ECONOMIC DEVELOPMENT FOR CENTRAL AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87B00342R000100100002-4
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: May 13, 2010
• Sequence Number: 2
• Publication Date: March 1, 1985
• Content Type: REPORT

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Economic Development for
Central America (u)
NSSD 2-85
March 1985
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Central America
Go- o` Mexico
MEXICO
North
Pacific
Ocean
Puerto
Cabezas
Cayos
Misk,tos
Islas
drift Mai,
Scale 1.9,500,000
0 100 200 Kilometers
Lambert Conformal Conic Projection,
standard parallels 9 N and 17"N
Boundary ,presentation is
not necessarily authoritative
Isla de
Providencia
(Colombia)
Isla de San Andres
(Colombia)
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Cayman Islands
Georgetown* U K 1
Montego Bay,
JAMAICA
--- ~- Kingston
Islas de
a Bahia
L:?n~1 NICARAGUA
~
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Summary and Conclusions
1. Good progress is being made in implementing the Central American Initiative
recommended by the Kissinger Commission a year ago. The principal objectives we seek
through economic assistance -- rapid growth through exports and private investment --
are still appropriate.(U)
2. Central America is in the initial stages of an economic recovery, fueled by the
increased U.S. economic assistance, an improving political climate, better policies and
world economic recovery.(U)
3. Because progress toward regional peace has been less than hoped for, the region is
still unlikely to achieve the economic goals set by the Commission. The region holds
little interest for foreign investors, and even Central American entrepreneurs are
hesitant to invest. Consequently, per capita incomes in Central America are unlikely to
even return to the pre-crisis level by 1990.(S)
4. We reaffirm the need for the $8.4 billion five-year assistance package recommended
by the Bipartisan Commission a year ago. The trade credit guarantee program should be
extended until the security situation has improved sufficiently to restore private
credits. Up to now, we have received most of what we requested, but increased efforts
may be needed in the future to assure adequate funding.(S)
5. The United States is shouldering the great bulk of the assistance burden in
Central America, followed by the multilateral banks. Very little assistance has been
forthcoming from Europe or Japan. We will want to monitor the contributions of other
donors carefully. S)
6. Economic stabilization assisted by the IMF is important to Central American
governments: it generates additional amounts and sources of financial flows, and it
promotes more efficient resource use.(U)
7. The security situation remains threatening, increasing the difficulties of
implementing our economic assistance program. Governments are reluctant to adopt
unpopular measures in an unstable political environment. Yet improved economic policies
-- which usually have some short-term political costs -- are, in addition to political
stability, the key to the effectiveness of our aid and to rapid economic growth.(S)
8. This dilemma of tradeoffs between our economic and strategic objectives will
continue to pose difficult choices for U.S. policymakers. Close coordination among U.S.
Government agencies will be important in properly balancing these objectives to achieve
an optimal mix. This is likely to require increased policy-level discussion.(S)
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!1TTT
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The Decline in Per Capita Income
Per Capita GNP (Dollars)
1,100
1,080
1,060
1,040
1,020
1,000
980
960
940 ` I ' '
1979 1980 1981 1982 1983 1984
Year
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2. Central America: The Economic Backdrop
Since 1978, Central America has been buffetted by security threats, declining regional trade,
the loss of international credits and foreign investment, and erosion of business confidence.
(S)
These events have been mutually reinforcing, with political turmoil leading to loss of
confidence, capital flight, and economic decline, which then increases political turmoil.
o Insurgency has seriously damaged much of the productive infrastructure in El
Salvador. Even now, road transportation, electrical transmission systems, and
dams are regular targets of the insurgents, and intimidation of rural workers has
cut into agricultural production and exports.
o The region has been too risky politically and economically to attract external
financial flows.
o Inadequate economic policies used to strengthen political support have fueled
inflation and discouraged investment in export and other industries.
o The economically and politically risky environment has spurred capital flight to
safe havens in the United States and elsewhere.
o Tourism has declined dramatically as a source of foreign exchange. (S)
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". . . whatever the costs of acting now, they are far less than
the long-term costs of not acting now." (U)
. . the intrusion of aggressive outside powers exploiting
local grievances to expand their own political influence and
military control is a serious threat to the U.S. and to the
entire hemisphere." (U)
"Ultimately, the effectiveness of increased economic assistance
will turn on the economic policies of the Central American
countries themselves. . . . We agree with what many experts
have told us: that unless these reforms are extended economic
performance will not improve, regardless of the money foreign
donors and creditors provide. In too many other countries,
increased availability of financial resources has undermined
reform by relieving the immediate pressure on policy makers.
This must be avoided in Central America." (U)
". . . the crisis in Central America cannot be considered in
solely economic or political or social terms. The requirements
of the development of Central America are a seamless web." (U)
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3. Highlights of the Bipartisan Report
The report of the National Bipartisan Commission on Central America, chaired by
Henry Kissinger, concludes that the current crisis is the result of the failure of
political systems in Central America during the early 1970s to become more open in line
with economic progress and a rise in political consciousness. The 1979 oil price
increases, Cuban-Soviet-Nicaraguan intervention, and the world recession then
overburdened the weak political institutions. (U)
The Report has two principal recommendations:
--The security situation must be improved through substantially increased military
assistance to help El Salvador win the war and negotiation with or isolation of
Nicaragua.
--An $8.4 billion economic assistance program should be launched to address the
interdependent economic, political and social problems facing the region. Three
elements are involved: creating sustainable economic growth; building democratic
political structures; and attacking extreme poverty. (U)
Other Recommendations
--Support for Export Development through financial support for export and investment
promotion in the region and reduced U.S. trade barriers.
--Scholarships to bring 10,000 Central Americans to the United States over five years, a
level of effort comparable to that of Soviet-bloc governments.
--Creation of CADO, the Central American Development Organization, an umbrella
organization to oversee the progress of economic, social and political reforms in the
region and to control one-fourth of the total U.S. assistance for the region.
--Accelerated Health and Education Programs including use of Peace Corps Volunteers for
literacy and teacher training, expanded technical education, new approaches to health
programs, and expanded family planning programs.
--Strengthened Judicial Systems. (U)
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Major Goals of the
Central American Initiative
Central American Population
by Age, 1960-2000
Number of People (Millions)
1984 1990
Target Concern Level Goal
GNP Growth Rate
1.2%
5-6%
Agricultural Production
Growth
0%
4%
Manufactured Exports
to the U.S.
$314 million
$950 million
Infant Mortality
(per 1,000)
65
50
Primary School
Enrollment (%)
80%
95%
Family Planning
Prevalence
(% of Fertile Women)
24%
40%
34
32
30
28
26
24
22
20
18-
16
14
12
10
8
65 + years
1 5-64 years
Under 15 years
1960
1980
Year
2000
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UNCLASSIFIED
4. U.S. Economic Assistance Strategy in Central America
Based on the diagnosis of the Kissinger Commission Report, the U.S. Government has
developed a four-pronged strategy. The program would achieve major social and economic
goals; it would also address the massive increase in the labor force over the next 15
years that is the legacy of high birth rates during the past two decades. (U)
--Economic Stabilization. The essential first step is to stop the downward spiral
in production, incomes and employment by policy reforms to halt capital flight and
by financing necessary imports. This buys time for the governments to establish
sustainable development strategies. (U)
--Economic Transformation. Over the medium term, the region's economy must be put
on a self-sustaining basis. Production of labor-intensive agricultural and
industrial products for export markets is needed. An export-led growth strategy
requires changes in government economic policy -- broader opportunities for the
private sector, an end to excessive regulation, appropriate exchange rates, major
investments in productive enterprises and in economic infrastructure, and
development of indigenous energy resources to reduce the burden on imports. (U)
--Broadening the Base. In Guatemala, El Salvador and Honduras, disparities in
income and opportunity are so wide that a direct attack on poverty is needed.
Increasing primary school enrollments to all primary-aged children, sharply reducing
infant mortality, increasing access to modern family planning, and improving access
to agricultural technology are all necessary. (U)
--Democratic Institutions. Democratic institutions should be promoted through
strengthening of judicial administration, support for fair elections, and increased
understanding of U.S. institutions through scholarships for U.S. education. The
planned 10,000 scholarships for U.S. study during the next five years would raise
U.S. support to the level of the Soviet-bloc countries. (U)
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Encouraging Signs of an
Economic Turnaround in Central America
Short-Term Private Capital Movements
Short-Term Capital Movements (Million $)
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
-900
I I I I I I I I
1977 78 79 80 81
Year
82 83 84
Growth Rate (%
-3
-4
Growth in GNP
1980 1981 1982 1983 1984 1985
Year (Proj.)
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5. U.S. Assistance Has Produced Some Encouraging Signs
The buildup of U.S. economic assistance to Central America, coupled with economic
reforms and an improved international economy, has begun to yield positive results on
both the economic and political fronts. A vicious circle of worsening economic
conditions and political instability was halted in 1984, when the region had positive
economic growth for the first time in four years. There is also an encouraging movement
toward democracy in the region. (S)
--Economic Stabilization. After plummeting steadily over the 1979-83 period, gross
national product grew by 1.2% in 1984 in the Central American countries we are
supporting -- the highest in five years. U.S. assistance and economic reforms were the
key elements in this turnaround -- both through the financial resources we provided and
through the increased confidence in political and economic stability that our support
generated. Private sector confidence is also returning, as evidenced by short-term
private capital movements -- which became positive in 1983 and 1984 after large amounts
of capital flight in the previous three years. Much more remains to be done, but
progress has been made in policy reform:
--exchange rates in Costa Rica, El Salvador and Guatemala have been realigned to
encourage exports;
--government budgets have been reduced and fiscal deficits cut in Costa Rica;
--government controls inhibiting private sector investment have been reduced; and
--governments are actively considering divestment of inefficient public enterprises
through sale to the private sector, particularly in Costa Rica and Panama. (S)
--Political Stabilization and Democratic Institutions. Considerable progress has been
made toward strengthened democratic institutions. Only Costa Rica and Belize have solid
traditions of democratic government in the region, but significant positive progress has
occurred in each of the other countries supported by U.S. assistance. El Salvador and
Panama have both completed democratic elections for president after a decade or more of
military rule. Guatemala, where a constituent assembly has been writing a new
constitution, may make this transition later in 1985. In Honduras, a
democratically-elected government is expected to complete its term next January and turn
power over to another democratically-elected government -- the first peaceful transition
of power there in three decades. (S)
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1,600
Central America: Per Capita Income Trends
High Growth
? Full US assistance
/~ ? Improved economic
/ policies
? Peace
1,000
Moderate Growth
/ ? Full US assistance
? Inadequate economic
/ adjustment 1000, .00000 ? Political instability
=--/
4dft
Low Growth
? Reduced US assistance
800 ~~ ? Inadequate economic
adjustment
1978 1980 1985 1990 1995 2000
? Political instability
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6. Illustrative Economic Growth Paths
The Kissinger Commission made four key assumptions:
--OECD economic growth of 3-4%, with higher growth in the United States.
--high levels of U.S. assistance.
--economic policy reform by Central American governments to increase private sector
investment and exports.
--declining violence, followed by peace within the region within 1-2 years.(U)
There are three critical variables which will affect growth:
--the presence or absence of peace;
--the level of foreign assistance; and
--economic policies of the region's governments.(U)
With these variables, several alternative growth paths are possible:
o High Growth. A combination of high levels of U.S. aid, major reforms in local economic
policy and a reversal of Managua's aggressive regional stance could provide rapid economic
growth. This outcome would require strong commitment to market-oriented economic policies to
stimulate financial flows and private investment, particularly in non-traditional export
sectors. (S)
o Moderate Growth. A combination of high levels of U.S. aid, inadequate economic reforms
and political instability will lead to only moderate growth in per capita incomes. The lack
of stabilization programs would reduce net financial flows from other sources, including debt
rescheduling. It would be the mid-1990s before the 1978 level of per capita income was
re-established. (S)
o Low Growth. Without the Jackson Plan U.S. assistance, a continuation of current policies
would be likely to lead to a continued downhill slide in per capita income. Because of the
likely political unrest and poor economic climate, potential foreign investors or commercial
lenders would be generally unwilling to provide resources to the region, and capital flight
would continue. (S)
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U.S. AID Allocations by Country
(Million Dollars)
Level (Million $)
400
350
300
250
200
150
100
50
Actual FY 1984
~~~~ aJt
C,
_ZZ
Requested FY 1986
Level (Million $)
400
350
300
250
200
150
100
50
~CO
ti?
?
C) C?
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7. Allocation of U.S. Economic Assistance
--The total amount available for the region is set both by our estimate of the need
(based on balance of payments gaps and absorptive capacity) and the constraints imposed
by the U.S.-budget. Allocations among countries must reflect relative needs, each
government's commitment to sound policy, and its willingness to cooperate with us on
broad goals, both economic and political, that will ensure security. Thus, the relative
levels are not absolute rankings of the importance of each country to the United States.
(U)
Our current assistance levels illustrate the criteria used:
--El Salvador and Costa Rica received the largest shares of the total because
their economies were in the greatest danger of collapse -- El Salvador because of
the insurgency, and Costa Rica because of a massive foreign debt. (U)
--We have judged that democratic Costa Rica also deserves continuing support to
reward their progress -- the most significant in the region -- in adopting and
implementing the free-market reforms we advocate for sustained economic growth. (U)
--Honduras receives less because its needs and absorptive capacity are less, even
though the country is highly cooperative on security matters. (U)
--Aid to Guatemala has been constrained by Congressional concerns over the human
rights record of the successive military governments, and a lack of strong
economic policies. (U)
--Assistance to Panama and Belize has increased markedly under the Central
American Initiative, albeit less than to the Core Four, because of lower immediate
need, higher living standards and lesser threats to their security. (U)
--Nicaragua, of course, receives no U.S. economic aid because of its relationship
with the Soviet bloc and its adoption of marxist and statist economic policies.
Should these circumstances change, our aid policies would change accordingly. (U)
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Projected Sources of Net Financial
Flows to Central America, 1985-89
Multilatera
::Agencies
(16.6%)
U.S. Government
(61.2%)
Note:
This Projection Assumes Agreements With the IMF.
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8. The U.S. Faces Potentially Difficult Choices in Central America
The major vehicle for assisting Central American governments -- economic aid -- could be the
means by which they can postpone difficult steps. We therefore sometimes face problems in
effectively using our economic assistance. Moreover, governments in the region may view our
economic assistance as payment for their role in supporting U.S. strategic or political
objectives rather than as conditioned economic aid. (S)
An International Monetary Fund-supported program is the best assurance of an adequate
short-term economic adjustment program and of the availability of funding from other
sources. However, implementation of the economic reforms associated with IMF programs is
sometimes politically unacceptable to the government in question. Since the U.S. Government
is deeply concerned about political stability in the region, we face difficult decisions
regarding the level of conditionality we believe is achievable. U.S. policymakers need to
make careful assessment of, and conscious decisions about, the likely consequences for
various interrelated U.S. objectives. (S)
In the recent past, our policy responses have tended to fall into three categories:
--An IMF Agreement. We have generally sought to provide balance of payments assistance in
support of IMF programs. Structural reform conditions are often included as well. (S)
--Set our own conditions. Where conditions have precluded an IMF agreement, we have
continued to disburse funds in some cases, using our own conditions to ensure their effective
use. This approach involves two complications:
--the U.S. can be seen as imposing onerous conditions on our aid, thereby potentially
damaging bilateral relations.
--lack of an IMF program would mean foregoing other resources. Over the next 5 years,
the net cost to the Central American countries with no IMF programs is estimated to be
as high as $4 billion, or 30% of projected net flows to the region. (S)
--Waive conditionality. This alternative maintains the best bilateral relationship, and goes
furthest to support political stability in the short run. However, lack of needed economic
reforms may slow growth, which will tend to increase dependence on U.S. support and could
threaten long-term political stability. (S)
No single choice is likely to produce an ideal outcome. Therefore, there will be a
continuing need to tailor our conditionality to the specific factors at play in any given
country, including the political and security environment. Getting the mix right is likely
to require considerable understanding of the tradeoffs and attention at the policy level. (S)
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U.S. Economic Assistance-Central America
(Obligations & Expenditures by FY)
Millions of Dollars
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
1980 1981
Total Obligations
Total Expenditures
1982 1983 1984 1985 1986 1987 1988 1989
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9. Implementation, Timing and Monitoring of Assistance Programs
--Economic progress in Central America demands a long-term commitment.
--Implementation of the President's Central American Initiative is presently being carried
out primarily by AID. Program proposals are developed in the field and reviewed in
Washington by an interagency group.
--A two-tier computer tracking system is being developed to monitor implementation and
progress toward the achievement of our Central American goals. These efforts help to
track progress toward our long-term economic and political objectives.
--To assure that policy issues relating to assistance requirements are met, a special ad
hoc group chaired by AID and State has been created.
--This NSSD underscores the need for timely and systematic review of both ongoing and ad
hoc funding requirements. (S)
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Economic and Social Indicators for Central America
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
0
Rate per 1,000
90
- Infant Mortality, 1981
Population (Million)
8
Persons per Km2
260
240
220
200
180
160
140
120
100
80
60
40
,Y%%YAt ~Y A A Y~Y{
201
Population Density, 1982
Costa Rica El Salvador Guatemala Honduras Belize Panama
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10. Country Profiles
Central America is usually treated as largely homogenous. Yet diversity and uneven
progress among the countries are historical facts. For example, infant mortality in
Costa Rica, Belize, and Panama is at the level of the United States during the early
1970s; for the rest of Central America, the rate parallels that in the United States a
half-century earlier. (U)
Costa Rica has had a long tradition of democratic government, mass education, and
stability. Excessive borrowing during the late 1970s fueled massive growth in the
public sector, creating a financial crisis. The government has come to grips with this
problem and is divesting government enterprises. Nevertheless, working off the debt
overhang will require most of the rest of the decade. (U)
El Salvador is the smallest and most densely-populated country. The country grew
rapidly during the 1960s and the political system appeared to be opening, but most of
the progress was reversed after 1973. (U)
Guatemala has the largest population of any Central American country, and the largest
industrial sector. Nevertheless, it also has great cultural divisions between the
largely Indian highlands (many Indians do not speak Spanish) and the rest of the
society. Governments have tended to be conservative and to lack a development
orientation. (U)
Honduras is the poorest of the countries. Though having ample land and other natural
resources, lack of human resources and leadership have gradually widened the gap between
Honduras and the other countries. (U)
Belize, originally a British enclave, is a sparsely-populated country with a solid
democratic tradition, and high education and health standards. With a large resource
base, its economic problems are the least severe of any of the countries in the region.
(U)
Panama is a middle-class country that has gradually emerged as a Latin American banking
and service center. The current government is addressing the foreign debt and bloated
public sector that pose the most serious challenges to economic recovery. (U)
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--ESF. Economic Support Funds, the most flexible form of U.S. assistance, are usually
not tied to specific projects; allocations are determined by U.S. security interests,
but usually tied to economic reforms by the recipient.
--DA. Development Assistance funds administered by AID are for specific development
projects, mainly in agriculture, health, education and family planning.
--PL 480. PL 480 provides grants and long-term loans at concessional interest rates for
purchase of U.S. agricultural commodities.
--CCC. The Commodity Credit Corporation provides guarantees for 3-year credit at
near-market interest rates. The purpose is market development for U.S. agricultural
exports.
--Eximbank. The Export-Import Bank provides short and medium-term insurance and
guarantees at near-market rates of interest to promote U.S. exports.
--MDBs. Multilateral Development Banks draw funds from the U.S. and other governments
and raise funds in capital markets, using member-government guarantees, to provide
long-term finance, primarily for development projects.
--IMF. The International Monetary Fund provides temporary balance of payments
assistance in conjunction with stabilization programs.
--Paris Clubs. Rescheduling, or postponment of repayment, of debts to the U.S.
government -- done in concert with other bilateral creditors -- provides breathing space
to governments facing imminent default. An IMF agreement is a precondition for such
reschedulings. (U)
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