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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 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, 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