LATIN AMERICA REGIONAL AND POLITICAL ANALYSIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00912A000700010009-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: December 20, 2016
• Document Release Date: February 1, 2006
• Sequence Number: 9
• Publication Date: August 25, 1977
• Content Type: REPORT

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Latin America
NAL AND
ITICAL ANALYST
State Department review completed
Secret
137
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LATIN AMERICA
25 August 1977
Panama: On the Road to Ratification . . . . . . . . 1
El Salvador: Terrorist Activity . . . . . . . . . . 5
Argentina: Changes in the Human
Rights Situation . . . . . . . . . . . . . . . . . 7
St. Kitts - Nevis: Fragmentation in
the Caribbean . . . . . . . . . . . . . . . . . . 11
Brazil: Possible Shift in Technology
Transfer Policy . . . . . . . . . . . . . . . . . 13
Colombia: Politics, Campaigns and the
Presidency . . . . . . . . . . . . . . . . . . . 15
Birth Control vs. the Church in Brazil . . . . . . . 19
Venezuela: Oil Agreement Postscript . . . . . . . . 21
Chilean Payments Position: Breathing
Spell . . . . . . . . . . . . . . . . . . . . . . 25
Brazil: Renewal of Protest . . . . . . . . . . . . 33
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Panama: On The Road to Ratification
The treaty ratification
debate began officially last
Friday when Chief of Govern-
ment Torrijos and major gov-
ernment figures made speeches
defending the accords to a
receptive legislative assembly.
Backstage, the government has
pressured some groups into
early support for the treaty
and plans to warn government
officials not to risk opposi-
tion. The thrust of the gov-
ernment's emerging public
strategy is to picture the
accords as the most Panama
could realistically hope to
achieve and therefore a major
triumph. Chief negotiator
Escobar's public threats against the US were given con-
siderable international press; play, but were taken out
of context; such explosive rhetoric runs counter to the
primary Panamanian strategy.
The Government Argument
General Torrijos, along with his ministers for for-
eign. affairs, education, and planning and two leading
negotiators, addressed the legislative assembly on 19
August, each discussing an aspect of the agreements.
Most pushed a similar argument--that the alternatives
for Panama were to:
-- Do without a treaty---and live with the reality
of a US presence in perpetuity.
-- Choose the path of violence--and sacrifice an
entire generation of Panamanians.
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-- Negotiate--and achieve the best possible terms,
given the circumstances.
In support of their decision and the new treaty,
officials are highlighting such benefits as the total
$345 million economic-military package and the $50-60
million annuity, while exaggerating such provisions as
a US commitment to reduce its military presence. A
newspaper recently published a map depicting the final
lands and water agreement contrasted with the 1975 posi-
tions of the two sides in order to highlight Panamanian
gains. Responding predictably to the official arguments,
the hand-picked legislative assembly endorsed the ac-
complishments of the negotiators.
Chief treaty negotiator Escobar has been the pri-
mary public defender of the treaty and has drawn the
toughest tasks--talking to student groups and defending
the neutrality provisions. In addition to sounding the
general government themes, Escobar has addressed his
audiences with considerable candor, contending that
great powers "intervene wherever they damn well please,
with or without a (neutrality) pact." He has also in-
vited critics of the treaty to attempt to dislodge the
"gringos" themselves from the Canal Zone rather than
spout rhetoric. Thus, although he did warn in his
speech last Friday that Panama would take the path of
violence if the US Congress did not approve the trea-
ties, this was not--as international press accounts sug-
gested--the major thrust of his remarks. On the con-
trary, since the treaty agreement was concluded, Escobar
has been the most outspoken advocate of the negotiating
path. His "threat" can more properly be read as a do-
mestic effort to flank at least some of the recent left-
ist criticism directed at the government for its treaty
concessions.
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Treaty Opposition
The expected domestic opposition to the treaties
has been quick to surface, although insufficient to
change the opinion of most observers that Torrijos
should be able to produce a plebiscite victory for the
accords. Last week, a pro-government daily headlined
critical statements by a prominent ultranationalist
lawyer, the Independent Lawyers Movement, the far left-
ist Revolutionary Student Front, the Christian Demo-
cratic Party, and Panamanian exiles in Miami--all of
whom were expected to oppose the new accord.
. And Government Limits
The publicity given opposition statements in a con-
trolled newspaper was further evidence of Torrijos pub-
lic commitment to permit debate,
Intelligence Chief Noriega's orders
a student emonstrations against the US are inappro-
priate apparently still stands. A small group of left-
ist students did enter the Foreign Ministry last week,
but by the next day National Guard officers were sta-
tioned on the scene to control access to the building.
Thus far domestic debate--still somewhat handi-
capped by the lack of official treaty texts--has gone
about as expected.
Public enthusiasm has yet to catch
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fire--a crowd of several thousand gathered at the legis-
lative palace to launch the treaty campaign last Friday,
but most were gone by the time Torrijos spoke and, as
usual, his performance was mediocre. Overall, however,
the government has begun to sketch out an effective
argument and appears to be willing to accept at least a
few public lumps in the process of securing a majority
plebiscite vote.
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El Salvador: Terrorist Activity
The left-wing People's Revolutionary Army (ERP) has
claimed credit for placing 35 bombs in various cities
throughout the country last Sunday morning. Government
officials believe the well-coordinated effort was de-
signed to goad the government into repressive action,
thus negating any improvement the government may have
been making in its human rights image. Although con-
cerned over this increased activity, especially in view
of the visit of the King and Queen of Spain in September,
Vice President Astasio told a US Embassy officer that
the government plans to prosecute any perpetrators it
may arrest for criminal--rather than subversive--activity.
Sunday's events were the most widespread and best
coordinated efforts of terrorist groups to date. Twenty-
seven of the 35 bombs exploded, six in the capital city
and 21 in other major cities and towns throughout the
country--all set to explode at approximately the same
time. Property damage was minimal, and only six persons
were slightly injured. The degree of coordination and
the relatively minor nature of the damage indicate that
the action was undertaken for publicity value and as a
warning to the government of the terrorists' potential.
Another group, the Armed Forces of National Resistance
(FARN), received a bit of publicity as well as a fat
ransom by kidnaping a prominent doctor. In addition
to the ransom, the FARN demanded--and got--the publication
of a manifesto on the front page of four leading news-
papers.
Thus far, the strongest public reaction has come
from Minister of Defense Castillo, who said the violence
is evidence that terrorist groups have no understanding
of, or belief in, the democratic process they claim to
promote. He called on the public to join forces to pre-
serve social peace. The government has one suspect in
custody and clues to the identities of others.
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Salvadoran officials are probably right in viewing
the terrorist incidents as an attempt to make the govern-
ment revert to repressive tactics. Even if the new ad-
ministration's efforts to improve its image are mere
window-dressing rather than a sincere commitment to
change, it will probably try to avoid falling into the
trap being set by the terrorists.
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Argentina: Changes in the Human Rights Situation
The government reportedly has recently made a num-
ber of changes in its countersubversive campaign that
appear to be aimed at lessening human rights abuses and
hastening the judicial resolution of some subversive
cases. Nevertheless, the day-to-day fight against sub-
version reportedly still involves serious violations of
human rights. Several recent "disappearances" are evi-
dence of what appears to be an increasing use of violence
and illegal counterterrorist techniques by small groups
within the military and security forces, apparently for
internal political purposes. Such activity is more a
.3 reflection of the regime's inability to control hard
liners in the military than an indication that the gov-
ernment condones the use of these techniques.
The government has already taken steps to reduce
blatant human rights abuses and to lessen the enormous
margin for error tolerated in the official fight against
i
terror
sm. More cases are being turned over to military
and civilian tribunals, thus reducing the number of de-
tainees in executive custody under state-of-seige pro-
visions. This change marks only the increased use of
the judicial system, however, and will not necessarily
result in improved prisoner conditions. Seriously com-
promised terrorists continue to be treated harshly and
systematically eliminated.
As a result of the significantly reduced capability
of the terrorist organization, the government is treat-
ing with special considerations, including reduced sen-
tences, those arrested who are only marginally affiliated
with subversives. Some detainees have been released,
and others have been authorized to leave the country.
The government also has published lists of those released
and tried. According to US Embassy sources, a central-
ized computer information retrieval system and new re-
quirements for multiple prior clearances on suspected
subversives have reduced the chances of "mistakes."
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The government is taking advantage of the reduced
terrorist threat to assert more control over and to com-
partment further the anti-subversive activities of its
.2- forces. As the war against terrorism ebbs, however, the
abuses and violence that are a part of inter- and intra-
service rivalry, including schemes by some officials to
discredit others, are becoming more apparent.
The unsolved abduction of the Argentine Ambassador
to Venezuela, the disappearances, among others, of a
prominent labor leader in February and a number of law-
yers more recently, probably are more attributable to
2 internal high-level politics than a result of the war
against subversion. The backgrounds of most of the vic-
tims offer little information to connect them with ter-
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St. Kitts - Nevis: Fragmentation in the Caribbean
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St. Kitts - Nevis: Fragmentation in the Caribbean
The 18 August referendum on Nevis produced an over-
whelming victory for those who favor separation from
the St. Kitts - Nevis federation. While the near unan-
imous vote is not legally binding, it will complicate
the attempt of federation Premier Robert Bradshaw to
lead this twin-island British Associated State t
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o
n-
dependence as a joint entity.
Residents of Nevis have for a long while adamantly
refused to become independent as part of the current
federation preferring instead to revert to the island's
prior status as a British colony. They are fearful of
Bradshaw's autocratic tendencies and are convinced that,
because of their islands' smaller size, they will con-
tinue to be given second-class treatment. As it became
increasingly clear this summer that Bradshaw intended
to declare independence soon--perhaps before the end of
the year--Nevisian leaders headed by Simeon Daniel felt
compelled to call a referendum. Convinced that refusal
would result in violence, Bradshaw--to the surprise of
many observers--shelved his earlier threats to "crush"
any attempt at secession by Nevis and allowed the refer-
endum to be held.
The referendum results are not only a defeat for
Bradshaw but a setback to British efforts to avoid
further fragmentation of the federation. In a classic
example of the problems in achieving unity among the
island entities of the Caribbean,* the secession of
Nevis would mean the final dismemberment of a three-
island federation that also included Anguilla until it
effectively broke away from the other two islands 10
years ago. It now appears likely that only resort to
force by Bradshaw, severe pressure from Britain, or a
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postponement of independence can keep St. Kitts - Nevis
together. No doubt anticipating the outcome of the
referendum, the leading opposition party in St. Kitts--
which would prefer to retain the present relationship
with Britain--has called for a plebiscite on the ques-
tion of independence for St. Kitts - Nevis.
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Brazil: Possible Shift in Technology Transfer Policy
The Government of Brazil recently announced its
willingness to accept bids from foreign minicomputer
manufacturers to establish two joint ventures in Brazil.
This is a departure from recent technology policies that
have sought to minimize competition in the local computer
industry and may also indicate a relaxation of Brazil's
very strict technology transfer code. Such a relaxation
is necessary if Brazil's indigenous industries are to
receive the technical assistance they need from foreign
firms. US firms may not get equal consideration because
of political tensions.
The Brazilian decision is the result of recent pres-
sure by IBM to produce its System 32 small business com-
puters at its wholly owned subsidiary in Sumare. Brazil
has delayed approval of IBM's plans for several months.
While the IBM operation will provide jobs and exports
for Brazil and use a large percentage of Brazilian-made
components, Brazil fears that it will further strengthen
:[BM's already dominant market position (75 percent in-
stalled value as of 1976). IBM would be too strong a
competitor for Brazil's nascent minicomputer industry.
The country was faced with the choices of restricting
IBM, strengthening domestic industry through other for-
eign technology, or forcing concessions by IBM.
The decision to invite foreign firms to participate
may be ineffective unless Brazil is willing to modify its
technology transfer code, a requirement that any tech-
nology purchased by Brazil must be effectively transferred
to the Brazilian buyer at the end of five years. Such a
transfer would include all evolutionary improvements made
in the technology by the original seller, and, further,
would give the Brazilian buyer the right to manufacture
and export to other markets. Thus the original seller
could be creating his own competition. In negotiations
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earlier this year, Brazilian officials indicated they
might even change the code to exempt certain kinds of
technology.
US bids may be at a disadvantage because of polit-
ical difficulties between the two governments. I
Brazilian efforts to minimize foreign participation
in its computer market have been associated with the gov-
ernment's desire to strengthen and protect its indigenous
manufacturer of small computers, the Cobra S. A. Estab-
lished in 1974, Cobra is a joint venture of the Brazilian
Government's computer agency (Digibras), Brazil's largest
bank, a small electronics company, and the British com-
puter manufacturer, Ferranti. In addition to producing
the small Ferranti Argus-700 minicomputer, Cobra earlier
this year signed a technology transfer agreement with
Sycor, Inc. to produce a small business computer com-
petitive with the IBM System 32. While opposition to
foreign participation in the computer industry has em-
phasized minicomputers, the Brazilian definition of a
minicomputer has been sufficiently general to include
small business systems like the System 32.
Unless Brazilian policies toward foreign technolo-
gies are modified, it is unlikely that any of the truly
capable foreign manufacturers will enter into the joint
ventures. The past partnership with Ferranti, a project
that was plagued with financial, design, and production
problems, is an example of the results of such policies.
In technology, Ferranti's minicomputer product line is
among the least competitive available from foreign com-
mercial minicomputer firms.. Ferranti's heavy involve-
ment in military electronics and bias toward total sys-
tems sales have made it historically a very unsuccessful
commercial minicomputer manufacturer.
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z
Colombia: Politics, Campaigns, and the Presidency
As next April's national election draws nearer, the
campaigns and political maneuverings of the several presi-
dential hopefuls assume increasing urgency and importance.
Although a number of independent and minor leftist party
candidates are entered in the race, most attention will
focus on the traditional Liberal and Conservative Party
nominees--one of whom will govern Colombia for the next
four years from the Palacio San Carlos, the Colombian
White House.
Until recently, the Conservatives seemed irreconcil-
ably split between the factions of former President Misael
Pastrana Borrero and Alvaro Gomez Hurtado. Both groups,
each claiming sole legitimacy as the true Conservative
Party, now have agreed to unite behind Belisario Betancur,
a compromise candidate who may also pick up support from
dissatisfied elements of the Liberal Party.
The Pastrana wing of the Conservative Party will
hold a national convention in October to name its candi-
date officially and outline the campaign platform. Even
if the Gomez faction decides to hold a separate conven-
tion, the joint agreement to support Betancur's candidacy
probably will not be jeopardized.
Betancur, a leftist-nationalist who is not well dis-
posed toward the US, is viewed by his contemporaries and
constituency as an antiestablishment politician who be-
lieves the government should be more responsive to the
needs of the people. He has a complicated sense of social
justice and a seemingly genuine concern for the under
privileged masses of Colombia; nevertheless, he identifies
closely with the privileged class into which he has worked
himself.
While Conservatives seek to mend their political
fences, President Lopez' governing Liberal Party is tak-
ing steps to eliminate the divisiveness and inertia that
have thus far hampered the party's campaign efforts. In
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Lead.inc
Contenders for 1978 Presidential Race
Hernando Agudelo Villa
Liberal Party Contender
Belisario Betancur
Conservative Party Contender
Carlos Llcras Restrepo
Liberal F'.iriy Contender
Julio Cesar Turbay
Liberal P,irty Contender
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a major drive to achieve party unity among the four war-
ring factions, former President Carlos Lleras Restrepo
and party Mogul Julio Cesar Turbay Ayala--the leading
contenders--met with Carlos Holmes Trujillo and Hernando
Agudelo Villa to iron out details of an informal pact
guaranteeing the nomination of a single candidate.
Under the agreement the nominee will be the candi-
date who receives the greatest number of popular votes
in the February congressional elections, when Liberal
congressional candidates will be identified with presi-
dential aspirants. The nominee will then be proclaimed
by a united Liberal Party national convention slated for
early March.
The political pendulum may be swinging away from
Turbay, the party's front-runner in weeks past, to Lleras
Restrepo, an accomplished statesman whose presidency
(1966-70) was characterized by well-administered fiscal
programs that slowed the rate of inflation. Turbay, who
played a major role in the 1974 election of President
Lopez, has the President's tacit backing, but the mutual
support is merely a marriage of convenience maskinna
longstanding personal antipathy between the two.
EZ Espectador, Bogota's liberal morning newspaper,
has come out in opposition to Turbay, stating that he is
not qualified to manage the country's numerous and press-
ing problems. At the same time, EZ Tiempo, the nation's
leading and highly influential news daily, has endorsed
Lleras, calling him the candidate with the clearest vi-
sion of Colombia's future and the most capable person
to deal with national problems.
Most, if indeed not all, of the numerous problems
that have plagued the Lopez administration are likely to
be inherited by the succeeding president. Highlighting
Colombia's worsening social and economic problems are
3 government corruption, student unrest, kidnapings, ram-
pant crime, and guerrilla activity. A 30 percent annual
rate of inflation, brought on in part by massive foreign
revenues from windfall coffee exports and huge black-
market profits from narcotics trafficking and contraband
smuggling, has reduced the average wage earner's buying
power to record lows.
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President Lopez, who twice during his tenure has had
to impose a state of siege to quell massive public dis-
turbances, is bracing for another national work stoppage
scheduled for next month. The labor unions have called
the strike to protest spiraling inflation, perhaps the
most serious and. persistent issue to be faced by next
year's new chief of state.
The explosive social and economic situation, coupled
with the political turmoil surrounding a campaign of
heavy-handed, muckraking attacks on the incumbent as well
as the contenders have given the military cause for con-
cern. There is no evidence, however, of coup plotting
by the armed forces. Indeed, most Colombians have a
strong attachment to their country's democratic institu-
tions, and political leaders will be careful to avoid
giving the military any pretext for political interven-
tion.
In the months ahead, pre-election campaigning will
continue to be highly partisan and stir controversy.
Many of the enduring political animosities which will
characterize that campaign are a vestige of the rigid
coalition system of government that was in effect from
1958-1974. The purpose of the coalition, known as the
National Front, was to end the bloody, internecine polit-
ical warfare that raged throughout the 1950s. Under the
Front system, which was designed by leaders of the two
major parties, the presidency alternated for four terms
and there was parity for both Liberals and Conservatives
in all public elective bodies, executive departments,
and administrative posts.
Since the demise of the Front in 1974, however, new
power blocs and political allegiances have formed in the
House, Senate, department assemblies, and municipal coun-
cils. As a result, the new president's ability to solve
Colombia's pressing problems will depend on the extent
to which he can garner support from among the political
opposition likely to emerge in February's congressional
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In contrast, only $3.7 million is earmarked for the
prevention of "high risk" pregnancy, and public advertise-
ment of this program will not be permitted. As one
presidential spokesman said, the government is seeking
individual decisions rather than mass action. Doctors
may now prescribe or provide free contraceptives in
cases where age, health, mental problems, or socioeco-
nomic family conditions cause complications, but they
may not "coerce or encourage" the use of contraceptives.
Abortion and sterilization are still illegal--except
in a few cases.
In an apparent attempt to head off public criticism,
Health Minister Machedo observed that since Brazil is a
Catholic country and the 'church condemns the pill, prob-
ably only a few couples will decide in favor of family
planning. This observation, however, has had little
soothing effect on the Brazilian clergy, who have already
voiced strong opposition to the program. While conserva-
tive spokesmen predict that it will start Brazil on the
path of permissiveness "from divorce to the pill to
abortion to homosexuality," their more liberal colleagues
assert that what is really needed is social justice along
with profound reforms to alleviate the misery of the
poor.
The church apparently is concerned that the govern-
ment will be far more flexible in implementing the new
measures than current accounts suggest. It is estimated
that between three and four million Brazilians are al-
ready using contraceptives, and that the abortion rate
may be as high as 2.5 million a year. Indeed, if Brazil's
3 economic growth rate fails to keep pace with population
/ / increases and per capita income begins to decline, pub-
lic opinion could well shift to favor more government
sponsorship of family planning programs.
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Birth Control vs. the Church in Brazil
Recent moves by the Brazilian Government to launch
a limited family planning program and to encourage birth
control in "high risk" pregnancies constitutes a sharp
/ break with the tradition of noninterference in family
matters. So far, the reaction has been strongly emo-
tional, particularly among Catholics, who--regardless
of political orientation--have condemned the measure.
Brazil's population, now approximately 110 million,
is growing at an annual rate of 2.8 percent--faster than
any other large country in the world, with the possible
exception of Indonesia. Demographic experts predict that
the population could double by the year 2000. While
Brazil's food supply is adequate, serious overcrowding
exists in some areas--especially in the sprawling industrial
center of Sao Paulo, the economically depressed Northeast,
and in certain frontier regions where the migrant popu-
lation has grown rapidly and squatters have become a
major problem. At the Itaipu hydroelectric site, thou-
sands of Brazilian settlers have already poured across
the Parana River to clear farming tracts in eastern
Paraguay, virtually eliminating the border between the
two countries.
The uncontrolled movement of people in search of
jobs and land is obviously a subject of concern to the
Geisel government. Until recently, however, it has
been unwilling to tackle the issue of population control,
apparently because it fears that an almost certain con-
frontation with the Catholic Church would only complicate
its numerous political problems.
The government's tentative moves in the name of
social welfare are primarily directed toward reducing
health risks to both the mother and child and, for the
most part, do not address the population problem directly.
Under the new plan, which will receive widespread pub-
licity on radio and television, approximately $50 mil-
lion per year for the next four years will be devoted
to health care.
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Venezuela: Oil- AcTreement Postscript
The petroleum agreement announced by Pr, .dent Perez
on his official visit to Moscow last Novernbc,r is a dead
letter., according to rdcent. reports.
The "agreement in principle" with the 1J~ IR provided
[or Venezuela to initially sell Cuba 10,000 ;~,rrels per
day of crude oil, about 8 percent of Cuba's ":ude re-
quirement. In return,
amount of petroleum to
Europe.
the USSR would supply L similar
some of Venezuela's cry 1-omers in
r r< sr en erez and oviet, ea ers witness the signing
,W i oil ?rlreernent in Moscow in November 1976
When the aq.-eement. was announced with mu, :h fanfare
by President Perez and then elaborately defened in
December in an improvised "rancho-side chat" 'n the na-
t:ion,, there were a number of major obstacles ; c-eventinq
i._rnlDlementation o!= the deal.
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Rising political opposition at home based on
the promises that Venezuela would gain nothing
from the arrangement, that the agreement did
not represent a significant diversification
of oil markets and that Venezuela would be
required to ship some light crude to Cuba.
The latter action would run counter to the
government's stated policy to conserve light
crudes and market more of its heavy crudes.
The difficulty in overcoming the reluctance
of Venezuela's West European customers to be-
come overly dependent on Soviet oil and the
problem of determining the equivalence of
Venezuelan and Soviet oils of differing com-
positions.
Lead-
ers of the governing Democratic Action Party have not
been enthusiastic about the agreement or about Perez'
single-handed conduct of the country's policy. The
party's founder and president-for-life-, Romulo Betancourt,
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has been particularly critical of the government's policy
toward Cuba and anything that smacks of economic or po-
litical support for the Castro regime. If the govern-
ment intends to implement this agreement, it will have
to release the text to the Venezuelan Congress for debate
and approval, a step that the administration has resisted 25X1
until now and one that it is unlikely to take in the
midst of a general election campaign.
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Chile: Foreign Financial Gap
1973
1974
1975 1976'
19772
Exports, f.o.b.
1,267
2,244
1,570 2,077
2,000
Imports, f.o.b.
1,363
1,821
1,577 1,412
1,650
Net services and
transfers
-363
-626
-571 -612
-680
Current account balance
-459
-203
-578 53
-330
Debt amortization
-407
-367
-524 -556
-589
Financial gap
-866
-570
-1,102 -503
-919
Medium- and long-term
capital inflows
646
742
1,051 890
730
Direct private
investment
0
-98
50 80
90
Official lending
agencies
172
310
516 463
180
Bilateral debt relief
352
287
232 0
0
Private foreign credit
122
243
253 347
460
Net short-term capital
and errors and omissions
251
-250
59 -42
0
Change in reserves
31
-78
8 345
-189
.External debt at yearend
(including short-term)
4,218
4,849
5,225 5,725
5,776
Debt service ratio
Due
36
24
41 33
35
Paid
11
12
28 33
35
' Provisional.
2Projected.
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Chilean Payments Position,: Breathing Spell
Two years of harsh austerity have reduced Chile's
financial gap* to a manageable size. The military junta
is now gradually easing austerity and allowing imports
to increase by 15 to 20 percent this year. Although
Santiago is counting on increased commercial bank and
supplier credits, it will have to draw heavily on its
small foreign reserves to cover this year's projected
$900 million financial gap.
The military government's ability to further relax
demand management policies will be constrained by slug-
gish copper prices and difficulties in obtaining more
foreign capital. Availability of foreign funds depends
partly on the junta's willingness to curb its human
rights violations. The recent announcement that the gov-
ernment has disbanded the National Intelligence Directorate
(DINA) seems to be a genuine effort to curtail past
abuses and modify the most: severe aspects of political
repression. Given the prospects for aid, even with im-
proved human rights policies, Chile's growth for the
next few years will not support a sharp rise in the living
standards of most of the population.
The Allende Legacy and the 1975 .Crisis
Chile's precarious payments position--in large part
the aftermath of economic mismanagement by the Marxist
regime of Salvador Allende (1970-73)--developed into a
financial crisis in 1975. The crunch was brought on by
the collapse of world copper prices and the due date
*Financial gap is defined as the current-account deficit
plus amortization of medium- and Long-term debt; shifts
in short-term capital are not included.
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Foreign Debt Service Payments
Million US$ 769 796
Copper Exports and Earnings
Million US $
Unemployment Rate
Percent 14.5
Annual Average
Central Government Deficit as a
Percent of Expenditures
59.0 3
1. Estimated 2. Projected 3. Including large-scale deficit spending
not reported in the official budget.
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of large scheduled debt repayments, which pushed the
current-account deficit to $580 million and the financial
gap to $1.1 billion. The gap was closed only by post-
poning roughly a third of the $730 million in scheduled
debt repayments.
To prevent an even larger deficit and ease the in-
flation rate, the new military government--which had
seized power in September 1973--imposed an austerity
program. Private sector credit all but disappeared in
1975, while government spending was slashed by one fourth.
The squeeze on domestic demand cut the volume of foreign
purchases by nearly one fifth; real GDP fell 13 percent
and industrial output plummeted 28 percent. From the
viewpoint of the military government, such unpopular and
wrenching changes could be installed only by tightening
the junta's already strong political grip on institutions
and individuals.
Restoring Equilibrium in 1976
The effects of the austerity program carried over
to 1976 when import volume fell another 13 percent to
about the 1972 level. At the same time, Chile benefited
from the recovery in copper prices and from rapidly ex-
panding non-copper exports, the result of a vigorous
export promotion campaign and devaluation of the peso
roughly in.line with the country's triple-digit inflation.
Total exports gained more than 30 percent in value, al-
lowing a small current-account surplus and more than
halving the financial gap to $500 million.
By narrowing the gap, Santiago was able to meet
scheduled debt repayments for the first time since 1971.
Private foreign lenders, encouraged by the government's
belt-tightening and improved ability to repay its debts,
provided about a $100 million increase in long-term
capital last year, more than offsetting a fall in official
lending brought on by Chile's human rights policies.
These funds, together with $80 million in direct invest-
ment inflows, closed the financial gap and permitted a
substantial increase in foreign exchange reserves. By
the end of the year, reserves amounted to about four
month's imports.
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The improved payments situation paved the way for
the gradual easing of fiscal and monetary restraints
beginning in mid-1976. Despite somewhat easier private
credit and increased foreign demand, real GDP rose
rose only 3.5 percent and industrial output recovered
by a mere 6.5 percent. The strongest revival occurred
in the copper industry where output last year averaged
1 million tons, up from 828,1)00 tons in 1975. The growth
in economic activity barely put a dent in the record
unemployment rate. The inflation rate, fueled by con-
tinued large budget deficits and parallel monetary growth,
averaged 174 percent for the year as a whole, compared
with 341 percent in 1975.
The 1977 Pa ents Situation
We expect: Chile's financial gap to widen by more
than 80 percent this year, to about $900 million. Al-
though foreign sales are being bouyed by non-copper ex-
port earnings, sagging copper demand and prices will
prevent any increase in total. exports. Copper shipments
this year will. total about 951,000 tons, down 6 percent
from last year, while copper earnings are projected to
slip more than 10 percent.
At the same time, Santiago is providing enough re-
flation to induce a 15- to 20-percent rise in imports,
leaving a trade surplus of $350 million this year. The
deficit in transportation, other services, and interest
payments, together with debt amortization costs, will
leave Chile with the estimated financial gap of about
$900 million in 1977.
The military government is relying on commercial
bank borrowing and expanded use of supplier credits to
finance the payments gap. Anticipating criticism and
pressure from the US and other creditors for its human
rights practices, Santiago has forgone negotiations for
debt relief again this year. For the same reason, bor-
rowing from bilateral and multilateral sources is off
sharply. Funds from these sources will amount to less
than half of last year's inflows. Direct investment
will not grow much, partly because of bureaucratic de-
lays in approving new projects. Consequently, a decrease
in reserves of nearly $200 million probably will be re-
quired this year.
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To keep import growth within bounds and maintain
progress against inflation, the junta is staying with its
plan to ease austerity measures only gradually. Real
wages'this year are being allowed to increase only about
5 percent, leaving them still well below 1972 levels.
On the budgetary side, Santiago's program calls for
moderate tax reductions, small increases in social spend-
ing, and some limited wage increases for government
workers. In these circumstances, Santiago will run a
budget deficit equal to 12 percent of government ex-
penditures, 5 percentage points smaller than last year.
Consumer credit is also being eased, but not very fast.
On balance, we estimate that these measures will
allow real GDP to rise by close to the junta's 6 to 7
percent target this year. Real output for 1977 will
still be slightly below the 1974 level, unemployment will
remain at about 12 percent, and inflation is likely to
average about 100 percent. Given the authority of the
junta, Chilean labor is in no position to protest the
slow revival in its real income. For its part, the
business community still feels it is better off under
the present regime than under.the Allende government.
Looking Ahead
Unless world copper prices rise more than can
reasonably be expected, the military government will be
unable to further relax its austerity measures over the
next few years and may have to tighten them again. Debt
amortization payments will not begin to decline until
after 1980, and obtaining external financing will con-
tinue to be a serious problem. By the end of this year,
foreign reserves will be down to two month's import
cover and thus cannot continue to underwrite increased
imports. Without higher copper prices, Santiago needs
$800 million to $900 million a year in gross capital in-
flows if the junta's target of 6 to 7 percent economic
growth is to be met. Even though the junta seemingly
is relaxing its human rights attitudes, Chile cannot
count on filling much of the gap with bilateral or multi-
lateral financing.
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Substantial increases in direct foreign investment
are also unlikely over the next few years. Thus, the
outlook is for prolonged constraints on imports, slower
economic growth, and continued high unemployment levels.
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Albuquerque Lima has said that he thinks the letter
helps President Geisel in his efforts to open paths to
democracy in Brazil. The letter doubtless also gives
impetus to the views of such individuals as former Min-
ister of Industry and Commerce Severo Gomes, who re-
cently published a book called Time for Change which
argues that the military should return the government
to civilians for economic as well as political reasons.
The publication of the letter touched off an im-
mediate public reaction, which was strongest in Sao
Paulo, but was also evident in other urban centers. A
spontaneous parade through the streets of downtown
Sao Paulo by students attending the law school soon grew
into a peaceful demonstration of some 7,000 people.
Security officials did not interfere with the parade,
claiming that they did not consider it a confrontation.
Since then, however, the government has taken a harder
line against public protests. Several students have
been arrested, and earlier this week police in Sao
Paulo used tear gas and billy clubs to disperse thousands
of students.
The government's response to the letter, however,
has been both indirect and muted. President Geisel
and his top advisers have avoided making any public
statements, and the presidential press secretary has
refused to comment. One of the law professors who
signed the letter says that he now has information that
the government's reaction will continue to be mild and
that no one will be punished for collaboration. The
failure to respond to such a challenge can only reinforce
?a growing belief in educated Brazilian circles that the
Geisel government and the military high command are in-
creasingly aware of the decline in popular support for
their policies and are unsure of their future political
course. Continuing and increasing pressure from in-
fluential sectors of Brazilian society to return Brazil
to democratic rule could conceivably bolster the chances
of those civilian politicians, such as pro-government
Senator Magalhaes Pinto and Minister of Education Ney
Braga, who have already expressed interest in obtaining
high political office--possibly the vice presidency--in
the government that succeeds Geisel in 1979. It still
seems highly unlikely, however, that the military--
Brazil's only cohesive political institution--will be
willing to return any real measure of power to civilians
by that date, I
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'1 2
3t
Brazil: Renewal of Protest
A letter signed by 93 Brazilian jurists calling
for an immediate return to government under law is
having a major political impact among educated and in-
fluential Brazilians. It has apparently provided the
spark for a renewal of the student protests that swept
the nation three months ago and has focused national
attention on similar expressions of opinion in recent
weeks by retired military leaders and former government
ministers who favor a return to civilian rule.
The letter, which was read publicly two weeks ago
at Brazil's most prestigious law faculty--located in
Sao Paulo--was part of a series of events commemorating
the 150th anniversary of the founding of law schools in
Brazil. The initial drafting, however, began late last
spring after President Geisel recessed Congress for 15
days and issued a series of major decrees now popularly
known as the "April Reforms." The letter, which was un-
doubtedly a direct response to Geisel's actions, pro-
claims that the Constitution is sovereign and that no
law or person can be above it. It also says that "secu-
rity and development"--the slogan of the Geisel adminis-
tration--is the slogan of totalitarian regimes.
Political reaction to the letter has divided along
predictable lines. Pro-government leaders have called
it injurious, even claiming that it is of "Communist
inspiration," while members of the opposition party
attribute great political significance to it as "an
appeal without hate to the nation."
Several retired military officers who have recently
urged publicly that the military return to the barracks
have seen their comments thrown into high relief by the
timing of the letter--which has become the front page
story of national news magazines and is now being cir-
culated throughout the country for signatures. One of
the most supportive statements has come from retired
General Albuquerque Lima, Minister of Interior under
President Costa e Silva and known for his liberal views.
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