THE ECONOMIES OF MOST LATIN AMERICAN COUNTRIES HAVE BEEN IN A FREEFALL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86M00886R001200330023-1
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 9
• Document Creation Date: December 21, 2016
• Document Release Date: November 7, 2008
• Sequence Number: 23
• Publication Date: October 16, 1984
• Content Type: LETTER

Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
EXECUTIVE SECRETARIAT
ROUTING SLIP
ACTION
INFO
DATE
INITIAL
1
DCI
X
2
DDCI
3
EXDIR
X
4
D/ICS
5
DDI
X
6
DDA
7
DDO
8
DDS&T
9
Chm/NIC
10
GC
11
TG
12
Compt
13
D/Pers
14
D/OLL
15
D/PAO
66
SA/IA
77
AO/DCI
18
C/IPD/OIS
19
r, [CO'1
X
20
21
22
SUSPENSE 3 spV
Date
To ': Please prepare response for ULI
s i t'nature aid take apnroori ate
follow-up action.
Executive Secretary
7 '!ov 'r,
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 United States Permanent Mission to the
Organization of American States
Washington, D. C. 20520
October 16, 1984 Executive Regis
84- 9579
The economies of most Latin American countries have been in
a freefall. Despite some modest recent improvements in their
exports, primarily to the U.S. and helped along by our Reagan-
led recovery, as well as some indications of a very modest
resumption of growth, full-recovery cannot be expected for
some time. Their debts are potentially overpowering and the
prospe#-ts for early repayment without major capital infusions
are small. Furthermore, with these economies still being in
the doldrums, and with the people becoming restless, this
region, so strategically important to the United States,
remains a potential breeding ground for leftist adventurism.
All need not be lost. Their desperate capital needs can be
met -- not by more borrowing -- but rather by major infusions
of foreign direct investments, by reviving their relatively
dormant private sectors and by bringing into better balance the
private sector-public sector ratios now highly tilted toward
generally inefficient state enterprises. A fair number of the
countries owing the largest amounts of the $350 billions have
nearly 75% of their industrial production owned by the govern-
ment, with the energetic private sector being pushed aside.
Excessive printing of money, capital flight and, in some cases,
corruption have been the result. As Senator Manuel Ulloa of
Peru has said, "Is it any wonder no one wants to invest in our
countries where.we..don't want to ourselves?" Just after World
War II, half of all U.S. investments overseas were in Latin
America - now only 5% of new investments, often bringing with
them needed technology and management skills, are going there.
Much of this, however, will require basic structural changes in
their economic approach, and as I travel in the region, I see-a
new willingness on the part of many countries to face up to
these issues.
Frankly, what is needed is a healthy dose of P.eaganomics -
it works!
During the week of August 27-31, we had our Annual Meeting
of the Inter-American Economic and Social Council of the OAS in
Sanr_iaao, Chile. One of the matters we discussed was how to
promote a'structural change in Latin America to bring about a
greater awareness of the political-economic benefits of a vital
private sector and a free market approach to the region's
economic problems.. I strongly feel that a measure of success
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
in promoting this structural change could be the greatest legacy
leaders like you and those of us serving in positions which
influence economic thought can leave to future generations. In
our Hemisphere at the present time, we have a "window" of oppor-
tunity to stem the tide of socialist-statist philosophy and we
must take every opportunity.to speak out against statist "non-
solutions" to the region's economic problems. These issues
directly effect our own long, term survival in this hemisphere.
As Ben Franklin said, "We must all hang together or we will
surely all hang separately."
In the enclosed speech to the Chilean-American Chamber of
Commerce, I have directly confronted the sacred cows of the
Calvo Doctrine, Andean Pact Decision 24, and certain development
policies earlier inspired by Raul Prebisch, who himself has
modified many of his views, as Keynes did later in his life.
In this effort, the work of such researchers as Dr. Hernando de
Soto of Peru has provided us not only with valuable intellectual
ammunition, but also represents the,spadework in preparing the
ground for a philosophical re-orientation in development
economics in Latin America.
President Reagan addressed this whole issue in this speech
to the World Bank last month, calling for greater infusions of
foreign direct investments into a more hospital investment
climate south of the border.
I hope that you, as a friend of the OAS, will find these
remarks of interest, and we here at this Mission would very
much appreciate your input before we move to the next phase
in this battle in mid-November at our OAS General Assembly in
Brasilia. We need your help and counsel on this.
'Sincerely,
J. William Middendorf, II
Ambassador
Perma;ent Representative
Enclosure: As stated oat ?
5"
The Honorable
William Casey,
Director of CIA.
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 Current
Policy
No. 609
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
The Private Sector's Role in
Latin American Development
August 30, 1984
United States Department of State
Bureau of Public Affairs
Washington, D.C.
Following is an address by J. William
Middendorf II, Ambassador to the
Organization of American States (OAS),
before the American Chamber of Com-
merce, Santiago, Chile, August 30, 1984.
It is a great pleasure for me to appear
before you today and to have this oppor-
tunity to share with you my thoughts on
increasing economic opportunities for
the countries of our hemisphere.
Virtually all our countries have
undergone severe economic retrench-
ment since 1980. I am pleased to be ad-
dressing this vital forum in Chile today
and, while economic recovery in the
United States has been proceeding
somewhat longer than in Chile, I am
also especially pleased to note that in
the first quarter of 1984, Chilean gross
domestic product grew by 4.5% on an
annual basis.
We all know that debts have become
a crushing burden and that unemploy-
ment has skyrocketed. Today I propose
to present my thoughts on a tried and
true formula for long-term economic
success so that this hemisphere-so rich
in assets of raw materials and of man-
power-may reach the kind of potential
enjoyed by so many other nations with
far fewer assets.
Development and the Private and
Public Sector Roles
The question of effective and efficient
utilization of available resources, both in-
ternal and external, in the process of
economic development and growth is the
central issue of public policy in most
countries in Latin America and the
Caribbean. In most developing countries,
a large portion of all resources is
privately owned by a large number of
businessmen and farmers who, while
acting independently, contribute a flex-
ibility and capacity for entrepreneurship
in a nation's drive for economic develop-
ment which is not typical of the public
sector. In too many instances this
private sector has been severely
restricted.
In order for governments to
stimulate and sustain economic growth
and to diversify their economies in the
quest for economic development, a
viable private sector must be present.
However, without a reasonably efficient
public sector capable of providing-at
reasonable and manageable economic
costs-'the necessary infrastructure and
overall environment conducive to sound
investment, the private sector is unlikely
to make its full contribution to com-
merce, growth, and development. Eco-
nomic development begins with a set of
motivations and attitudes that are con-
cretely expressed in the absence of civil
conflict, a system of generally accepted
and enforceable property rights, and the
ability of individuals to enjoy the fruits
of their labor without confiscatory
systems of taxation or arbitrary seizure
of property. If government pursues
policies that significantly distort private
sector decisionmaking, if it is inefficient
and/or ineffective, then the overall pros-
pects for economic development suffer
and international commerce with it.
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
We all recognize, for example,
that planning at various levels and for
varying time periods is an inherent part
of economic activity in any economy. In-
dividual entrepreneurs engage in plan-
ning so that scarce capital, skilled labor,
land, and other resources should not be
wasted. But to engage in sound planning
for the future, one must know where
one is in the present, and in this connec-
tion, I should like to mention the inven-
tion of double-entry bookkeeping as one
of the pivotal intellectual achievements
of Western civilization and, I would even
go so far as to say that, without this
achievement, the industrial revolution
and commerce, industrial production on
a global scale, and indeed the high
standard of living to which one can
aspire today would be almost in-
conceivable without well-developed ac-
counting practices. Regrettably, a recent
article in a major U.S. business maga-
zine pointed out that a number of Latin
countries rank at the bottom in terms of
their accounting practices for financial
reporting. It is no accident that those
countries with the most developed
economies and with the most efficient
capital markets also have the most
developed accounting systems, practices,
and professions.
Soto, an informal economy developed
and grew, despite the tremendous handi-
cap of being illegal.
De Soto's study estimates that the
informal economy of Peru now accounts
for 90% of Lima's garment industry,
25% of its furniture industry, 60% of
housing construction, and even a good
part of the automobile and truck in-
dustries. The informal Peruvian
economy, says the study, has grown so
fast that it now accounts for an esti-
mated 60% of the Peruvian economy
and almost none of this output is
counted in the official $22 billion Peru-
vian gross domestic product. Perhaps
most important is the private sector's
ability to create jobs; in Peru an esti-
mated two out of every three jobs are
now in the informal sector.
Another factor Mr. de Soto's study
points out is that South American econo-
mies often have two kinds of private
sectors: one that is seriously burdened
by excessive regulation and hampered
by bureaucratic inefficiency but is of-
ficially sanctioned, and a second one
which is far more in accord with free
market principles, but whose existence
is barely acknowledged. This difference
is made clear by an experiment recently
documented by a study group from Mr.
For the reasons I have just outlined,
the Reagan Administration has espoused
a fresh but also historically validated
view of development-a view that en-
courages a vigorous private sector as
the "principal engine of economic
growth." The reason I say that the
Reagan Administration's view of devel-
opment is also a historically validated
one is that this philosophical emphasis
on the private sector is rooted in the no-
tion of broad private ownership of the
means of production. To illustrate, let
me give you some selected quotes:
? "Men pay most attention to what
is their own." (Aristotle)
? "The most meritorious degree of
charity is to prevent poverty by putting
the poor man in business so that he may
earn an honest livelihood." (Moses
Maimonides, 12th-century Talmudic
scholar)
? "When incentive to acquire and
obtain property is gone, people no
longer make efforts to acquire any. This
leads to destruction and ruin of civiliza-
tion." (Muhammad Ibn Khaldun, 14th-
century Arab jurist, historian, and
statesman)
? "The church's teaching on owner-
ship diverges radically from collectivism
as proclaimed by Marxism and `rigid'
capitalism. The primacy of the person
over things (can be restored through)
joint ownership of the means of work."
(Pope John Paul II, encyclical, On
Human Work)
? "Developing countries need to be
encouraged to experiment with the
growing variety of arrangements for
profit-sharing and expanded capital
ownership that can bring economic bet-
terment to their people." (Ronald
Reagan, President of the United States
of America)
The Finance-Commerce Link
Efforts to increase commerce between
Chile-and indeed all of Latin America
and the Caribbean-and the United
States must focus on the two broad
areas of trade and investment. Although
Planning at a highly centralized de Soto's Institute for Liberty and
government level cannot determine how Democracy in which it tried to set up a
each economic unit should effectively legal garment firm without easing the
behave under all circumstances. In order way with tips. According to a Wall
to effectively support and complement Street Journal article:
the decisions of entrepreneurs, planning It took a lawyer and three others 301
must be flexible enough to be able to ac- days of full-time work, dealing with 11
commodate to changing i:ircumstances, government agencies, to complete the paper-
and we know that a centralized state work-which, when laid end to end, measured
planning apparatus is inherently in- 102 feet. (One of the researchers then tried
capable of such flexibility. In a govern- the same experiment in Tampa, Florida, and
mentally planned economy, the dynamics finished it in 31/2 hours.)
of the bureaucracy rather than the com- In mast countries, the public sector
petitive exigencies of supply and demand needs to be more circumspect about ex-
determine inputs and outputs. As we tending its activities into fields where it
have seen, such an economic system re- does not have practical experience;
sults in waste, inefficiency and short- rather, it should encourage a climate
ages-in other words, a low standard of where thousands of independent and
living. More importantly, centralized interdependent economic units of the
planning concentrates too much eco- private sector can perform efficiently.
nomic power into the hands of those As James B. Burnham, U.S. Executive
with political and military power, thus Director of the World Bank, stated:
reducing liberty and opening the door to
f more
ti
d
h
on o
e a
op
The pay off from t
corruption. world, they are complementary and
and exchange rate policies
ri
i
ibl
ng
c
e p
A good example of how the private sens
sector can triumph in spite of govern- and from reducing the role of government mutually reinforcing and, therefore,
mental restrictions is revealed in the re-.: economic enterprises is extraordinarily high poor public policy prescriptions designed
in many cases. The actual financial resources for one area often have negative results
cent study by Peruvian businessman and needed to implement these policy changes are in the other.
economist Hernando de Soto. Because it relatively small, which is one reason why the Finance is a key ingredient in the
takes a person 6 months to get govern- fixation on equating economic development promotion of international trade, but
ment approval to set up a simple with the flow of concessional assistance is so nowadays, it is difficult to mention
business in Peru, an informal economic misleading and threatens to divert attention finance without mentioning the debt
system has grown to rival the. more from what is really needed in today's world,
namely: more market-oriented economic and crisis. Assigning blame is an unproduc-
traditional business. According to de financial policies. tive exercise-after all, "errare
humanum est"-but one cannot escape
these two areas are often treated separ-
ately for analytical purposes in the real
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 noticing that there appears w ve an un-
fortunate parallel between most of those
countries of the hemisphere that owe
tiwn of this external debt, now totaling
over $300 billion, and the fact that a
large part of the industrial production of
those particular countries is owned by
their governments.
During the 1970s, Latin American
countries annually increased exports by
23%u and borrowings by 25%. But 1979
brought the second oil shock-in my
opinion, one of the most devastating
blows to the economies of the developing
world in economic history. Although the
1979 OPEC [Organization of Petroleum
Exporting Countries] oil price increase
of 200% was much smaller than the in-
crease of 1974 (400%), this increase was
applied to a much higher base (about $13
a barrel versus $3 a barrel in 1974),
thereby generating an effect that was
nearly as great. The psychological effect
was perhaps even more important, in
that when the inflation-adjusted price of
oil-which had not been expected to in-
crease after after 1974-escalated in
1979, it destroyed confidence in the
stability of relative prices.
Desperately, many developing coun-
tries borrowed even more after 1979 to
maintain consumption levels, as well as
to pay for the oil-such borrowings did
not necessarily, therefore, flow into
foreign-exchange-earning industries.
This has been one of the contributing
causes of today's dilemma. Suffice it to
say that one can find enough fault to at-
tach to all major economic actors-both
in the developing countries as well as in
the developed. Nor is it particularly pro-
ductive to characterize the debt issue
and its impact on trade and investment
only in terms of problems. After all, in-
ternational financial crises are not
new-indeed, it has been said that with
the invention of money, financial crises
become almost inevitable.
That said, I believe that it is far bet-
ter to characterize our present environ-
ment more positively in terms of the
challenges facing us and how to meet
them constructively. As one such
positive step, last September the OAS
external finance conference in Caracas,
Venezuela, demonstrated that the na-
tions of the hemisphere can come
together and discuss major hemisphere
economic problems constructively. The
October 1983 meeting of the Inter-
American Economic and Social Council
(LIES) in Asuncion, Paraguay, unani-
mously confirmed the decisions taken in
Caracas and established a special com-
mittee under the chairmanship of -
Senator Manuel Ulloa of Peru to ex-
amine external debt, trade, and financ-
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
ing. This initiative has received our close
attention, and the report is to be pre-
sented to the Inter-American Economic
and Social Council meeting here in San-
tiago this week.
The United States is deeply con-
cerned with the external finance issue
and has directed both bilateral and
multilateral resources toward support of
the international financial system re-
sponse. The system has matured and
changed during the past 2 years. More
changes are to be expected as we look
for the best responses to maintain inter-
national conditions for growth of eco-
nomic opportunity in all our countries.
Here, I would like for a moment to
discuss the impact of recent increases in
U.S. dollar interest rates. We all under-
stand the political impact of interest rate
increases, but the political rhetoric over-
states the real economic costs of higher
interest rates because such rhetoric ig-
nores the broader international economic
environment, particularly the very posi-
tive development in Latin America's
trade balance. If first-half of 1984 trends
hold, Latin American exports this year
to the United States could increase by as
much as $8 billion, to approximately $50
billion. William R. Cline, a senior fellow
of the Institute for International
Economics, stated in his August 1
testimony before the Foreign Affairs
Committee of the U.S. House of
Representatives:
[Non-OPEC] countries export $332 billion
in goods and $116 billion in services. Most
studies show that one percentage point addi-
tional OECD [Organization for Economic
Cooperation and Development] growth causes
exports of non-oil developing countries to rise
by 1.7 to 3 percentage points, and to cause
their terms of trade to rise perhaps 1' per-
cent in one year and more subsequently.
Even using the conservative end of the range
of estimates, in the first year, one percent
extra OECD growth causes exports of goods
and services to rise by about $12 billion (2.7
percent), or three times the direct impact of a
one percentage point rise in interest rates.
The dominance of the growth impact rises
over time, if both the higher growth and
higher interest rate are sustained, because
the export base keeps growing faster while
the interest rate shift causes a higher but
then constant plateau of interest payments.
Over four years, the trade-off between
growth (benefit) and interest (cost) is as high
as seven-to-one.
Latin America still needs vast
amounts of capital for progress. If the
decade of the 1960s can be considered
the decade of official aid, the decade of
the 1970s the decade of commercial
bank lending, then the decade of the
1980s must be the decade of foreign
direct investment. Why? Because in the
1980s, it would be prudent not to expect
Monetary Fund (IMF), the World Bank,
and other multilateral lending institu-
tions will be a replacement for private
sector lending-and I stress the word
replacement-for a number of reasons.
First, the sums needed are simply
too large;
Second, virtually all industrialized
country governments, including that of
the United States, are grappling with
the issue of control of their own govern-
ment deficits; and
Third, it is unlikely that industrial-
ized country central banks will be as ac-
commodating toward these deficits as
they were in the 1970s.
Further, there is a high probability
that Latin America will not receive the
same high level of borrowed capital to
which it became accustomed during the
1970s. We should remember that bor-
rowing is only one of the three types of
international monetary transfers-the
other two being direct aid, either
government to government or multi-
lateral, and foreign direct investment.
We should also remember that foreign
direct investment has the advantage
over the other two of providing manage-
ment know-how, technical skills, and
technology transfers resulting in a high
degree of export potential and,
therefore, being a source for valuable
foreign exchange.
In order to realize the tremendous
growth potential of Latin America, the
countries of the region will need large
infusions of capital. In order to attract
this scarce capital-in competition with
others also aggressively seeking it, such
as the Organization for Economic
Cooperation and Development and
Pacific Basin countries-the climate for
investment must be conducive. The best
test of this is found where local in-
vestors also find it attractive to' reinvest
their own funds and where there is no
capital flight.
Henry C. Wallich, member of the
Board of Governors of the U.S. Federal
Reserve System, in a recent incisive
paper entitled, "Why is Net Interna-
tional Investment So Small?," made the
following comments:
By comparing the growth in a country's
debt with its current account, one can derive
the capital flow that must have taken place in
order to balance the accounts. If a country's
gross liabilities, including equity investment,
increase by more than its current account
deficit, there must have been some counter-
vailing capital outflow. For the [world's] eight
largest borrowers over the years 1974-82,
this calculation shows an increase in debt
(equity and direct investment included) of
$317 billion, while the current account deficit,
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 amounts to only $207 billion. Thus, there ? mitment leaders s of f the seems to have been a capital outflow tf here
$110 by the other r leaders ma-
bilhon. The degree to which borrowing jor democratic industrial countries. This
inflow was compensated by outflows; for The maintenance of an open interna-
Mexico, 45 percent; for Venezuela, almost the tional trading order is essential for posi-
entire inflow was absorbed into outflows. tioning countries, such as Chile, for
rather than overstate, since under-invoicing
of exports and over-invoicing of imports, a
frequent practice in countries with exchange
controls or export taxes, would have caused
the current account deficit to be overstated.
Governor Wallich goes on to say:
.. There seems little doubt that sub-
stantial capital exports have taken place from
the count
i
th
t
b
i
f
r
es
a
were
orrow
ng. Un
or- Why? Because virtually all economic pro-
tunately, one must assume that in large part jections are predicated on open trade. If
this represents capital flight. The assets, thus
acquired, probably do not produce income and the assumption about the maintenance
taxes for the capital-exporting country, and of open-trading policies is removed, the
probably are not available to strengthen its medium-term outlook for the world
foreign exchange position and its economy
generally. In other words, given economic
and political conditions of the capital-
exporting countries, these foreign assets are
not likely to play the same constructive role
for the home countries that capital exports
from developed countries have ordinarily
played. To be sure, changes in the politics
and economic policies of the respective coun-
tries, giving adequate protection to the
owners of capital and a positive real return
on domestic assets, may change that situa-
tion. They may convert what today is flight
capital into an important resource for the
country.
Maintaining an Open Multilateral
Trading System
The challenge and opportunities which
we face in the financial arena, however,
must be seen in the broader context of
global economic adjustment which ob-
viously affects both Chile and the United
States. Simply put, this adjustment in-
volves converging the levels of consump-
tion and production, and in the United
States is reflected in the great success
of the Reagan Administration in reduc-
ing domestic inflation and increasing
U.S. gross national product (GNP)-for
example, U.S. gross national product
grew at an inflation-adjusted 7.6% an-
nual rate in the second quarter, while
prices as reflected in a GNP-based
measure, or deflator, rose 3.2%. This
process of global economic adjustment is
not cost-free, but it is inevitable and has
as its ultimate goal the restoration of
sustainable noninflationary global
economic growth.
Critical in this adjustment process is
the maintenance of an open multilateral
trading system. At the Williamsburg
summit, President Reagan committed
the United States to resisting protec-
servicing their external debt and for en-
abling the export and import sectors of
both our economies to make their con-
tributions to domestic economic recovery
and growth. I also want to make three
further points:
One, protectionism poses a serious
threat to the prospects for a medium-
term recovery in the world economy.
economy becomes bleak.
Two, protectionism poses a fun-
damental threat to the strategy that has
fostered development since 1945. Inter-
national trade is a powerful engine of
growth. The experience of the 1960s and
1970s demonstrated that countries with
"outward-looking" development
strategies-characterized by liberal im-
port regimes, adequate incentives for
producers, and the maintenance of
realistic exchange rates and prices as
well as positive real interest rates-have
performed better than countries with
"inward-looking" development strategies.
Protectionism would threaten the viabili-
ty of the "outward-looking" strategies
with far-reaching consequences for
economic efficiency and world trade.
The strategy of industrializing
through import substitution has been
disappointing. It has fostered dual
economies, crippled development in the
agricultural sector, resulted in frequent
balance-of-payments crises, and con-
tributed to rapid urban growth and
political instability. Studies by the
OECD and the World Bank both
recognize that a substantial relaxation of
import restrictions, coupled with moves
toward appropriate exchange rates, are
necessary to expand exports and over-
come the shortage of foreign exchange
that most developing countries (except
for some of the oil exporters) seem to
face.
For these reasons, the United States
is urging developing countries to use
great caution in applying import
substitution measures and encouraging
those countries to focus more actively on
the possibilities which exports offer their
economies, while striving to keep our
markets open to those exports. Since the
1970s many of the more successful
developing countries have been pursuing
precisely such a strategy. The economic
success stories, such as Taiwan, South
Korea, and Singapore, have all adopted
policies which emphasize exports as a
means of promoting rapid industrializa-
tion.
In recent years, these and other
countries have shifted toward more
liberal trade and payment regimes.
Often these moves have not been as
rapid or as encompassing as we might
want. But overall, particularly in Latin
America, East and Southeast Asia,
there has been a clear tendency of the
more economically progressive and suc-
cessful countries to move in the direc-
tion of liberalizing trade barriers and
adopting policies aimed at stimulating
exports.
Three, protectionism is, by defini-
tion, "anti-adjustment." It is an ad-
ministrative way of delaying adjustment
and changes in competitive positions
stemming from changes in technology
and productivity. We must jointly and
severally rise to the challenge of struc-
tural adjustment rather than run away
from it. Renewed growth and the rein-
vigoration of both our economies de-
mand it.
The United States, by and large, is
demonstrating its maintenance of an
open economy. I should point out that
the U.S. trade deficit for 1984 is pro-
jected to pass $100 billion. This is
creating substantial trade surpluses for
a number of our Latin American trading
partners. But maintaining an open
economy is not a unilateral task and, in
this connection, I would like to mention
the highly professional and vigorously
competent presentations made by
Chilean experts to U.S. Government
agencies on the question of copper ex-
ports to the United States. In address-
ing the challenge of resisting protec-
tionism in both of our countries, I find
the words of Benjamin Franklin,
although stated in a different context,
most appropriate: "We must all hang
together, or we will surely all hang
separately."
The Role of Foreign
Direct Investment
I have mentioned the complementarity
of trade and investment and how key
the element of foreign direct investment
is to a strong private sector and thus to
a healthy economy. Unfortunately,
foreign direct investment has been sub-
ject to restrictions which have hindered
growth of the private sector and, conse-
quently, economic development.
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
 Approved For Release 2008/11/07: CIA-RDP86MOO886ROO1200330023-1
The attitudes from which these
r e.trictions spring and their conse-
quences have been aptly summarized by
Brazilian Senator and former Planning
and Finance Minister, Roberto Campos,
in a speech he gave in the Brazilian
Senate in June 1983, entitled "The New
Demonology." He said:
In my days as a youth ... the demons
were the petroleum trusts, the foreign-owned
electric company, repatriation of dividends,
and the spoilage of international commerce
by rich countries. But the petroleum trusts
were replaced by the sheiks. The electric
company became a highly inefficient state
company. The repatriation of profits related
to risk capital-an average of 5 percent per
year of invested capital-proved to be much
less expensive than the payment of interest
on debt capital that mysteriously is our
preference. And those responsible for the
great spoilage of international commerce-
the two oil shocks-were not the industrial
countries but our "good friends" of the Third
World.
The fashionable demons today are the
multinational enterprises ... little does it
matter that the state most "spoiled" by the
multinationals is also the richest and least
dependent-Sao Paulo. And that Piaui, un-
touched by them, is poor and dependent. The
contrast between the two states reminds me
of what Professor Joan Robinson of Cam-
bridge said, with the notorious frankness of
the Marxists-"there is only one thing worse
than being exploited and that is not to be ex-
ploited."
Curiously, the North American unions
perceive otherwise: they accuse their multina-
tionals of benefiting other countries by ex-
porting capital and jobs. If, suddenly, the
multinational deserted us-which is not an
impossibility if inflation, the exchange crisis,
and the constant changing of the rules of the
game become our style of life-we would not
cure old sadnesses but would rather create
new anxieties. Only our ideologies possess
the imagination to create new scapegoats in
such a case.
... Developing countries are no
longer-if they ever were-the paradise of
the multinationals. The United States has
become the magnet for European and
Japanese investors, precisely because they
have two things that we lack-a strong cur-
rency and stable rules of the game. The
North Americans learned that, instead of
fighting with the efficiency of Japanese com-
petitors, let them produce in California,
creating new jobs and bringing new manage-
ment techniques. In commercial competition,
as in the politics of Mato Grosso, the saying
of a political chief of a distant outpost is ap-
propriate-"a hand that can't be cut must be
kissed.-
To fear this paper tiger, the multina-
tionals, is the true "banana republic" syn.
drome. The government controls all the basic
inputs-petroleum, electricity, telecom-
munications, railroad transport, credit and
imports. Three technocrats-one controlling
prices, another controlling credit at the cen-
tral bank, and a third controlling CACEX
IBrazil's international trade regulation agen-
cyl-could bring any of the great multina.
tionals to a state of agony in a few weeks.
In 1950, U.S. direct investment in
Latin America accounted for nearly 50%
of the total U.S. investment overseas. In
1970, the stock of the U.S. direct invest-
ment abroad amounted to $75.48 billion,
of which 68.7% was in developed coun-
tries; only 17.2% in Latin America; and
3.0% in Asia and Pacific. At the end of
1982, the stock of U.S. direct invest-
ment abroad stood at $221.342 billion, of
which 73.7% was in developed countries;
14.9% in Latin America; and 5.6% in
Asia and the Pacific. While the absolute
size of U.S. investment has risen, it is
also clear that in the competition among
developing countries for this scarce
capital, Latin America is beginning to
lose its lead over Asian-Pacific countries.
Investment-flow data confirm this in
that these flows declined for Latin
America toward the end of the 1970s,
except for Chile and Colombia. The
stock of U.S. direct investment in Chile,
as of 1982, amounts to approximately
$854 million. Too often we forget that
foreign direct investment also serves to
transfer new technology and manage-
ment skills in order to increase exports
and reduce the burden on the existing
export sector in achieving the dual goal
of renewed domestic growth and serv-
icing existing debt.
One of the difficult impediments to
foreign investment in Latin America has
been the Calvo doctrine. Many countries
in the hemisphere incorporate the doc-
trine and other restrictions in their con-
stitutions, in other laws, or in multi-
lateral agreements, such as the Andean
Pact decision 24.
For those of you who may not be
familiar with the Calvo doctrine, it
represents the views of a 19th-century
Argentine jurist who maintained that a
foreign investor or businessman, by
choosing to do business in a given coun-
try, subjects himself exclusively to the
law and courts of that country. In coun-
tries that subscribe to the doctrine there
have been a large number of expropria-
tions without fully satisfactory compen-
sation. The investor has no right of
recourse to his home government under
international law unless he is denied fair
access to national courts and tribunals.
This was a reaction to perceived abuses
of protection by the United States and
European powers on behalf of their in-
vestors and traders in the last century.
The contemporary result is often the in-
validity under national law of any choice
of law or forum outside the national
jurisdiction.
One negative consequence of such a
policy is that potential U.S. investors
are constrained from obtaining OPIC
[Overseas Private Investment Corpora.
tion] insurance coverage because of re-
quirements limiting possible litigation to
local courts. I note that Chile was able
to sign an OPIC agreement with the
United States last September. I predict
Chile will reap the benefits of this
enlightened and forward-looking policy.
The United States has long favored
an open international investment sys-
tem. A major U.S. goal in the 1980s is
to reverse the trend toward govern-
ment-induced distortions in the invest-
ment process through international
understandings and voluntary guidelines
leading to a more open and less in-
terventionist investment climate.
The Administration has advanced
the cause of private enterprise on two
fronts in Latin America: the Caribbean
Basin Initiative (CBI) and bilateral in-
vestment treaties. Both provide impor-
tant incentives for the private sector
and should stimulate additional foreign
investment in their areas.
As you know the key elements of
the bilateral investment treaties are:
? New and existing investment to
be granted national treatment or most-
favored-nation (MFN) treatment,
whichever is more favorable, but both
sides are allowed to list exceptions to
national treatment in specified sectors of
economic activitiy;
? Unrestricted transfer of capital,
returns, compensation, and other
payments into and out of the host coun-
try; and
? Dispute settlement procedures
both for disputes between the host coun-
try and a national or company of the
other.country, and disputes arising be-
tween the governments.
While these treaties are; reciprocal in
their treatment and protection provi-
sions, the major inducement for the
developing country is the assurances
such a treaty offers a foreign investor.
Several countries have seen the
wisdom of negotiating such agreements.
In this hemisphere, we signed treaties
with Panama in 1982 and with Haiti in
December 1983. We are also very close
to agreement with Costa Rica, and we
have had negotiations with Honduras, El
Salvador, the Dominican Republic, and
Jamaica.
Approved For Release 2008/11/07: CIA-RDP86MOO886ROO1200330023-1
 Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1
`There appears to be a growing
perception by many countries in the
hemisphere that increasing foreign
direct investment will be vital to their
prosperity in the decade, particularly as
aid and debt prospects appear less
promising.
Conclusion
If these programs and reforms are
undertaken, and if the principles I have
mentioned concerning the importance of
the private sector, foreign direct invest-
ment, and market-oriented economic
policies are followed, I am confident that
the economic status of Latin America
and the Caribbean will improve
dramatically. In fact, this may be the
long-term solution to economic malaise.
Additionally, the commerce between and
among Chile, the United States, and
other countries of the hemisphere will
surely increase. Give the private sector a
clear runway, and it will take off-and
with it the economies of our
hemisphere. ^
Published by the United States Department
of State ? Bureau of Public Affairs
Office of Public Communication ? Editorial
Division ? Washington, D.C. ? September 1984
Editor: Cynthia Saboe ? This material is in
the public domain and may be reproduced
without permission; citation of this source is
appreciated.
i
Approved For Release 2008/11/07: CIA-RDP86M00886R001200330023-1