set of options come under a heading I would describe as "government as usual." A second option is that of massive government response--a public sector program along the lines of the Marshall Plan or the Alliance for Progress. The third broad option is to rely on private sector initiative as an alternative to major government initiatives of either the piecemeal or the comprehensive type. Each of these three major approaches has advantages and disadvantages.

- 3 -

I believe we need to look at a fourth option--a public/private sector approach unlike any of the three options we have all heard before. The new approach must combine the best feature of the other three while avoiding their pitfalls. We have to begin to look at a new structural mechanism that would permit both government and private-sector leaders to make immediate decisions drawing from both sets of resources --operational management decisions that would result in actual funds being put against immediate needs, while building longer-term institutions and relationships that would make the economies of Central America self sustaining. A practical structural mechanism can be one of limited duration, minimal bureaucratic structure, and maximum leveraging of existing institutions and their resources. But it has to be more than a set of exhortations to diverse institutional players to do their own thing.

We believe that the task of designing an appropriate mechanism is do-able and must be done. We want to lay that task before this Commission. And we intend to do our part over the next weeks to explore options and make more detailed recommendations if you would find these useful. I would like to pass the microphone to Mr. Milstein, who is prepared to start the process of discussion of such an option by describing on an illustrative basis what such a mechanism might look like, and the kind of tasks we feel it might be authorized to carry out.

**Kissinger:** The important difference between business and State, State options are always the middle one, yours was the last. This is extremely helpful, please proceed with your elaboration of optional recommendations. We will save our questions until the end.

**Milstein:** Mr. Chairman, Members of the Commission: My name is Seymour Milstein, Chairman and CEO of United Brands Company. United Brands is one of the largest U.S. investors in Central America. I feel, therefore, it would be particularly appropriate--before following up on the action concept Mr. Segnar introduced--to say a few words about the nature of the U.S. business stake and commitment in the region.

- 4 -

First, let me say that responsible U.S. firms are staying the course on Central America. This says something both about our attitude and commitment and also about the climate in which we are working. The anger and distrust directed toward foreign firms in Latin America during the period in and around the 1960's has faded into history. All the Central American governments without exception have been dealing fairly and responsibly with the firms we represent. Many U.S. firms have given Central Americans a substantially larger share in their own operations. This trend has helped dispel the old image of foreign dominance.

Looking from that perspective, it is clear to us that Central American trade cannot be revitalized on a sustained basis without addressing underlying structural economic problems: the need to develop new export products and markets for them: the need to provide basic infrastructural improvements required for private-sector expansion; and the need to increase the availability and relevance of education and training. Unless these needs are addressed, no amount of financial relief will enable the economies of Central America to earn foreign exchange and pay their own way.

From the broadest perspective, the U.S. stake in assisting Central American economies goes beyond even our obvious interest in averting future financial crises and the emergency aid requirements they imply. Ultimately at stake is U.S. credibility in the region, and its impact on the region's political future.

It is our conclusion that this Commission must step beyond analysis and exhortation, and take upon itself the task of fashioning a bold, innovative, substantive and specific plan for effective U.S. action. Mr. Segnar indicated, we feel some structural mechanism is required to translate the commitment and resources of the public and private sector into effective action. While the members of our Ad Hoc Committee are in accord on the need for bold action, we have not had an opportunity to study, consult with one another, and reach a consensus on the form that bold action should take. I therefore present only an illustration of how the concept of public/private sector structural mechanism might be spelled out.

- 5 -

It would need a distinct legal identity, management structure, and funding with joint public and private sector leadership and authority. We are no doubt talking about an entity to be set up initially by an act of Congress. There are precedents for this approach to be found in entities such as the Reconstruction Finance Corporation and in the kind of federal-state joint ventures set up through the matching-fund process. I think we are talking about some type of corporate entity, substantially funded by a public appropriation but incorporating devices for tapping and leveraging various types of private resources.

To achieve the public/private management responsibility, it would be important to structure the governing board in such a way that all relevant players were represented: to include key U.S. Government agencies, representatives of the U.S. corporate and finance community, and representatives of U.S. labor. It may also be desirable to include representatives of relevant international financial institutions, government and/or business representatives from the Central American countries themselves, and representatives of concerned U.S. allies such as Canada and the Contadora Group. However the representation in the governing body were determined, it would be critical to insure that it played the role of a board giving direction to an active managing executive, not a mini-U.N. in which its component institutional interests would be debating policy while the time for action slips away.

The mechanism to be one of limited duration--say 3 to 5 years. Many of the programs it might undertake would be capable of being performed either by an existing government agency or as a profit-making venture by a private firm. A new entity would undertake them initially if it were found that no public or private sector organization were able to begin them immediately. But over time, they could be spun out to the public or private sector.

Let us look then at a number of areas that have been suggested for possible program responsibilities of such an entity. Some of these emerged from discussions of our Ad Hoc Committee of

- 6 -

business leaders, others represent areas where gaps
in existing programs such as those of AID and OPIC
cause serious needs to fall through the cracks. We
aren't talking about a mechanism with a high degree
of flexibility. While the different program areas
are distinct, the criterion to be used in each
would be the same--how to revitalize Central
American trade by fostering enterprises that
involve one or more of three critical elements:
export earning potential, rapid start-up, and labor
intensiveness.

These eight areas are in no particular order:
First, a short-term trade credit facility. Second,
a venture capital financing facility. Third, an
export marketing/trading company, or a unit
facilitating the creation of one or more such
companies in the private sector. Fourth, a program
of infrastructure investment development. Fifth, a
new approach to educational assistance. Sixth, a
system of guarantees for lines of credit to small
independent enterprises. Seventh, a reconstruction
fund. Eighth, a system of insurance guarantees.

These examples of programs reflect current needs
which, for one reason or another, are not being met
and probably will not be met, by existing public
agencies or private firms. It is my hope that it
will point to directions of possible actions and
recommendations by your Commission. But I also
realize that to provide a useful basis for future
discussion, it would need to be fleshed out and
input obtained from a wide variety of potential
players. Over the next three weeks we intend to
follow up on this initiative in three ways:
explore possible funding requirements; explore the
legal and structural precedents and options for
creating this type of public/private sector joint
venture; and, most of all, we will work to develop
the constituency that would be necessary to launch
and carry out such an enterprise.

Mr. Chairman, the members of our Ad Hoc Committee
are approaching this challenge with an open mind.
We are eager to cooperate with the recommendations
that emerge from this Commission. We are convinced
that strong action is necessary.

- 7 -

**Kissinger:** I thank both of you deeply for what you have done. It is an interesting and exciting aspect of the Commission that we receive similar conclusions from diverse sectors. Grateful if you would pursue your offer to flesh out your recommendations. I have a philosophical question. You began by implying a worse case, war. Almost nothing would justify U.S. military intervention?

**Segnar:** That was consensus, a great deal would be lost.

**Milstein:** American military involvement would do more damage, except in extremist case.

**Kissinger:** I won't ask for extreme case, but you did talk about a bleak situation. Would economic solutions take care of all of it?

**Milstein:** You must ride every horse you can. Good to show fleet. The local people, the last thing they want is a father telling them how to run their society. In Costa Rica, Panama ... our concept of democracy and theirs is different. Business interests think if U.S. can get through crisis short of troops by economic action we're better off. Greatest fear is Nicaragua.

**Kissinger:** Mr. Segnar indicated we are facing imminent crisis: 6-8 months. Mr. Milstein, your presentation offered very imaginative solutions. You know it would take more time. How do you bridge that period?

**Segnar:** It would take more time. We use a 6-8 month time frame to convey our sense of urgency. Deteriorating conditions, lack of credit feeds on itself. After six months a certain number of bankruptcies, after 12 months, more. Where is the point a country is no longer economically viable?

**Kissinger:** We wish to involve Contadora, Central American, maybe even European countries in social and development aspects of this. When you elaborate on your scheme, could you explore how to get other parties to contribute?

**Clements:** Economists tell us agriculture is 70 percent of the economies of Central America. It seems agriculture business, at least in Central America, is a problem. True?

- 8 -

Milstein: Yes.

Clements: In 20 years one could build industrial infrastructure, but can not do overnight. True?

Milstein: Yes.

Clements: We have problems domestically with farm programs. How do you address problem without creating similar problems?

Milstein: Can not depend on constant expansion of the things we're doing now. Each President says same thing, expand production in my country. Now price of bananas is less then the freight costs. Need a commodity agreement. The countries must move from the dessert crops (sugar, coffee, bananas), into other products. United Brands has melon project in Honduras. Unfortunately when you talk of 20 years, it is also true of many agriculture projects. A president of one country said we're a sugar country, we can't do pineapples. No reason ATARI has to move from California to Malaysia when it could have moved to Central America or Mexico.

Clements: When you prepare your paper, please address the agriculture problem. In creating stability in income, we don't want to create a U.S. type farm subsidy program.

Strauss: Opinions are bubbling up through your organization. The problem needs more creative, dynamic ideas than committee consensus usually can allow. Outside of the Council of Americas' framework personal opinions would be useful as well.

Kissinger: Don't feel confined to consensus of group. Especially you two.

Silber: Social problems. Could you include in your paper your position on a program of land reform?

Milstein: United Brands has been giving land away. Agrarian reform looks great on paper. In American companies' experience whenever you do, production drops. United Brands is the highest payer in the agricultural sectors of the region. An example: United Brands gives a good paycheck. Give the worker five acres instead. He, his wife, children,

- 9 -

everybody works -- and often starves. I can assure
you, agrarian reformers will fail. United Brands
is setting up cooperatives, doing so in Costa Rica.

Unless we change system we are getting no place.
I'll give you an example of bad land reform.
Honduras. We had 12,000 head of breeding cattle.
Had to sell, most went to meat packer. Now land
stands vacant.

**Segnar:** What good comes of our intentions if host governments do not respond. We'll come up with lots of programs and nothing happens.

**Milstein:** In Jamaica, used to produce 200,000 lbs. of bananas. Under Manley production dropped to 18,000 lbs. Seaga asked us back. After two years we just got seed bed started. Action has to happen on other side. Land tenure. I don't know any place it works. It seems ideal but all you're doing is sentencing all but few of the most entrepreneurial to greater hardships. In Latin America, there are social welfare systems that surpassed what U.S. labor has achieved. You can't fire, severance pay ...

**Strauss:** You started on a high note, now pessimistic. While pessimists, you haven't given up. You have come to grips with tenure system.

**Milstein:** In terms of private ownership, business is continuing and being treated reasonably fairly. Even Nicaragua is fairly compensating U.S. firms. United Brands has two factories there, haven't touched us. It is in their selfish interest not to touch us.

**Kissinger:** On land reform, could you and the Ad Hoc Committee recommend best judgment of what will work?

**Milstein:** We have program we think will work. United Brands doesn't want land, or even to grow bananas. We are a marketing company. Recognize that the government and labor leaders we must negotiate with are trained in bloc countries.

**Diaz-Alejandro:** Is Nicaraguan attitude tactic or long-term policy? Will it differ with banks or their own local private investment?

Milstein: Tactics. We're there on a string. They'll cut it when it's in their interest to do so. Castro told them not to take over the multinationals and banks. Since we can't get the dollars out, we find ourselves reinvesting.

Johnson: I don't see the commercial banks lending dollars. With the attitude of Congress, don't see dollars coming from there. Will private sector allocate? With locals sending their dollars out of these countries, is it realistic that U.S. companies will send dollars in? So where will the money come from?

Segnar: The mechanism we propose would provide an umbrella of security for private sector. Because of uncertainty we need something like OPIC, a spreading of risk. We are not negative on Central America, but concerned. All U.S. companies operating there agree; the problems are awesome, the future is never quite as clear as we would like, nor the condition as we would like, but you can not dictate to them. Joint ventures will work. The partners we are finding are better and better.

Kissinger: Thanks. Greatful. Please get us your report as soon as possible.

ARA/ECP:R.Watkins:jd:
9/16/83:x20465:Wang 4652E

SUBJECT: Economic Development: Role of Foreign Assistance
BRIEFER/WITNESS: Mr. Lawrence E. Harrison (ex-Harvard Univ.)
DATE: September 12, 1983
TIME: 2:45 - 4:00
PLACE: Rm. 1105

SUMMARY:

Mr. Harrison characterized U. S. efforts to push democratic political development in Central America as ineffectual and, although there has been progress in education and health, economic growth has not created higher real income for the masses. He asserted that Central America's current circumstances are rooted deep in its history, and that most Central Americans are inculcated with values and attitudes anti-democratic, anti-social and anti-work based on Hispanic authoritarianism and anti-humanism compounded by a harsh and exploitative colonial experience. Harrison argued that future U.S. policies should be aimed at accelerating movement away from the Hispanic world view toward a modern, pluralistic view. Harrison recommended that $200-300 million additional fast-disbursing assistance be given to those Central American governments genuinely committed to democratic practices and social reform. Harrison urged that priority be given to education and student exchange programs. He recommended a sharp reduction in USAID personnel levels in Central America.

NOTES:

Kissinger: Welcome. Mr. Harrison, until recently at Harvard, is former USAID Mission Director in Costa Rica and Nicaragua, and Deputy Director in the Dominican Republic.

Harrison: Pleased to be here. I might add that I also was in the ROCAP regional AID office in Guatemala. I have a prepared statement which I would like to read. I will omit the historical overview. (Harrison reads attached text starting at page 6)

Kissinger: Have our efforts to push democratic political development been ineffectual because of inherent conditions or poor policy?

-2-

Harrison: Inherent conditions based on culture.

Kissinger: You assert then that democracy is not indigenous to Central America?

Harrison: That's correct.

Kissinger: You seem to be saying that efforts toward development are most effective where democracy already exists. What is your solution for the development of democracy?

Harrison: I do not have a solution. We operate on the margin of such development. Key is the momentum of history...how people view the world.

Kissinger: How do we begin the process?

Harrison: Discriminate toward those committed to democracy. Bring more leaders and potential leaders to the U.S.

Kissinger: You recommend educational reform but do not put forward a specific proposal.

Harrison: The way Central Americans are taught is important. It is now by rote. There are few seminars, no exchange of ideas. The pedagogy works against self-expression.

Kissinger: My experience with USAID administration was that it is unable to gear aid to U.S. political objectives. Quick-impact projects are hardly ever considered. Do you think USAID can effectively administer substantial new funding to Central America?

Harrison: USAID's charter is different from State's. Congress sees fit to require USAID to emphasize projects that promote long-term development. Although many horror stories exist of USAID's unresponsiveness, there are examples of good teamwork between AID Missions and Embassies to disburse money quickly, e.g., in the Dominican Republic and in Nicaragua during the early years of the Sandinista regime.

Kissinger: You don't think we need a different institution?

Harrison: No.

-3-

Diaz-

Alejandro: I'm bothered by your cultural argument. It's too sweeping and attempts to explain too much. What about Venezuela? Why do we have democracy there where cultural conditions are similar to those in Central America?

Harrison: I agree cultures change. Venezuela has progressed farther than Honduras or Guatemala.

Diaz-

Alejandro: I think, in Costa Rica for example, people responded to the social system they were placed in.

Harrison: Costa Ricans came knowing they would have to farm their own land. They developed a different social system from the rest of Central America.

Kirkland: I'm also bothered by your attribution to culture as an impediment to democracy. It has overtones of defeatism. Your argument boils down to say forces in Central American society are anti-democratic and extremely durable.

Harrison: They are durable because of the way Central Americans are taught to see the world.

Kirkland: We hear this same thing said about Asia and Africa...they are all inherently anti-democratic. I've seen more democracy in some areas of Latin America...the fact that people there will risk their lives to have it...than in this old Republic. The Dominican Republic shows we can have democracy out of a violent oligarchy. If you are not suggesting defeatism, then you must agree there are ways to encourage democracy.

Harrison: 22 years ago another group like this Commission examined the problems of Latin America in response to events in Cuba. The resulting Alliance for Progress set unrealistic goals in terms of the time required to achieve them. The Alliance should be studied to learn from its failures, to learn in particular that meaningful changes occur only in the long-term.

-4-

Kissinger: You recommend that our aid be conditional on the recipient's progress toward democracy. How does that differ from the Alliance for Progress?

Harrison: The Alliance did not take the long-term view. After a series of military takeovers of civilian governments in the early 1960's, State reconciled with these regimes and did not pressure them to advance the democratic process. We must now have a longer-term mindset.

Weintraub: Costa Rica's per capita income declined nine percent in 1981-82. If that period is taken into account, Costa Rica would not be such an example of success. I think your conclusions are too sweeping based on the data.

Harrison: If the Alliance for Progress had succeeded in the timetable originally planned, we would now have growing democracies all over Latin America. Social progress has not changed the structures of society and economic growth has not improved income distribution or improved the quality of life.

Weintraub: Literacy is up in all the Central American countries.

Harrison: Anyone can make everyone literate in 20 years if they have the resolve.

Walsh: We are considering a large amount of new money for Central America. It will probably have to move through USAID. Although occasional AID Directors see the political imperatives of some projects, most AID bureaucrats see such projects as inherently wrong.

Strauss: I think USAID has good people. I have had good experiences with them.

Walsh: McPherson's efforts to make USAID more efficient and responsive have been blocked by his agency's bureaucracy.

Harrison: USAID moved money quickly into the Dominican Republic after 1965, into Bolivia after a friendly government emerged there in 1971, into

Guatemala and Nicaragua to aleviate their earthquake disasters, and in Nicaragua during the first two years of the Sandinista regime in an effort to influence them politically.

Scammon: You would deny resources to Nicaragua. How about El Salvador?

Harrison: I would tie more conditionality to our aid to encourage the Salvadorians to do more toward democracy.

Scammon: When would you give up on them? If we withdraw our aid, then we risk a more adverse result.

Harrison: We must naturally show flexibility and sense. I think we should deny aid to Guatemala under present circumstances, but I recognize the high importance not to have another Nicaragua.

Kissinger: If there are no further questions, thank you for coming today, Mr. Harrison.

9/13/83

Wang Doc. #4612E

SUBJECT: IMF and Conditionality

BRIEFER/WITNESS: Fred Bergston (International Institute of Economics)

DATE: September 12, 1983
TIME: 4:30 - 5:30
PLACE: Rm. 1105

SUMMARY:

Dr. Berston said that Central America, with the exception of Costa Rica, does not have a serious debt problem. The fundamental problem is related to trade. The 40 percent decline during the past 5 years in the region's terms of trade is, in Dr. Bergston's words, a stunning figure which suggests that the long-term solution to Central America's economic problems is lower interest rates, higher commodity prices (except petroleum) etc. IMF conditionality was characterized as generally appropriate but would be better if the Fund took world conditions more into account, i.e. conditions should be tougher when world economy is strong and vice versa.

Dr. Bergston's principal recommendation was for an export stabilization fund on the lines of the Stabex program created by the EEC for the members of the Lome Convention. The fund (parallel to the IMF's Commodity Financing Facility) would compensate the Central Americans for shortfalls in export revenues. Advantages are that it would address the principal problem at relatively modest cost and would automatically phase out as export markets strengthened. Several members of the Commission and Dr. Bergston agreed that such an initiative would be far more saleable to Congress than a price stabilization scheme (i.e. commodity agreements)

NOTES:

Kissinger: I would like to welcome and introduce Fred Bergston, former Assistant Secretary of Treasury for International Affairs during the Carter Administration and before that Economic Advisor to the National Security Council.

Bergston: Thanks. I want to begin by noting that I am not an expert on Central America; but much of my experience -- in economic analysis and in

- 2 -

putting financial deals together -- is pertinent and I will try to offer the Commission some concrete suggestions. I would also direct your attention to two studies we have done at the International Institute of Economic: one on the IMF and the other on international debt problems. I have provided copies.

To begin with an overview of Central America, I would highlight that these are economies that are very small and very open and they are, therefore, at the mercy of external events.

In the last five years the region's terms of trade have declined by 40 percent. That's a stunning figure; it is I think a greater deterioration that has occurred anywhere else. It means that these countries must produce and export 40 percent more to be able to import at the level of five years ago.

The cause of the deterioration in terms of trade is a two-edged sword; that is, lower prices for their exports and higher prices for their imports. It is unfortunate that the Commission, in order to resolve the fundamental economic problems, would have to lower interest rates, cause oil prices to be stable, etc.

While the smallest of Central America's economies make them exceedingly vulnerable there is a positive side of smallness. It does not cost much to help, either in terms of dollars or precedence. When I mention precedence, I mean that Central America is such a small actor on the world scene and is so subject to special conditions that we can do things there that we might not be able to do elsewhere. For example, the CBI legislation was passed, in order to provide a special benefit for this area, even with the very strong protectionist sentiments in Congress.

Now I would like to discuss two or three specific issues: first the Central America debt problem. Is there something the Commission should be doing in regard to debt problem? Probably not, since their problem is not

- 3 -

fundamentally one of debt (with the exception of Costa Rica.) They do not have high debt service ratios and most of the debt is not owed to banks but is official debt. Only one of the countries, Costa Rica, has had a Paris Club and therefore we could provide some assistance via debt relief by additional Paris Clubs.

Kissinger: Is that a good thing?

Johnson: Please explain the Paris Club.

Bergston: The Paris Club is used to reschedule official debts and it has been used by 25 - 30 countries.

Kissinger: Does this require IMF-type conditionality?

Commission Staffer: A Paris Club is only done when there is an IMF program in force.

Bergston: I continue to believe that we should consider rescheduling these countries official debts if we are looking for ways to help. A second possible way to assist would be the RTA, or Retroactive Terms Adjustment, which was approved by Congress several years ago and it permits the USG to provide unilateral debt relief by converting official debts into grants.

Strauss: These suggestions would be very appealing. Do you have additional ideas?

Bergston: There are all sorts of ways we can help. It is basically a political decision -- what will Congress approve and what best would fit our foreign policy interests.

We should focus on commodity trade. If we want to target the real problem, this is it. Terms for the Compensatory Financing Facility (CFF) of the IMF were liberalized in 1976 in response to suggestions that Henry Kissinger made to the 1975 General Assembly meeting. Further liberalization of the CFF would help. The Commission might also consider proposing an export stabilization program along the lines of Stabex which was adopted by the EEC to benefit the members of the Lome Convention. Under this

- 4 -

agreement, money is set aside by the EEC to
compensate the 46 Associated States for export
shortfalls. The money is repaid by the
relatively well-off recipients as exports
recover, but is converted to a grant if the
problem persists. The poorest countries receive
the money as a grant, regardless of whether or
how quickly their exports rebound.

Kissinger: Please go through the mechanics of this scheme
again.

Bergston: You establish or identify a base period of "normal" export revenues and then when external factors cause a shortfall in export earnings the deficit is calculated and the fund is used to provide equivalent compensation. The EEC provides grants to the poorest countries and loans to the better off. However, even the loans may be converted to grants if the shortfalls in export earnings persist.

Strauss: Sidney Weintraub has done some calculations on the shortfalls in Central America and can provide them.

Scammon: Would it be based on the trade deficits?

Bergston: No. It is based on export revenues and is not influenced by levels of imports.

Kissinger: Would you target this program exclusively on Central America? How could you justify excluding others, for example the Caribbean?

Bergston: There may be no compelling economic rationale for excluding anyone. However, the deterioration in the terms of trade in Central America has been so massive that special treatment could probably be justified.

Strauss: The President instructed us to propose solutions to the problems of Central America so we need not consider other regions. It is my impression that the Europeans like this program and they have not spent lots of money on it.

Kirkland: Is this part of the new economic order?

Bergston: In a sense it is. Helmut Schmidt for example has proposed a global Stabex.

- 5 -

Clements: Are there exceptions?

Bergston: The only major exceptions under the Lome Convention are agricultural products.

Kirkland: Do some of the Caribbean Basin Countries benefit from the Stabex program?

Bergston: Yes, but these countries are in the Caribbean and not Central America.

Commission Member: How about Belize?

Commission Staffer: We can find out.

Bergston: We could also consider trade liberalization; we should look at our own restrictions. We control sugar and meat imports. These quotas affect two of Central America's six most important exports. The CBI which was just passed also has some exclusions. The Commission could suggest that we go back to Congress to eliminate or reduce the number of items excluded from the CBI benefit. However it may not be politically expedient to go back to Congress so soon.

Another possible area of support for Central America would be to assist in the revival of the Central American Common Market (CACM). The CACM has been of modest help to industrial developments.

Kissinger: What is the problem?

Bergston: The assistance of large trade grants and debts have choked off trade. If we were to provide assistance to the payments union additional trade could be financed and this would permit greater economic activity.

I would also like to discuss the role of the IMF in Central America. Our Institute has looked at 12 different cases in detail, asking if the IMF has been too tough. Our conclusion was that the IMF is not perfect but on the whole has done

- 6 -

about right. In general, it has not caused serious recession or political destabilizing policies. However, there is no free lunch and some belt tightening is needed.

**Kissinger:** Another question. There is no way to impose a program of austerity without serious political repercussions. If it is perceived that foreign banks are the cause of the austerity, you may have created an internal crisis. The Marshall Plan began with some austerity and then led to development. How can we get the needed economic adjustment without looking as if we are merely striving to protect international bankers?

**Bergston:** Economic policies must follow domestic dictates; that is, when the domestic economic situation deteriorates, a change in domestic economic policy can be justified.

**Kissinger:** It seems that the limited recent lending by banks to developing countries has been to get interest paid on older loans. We need to transfer funds to get their economies moving and not merely to service their debt.

**Clements:** Banks are in the situation where they have non-performing, that is bad loans, but the loans may still not be classified.

**Bergston:** The banks have obvious difficulty in having to write off their loans.

**Commission Staff:** Many U.S. banks, especially the larger ones, do have non-performing loans and some of these loans are being written off.

**Kissinger:** What is the conclusion of our discussion on private bank loans?

**Bergston:** It probably would have been better to have had less private bank lending during the last 10 years. The so-called default calculus warns us that countries, like Brazil, are more likely to unilaterally default on debt repayment when their interest payments exceed the value of new loans. The question for Brazil and other large debtors is whether a default would result in massive retaliation against them.

- 7 -

Kissinger: Can't there be a limited default?

Bergston: Anything is possible.

Kissinger: How about Central America?

Bergston: The issue of default applies only partially to Central America: to Costa Rica, the only major debtor in the region. I would go on to add, again using a country outside Central America as an example, that Brazil imposed a very severe austerity program three years ago in order to avoid the IMF. This program, as everyone realizes, failed.

Kissinger: Why did it fail?

Bergston: Primarily because the international economy declined so rapidly and so severely.

Commission Staff:

Costa Rica has proposed that 10 percent of its export earnings should be used to service its external debt.

Bergston: Roberto Campos suggested 35 percent as an appropriate percentage of export earnings to be applied to Brazil's debt service. This is not a bad idea. For those countries with sufficient leverage over their creditors, it would force the banks to accommodate themselves.

Strauss: We cannot advocate a policy which would permit foreign countries to dictate terms to U.S. banks in such a one-sided manner.

Kissinger: If Brazil or Argentina installed a radical government and then blamed all their problems on international banks and then defaulted on their foreign debt, it would be a U.S. Government problem.

Bergston: Costa Rica as a much smaller actor in the world economy would subject itself to massive retaliation if it were to repudiate its foreign debt.

- 8 -

Diaz-

Alejandro: How much conditionality do you propose for the Stabex program? If it would be considerable, why should IMF programs have so much conditionality? A separate question is whether the program should cover Guatemala and/or Nicaragua.?

Bergston: In regard to the IMF I would like to qualify the favorable report card that I gave earlier. The IMF should be faulted for taking insufficient account of the state of the world economy. It should impose tougher conditions when the world economy is strong and vice-versa. In 1981 the IMF tightened conditionality just when it should have loosened. Stabex would go into effect when the world economy is in recession. Therefore, I would not be too worried about conditionality. The IMF has looked too much at the demand side and should work more in concert with the World Bank, since that institution is more concerned with the supply side. Putting the two together would provide a better balanced, more effective program.

Kirkland: Under Stabex there is a payment in the case of export shortfalls. What if exports are much larger than normal; could it work both ways?

Bergston: In a sense, yes, since loans are repaid when conditions improve. In principle, the system could balance.

Kissinger: You were saying that this mechanism doesn't take a lot of money.

Clements: I am concerned about domestic opposition to a Stabex type of program, especially from agricultural interests who oppose price stabilization programs.

Bergston: It would be a mistake to characterize this program as price stabilization. Commodity agreements with their reliance on price stabilization attract a great deal of domestic opposition. The Stabex program should be sold

- 2 -

This meeting, incidentally, brought together
Christian Democrats from every country of Central
America and the labor unions identified with the CD
movement. Monge also participated and this is
particularly interesting when you consider that his
own Social Democratic party is divided over the
question of internal destabilization of Costa Rican
society. Young Costa Ricans have no confidence
that they can maintain their current system in the
face of a Marxist government in Nicaragua. We need
to ask what the price of our friendship with Costa
Rica might be.

As far as a set of guidelines by which we might
judge progress toward democracy, I know of none.
But I believe we can accomplish our goal by
consulting closely and continually with regional
democrats.

Kissinger: The question is, I believe, how do you promote a democratic revolution without destroying what already exists and at the same time, without being completely of the status quo?

Diaz-Alejandro: What did the participants in this meeting say about US policy in El Salvador?

Weinstein: We had a good, open discussion about El Salvador. Duarte and Rey Prendes were both there, but ARENA was not. Duarte's position on our policy now is what you might expect from someone who hopes to be president and will want our support in controlling the insurgency when he takes over. I believe a Duarte presidency would be good for US policy. We missed out last time by not supporting him.

Scammon: Well, it's hard for the USG to support a
candidate. After all, there were over 600 US
journalists covering the election, and they would
have known immediately if we favored one candidate
over another in some tangible way. In contrast,
the kind of support ARENA got, much of which came
in the form of funds from the Salvadoran community
in Miami, could be sent covertly.

Diaz-Alejandro: Also, I don't believe Duarte would have wanted
then, or would want now to be branded as the
US candidate.

Weinstein: He is sufficiently confident of his support that US
backing wouldn't disturb him. Right now he is
criticized from the left as a creation of the US
anyway, while the extreme right attacks him as a
leftist.

- 3 -

Scammon: At any rate, you don't need to put US money directly behind the candidates we would like to see elected. There's so much German money available for elections support.

Weinstein: The Venezuelans have funds too.

Kissinger: If we ever do get around to supporting individual candidates, we would have to be very clear about what we want to achieve.

Weinstein: Well, I think Duarte would support continued US military involvement, just as the CD leaders at San Jose supported the US when things got serious. One of the dilemmas in this context is an overload of issues. I testified to the SFRC after I accompanied some journalists to El Salvador and Nicaragua and said that I think it would help if we talked coherently about what we want from the electoral process in those two countries. Also, there is no way of insulating the Central American countries from information about the US public debate on Central America.

Walsh: If the Central Americans are so concerned about US military involvement, why did all the Foreign Ministers make a visit to the Ranger?

Weinstein: I wasn't aware that all of them had.

Walsh: Yes, including the Costa Rican. It makes it hard for the Commission to recommend a policy that will enjoy bipartisan support and regional support when regional powers like the Contadora Four talk out of both sides of their mouth.

Weinstein: Well, you may as well accept that whatever you recommend will be criticized, and I would say you should acknowledge in a preambular statement that your recommendations will be controversial.

Kissinger: We are more afraid they will be ignored.

Weinstein: But Dr. Walsh raises an interesting point, i.e., what are you trying to create a consensus on--on the current policy which might be broadened, or on the ultimate goals for US policy, and, if the latter, over what time frame?

Walsh: We first need a national consensus that there is a problem, and I think we will achieve that.

Weinstein: The history of bipartisan support for US policy is that it develops post hoc.

- 4 -

**Kissinger:** Our mandate is somewhat different from that of some of the other Commissions that have operated recently. The MX Commission could come up with a simple legislatiave proposal that would be subject to a vote. But we need to develop concrete guidelines for an overall policy. So we need to be both practical and philosophical.

I would ask you, Alan, and the lead consultants to devote some thought to this issue of criteria by which to judge progress toward democracy. For example, I believe issuing a human rights report every six months is unrealistic. You can't make significant progress on a complicated issue like that within six months.

**Weinstein:** The Central American people themselves will be defining progress. We need to consult with the leaders of the regional democratic forces. I would suggest that on its trip to Central America the Commission should meet with regional Christian Democrats and Social Democrats. I think it's important that you meet with them in the region, in the environment in which they operate.

**Kissinger:** That's a good idea, perhaps we could arrange to do it in Costa Rica. I have told the President that we would be trying to meet with all regional democratic groups, not only in the Central American countries, but in the Contadora Four as well.

**Weinstein:** I'm sure the Venezuelans would be delighted to come up to San Jose.

**Walsh:** I've also provided a list of Nicaraguan democrats with whom the Commission might meet.

**Kissinger:** Our biggest problem is time. We simply can't meet with every group that we should see. At least some of the Commissioners need to visit Mexico and Venezuela.

I would ask once again, Alan, that you think about how to make our support effective so that we favor neither nihilism nor the status quo. We don't want to provide an alibi for either extreme.

**Weinstein:** To the extent that you involve our political parties in cooperative arrangements with counterparts in the region, I think you can avoid this.

#5479N

ARA/CEN:DJHrinak

SUBJECT: _Human Rights_

PRESENTATION BY: _Robert L. Bernstein_ (Chairman of Helsinki Watch)

Orville Schell (Chairman of Americas Watch)

Aryeh Neier (Vice Chairman of Americas Watch)

DATE: September 29, 1983
TIME: 12:45 - 1:45
PLACE: Room 1105

SUMMARY:

Mr. Bernstein argued that a policy which appears to accept human rights abuses in any country, regardless of whether it is totalitarian or authoritarian, is contrary to American beliefs and interests. Mr. Schell urged that the USG adopt policies which identify the US with human rights in Central America, but refrained from specific policy recommendations. Mr. Neier provided details on the human rights situation in Central America, noting that more than 37,000 non-combatants have been killed in El Salvador by government and paramilitary forces since October 1979. The level of killing is high also in Guatemala, although reporting is difficult. There is hope for Honduras, which is democratic, but some killing occurs. In Nicaragua, there is no freedom of expression and the level of killing is about that in Honduras. Mr. Neier and Mr. Schell said that one of the major causes of the failure of US policy in Central America has been its neglect, in the eyes of the American public, of human rights. The Commission should include and consider the poor human rights situation in its report.

- 2 -

NOTES:

Kissinger: Welcome. Having spoken with Mr. Bernstein earlier, I felt it important for him and Americas Watch to present their concerns on human rights to the Commission. Would they please offer their recommendations in two stages: (1) What they would like to see happen ultimately in Central America; (2) What should be done immediately.

Bernstein: I am Chairman of Helsinki Watch and founder of Americas Watch. Helsinki Watch provides forum of criticism of human rights abuse in USSR and Eastern Europe. When new Administration criticized only Marxist regimes while withholding criticism of authoritarian regimes in the belief that change is possible only in non-communist states, it made criticism of Marxist states difficult for Helsinki Watch. Therefore, we founded Americas Watch. Indepensible to show the world that human rights is active ingredient of US foreign policy. Current US Central America policy undermines strongest claim to human rights and democracy. Commitment to human rights is a strong weapon in US arsenal to win commitment of others in the world.

Neier: Booklet on human rights practices in four Central American countries has been given to you. Political murders are one of the saddest stories it contains. Before work of Commission ends in January, another 115 persons will be executed, another 200 persons "disappeared".

Have also distributed Roman Catholic Archdiocese of San Salvador's document on abductions, murders and disappearances. It reflects meticulous process of recording information. High level of killings. Security forces are the real government; civilians only ostensibly so.

In Guatemala no human rights organizations can operate. Killings are high. Disagree with Department of State's view regarding involvement of refugees in Mexico with guerrilla operations -- they aren't.

- 3 -

Honduras is democracy for which we have high hopes. Some killing: 56 disappeared per year; 30 killed by security forces. Civilian government powerless to investigate cases involving security forces.

In Nicaragua, no prospect of democratic development. No freedom of expression. Level of violence roughly comparable to Honduras. Victims overwhelmingly Indians.

US identified throughout Central America as sponsor of repression.

Schell:

Am a lawyer and have practiced on Wall Street for forty years. Americas Watch is human rights group and will not attempt to offer geopolitical advice. Are also realists. We assemble evidence, publicize, and attempt to end human rights abuses. If Commission does not deal with facts of human rights in Central America in its report and recommendations in an understanding and productive way, it will not advance consensus of American people on Central America policy.

Personal rights, or protection from killing, torture and disappearance, must be looked after more urgently than political and social rights, although political rights are important.

If we do not stand up in world as backer of rights of man, we will lose one of our most powerful weapons against totalitarianism. Human rights can be a strategic consideration to mobilize US opinion behind a policy. Failures in this area in recent years. If we deal with governments in Central America that violate human rights, we have denied ourselves strong weapon in other parts of the world.

Kissinger:

You mentioned 35,000 killed in El Salvador. What categories of people are killed and whom would we seek to protect?

Neier:

Civilian non-combatants: (1) residents of areas where guerrillas are active. (2) People killed by armed forces acting for powerful people in particular vicinity. Example - killing of members

- 4 -

of farming cooperative in Las Hojas last year.
Captain in charge promoted. (3) Disappearances.
Also political killings by guerrillas at rate of
seven per month.

Kissinger: We are going to El Salvador next week.

Neier: Be sure to see Archbishop Rivera y Damas and a Human
Rights Commission staffer Maria Julia Hernandez.

Kissinger: We will see him without government presence. Have
there been any improvements? Have you any
recommendations to alleviate the situation?

Neier: No improvement. Recommend that USG can't be sponsor
of terror. No military aid should be sent to El
Salvador and Guatemala. There are other means of
dealing with unrest in area.

Stuart: The substantial Indian populations are in Guatemala
and Nicaragua, yet you refer to Indians at Las Hojas.

Neier: Right, but Las Hojas is one of the few Indian
settlements in El Salvador.

Strauss: Moving presentation; didn't fall on deaf ears.
Facts won't cure problem; cure comes by causing
people to change. Which combination of carrot and
stick would you use?

Schell: USG representations to GOES not believed. Must have
back-up positions. Military and other options.
Assume that Salvador goes way of Nicaragua. We have
to understand our commitment regarding El Salvador
and Cuba.

Strauss: Commission can't negotiate. Does it make any
difference to victims whether they are killed by our
or by their SOBs?

Neier: US is the only country capable of being a force for
human rights.

Strauss: Sounds good, but what do we gain if we say no more
help in military area, and it goes way of Nicaragua?

- 5 -

Neier: US has world wide interests. Espouses human rights world wide. May be that killing goes on with or without us. We are identified with the killing in Central America now.

Bernstein: There has been no change in El Salvador after three years of giving arms.

Strauss: Have choice of attaching human rights conditions to a vastly increased aid program.

Neier: That has been USG policy. No member of security forces convicted since 1979. They know bottom line; make us look like fools.

Strauss: You have given us no alternatives.

Schell: We intended only to present you with facts.

Cisneros: They have fulfilled their task, and have left interpretation of facts to Commission. How we can have elections in that environment is one question of interpretation. Another question is about open-ended support. Have you heard about the Guatemalan computer with 25-year old information being used to target Guatemalans for security forces?

Neier: Lucas regime violence was centrally directed. Under Rios-Montt, not so. Too early to tell with new government yet. Am going to Mexico this evening to talk with researchers on Guatemala.

Cisneros: Have to accept that killings are of people who attempt to gather support for a particular position. Can't create structural improvements; need improvements in government first.

Walsh: If your advice followed, no question that we would have another Nicaragua. What assurance do you have that it just wouldn't be killing by other side? No one called killings of Somocistas atrocities.

Neier: Some killings were committed at the moment of the triumph of the revolution in 1979.

- 6 -

Walsh: What has happened to the 5,000 still in prison?

Neier: There aren't that many. Facts wrong.

Walsh: The independent Nicaraguan human rights group said so.

Neier: That group is headed by Baltodano, who doesn't claim that.

Kissinger: What degree of confidence do you have in the figures you have given us?

Neier: Full confidence. USG has tried to discredit the Archdiocese but hasn't been able to point out a single untrue case.

Strauss: Who has attempted to discredit?

Neier: State Department certification reports, which claim that figures are subject to duplication.