Notes of the
National Bipartisan Commission on Central America

Witness: Robert E. Hunter, CSIS
Mark Falcoff, AEI

DATE: September 30, 1983
TIME: 11:00-12:00
PLACE: Rm 1005

SUMMARY:

Mr. Hunter examined the premises of US policy in Central America and discussed the roles of the Soviet Union, Cuba and Western Europe. A military solution in possible, he stated, but the US must be willing to pay the price. He reviewed options for the resolution of major issues involving the Soviets, Cubans, and European allies. His model for political and security drew upon experience with previous ideas, such as the Central American Defense Council of 1965.

Mr. Falcoff reviewed the existing instruments for diplomatic solutions, with particular attention to the mechanisms of the Inter-American System, explored the various peace proposals and the alternatives if they fail.

NOTES:

Hunter:

In dealing with the Soviets, we need ability to sustain our program over time. We can solve issues but must be willing to pay price. Options range from raising the risk, to bargaining, to lowering benefits. Soviet actions must be seen as fitting into context of overall Soviet-US experience and policy options must permit private channels of communication and an ability for Soviets to withdraw with honor. If we are not willing to win, then we must get out.

Less well defined areas, such as use of proxies and small arms, doesn't fit into overall pattern of relations. We can assert primacy of US in region, invoke linkage with Soviet actions in Afghanistan, etc. Other options include: asserting that CA is "off limits" to Soviet, isolate within Hemisphere, strike global "deal", abrogate US-Soviet understanding on Cuba, extend understand-

ing to Central America, link behavior in region to
other aspect of East-West relations, or counter
Soviet role through strategy/framework focussed on
Central America. US could change risks and Soviets
could respond with nuclear weapons in Latin
America. To lower benefits, bipartisanship is
needed in conduct of US foreign policy to provide
clarity of intentions by US. US could lower
rhetoric, and need strategy for European
neutrality. Worse case: more Cubas.

In Cuba, increasing risks could mean harassing
Cuba, lift trade embargo or have a two track
approach to relax travel, but implement Radio
Marti, for example, and have benefits with regional
opposition. Could invite Cuba into regional frame-
work and bargain, but this isn't possible now.
We need long term strategy to deal with Cuba now
in order to neutralize. During real conflict
with Soviets Cuba must not be added source of
diversion.

In dealing with Western Europe, need to highten
their ideas of issues involved, reduce role of
Socialist International. Bipartisanship and
clarity imperative. Other options range from
encouraging Europeans to open dialogue with Cuba
to permit selling of arms and in maintaining
ties to Nicaragua.

Falconer:
Need political and diplomatic solutions to
reflect sensitivity to new realities. Existing
regional instruments for diplomatic solution
include: Inter-American Treaty of Reciprocal
Assistance. Rio treaty establishes mechanism
for responding to cases of armed aggression. OAS
provides for defensive mechanisms in case of threat
to peace and security. The Central America
Security Treaty of 1963 obligates the signatories
to respond in case of attack and establishes the
Central American Defense Council. Vehicles,
however, are antiquated.

Current peace proposals include: Six Point Honduran
Peace Plan, San Jose Declaration, Ten Point Cancun
Delcaration, Six Point Nicaraguan Proposal and Four
Point US Proposal. All plans have theme of need to
end intervention, an end to acquisition
of offensive armaments, shift away from political

conflict toward social and economic development.

Contadora Four comprehensive regional settlement supported by UN Security Council and European Community. Mexico believes it can co-opt revolutionary left, while US and Venezuela more similar approach. Contadora initiative is like plane that can not get off ground, and when it does wings fall off. Alternatives: force plan to conclusions, propose different negotiation framework either bilateral or new ad hoc regional approach but without Mexico or Nicaragua. Also, OAS may be successful, but enforcement is vague. If diplomatic option does not work then push to back burner until shift in Contadora Group.

**Kissinger:** Spendid options and approaches. Negotiations with Soviets would end with spheres of influence discussion and this option is politically untenable. Lower benefits and increase risk options only possible.

**Hunter:** Increasing risk options are not significant. Where is line in risk confrontation. Soviet currently have advantage over US.

**Kissinger:** American public thinks negotiations are in vacuum. How to create atmosphere of a crunch? You argue that Nicaragua may do more if they think that we perceive things out of control.

**Hunter:** How long are we prepared to do this? Must be believable. How far will be go with military threat? Short of direct intervention Nicaragua can not be toppled.

**Cisnero:** US politics hasn't been discussed except Soviet perception of US processes. You assess some military options after diplomatic options. But Americans don't want any military involvement.

**Hunter:** We are coming out of Vietnam era. Some areas are worth using force, such as Lebanon.

**Falcoff:** If I were Sandinista, main objective is to get US. This is meaning of revolution, not just school curriculum change. Fight with US is inevitable.

Notes On Meeting of the
National Bipartisan Commission on Central America

SUBJECT: Political Options

PRESENTATION BY: Dr. Robert Pastor (University of Maryland)

DATE: September 30, 1983

TIME: 1:00 - 2:15

PLACE: Rm. 1105

SUMMARY

Dr. Pastor discussed the sources of the current conflict in Central America and alternatives for US policy. He believes the first step toward resolving the conflict is to achieve a negotiated solution among all the factions in El Salvador, a scenario which could then be replicated in Nicaragua. He favors integration as a means of strengthening the Central American economies.

NOTES:

Kissinger: Welcome and thank you for coming.

Pastor: Appreciate the opportunity. I support wholeheartedly the work of this Commission. US foreign policy is served by debate, but not by permanent division and polarization. I'm afraid the situation we have now in the US reflects the polarization of groups in Central America. But I believe a bipartisan policy is possible.

I think there are two ways of approaching the problems in Central America. You can talk about 5-year development plans and support for democracy, but those are too broad. There is really no disagreement about what we want to achieve; the debate is over how we attain those goals. No one wants to see another Nicaragua in El Salvador, or another Cuba in Nicaragua, but we need a consensus on how to keep this from happening.

I think we need to put the current crisis in context. The crisis in Central America today is the result of three historical transitions through which that region is passing. First, the countries of Central America are moving from narrow-based to more broad-based political systems. It is therefore more a case of classic revolutionary ingredients coming together than of poverty. The political systems are unable to cope with rapid change.

In these circumstances the systems could move either toward Marxism or democracy. Some say that there are no democratic roots in Central America, so that the US either has to export democracy or, on the other hand, can't possibly export democracy successfully. That isn't true. There are strong democrats in each country looking for support, and we have failed to back them. There are also strong middle classes in these countries, and these too are a force for democracy.

Of course, there are certain attractions to Marxism and we should know what they are. Marxism delivers services well and militarizes well, in addition to being effective at organization.

The second transition is the Central American states' move to greater autonomy. This could result in their being either anti-US or simply independent, as is the case with Panama.

- 2 -

The third transition involves the states
surrounding Central America -- the Core Four and
the Andean Pact. We have long-term interests in
common with these states, but right now, it
appears our differences are greater. These people
will criticize the US publicly and support us
privately, but both types of comments reflect what
they are feeling and we need to listen to the
public and the private. Their private comments
reflect their need to wrestle with their own
internal situation and their long-held view that
the Cuba/US problem should be dealt with by those
two countries alone. Their public comments
reflect their realization of what greater US
involvement could mean for them.

We need to deal with these countries as we deal
with our European allies, although there is one
crucial difference. With the Europeans we differ
over a single question: how to handle the
Soviets. With the Latins, we differ over the
question itself, over whether the problems is
Soviet intervention or US intervention.

The nature of the Central American problems is
such that except in Nicaragua and Costa Rica, the
most immediate threat is coming from the Right,
which creates the conditions on which the Left
feeds. The Left in El Salvador, Guatemala, and
Honduras can only come to power if one of two
things happens. They can attract the middle class
if the Right continues to use its power to resist
change, or they can adopt the mantle of
nationalism if we intervene. The strength of
nationalism is the lesson of Vietnam, and
nationalism is growing in Central America.

What I have just said has two implications.
First, that you can't defeat the Left unless you
deal with the power of the Right. And the second
is that you are mistaken if you believe you can
win the war and then deal with the fundamental
problems later. The war is the result of those
problems.

Our influence and the nature of the problem is
different in each country. But I agree with the
Administration that we should begin in El Salvador
and that the Nicaraguan problems will be easier to
manage if the Salvadoran conflict is resolved.

We learned in the Carter administration that
conditionality works in El Salvador when we
decided to suspend all aid in December 1980.
I advised against it because I thought we had
no more leverage, but the military knew the final

- 3 -

offensive was in the works, and they were willing
to take steps to have the aid restored, including
dismissing the Vice Minister of Defense, Carranza,
who, incidentally, has recently returned to the
government without a murmur from this
Administration.

Kissinger: Do you think the suspension of aid could have
triggered the final offensive?

Pastor: No, our intelligence showed it had been planned
over a long period and I think the guerrillas went
ahead in January, 1981 because they misunderstood
the depth of their support. Unfortunately, we
discarded our leverage in 1981 when we went around
Duarte to work out a new relationship with the
military and when we began to talk of the conflict
in terms of the East-West confrontation, because
the military then understood that we would support
them no matter what. So even though human rights
is of interest to this Administration, by giving
it such a low priority and by not using our
leverage, there is no improvement in human rights.

We need to recover our leverage by bridging the
gap between what Congress says in its foreign aid
law and what the White House says. We needn't do
this directly, but can do so through the context
of negotiations where we will get something from
the other side in return for the leverage we exert
on the military. I would propose multinational
negotiations, with four countries sponsoring the
GOES and four sponsoring the guerrillas.

For successful negotiations we will have to attack
the true long-term problem and use our leverage
for a genuine restructuring of the military. This
will put the moderates in the GOES in the position
of calling the tune.

The formula I have outlined could potentially be
replicated in Nicaragua. Both the Carter
administration and this one have been ineffective
in dealing with Nicaragua. We forget now that
there is a middle in Nicaragua that is
increasingly being squeezed, and those are the
people we need to support. Instead, we have
covert action which is both driving our public
policy and substituting for it. The American
people won't support the US as a covert actor.

It's true that our influence now in Nicaragua is
primarily negative, but the Core Four and the SI
both can bring positive influence to bear, and we

- 4 -

should stop trying to implement a unilateral
policy. As for our military forces, the recent
exercises were not wholly counterproductive since
there are signs they did encourage flexibility in
negotiations. But they were more counterproductive
than productive.

I think there are four objectives to pursue in
Nicaragua. First, democracy, which we should work
toward with countries like Venezuela and by
supporting the opposition groups that are still
within Nicaragua. Second, a halt to arms
trafficking. Actually, you can never stop all the
trafficking, but the Nicaraguans are now talking
about the possibilities of letting observers into
the country to monitor strategic points. Third,
we should pursue a limit on levels of arms, which
I believe is possible only in the Central America
context. The fourth objective concerns foreign
military advisers, who are both an asset and a
liability for Nicaragua, but whom they won't give
up easily.

As for Guatemala, Honduras, and Panama, I believe
in the near-term we must deal with their severe
economic problems and ensure that the civilians
maintain control over the military.

There are also a couple of things we should do on
the regional level. First, we are perceived as
being more cynical than sincere about negotiations,
and we should make it clear that we support
negotiations. And secondly, we should encourage
regional economic integration. Recently, all five
states presented a unified position at an economic
meeting in Brussels, and the Costa Rican who spoke
for the group said plainly that economic
cooperation in Central America is rooted in
necessity and can occur even in a climate of
political violence. We need to encourage this
because the Central Americans themselves have
more leverage over Nicaragua than do we.

The CBI is important to the region's economic
development, but it should be expanded to include
textiles. This is a labor-intensive industry and
including it in our program could help solve the
significant problem of the doubling in the size of
the Central American workforce. Also, we need to
provide long-term aid -- more grant than loans --
and to encourage greater cooperation between CACM
and CARICOM. We should also involve the Europeans
Japan, Mexico and Venezuela in solving the
economic problems.

- 5 -

I also support the democracy program. We need to
provide incentives to keep the military out of
politics. That's where leverage comes in.

As for Cuba, I haven't mentioned them because I
don't believe they can be helpful. But I wouldn't
rule out negotiations with them first because
there is always a possibility of progress and
second because negotiations would put some
distance and some distrust between the Cubans and
the guerrillas.

I also believe it would be beneficial to have a
Soviet-US understanding on Central America,
similar to those we have arranged in 1962, 1970,
and 1978, when they promised not to install
offensive weapons; not to establish a naval base;
and not to change the role of their combat
brigade, and we agreed not to invade Cuba or
anywhere else in the Caribbean. In reaching the
same kind of understanding on Central America, we
would be giving up what we don't have anyway.

We should unconditionally support the Central
American democracies, but only give conditional
support to states with other kinds of political
systems. There are risks in this approach,
because if our leverage doesn't bring about the
desired result, we have to walk away. Also, we
need to take a more multilateral approach to the
region. Others' views will inhibit our moves, but
we can't manage the long-term problems on our own.
And we need to support negotiations because a
military victory is both elusive and undesirable.
Neither Zamora nor Duarte wants a military victory
on their side, because both fear military influence
on the government that would follow.

The task is to put the moderates in the position
of calling the tune, instead of dancing to it.

Kissinger: You say the Right is the greatest problem.

Pastor: It is the most immediate threat.

Kissinger: But by removing something that causes a crisis you don't necessarily solve the crisis. This raises the question of whether we should work with governments that aren't yet democracies and what criteria we use to judge if they are moving toward democracy.

- 6 -

**Pastor:** By supporting democratic governments, we reduce the base for leftist movements. Most who are joining the guerrillas in El Salvador now aren't doing so because they believe the promises of utopia, but because they are running from the government for which they have no hope.

**Scammon:** But most aren't joining the guerrillas but are coming to refugee camps under government control.

**Pastor:** Because they are afraid to fight and die. I'm not saying the guerrillas are not also repressive, but most of those who are fleeing from guerrilla strongholds are actually fleeing the war, the physical danger of the battle.

I'm not saying there are any quick solutions. I don't believe you can wipe out the death squads overnight, although in Guatemala that is in effect what happened. Rios Montt shut down government-sponsored right wing violence, and all the killings stopped.

I support negotiations for several reasons, but it is also true that negotiations strengthen the incumbent.

**Kissinger:** You suggest getting Zamora and Duarte together, but neither is in control of his group. What would be the outcome of any negotiations? There is almost no historical example of a civil war that ended without a military victory.

**Pastor:** There are moderates in both groups that want negotiations, and I think we need to get majority international support behind this idea, so they are no longer afraid to speak up.

**Kissinger:** How do we make it easier for the moderates?

**Pastor:** By making it clear our support is not unconditional.

**Kissinger:** Well, what would we want them to propose in any negotiation that isn't being proposed now?

**Pastor:** The ultimate objective is to provide the conditions for a genuinely free election. This would require a restructuring of both the government and the opposition forces. I would also favor negotiating a provisional government for only 2-3 months to make clear that the Left would have a role in overseeing the election.

- 7 -

Now, some say if you let Communists in the government they will seize control. Well, I see them in the French government and they aren't seizing control. It depends on how they are brought in. If they come in through a military victory, it is more likely they will try to take charge.

Walsh: Your recommendations are exactly what the guerrillas are demanding, so you would just have the GOES surrender. What about elections in Nicaragua? Do you think the Left would win?

Pastor: I don't think they would, but I believe the Sandinistas themselves think they would win.

Walsh: Well, why not lay the same ground rules for them, i.e. insist they let the opposition have a role in the elections? They would not go for that.

Pastor: We couldn't make them do it, but the Contadora Four could.

Walsh: Do you think the agreements we have had with the Soviets, like the 1962 agreement you mentioned, have been successful?

Pastor: In that we saved the world from a nuclear disaster, yes.

Kissinger: Well, you admit that there are risks in all this, but you would run them because while the risk is the destruction of the current system, you think that outcome would occur anyway.

Pastor: And also because I don't believe we will have that bluff called.

Kissinger: The other view is that as unsatisfactory as the current government is, the first priority is the defeat of Marxism-Leninism. Do you think positing these two alternatives is a fair statement of the issue?

Pastor: Yes. I have just written an article on change and continuity in foreign policy which addresses this point.

Kissinger: I must say I have had no experience with the type of multinational negotiations you propose.

Pastor: It's interesting to note that in 1907 the US, Mexico, and the Central Americans came together and signed several treaties. The meeting was both a success and a failure. It succeeded because

Witness: William Hyland

DATE: September 30, 1983
TIME: 2:00-3:00
PLACE: Rm 1105

SUMMARY:

Mr. Hyland reviewed the change in US-USSR relations from
mid 1975 to 1983, indicating that the current relationship will
most likely remain frozen.

NOTES:

Hyland: December, 1975, represented the first time that Congress refused to support anti-Communists in Angola. Soviet Union sees Central America in context, with no intrinsic merit but in competition with US. How does Central America related to US and how can they exploit? Ethiopia was general offensive by Soviets. By 1979 they invaded Afghanistan which ended residual detente under Carter. 1979 SALT Treaty was isolated, without political foundations. Afghanistan ended any hopes of a treaty. This ended period of detente.

Interim period existed from that time. Reagan picked
up threads, out of pressure from Europe, but without
enthusiasm. Moved after 1.5 yrs on path to summit
and breakthrough. But, we moved without political
context; discussions were largely on number of
missiles, where they were located. Korean jet in-
cident collapsed relationship, other than symbol-
ism of arms control.

Now, relationship is frozen and not likely to go
anywhere.

In Central America, Soviets backing away from
Nicaragua and El Salvador, cooling of relations
with Castro. Nicaragua is different catagory
than El Salvador for Soviets. Nicaragua movement
to Marxist-Leninist regime, but Salvador less cer-
tain; never really embraced revolution. Soviets

could salvage Nicaragua and would abandon Salvador if necessary.

Kissinger: Hunter presentation discussed levels of treatment in Central America, such as the Contadora group, Soviet and Europeans. Should process be discussed with Soviets?

Hyland: No. Gives legitimacy to Soviets. Practically, we can't keep off agenda, but we shouldn't propose. Issues not negotiable. If they put on agenda, we won't object.

Kissinger: Any other context for Soviets to put issue on agenda? Eventually, discussion focuses on sphere of influence.

Hyland: Andropov implied hands off in Central America if US hands off in Afghanistan. Can't make arrangement; US public opinion would not accept that. Issue of Soviet role in peace discussions doesn't have to arise at all. As long as it doesn't impact on Cuba, not high priority. But if negotiations involved Nicaragua and El Salvador provisional government, Soviets would be "happy as clams."

Kissinger: Greater involvement for Europeans?

Hyland: No. Europe is irresponsible. Treat Latinos in romantic way. Europe involvement would bring another set of problems with allies. Inviting Gonzales (Spain) would be a "nightmare." Never clever to turn over power.

D-Alej: Would Soviets increase presence due to missile deployment in Europe?

Hyland: We will see seabased systems in Cuba; not SS-20s but port visits and cruise missiles. This is not quite a base, but Soviet concerned with increased US options.

Strauss: How to deal with security problem in simple way, with strategy. What kind to stay with, to get support?

Hyland: Difficult in post-Vietnam era.

We assume that everything is always negotiable. Not always. Strategy: restore security and integrity in El Salvador first, later economic help. Mistake for Stone to meet with rebels. US strategy must give emphasis on security. Political problems are ideological, not based on economic depression. Revolutions happen when things getting better. Priority: help friends first. Wrong for Reagan to state that no American troops will be committed.

Strauss: Using troops not an option.

Lord: Which school of thought is appropriate. Nicaragua is dangerous as example, or we should negotiate and pressure them to lay off neighbors, or over-throw?

Hyland: If they are not contained, this problem will come back. Revoluntary regimes don't become beniegn. Preferable to topple than contain, but could not get congressional support.

Kissinger: This Commission must put forward different ideas for public debate. My own knowledge of Central America started with it being a "Salvador problem;" now it has changed to being a "Nicaraguan problem." This is what I have learned. Country needs to learn this.

wang 0174B
mcfreedman,AID

SUMMARY:

William Hyland

September 30, 1983

Mr. Hyland reviewed Soviet foreign policy and US relations. 1975, he suggested, was the first time that Congress refused to support anti-Communist forces fighting Cuban proxies in Angola. The period of detente ended with a SALT treaty in 1979 that had no political foundations and that was isolated from overall Soviet-US relations. Our current relationship is likely to remain frozen and we must deal with this realization instead of attempting to negotiate all issues will all parties. The Soviets will continue to exploit weaknesses in Central America and we should not voluntarily invite the Europeans to become involved in negotiations. In speaking on Central America, Hyland suggested that we need to support our friends such as El Salvador. Some issues, however, are not negotiable, he concluded.

MANUSCRIPTS AND ARCHIVES
YALE UNIVERSITY LIBRARY

CLASSIFIED ITEM(S) REMOVED

The following item(s) have been removed from the collection because they
contain security classified information:

Collection: Henry A. Kissinger papers

Box Number: 664

Folder Number: 2

Item(s) and Security Classification:

1 Notes on the meeting of the National Bipartisan Commission on Central America, 7pp C
re. El Salvador, 30 Sep 1983

Notes on Meeting of the
National Bipartisan Commission on Central America

SUBJECT: Wrap-up by Commission Consultants

BRIEFER/WITNESS: Alan Stoga and Sidney Weintraub
(Economic Consultants to the NBCCA)

DATE: October 7, 1983

TIME: 4:30-5:30 p.m.

PLACE: Rm. 1105

SUMMARY:

Mr. Stoga presented and discussed his paper entitled "A Financial Assistance Program for Central America". He said that total external financing requirements for achieving either 6.5 percent growth by 1988 or of returning to 1980 levels of per capita income by 1988 would be about $12 billion and $17 billion, respectively. The U.S. share would likely be $5-10 billion. Given our current assistance levels to Central America of about $600 annually, achievement of the more modest, 6.5 percent growth target implies a doubling, more or less, of U.S. effort.

Messrs. Stoga and Weintraub commented that a key assumption underlying their estimates, as well as those by AID, is a reasonable degree of political stability. Mr. Weintraub said that AID's estimates were pretty good but he suggested that AID revise their estimates in order to factor in differing sets of assumptions.

Conditionality and the appropriate role for a group of "wise men" were discussed. Messrs. Weintraub and Stoga said that considerable conditionality would be appropriate; and a Commission member noted that Nicaragua would probably exclude itself because of the conditions. The wise men approach in some, yet undefined way, was supported by several Commission members.

NOTES:

Kissinger: I would now like to turn the meeting over to Alan Stoga and Sid Weintraub.

- 2 -

Stoga:
I would like to summarize some of the
observations and conclusions in my paper, "A
Financial Assistance Program for Central
America", focusing first on how much it would
cost. In order to quantify the costs it is
necessary to specify objectives. AID talks of
reaching a real per capita GDP increase of 3.5
percent by 1988. My calculations indicate that
this objective would require about $12 billion
in external financing during 1984-88 for the
five countries. AID's figures are higher; $12
billion for Central America excluding
Nicaragua. My paper is not specific about who
pays; as long as $12 billion is available, it's
not very important from the perspective of
economic growth.

Another more ambitious objective is possible:
return to 1980 per capita levels of income by
1988. This would cost about $17 billion. This
corresponds to the figure of $20 billion given
you earlier by Congressman Wells.

With those members in mind, let's turn to the
issue of who pays. AID's assumption of $2.5
billion in private investment is probably too
optimistic; and the estimate of about $2.0
billion from private commercial banks may be
reasonable. Between now and 1988, Central
America is scheduled to repay about $3 billion
to foreign commercial banks, but a net inflow of
$2 billion is possible. Coupled with that, I
think $5 billion is likely from MDBs and the
Mexican/Venezuelan oil facility; with new
programs, the number could be higher. With a
total external financing requirement of $12
billion (to reach 6.5 percent growth by 1988) or
$17 billion (to return to 1980 per capita income
levels in 1988), the amount left for the U.S. to
finance would be $5-10 billion. Our current
annual $600 million assistance times 5 years
equals $3.0 billion. The need, therefore, is
for a doubling (or better).

The key underlying assumption in my estimate,
and in AID's, is a reasonable political
situation. That is, we assume that capital

- 3 -

flight will not overwhelm efforts to help.
Another assumption is that the Central Banks
will not increase their foreign exchange
reserves.

Kissinger: Why are AID's numbers different than yours?

Stoga: To begin with, they did not include Nicaragua in their exercise. Also, their methodology undoubtedly is somewhat different. However, the numbers are not all that different.

Kissinger: Would success of an assistance program depend on the existence of an overall plan coordinated with the IMF and the MDBs?

Stoga: Coordination would be important. Without it, it would take longer to return to 1980 levels of economic activity.

Kissinger: In 1980 there was lots of insurrection. How does this address the problems?

Stoga: Some sort of political stability is essential to progress on the economic front. However, the relationship between the state of the economy and the political situation makes it desirable to attempt to effect needed economic changes.

Kissinger: Sidney, what will you add?

Weintraub: AID's presentation has a number of assumptions with which I could disagree. Shortfalls in capital flows from private sources or MDB's would greatly change results. AID's approach is very dependent on the savings rate and an assumption that the rate will improve. The marginal capital output ratio of 4:1 is important, but the choice of this particular ratio is not explained.

AID did not, as we had requested of them,
calculate results on the basis of different
assumptions. I think that they should be asked
to do this. I do not think, however, that their
numbers are all that bad. Their assumption of
gradually building up to 6.5 percent growth is
reasonable. I agree that a Central American

- 4 -

consultative group could be a useful approach. It could combine bilateral conditionality with multilateral cooperation. We also agree on the importance of conditions, on economic policy, regarding progress in human rights, and so on.

Kissinger: I want to know more about these conditions we will be imposing. I'm afraid about the sort of conditions that might be prescribed by some Assistant Political Science professor hired by AID.

Weintraub: You are right; and I would add that any conditions imposed have a tendency of becoming negotiable when the country encounters difficulty in meeting the conditions.

Diaz-Alejandro: I would suggest the wise men approach as the best way of setting conditions and evaluating performance.

Silber: We must not be too one-sided. There is a war going on down there and conditions can become irrelevant.

Weintraub: An example of the kinds of problems created by strict conditionality was in Colombia under the Alliance for Progress. We couldn't decide whether to withhold aid in order to force the Government to devalue.

On another subject, I don't know if Nicaragua will play ball, but the Commission should not automatically exclude Nicaragua. To the degree that your approach or recommendation will be based on the Central American Common Market (CACM) it would be nearly impossible to exclude Nicaragua.

Walsh: We must be realistic. Congress would not approve assistance to Nicaragua.

Silber: The assistance should be offered but only on the basis of certain, fundamental conditions. Nicaragua would be unable or unwilling to meet all of the likely conditions. It would still make good sense to make the offer to all.

- 5 -

**Diaz-Alejandro:** Going back to Alan's comments earlier, why did you preclude the rebuilding of foreign exchange reserves. That seems like a real need.

**Stoga:** It is important. It would cost about $1 billion additional to rebuild foreign exchange levels to minimum levels.

**Commission Staff:** How about the mechanism to implement the program. Can you say any more about the multilateral role and about the wise men concept?

**Diaz-Alejandro:** Could the wise men operate as a board of supervisors?

**Weintraub:** Alan and I have not discussed this in any detail. We do think that the wise men approach is needed, probably including Latin Americans and not just Central Americans. For example, Mexico, Venezuela and others. The problem with the wise men approach is that it works well initially but it tends to have a short half-life.

The Council of the Americas wants a public-private board like those that are responsible for OPIC and the Inter-American Foundation and which would have a majority from the private sector. I would recommend greater private sector involvement using the type of informal, ad hoc practices of the EEC and the USTR. They keep the private sector involved and interested by having lots of different study and advisory groups.

**Walsh:** Under the Presidential Executive Exchange program, lots of very senior private sector executives are obtaining experience with the government and in U.S. Embassies. The increased exposure of private sector executives to public service translates into greater awareness of and concern about the problems of Central America.

**Kissinger:** I would like to ask Alan and Sid to pull all the

- 6 -

recommendations together, including 100 some
sent us by mail, and give us your opinions on
each. I would also like you to review your own
thoughts and the papers you prepared for us and
update or revise them as appropriate.

I appreciate the time you are all giving to this
and I'll see you Sunday.

Drafted: ARA/ECP:RBash:jd
10/12/83:x22627:Wang 5064E

SUBJECT: Session on Economic Development: A Strategy for the Recovery of Central America

WITNESS: M. Peter McPherson
         Administrator - Agency For International Development

DATE: October 7, 1983
TIME: 3:00-4:00
PLACE: Room 1105

SUMMARY:

AID Administrator Peter McPherson presented his agency's strategy for economic and social recovery in Central America. Financial instability, underemployment, inequality of opportunities and rapid population growth have contributed to the region's unrest. AID's strategy for addressing these problems would require $5.7 billion dollars over five years and $2 billion more over the subsequent five years. The strategy seeks to achieve financial stability for these countries by providing a per capita GNP and employment growth of 3.5 percent annually by 1989. Programs would facilitate universal access to primary education, reduced infant mortality and greater acceptance of family planning. While the U.S. must maintain control of our assistance programs we should work with other donors and multilateral development organizations as well as an advisory, "wise-men" group of prominent Central or Latin Americans.

Action on the social as well as the economic front is required by each recipient country's government if the program is to work.

NOTES:

McPherson: Presented Executive Summary of AID's Strategy for the Recovery of Central America (attached). McPherson concluded his prepared remarks by adding that it is important not to overlook the need to spend time as well as more dollars on certain problems. Effective legal service in Guatemala for example may put pressure on death squads.

- 2 -

Kissinger: Maybe it is the other way around. Poor legal systems result in death squads.

McPherson: It is a chicken and egg situation. We will work on it from both sides. In Guatemala the political structure did not mature with economy. Lots of problems will result if it does not mature.

The USG must take the lead on seeking regional development.

We should control our own resources but coordinate our efforts with the IDB, World Bank and other donors. Contributions from the Europeans are tough to get, but the Scandinavians, for examples could help on health issues. A Central American wise-man group is also needed.

Kissinger: What do you think we are?

McPherson: You want to do this for the next five years?

Kissinger: Are these wise-men Americans?

McPherson: From Central America and the U.S.

Kissinger: How should the U.S. organize the recovery program?

McPherson: AID is adaptable to do it. In the CBI, AID has shown a record of quick action, disbursing $300 million in only a few months.

The question is not how AID conducts its operations but how to get governments to act.

The U.S. must say no as well as yes. For example we insisted Jamaica make some changes in exchange rate policy before we disbursed $50 million. Guatemala has to do considerably more before we would act.

Kissinger: These figures you quote (total cost of AID program) are you addressing us or OMB?

McPherson: To you.

- 3 -

Kissinger: You would not get this amount through normal budget process?

McPherson: No. But OMB is looking at this Commission as part of the budget process.

Kissinger: Population growth?

McPherson: The region has one of the highest population growth rates in the world. Our goal is 6.5 percent annual growth rate in GDP by 1988, allowing average real income and employment to grow at 3.5 percent.

Kissinger: You are asking countries to make changes, do you know what kind? How will social change affect oligarchical societies like Guatemala with 60 percent Indian population? What is our goal?

McPherson: Guatemala is two countries: Guatemala city and the highlands. The city is one of the most economically active. In the highlands you must deal with questions of land ownership, child mortality, literacy. You must give social opportunities to the Indians. I think the disbandment of the Council was a serious step backwards.

Kissinger: Do we know the perception of the Indians to self government? They have no ancient Greece in their background.

McPherson: We have a long way to go, but what we have learned in past 25 years is that peasants are a lot smarter than we thought, a lot more adaptable.

Kissinger: But they do not have the cultural background of democracy. We agree that democratic societies provide economic progress, etc. But when applied to other societies that we do not know, do we destroy the country's structure?

McPherson: There is the potential for all kinds of turmoil that we do not know about, but if we do not act there is certain to be turmoil.

- 4 -

One thing I do know - take the green revolution, for example, when given opportunities they spread like wild fire. Peasants react to opportunity

Carlos Diaz-Alejandro:

Land reform. You didn't mention. Any funds? (McPherson: Yes). Does it interfere with export lead growth strategy?

McPherson:

It's not a major problem. Land reform may replace need to import food. This is not inconsistent with our export strategy.

Diaz-Alejandro:

Integration - The Central American Bank is open to outsiders, the Common Market. Can you use this channel for USAID?

McPherson:

We must control our own aid so we can force the changes we desire. But we must cooperate with these other organizations as leverage for more dollars toward our objective.

After the Central American Common Market came into existence there was a big jump in the region's exports. After a decade it fell apart as some countries capitalized on the opportunities more than others. The whole population of the CACM isn't as big as that of Colombia. It isn't a big enough market. Look at the Common Market as a tool, but not as an import substitution model.

Scammon:

Exports. To who, what, how much? Will they face restrictions?

McPherson:

Exports should grow within region. $400 million additional exports outside region.

Scammon:

That's 100 percent growth in exports.

Kissinger:

What is the objective for seeking change?

McPherson:

Greater equality, health, education.

- 5 -

Silber: One of the experts that testified before us earlier said El Salvador's land reform was a technocratic exercise which did not involve peasants in its planning.

McPherson: Things were done that could have been done better. Especially in area of cooperatives. No advantage for peasants involvement.

Kissinger: Who thought it up?

Silber: U.S. Department of Agriculture. It was done in 80 days. Which should tell you something.

McPherson: Guatemala is different than El Salvador. It is larger, has extra land that can be sold. In El Salvador, under the land reform laws, people can't sell or mortgage their newly acquired land for 30 years. Without ability to mortgage, they won't have financing to develop land. I know the intensity of farmers to hold onto their land. The 30 year period is too long.

Do we know all the answers? Maybe not, but we have 20 years experience. The "wise-men" will help. I believe we can contribute to these societies if these countries' governments are willing to do what needs to be done.

Brady: How do you put teeth into the allocation process? How do you make it stick?

McPherson: Be tough. Take Jamaica, everyone said we couldn't be tough on them. AID prevailed. We are tough, sometimes publicly, sometimes behind the scenes.

Brady: Not just monetary restraint. What about social justice, human rights?

Kissinger: Judge Taylor is down there working on this.

McPerson: He is a good man.

Kissinger: Justice Stewart has agreed to make a study for Commission. Is Taylor doing this for State?

- 6 -

McPherson: State and AID. Jim Michel is aware of what he's
doing.

Stewart: I'll check on it.

Walsh: Government cooperation. Having any real effect?

McPherson: Yes, some. I am not in favor of governments
giving away medical services. Poor people can
pay something. Advances are being made in job
opportunities, literacy. The underlying
philosophy -- greater social equality builds
stability.

Walsh: Shall we pressure Guatemala to do more?

McPherson: Yes. Guatemala doesn't do enough.

Kissinger: In Peru, the people I talked to - probably the
wrong people - they stressed that the social
thinking of the Indians was totally different
from the people in the lowlands. Do they accept
the same reasoning? Do we know?

McPherson: The Guatemalan Indians are probably the most
studied people anywhere. Historically,
anthropologists assumed peasants were
different. Fundamentally I find that not to be
true. They are motivated when given the
opportunity.

McPherson: We're looking at $500 million in additional
exports over the next five years. That is less
than Korea did in one year.

Scammon: Do you get the Guatemalan Indians to build air
bases in Saudia Arabia?

McPherson: Those aren't the things we're getting from
Korea. The CBI offers opportunities, like
exporting baseballs, etc.

Scammon: How about baseball bats?

......... The people in Louisville won't be happy.

McPherson: Their labor costs are comparative. As for labor
efficiency -- El Salvador is good. They do not
have a lot of artificial work rules.

- 7 -

Scammon: You are saying these amounts won't bother Kirkland?

McPherson: Oh he'll be against, but he was initially against CBI but eventually went along with it.

Stewart: Does your proposal assume political stability?

McPherson: Yes, if not, costs will be greater. That assumption makes me nervous. We are assuming private capital flows. Without stability they won't get private capital. Take a worse case - guerrillas operating in every country like El Salvador now - our proposal would be irrelevant.

Stewart: How can you make these program cost assumptions?

McPherson: I have just come back from El Salvador. Things are better than one year ago. We'll need to maintain reasonable military assistance.

Diaz
Alejandro: What do you project for private capital flows?

McPherson: $2.3 billion.

Diaz
Alejandro: How does that compare with previous years, direct U.S. foreign investment?

McPherson: Look at Thailand. U.S. investments flowed in as Thailand adopted what we are trying to create in Central America.

Kissinger: They didn't have guerrillas!

Brady: Human Rights. How do we answer critics who say U.S. is giving dollars to these countries?

McPherson: We need to insist that countries make efforts.

Brady: Like what?

McPherson: The power structures of these countries must use their political capital to bring the situation under control. They need to pay judges more.

- 8 -

Brady: Pay judges more. That is a good concrete example. Do you have any other?

McPherson: Security for judges is also necessary.

Kissinger: Congress sets human rights standards which must be met for a country to receive our assistance. Could we have two parts to our assistance? The second part, that which would support economic improvement would be based on significant improvement in human rights. The first part, the security assistance and basic human needs, would be without strings. Is that feasible?

McPherson: Yes.

Silber: Why should we assume that the right wing oligarchies could be bought off by extra economic aid if we satisfy their security needs?

Kissinger: Thanked McPherson for presentation.

Drafted: ARA/ECP:R.Watkins:jd

10/17/83:20465:Wang 5024E