Background Notes on Selected American Countries from the Department of State


Argentina

PEOPLE

Argentines are a fusion of diverse national and ethnic groups. Descendants of Italian and Spanish immigrants predominate. Waves of immigrants from many European countries arrived in the late 19th and early 20th centuries. Syrian, Lebanese, and other Middle Eastern immigrants number about 500,000, mainly in urban areas. Argentina has the largest Jewish population in Latin America, about 250,000 strong. In recent years, there has been a substantial influx of immigrants from neighboring Latin American countries. The native Indian population, now estimated at 50,000, is concentrated in the peripheral provinces of the north, northwest, and south. The Argentine population has one of Latin America's lowest growth rates. Eighty percent of the population resides in urban areas of more than 2,000 and more than one-third of the population lives in the greater Buenos Aires area. This sprawling metropolis, with about 12 million inhabitants, serves as the focus for national life. Argentines enjoy comparatively high standards of living; half the population considers itself middle class.

HISTORICAL HIGHLIGHTS

Europeans arrived in the region with the 1502 voyage of Amerigo Vespucci. Spanish navigator Juan Diaz de Solias visited what is now Argentina in 1516. Spain established a permanent colony on the site of Buenos Aires in 1580. They further integrated Argentina into their empire following the establishment of the Vice-Royalty of Rio de la Plata in 1776, and Buenos Aires became a flourishing port.

Buenos Aires formally declared independence from Spain on July 9, 1816. Argentines revere General Jose de San Martin, who campaigned in Argentina, Chile, and Peru, as the hero of their national independence. Following the defeat of the Spanish, centralist and federalist groups waged a lengthy conflict between themselves to determine the future of the nation. National unity was established and the constitution promulgated in 1853.

Two forces combined to create the modern Argentine nation in the late 19th century: the introduction of modern agricultural techniques and the integration of Argentina into the world economy. Foreign investment and immigration from Europe aided this economic revolution. The investment, primarily British, came in such fields as railroads and ports. The migrants who worked to develop Argentina's resources came from throughout Europe, but mostly from Italy and Spain.

Conservative forces dominated Argentine politics until 1916, when their traditional rivals, the Radicals, won control of the government through a democratic election. The Radicals, with their emphasis on fair elections and democratic institutions, opened their doors to Argentina's expanding middle class as well as to elites previously excluded from power for various reasons. The Argentine military forced aged Radical President Hipolito Yrigoyen from power in 1930 and ushered in another decade of Conservative rule.

Using fraud and force when necessary, the governments of the 1930s attempted to contain forces for economic and political change that eventually helped produce the governments of Juan Domingo Peron (b. 1897). New social and political forces were seeking political power. These included the modern military and the labor movement that emerged from the growing urban working class.

The military ousted Argentina's constitutional government in 1943. Peron, then an army colonel, was one of the coup's leaders, and he soon became the government's dominant figure as minister of labor. Elections carried him to the presidency in 1946. He aggressively pursued policies aimed at giving an economic and political voice to the working class and greatly expanded the number of unionized workers. In 1947, Peron announced the first five-year plan based on nationalization and industrialization. He presented himself as a friend of labor and assisted in establishing the powerful General Confederation of Labor (CGT). Peron's dynamic wife, Eva Duarte de Peron, known as Evita (1919-1952), helped her husband develop his appeals to labor and women's groups. Women obtained the right to vote in 1947.

Peron won reelection in 1952, but the military deposed him in 1955. He went into exile, eventually settling in Spain. In the 1950s and 1960s, military and civilian administrations traded power. They tried, with limited success, to deal with diminished economic growth and continued social and labor demands. When military governments failed to revive the economy and suppress escalating terrorism in the late 1960s and early 1970s, the way was open for Peron's return.

On March 11, 1973, Argentina held general elections for the first time in 10 years. Peron was prevented from running, but voters elected his stand-in, Dr. Hector J. Campora, to the presidency. Peron's followers also commanded strong majorities in both houses of the National Congress, which assumed office on May 25, 1973. Campora resigned in July 1973, paving the way for new elections. Peron won a decisive victory and returned as President in October 1973 with his third wife, Maria Estela Isabel Martinez de Peron, as Vice President.

During this period, extremists on the left and right carried out terrorist acts with a frequency that threatened public order. The government resorted to a number of emergency decrees, including the implementation of special executive authority to deal with violence. This allowed the government to imprison persons indefinitely without charge.

Peron died on July 1, 1974. His wife succeeded him in office, but her administration was undermined by economic problems, Peronist intraparty struggles, and growing terrorism from both left and right. A military coup removed her from office on March 24, 1976. Until December 10, 1983, the armed forces formally exercised power through a junta composed of the three service commanders.

The armed forces applied harsh measures against terrorists and their sympathizers. They silenced armed opposition and restored basic order. The costs of what became known as the "Dirty War" were high in terms of lives lost and basic human rights violated.

Serious economic problems, defeat by the U.K. in 1982 after an unsuccessful Argentine attempt to forcibly take control of the Falklands/Malvinas Islands, public revulsion in the face of severe human rights abuses, and mounting charges of corruption combined to discredit and discourage the military regime. This prompted a period of gradual transition and led the country toward democratic rule. Acting under public pressure, the junta lifted bans on political parties and restored other basic political liberties. Argentina experienced a generally successful and peaceful return to democracy.

On October 30, 1983, Argentines went to the polls to choose a president, vice president, and national, provincial, and local officials in elections international observers found to be fair, open, and honest. The country returned to constitutional rule after Raul Alfonsin, candidate of the Radial Civic Union (UCR), received 52% of the popular vote for president. He began a six-year term of office on December 10, 1983.

In 1985 and 1987, large turnouts for mid-term elections demonstrated continued public support for a strong and vigorous democratic system. The UCR-led government took steps to resolve some of the nation's most pressing problems, including accounting for those who disappeared during military rule, establishing civilian control of the armed forces, and consolidating democratic institutions. However, constant friction with the military, failure to resolve endemic economic problems, and an inability to maintain public confidence undermined the Alfonsin Government's effectiveness, which left office six months early after Peronist candidate Carlos Saul Menem won the 1989 presidential elections.

As President, Menem launched a major overhaul of Argentine domestic policy. Large-scale structural reforms have dramatically reversed the role of the state in Argentine economic life. A decisive leader pressing a controversial agenda, Menem has not been reluctant to use the presidency's extensive powers to issue decrees advancing modernization when the congress was unable to reach consensus on his proposed reforms. Those powers were curtailed somewhat when the constitution was reformed in 1994 as a result of the so-called Olivos Pact with the opposition Radical Party. That arrangement opened the way for Menem to seek and win reelection with 50% of the vote in the three-way 1995 presidential race.

The 1995 election saw the emergence of the moderate left FREPASO political alliance. This alternative to the traditional two main political parties in Argentina is particularly strong in Buenos Aires, but as yet lacks the national infrastructure of the Peronist and Radical parties. In an important development in Argentina's political life, all three major contestants in the 1995 race espouse free market economic policies.

Argentina held mid-term congressional elections in October 1997. The opposition UCR-FREPASO alliance made major gains in the number of seats it held and deprived the Peronists of an absolute majority. The elections are widely seen as setting the stage for the 1999 presidential race. The government's pro-market policies remain unchallenged, but continued high unemployment and growing public concern over perceived corruption have hurt the government's standing in public opinion polls.

GOVERNMENT AND POLITICAL CONDITIONS

After years of instability, Argentina is today a fully functioning democracy. During President Carlos Menem's first term (1989-1995), he dramatically reordered Argentina's foreign and domestic policies. His overwhelming reelection in May 1995--in the face of hardships caused by economic restructuring and exacerbated by the Mexico peso crisis--provided a mandate for his free market economic strategy and pro-U.S. foreign policy. Menem's second term ends in July 1999; the constitution does not currently provide for a sitting president to succeed himself more than once.

The constitution of 1853, as revised in 1994, mandates a separation of powers into executive, legislative, and judicial branches at the national and provincial level. Each province also has its own constitution which roughly mirrors the structure of the national constitution.

The president and vice president were traditionally elected indirectly by an electoral college to a single six-year term. They were not allowed immediately to seek reelection. Constitutional reforms adopted in August 1994 reduced the presidential term to four years, abolished the electoral college in favor of direct election, and allowed a sitting president to stand for reelection after his or her first term. Cabinet ministers are appointed by the president. The constitution grants the president considerable power, including a line-item veto.

Provinces traditionally sent two senators, elected by provincial legislatures, to the upper house of Congress. Voters in the federal capital of Buenos Aires elected an electoral college which elected the city's senators. The constitution now mandates a transition to direct election for all senators, and the addition of a third senator from each province and the capital. The third senator will represent the electoral district's largest minority party. The revised constitution reduces senatorial terms from nine to six years in office. One third of the Senate stands for reelection every three years.

Members of the Chamber of Deputies are directly elected to four-year terms. Voters elect half the members of the lower house every two years through a system of proportional representation.

Other important changes to the constitutional system included the creation of a senior coordinating minister to serve under the president and the popular election of the mayor of the city of Buenos Aires. The constitution establishes the judiciary as a separate and independent entity of government. The president appoints members of the Supreme Court with the consent of the Senate. Other federal judges are appointed by a special judicial commission. The Supreme Court has the power, first asserted in 1854, to declare legislative acts unconstitutional.

Political Parties

The two largest political parties are the Partido Justicialista or Peronist Party (PJ), which evolved out of Juan Peron's efforts to expand the role of labor in the political process in the 1940s, and the Union Civica Radical, or Radical Civic Union (UCR), founded in 1890. Traditionally, the UCR has had more urban middle-class support and the PJ has received more labor support. Support for both parties is broadly based. A grouping of mostly left parties and former Peronists--the Front for a Country of Solidarity (FREPASO)--has emerged in the 1990s as a serious political contender especially in the Federal Capital. Smaller parties occupy various positions on the political spectrum and some are active only in certain provinces.

Historically, organized labor (largely tied to Menem's Peronist Party) and the armed forces have also played significant roles in national life. Labor is only just emerging from disarray; its political power has been significantly weakened by Menem's free market reforms. The armed forces are firmly under civilian control. Repudiated by the public after a period of military rule (1976-83), marked by human rights violations, economic decline, and military defeat in the 1982 Falkland/Malvinas Islands war, the Argentine military is now a slimmed-down, all volunteer force focused largely on international peacekeeping.

Government Policy

The Menem Administration has pursued wide-ranging economic reforms designed to open the Argentine economy and enhance its international competitiveness. Privatization, deregulation, fewer import barriers, and a fixed exchange rate have been cornerstones of this effort. All these changes have dramatically reduced the role of the Argentine state in regulating the domestic market. The reform agenda, however, remains incomplete, including improvements in the judicial system and provincial administration.

National Security

The president and a civilian minister of defense control the Argentine armed forces. The paramilitary forces under the control of the Ministry of Interior are the Gendarmeria (border police) and the Prefectura Naval (coast guard). The Argentine armed forces maintain close defense cooperation and military supply relationships with the United States. Other countries also have military relationships with the Argentine forces, principally Israel, Germany, France, Spain, and Italy. The lack of budgetary resources is the most serious problem facing the Argentine military. Current economic conditions and the government's commitment to reduce public sector spending have slowed modernization and restructuring efforts. Under President Menem, Argentina's traditionally difficult relations with its neighbors have improved dramatically and Argentine officials publicly deny seeing a potential threat from any neighboring country.

ECONOMY

In 1989, after decades of economic decline and chronic bouts of inflation, Argentina under President Menem began an unprecedented, profound, and remarkably successful economic restructuring based on trade liberalization, privatization, public administrative reform, and macroeconomics stabilization.

The 1991 Convertibility Law established a quasi-currency board which has provided the pillar of price stability but constrains monetary policy severely. The government privatized most state-controlled companies, opened the economy to foreign trade and investment, improved tax collection, and created private pension and workers compensation systems.

As a result of these measures, Argentina is experiencing a boom in economic growth, which started in the early 1990s. Following a year-and-a-half-long local recession, Argentina's real GDP growth reached 8% in 1997--higher than the average of 6% for the 1991-1997 period. Industry, agriculture, construction, energy and mining all expanded considerably during the year. Real GDP growth will likely slow to approximately 4% in 1998 (the Argentine Government projects over 5% growth). One of Argentina's challenges is to generate growth with more equitable distribution of income.

The structural reforms undertaken this decade--coupled with monetary stability--fostered major new investments in industrial sectors producing goods for exports. This was most notable in the food products, oil and gas, automotive, and mining and metals sectors. As a result, Argentina's exports doubled in five years--from about $12 billion in 1992 to about $25 billion in 1997. Similarly, imports almost doubled during the same period--rising from $15 billion to about $27.5 billion. Foreign direct investment flow--which averaged $3.5 billion annually from 1990 to 1995--exceeded $6 billion in 1997, according to reliable estimates.

The October 1997 unemployment rate was 13.7%--down from 18.4% in mid-1995. However, larger and more significant declines will come slowly over the longer term. This is likely because the government intends to implement several more privatization programs, labor productivity will rise as major private investments are implemented, and future growth will be strongest in the capital intensive sectors.

Argentina is vulnerable to abrupt changes in capital flows. However, strong leadership and earlier structural reforms helped the country weather the 1995-96 financial storm. Argentine authorities, supported by the U.S., Japan, Europe, and international financial institutions, reacted decisively to bolster the peso. The government has continued to demonstrate credibility through further economic adjustment and conclusion of a new Extended Fund Facility arrangement with the International Monetary Fund at the end of 1997.

Argentina's principal economic policy challenges in 1998 are:

Banking

Argentina's banking system began 1998 further consolidated and strengthened by recent large foreign investments. Peso and dollar deposits in the banking system grew strongly and reached nearly $70 billion at the end of 1997--close to twice the level in June 1995, when bank deposits hit a low of $37 billion. Foreign-controlled banks now hold about 35% of total Argentine bank deposits.

In late 1997, shortly after the Asian financial crisis began, the Government of Argentina reassured investors that the country's banking system and reserves were strong enough to withstand the storm. Rapid growth in bank deposits indicates growing confidence in the financial system and in Argentina's reforms. Bank financing and lending costs are still high by industrialized country standards. Credit is very expensive for certain sectors. Easier lending for small and medium sized firms and improved credit risk management are essential to foster job creation.

In late 1997, the Menem Administration announced its intention to privatize Banco de la Nacion, Argentina's largest commercial bank. Strong political opposition, however, makes the timing of this privatization uncertain. During 1998, the government also intends to privatize the National Mortgage Bank.

Foreign Trade

A key development in helping Argentina meet its external payments is the dramatic growth in Argentina's foreign trade since 1990. Foreign trade plays an increasingly important role in Argentina's economic development. Exports currently represent less than 10% of Argentina's GDP. This percentage will rise steadily as Argentine export competitiveness improves--as a result of increased productivity generated by new investments, diversification of export products and markets, and very low domestic inflation.

Grain output is expected to reach a record 60 million tons before the end of the decade. Fresh Argentine beef was exported to the U.S. market in August 1997 for the first time in over 50 years, and other export prospects improved tremendously.

However, export growth decelerated modestly in 1997 due to lower than expected shipments of some primary products, notably oilseeds, cotton, petroleum, and derivatives. Meanwhile, GDP growth led to a surge in imports. Capital goods imports in 1997 (which account for 44% of Argentina's total) grew nearly 40% from 1996 levels--more than double the rate of other import categories.

MERCOSUR, a regional customs union and emerging trade bloc (which includes Argentina, Brazil, Paraguay, and Uruguay, and has associations with Chile and Bolivia), is one of the largest and most dynamic integrated markets in the developing world. Close cooperation between Brazil and Argentina--historic competitors--is key to MERCOSUR's impressive growth. Argentina's trade with the other members of MERCOSUR has grown fivefold since 1991. (During that period, its total foreign trade doubled). As a result, Argentina will focus more attention on deepening MERCOSUR relations. MERCOSUR needs closer coordination of macroeconomic policies and better dispute resolution mechanisms.

Ties to MERCOSUR will take on added importance in coming years. Argentina's trade and investment have tremendous potential to grow along with hemispheric economic integration. The 1997 financial turbulence triggered by the East Asian financial crisis underscored that macroeconomic conditions in Brazil--Argentina's most important trading partner--are important variables for Argentina's foreign trade in 1998 and beyond. On an upbeat note, Chile's association with MERCOSUR has improved access for Argentine exports to East Asia via Chilean ports.

The U.S. registered trade surpluses with Argentina every year from 1993 to 1997 totaling nearly $13 billion. The annual surplus reached $3 billion in 1997--due in large part to Argentina's continued demand for capital goods, as well as the recovery of the local economy. The U.S. surplus with Argentina could climb to a record $3.6 billion in 1998. This trend reflects the Argentine Government's policy of encouraging modernization and improved competitiveness for Argentine industry.

Argentina adheres to most treaties and international agreements on intellectual property. It is a member of the World Intellectual Property Organization and signed the Uruguay Round agreements in December 1993--including measures related to intellectual property. However, extension of adequate patent protection to pharmaceuticals has been a highly contentious bilateral issue. In May 1997, the U.S. suspended 50% of Argentina's GSP benefits because of its unsatisfactory pharmaceutical patent law.

Investment

U.S. direct investment in Argentina, an estimated $12 billion in mid-1997, is concentrated in telecommunications, banking, electric energy generation, gas and petroleum production, food processing, and motor vehicle manufacturing. Additional direct U.S. investment of $3 billion is expected in 1998.

The U.S. and Argentina have an Overseas Private Investment Corporation (OPIC) agreement and an active U.S. Export-Import Bank (EXIMBANK) program. Total EXIMBANK exposure in Argentina approaches $2.5 billion, and the OPIC portfolio is approaching the country limit.

Under the 1994 U.S.-Argentine bilateral investment treaty, U.S. investors enjoy national treatment in all sectors except shipbuilding, fishing, nuclear power generation, and uranium production. The treaty allows for international arbitration of investment disputes.

FOREIGN POLICY

In foreign policy, Menem has dramatically made partnership with the United States the centerpiece of his approach. Argentina was the only Latin American country to participate in the Gulf war and all phases of the Haiti operation. It has contributed to UN peacekeeping operations worldwide, and has offered to send peacekeepers to Eastern Slavonia and police to the international Police Task force in Bosnia. It has recently offered to send a military medical unit to the Gulf in support of the effort to secure Iraqi compliance with United Nations resolutions. In recognition of Argentina's contributions to international security and peacekeeping, the U.S. Government designated it as a major non-NATO ally in January 1998. Menem was an enthusiastic supporter of the December 1994 Summit of the Americas. At the UN, Argentina is one of the U.S.'s closest collaborators. In regional fora, such as the OAS and Rio Group, Argentina has repeatedly advanced U.S. goals. The Menem Administration supports the U.S. campaign to improve human rights in Cuba and joins with the U.S. in international disarmament efforts from nuclear supply to control of missile technology.

Eager for closer ties to developed nations, Argentina has pursued relationships with the OECD and has left the Non-Aligned Movement. It has become a leading advocate of nonproliferation efforts worldwide. A strong proponent of enhanced regional stability in South America, Argentina has revitalized its relationship with Brazil; settled lingering border disputes with Chile; served with the U.S., Brazil, and Chile as one of the four guarantors of the Ecurador-Peru peace process; and restored diplomatic relations with the United Kingdom. In September 1995, Argentina and the UK signed an agreement to promote oil and gas exploration in the Southwest Atlantic, defusing a potentially difficult issue and opening the way to further cooperation between the two nations.

U.S.-ARGENTINE RELATIONS

The United States and Argentina currently enjoy a close bilateral relationship, which was highlighted by President Clinton's visit to Argentina in October 1997. The efforts of the Menem Administration to open Argentina's economy and realign its foreign policy have contributed to the improvement in these relations, and the interests and policies of the two countries coincide on many issues. Argentina and the United States often vote together in the United Nations and other multilateral fora. Argentina has participated in many multilateral force deployments mandated by the United Nations Security Council, including recent missions to Haiti and the former Yugoslavia. Reflecting the growing partnership that marks ties between the two countries, on October 16, 1997, Secretary of State Albright and Argentine Foreign Minister Di Tella held the first meeting of the Special Consultative Process to address important issues in the bilateral relationship.


Bolivia

PEOPLE

Bolivia's ethnic distribution is estimated to be 56% indigenous people, and 42% European and mixed. The largest of the approximately three dozen indigenous groups are the Aymara, Quechua, and Guarani. There are small German, former Yugoslav, Asian, Middle Eastern, and other minorities, many of whose members descend from families that have lived in Bolivia for several generations.

Bolivia is one of the least-developed countries in South America. About two-thirds of its people, many of whom are subsistence farmers, live in poverty. Population density ranges from less than one person per square kilometer (km) in the southeastern plains to about 10 per square km. (25 per sq. mi.) in the central highlands. Bolivia's high mortality rate restricts the annual population growth rate to around 2%.

La Paz is at the highest elevation of the world's capital cities--3,600 meters (11,800 ft.) above sea level. The adjacent city of El Alto, at 4,200 meters above sea level, is one of the fastest-growing in the hemisphere. Santa Cruz, the commercial and industrial hub of the eastern lowlands, also is experiencing rapid population and economic growth.

The great majority of Bolivians are Roman Catholic (the official religion), although Protestant denominations are expanding strongly. Many indigenous communities interweave pre-Columbian and Christian symbols in their religious practices. About half of the people speak Spanish as their first language. Approximately 90% of the children attend primary school, but often for a year or less. The literacy rate is low in many rural areas.

The cultural development of what is present-day Bolivia is divided into three distinct periods: pre-Columbian, colonial, and republican. Important archaeological ruins, gold and silver ornaments, stone monuments, ceramics, and weavings remain from several important pre-Columbian cultures. Major ruins include Tiwanaku, Samaipata, Incallajta, and Iskanwaya. The country abounds in other sites that are difficult to reach and hardly explored by archaeologists.

The Spanish brought their own tradition of religious art which, in the hands of local indigenous and mestizo builders and artisans, developed into a rich and distinctive style of architecture, painting, and sculpture known as "Mestizo Baroque." The colonial period produced not only the paintings of Perez de Holguin, Flores, Bitti, and others but also the works of skilled, but unknown, stonecutters, wood carvers, goldsmiths, and silversmiths. An important body of native baroque religious music of the colonial period was recovered in recent years and has been performed internationally to wide acclaim since 1994.

Bolivian artists of stature in the 20th century include, among others, Guzman de Rojas, Arturo Borda, Maria Luisa Pacheco, and Marina Nunez del Prado.

Bolivia has rich folklore. Its regional folk music is distinctive and varied. The devil dances at the annual carnival of Oruro are one of the great folkloric events of South America, as is the lesser known carnival at Tarabuco.

HISTORY

The Andean region probably has been inhabited for some 20,000 years. Beginning about the 2nd century B.C., the Tiwanakan culture developed at the southern end of Lake Titicaca. This culture, centered around and named for the great city of Tiwanaku, developed advanced architectural and agricultural techniques before it disappeared around 1200 A.D., probably because of extended drought. Roughly contemporaneous with the Tiwanakan culture, the Moxos in the eastern lowlands and the Mollos north of present-day La Paz also developed advanced agricultural societies that had dissipated by the 13th century of our era. In about 1450, the Quechua-speaking Incas entered the area of modern highland Bolivia and added it to their empire. They controlled the area until the Spanish conquest in 1525.

During most of the Spanish colonial period, this territory was called "Upper Peru" or "Charcas" and was under the authority of the Viceroy of Lima. Local government came from the Audiencia de Charcas located in Chuquisaca (La Plata--modern Sucre). Bolivian silver mines produced much of the Spanish empire's wealth, and Potosi, site of the famed Cerro Rico--"Rich Mountain"-was, for many years, the largest city in the Western Hemisphere. As Spanish royal authority weakened during the Napoleonic wars, sentiment against colonial rule grew. Independence was proclaimed in 1809, but 16 years of struggle followed before the establishment of the republic, named for Simon Bolivar, on August 6, 1825.

Independence did not bring stability. For nearly 60 years, coups and short-lived constitutions dominated Bolivian politics. Bolivia's weakness was demonstrated during the War of the Pacific (1879-83), when it lost its seacoast and the adjoining rich nitrate fields to Chile.

An increase in the world price of silver brought Bolivia a measure of relative prosperity and political stability in the late 1800s. During the early part of the 20th century, tin replaced silver as the country's most important source of wealth. A succession of governments controlled by the economic and social elites followed laissez-faire capitalist policies through the first third of the century.

Living conditions of the indigenous peoples, who constituted most of the population, remained deplorable. Forced to work under primitive conditions in the mines and in nearly feudal status on large estates, they were denied access to education, economic opportunity, or political participation.

Bolivia's defeat by Paraguay in the Chaco War (1932-35) marked a turning point. Great loss of life and territory discredited the traditional ruling classes, while service in the army produced stirrings of political awareness among the indigenous people. From the end of the Chaco War until the 1952 revolution, the emergence of contending ideologies and the demands of new groups convulsed Bolivian politics.

The Nationalist Revolutionary Movement (MNR) emerged as a broadly based party. Denied its victory in the 1951 presidential elections, the MNR lead the successful 1952 revolution. Under President Victor Paz Estenssoro, the MNR introduced universal adult suffrage, carried out a sweeping land reform, promoted rural education, and nationalized the country's largest tin mines. It also committed many serious violations of human rights.

Twelve years of tumultuous rule left the MNR divided. In 1964, a military junta overthrew President Paz Estenssoro at the outset of his third term. The 1969 death of President Rene Barrientos, a former member of the junta elected President in 1966, led to a succession of weak governments. Alarmed by public disorder, the military, the MNR, and others installed Col. (later Gen.) Hugo Banzer Suarez as President in 1971. Banzer ruled with MNR support from 1971 to 1974. Then, impatient with schisms in the coalition, he replaced civilians with members of the armed forces and suspended political activities. The economy grew impressively during Banzer's presidency, but demands for greater political freedom undercut his support. His call for elections in 1978 plunged Bolivia into turmoil once again.

Elections in 1978, 1979, and 1980 were inconclusive and marked by fraud. There were coups, counter-coups, and caretaker governments. In 1980, Gen. Luis Garcia Meza carried out a ruthless and violent coup. His government was notorious for human rights abuses, narcotics trafficking, and economic mismanagement. Later convicted in absentia for crimes including murder, Garcia Meza was extradited from Brazil and began serving a 30-year sentence in 1995.

After a military rebellion forced out Garcia Meza in 1981, three other military governments in 14 months struggled with Bolivia's growing problems. Unrest forced the military to convoke the Congress elected in 1980 and allow it to choose a new chief executive. In October 1982--22 years after the end of his first term of office (1956-60)--Hernan Siles Zuazo again became President. Severe social tension, exacerbated by economic mismanagement and weak leadership, forced him to call early elections and relinquish power a year before the end of his constitutional term.

In the 1985 elections, the Nationalist Democratic Action Party (ADN) of Gen. Banzer won a plurality of the popular vote, followed by former President Paz Estenssoro's MNR and former Vice President Jaime Paz Zamora's Movement of the Revolutionary Left (MIR). But in the congressional run-off, the MIR sided with MNR, and Paz Estenssoro was chosen for a fourth term as president. When he took office in 1985, he faced a staggering economic crisis. Economic output and exports had been declining for several years. Hyperinflation had reached an annual rate of 24,000%. Social unrest, chronic strikes, and unchecked drug trafficking were widespread.

In four years, Paz Estenssoro's Administration achieved economic and social stability. The military stayed out of politics, and all major political parties publicly and institutionally committed themselves to democracy. Human rights violations, which badly tainted some governments earlier in the decade, were not a problem. However, his remarkable accomplishments were not won without sacrifice. The collapse of tin prices in October 1985, coming just as the government was moving to reassert its control of the mismanaged state mining enterprise, forced the government to lay off over 20,000 miners. The highly successful shock treatment that restored Bolivia's financial system also led to some unrest and temporary social dislocation.

Although the MNR list headed by Gonzalo Sanchez de Lozada finished first in the 1989 elections, no candidate received a majority of popular votes and so in accordance with the constitution, a congressional vote determined who would be president. The Patriotic Accord (AP) coalition between Gen. Banzer's ADN and Jaime Paz Zamora's MIR, the second- and third-place finishers, respectively, won out. Paz Zamora assumed the presidency and the MIR took half the ministries. Banzer's center-right ADN took control of the National Political Council (CONAP) and the other ministries.

Paz Zamora was a moderate, center-left president whose political pragmatism in office outweighed his Marxist origins. Having seen the destructive hyperinflation of the Siles Zuazo Administration, he continued the neo-liberal economic reforms begun by Paz Estenssoro, codifying some of them. Paz Zamora took a fairly hard line against domestic terrorism, personally ordering the December 1990 attack on terrorists of the Nestor Paz Zamora Committee (CNPZ--named after his brother who died in the 1970 Teoponte insurgency) and authorizing the early 1992 crackdown against the Tupac Katari Guerrilla Army (EGTK).

Paz Zamora's regime was less decisive against narcotics trafficking. The government broke up a number of trafficking networks but issued a 1991 surrender decree giving lenient sentences to the biggest narcotics kingpins. Also, his administration was extremely reluctant to pursue net eradication of illegal coca. It did not agree to an updated extradition treaty with the U.S., although two traffickers have been extradited to the U.S. since 1992. Beginning in early 1994, the Bolivian Congress investigated Paz Zamora's personal ties to accused major trafficker Isaac Chavarria, who subsequently died in prison while awaiting trial. MIR deputy chief Oscar Eid was jailed in connection with similar ties in 1994; he was found guilty and sentenced to four years in prison in November 1996. Technically still under investigation, Paz Zamora became an active presidential candidate in 1996.

The 1993 elections continued the tradition of open, honest elections and peaceful democratic transitions of power. The MNR defeated the ADN/MIR coalition by a 34% to 20% margin, and the MNR's Gonzalo "Goni" Sanchez de Lozada was selected as president by an MNR/MBL/UCS coalition in the Congress.

Sanchez de Lozada pursued an aggressive economic and social reform agenda. He relied heavily on successful entrepreneurs-turned-politicians like himself and on fellow veterans of the Paz Estenssoro Administration (during which Sanchez de Lozada was planning minister). The most dramatic change undertaken by the Sanchez de Lozada Government was the Capitalization program, under which investors acquired 50% ownership and management control of public enterprises, such as the state oil corporation, telecommunications system, electric utilities, and others. The reforms and economic restructuring were strongly opposed by certain segments of society, which instigated frequent social disturbances, particularly in La Paz and the Chapare coca-growing region, from 1994 through 1996.

In the 1997 elections, Gen. Hugo Banzer, leader of the ADN, won 22% of the vote, while the MNR candidate won 18%. Gen. Banzer formed a coalition of the ADN, MIR, UCS, and CONDEPA parties which hold a majority of seats in the Bolivian Congress. The Congress selected him as president and he was inaugurated on August 6, 1997.

GOVERNMENT AND POLITICAL CONDITIONS

The Banzer Government has committed itself to shutting down illegal coca cultivation and narcotrafficking during its five-year term. President Banzer has called for action against government and judicial corruption and has encouraged foreign investment as a means to stimulate economic growth and reduce poverty.

The 1967 constitution, revised in 1994, provides for balanced executive, legislative, and judicial powers. The traditionally strong executive, however, tends to overshadow the Congress, whose role is generally limited to debating and approving legislation initiated by the executive. The judiciary, consisting of the Supreme Court and departmental and lower courts, has long been riddled with corruption and inefficiency. Through revisions to the constitution in 1994, and subsequent laws, the government has initiated potentially far-reaching reforms in the judicial system and processes.

Bolivia's nine departments received greater autonomy under the Administrative Decentralization law of 1995, although principal departmental officials are still appointed by the central government. Bolivian cities and towns are governed by elected mayors and councils. The most recent municipal elections took place in December 1995. The Popular Participation Law of April 1994, which distributes a significant portion of national revenues to municipalities for discretionary use, has enabled previously neglected communities to make striking improvements in their facilities and services.

ECONOMY

Bolivia's 1997 gross domestic product (GDP) totaled $8.0 billion. Economic growth has remained steady at about 4% a year (1.5% a year in per capita terms) over the 1988-97 period and real GDP grew by 4.1% in 1997. Inflation declined from 8% in 1996 to 6.7% in 1997. The government's 1998 economic program has targeted GDP growth of 5% and an inflation rate below 6%.

Since 1985, the Government of Bolivia has been implementing a far-reaching program of macroeconomic stabilization and structural reform aimed at restoring price stability, creating conditions for sustained growth, and alleviating poverty. Important components of these structural reform measures include the capitalization of state enterprises and strengthening of the country's financial system.

The most important recent structural changes in the Bolivian economy have involved the capitalization of numerous public sector enterprises. (Capitalization in the Bolivian context is a form of privatization where investors acquire a 50% stake and management control of public enterprises in return for a commitment to undertake capital expenditures equivalent to the enterprise's net worth). Parallel legislative reforms have locked into place market-oriented policies, especially in the hydrocarbon and mining sectors, that have encouraged private investment. Foreign investors are accorded national treatment, and foreign ownership of companies enjoys virtually no restrictions in Bolivia. As a consequence of these measures, 1996 private investment surged by 25% to an estimated $225 million and the privatization program has generated commitments of $1.7 billion in foreign direct investment over the period 1996-2002.

In 1996, three units of the Bolivian state oil corporation (YPFB) involved in hydrocarbon exploration, production, and transportation were capitalized. The capitalization of YPFB allowed agreement to be reached on the construction of a gas pipeline to Brazil. A priority in the development strategy for the sector is the expansion of export markets for natural gas. The government intends to maintain its current contract for gas exports to Argentina through 1999. The contract to construct a pipeline to Brazil projects natural gas exports of 8 million cubic meters per day (cmd) by 1999, increasing to 16 million cmd by the eighth year of operation. The Bolivian Government has signed a financing contract for the Bolivian side of the gas pipeline with Petrobras and the capitalization of YPFB's transportation company will facilitate the finance, construction, and operation of the pipeline. The government plans to position Bolivia as a regional hub for exporting hydrocarbons.

Six smaller public enterprises were sold during 1996, and the Government of Bolivia has taken steps to improve the efficiency of some public services through concession contracts with private sector managers. All three major airports were transferred to private managers in March 1997, and a water supply company was transferred to a private operator in June 1997. Also, by the end of 1996, almost all customs posts were under private management.

By May 1996, three of the four Bolivian banks that had experienced difficulties in 1995 were recapitalized and restructured under new ownership with support from the Bolivian Government's Special Fund for Strengthening the Financial System (FONDESIF), which helped restore confidence in the banking system. In November 1996, the Bolivian Congress approved a comprehensive pension reform that replaces the old pay-as-you-go system by a system of privately managed, individually funded retirement accounts, and the new system began operations in May 1997. The reform represents a major step toward lasting fiscal consolidation in Bolivia.

Bolivian exports were $1.19 billion in 1997, from a low of $652 million in 1991. Imports grew in 1997 to a level of $1.74 billion, with import growth facilitated by the gradual reduction of Bolivian tariffs to a flat 10% (except for capital equipment, which has a 5% rate). Bolivia's trade deficit rose from $419 million in 1996 to $620 million in 1997.

Bolivia's trade with neighboring countries is growing, in part because of several regional preferential trade agreements it has negotiated. Bolivia is a member of the Andean Community and has free trade with other member countries (Peru, Ecuador, Colombia, and Venezuela). Bolivia began to implement an association agreement with MERCOSUR (Southern Cone Common Market) in March 1997. The agreement provides for the gradual creation of a free-trade area covering at least 80% of the trade between the parties over a 10-year period. The U.S. Andean Trade Preference Act (ATPA) allows numerous Bolivian products to enter the United States free of duty on a unilateral basis. Tariffs have to be paid on clothing and leather products only.

The U.S. remains Bolivia's largest trading partner. In 1997, the U.S. exported $295 million of merchandise to Bolivia and imported $223 million, according to the World Trade Atlas of the Global Trade Information Service. Bolivia's major exports to the U.S. are tin, gold, jewelry, and wood products. Its major imports from the United States are computers, vehicles, wheat, and machinery. A Bilateral Investment Treaty is under negotiation.

Agriculture accounts for roughly 15% of Bolivia's GDP. The amount of land cultivated by modern farming techniques is increasing rapidly in the Santa Cruz area, where weather allows for two crops a year and soybeans are the major cash crop. The extraction of minerals and hydrocarbons accounts for another 10% of GDP. Bolivia is self-sufficient in oil and exports natural gas to Argentina. Manufacturing represents less than 17% of GDP.

The Government of Bolivia remains heavily dependent on foreign assistance to finance development projects. At the end of 1997, the government owed $4.23 billion to its foreign creditors, with $1.6 billion of this amount owed to other governments and most of the balance owed to multilateral development banks. Most payments to other governments have been rescheduled on several occasions since 1987 through the Paris Club mechanism. External creditors have been willing to do this because the Bolivian Government has generally achieved the monetary and fiscal targets set by IMF programs since 1987. The current IMF program, which consists of soft balance-of-payments loans from the enhanced structural adjustment facility as the government achieves certain targets, is a multi-year agreement ending in 1998.

Rescheduling agreements granted by the Paris Club have allowed the individual creditor countries to apply very soft terms to the rescheduled debt. As a result, some countries have forgiven substantial amounts of Bolivia's bilateral debt. The U.S. Government reached an agreement at the Paris Club meeting in December 1995 which reduced by 67% Bolivia's existing debt stock. The Bolivian Government continues to pay its debts to the multilateral development banks on time and to receive soft loans. Bolivia has qualified for the Highly Indebted Poor Countries (HIPC) debt relief program.

FOREIGN RELATIONS

Bolivia traditionally has maintained normal diplomatic relations with all hemispheric states except Chile. Relations with Chile, strained since Bolivia's defeat in the War of the Pacific (1879-83) and its loss of the coastal province of Atacama, were severed from 1962 to 1975 in a dispute over the use of the waters of the Lauca River. Relations were resumed in 1975 but broken again in 1978 over the inability of the two countries to reach an agreement that might have granted Bolivia a sovereign access to the sea. In the 1960s, relations with Cuba were broken following Castro's rise to power, but resumed under the Paz Estenssoro Administration in 1985.

Bolivia pursues a foreign policy with a heavy economic component. Bolivia has become more active in the OAS, the Rio Group, and in MERCOSUR, with which it signed an association agreement in 1996. Bolivia promotes its policies on sustainable development and the empowerment of indigenous people.

Bolivia is a member of the UN and some specialized agencies and related programs; Organization of American States (OAS); Andean Pact; INTELSAT; Non-Aligned Movement; International Parliamentary Union; Latin American Integration Association (ALADI); World Trade Organization; Rio Treaty; Rio Group; MERCOSUR; and Uruguay, Paraguay, Bolivia (URUPABOL, re-started in 1993). As an outgrowth of the 1994 Summit of the Americas, Bolivia hosted a hemispheric summit conference on sustainable development in December 1996. A First Ladies' hemispheric summit was also hosted by Bolivia that same month.

U.S.-BOLIVIAN RELATIONS

Relations between the United States and Bolivia are cordial and cooperative. The major issue in the bilateral relationship is control of illegal narcotics. Roughly one-third of the world's cocaine is made from coca grown in Bolivia: Bolivia's coca crop is second only to Peru's in the production of the cocaine alkaloid, and the country is second only to Colombia in the production of refined cocaine hydrochloride. For centuries, Bolivian coca leaf has been chewed and used in traditional rituals, but in the past few decades the emergence of the drug trade has led to a rapid expansion of coca cultivation, particularly in the tropical Chapare region. In 1988, a new law explicitly recognized that coca grown in the Chapare was not required to meet traditional demand for chewing or for tea, and the law called for the eradication, over time, of all "excess" coca. To accomplish that goal, the Bolivian Government instituted a program offering cash compensation to peasants who eradicated voluntarily and the government began developing and promoting suitable alternative crops for the peasants to grow. The Bolivian Government is now phasing out direct payments in favor of community-based incentives to eradicate coca cultivation. Parallel efforts were undertaken by the police to interdict the smuggling of coca leaves, cocaine, and precursor chemicals. The U.S. Government has, in large measure, financed the alternative development program and the police effort.

Bolivian President Hugo Banzer has pledged to wipe out illicit coca production and drug trafficking in Bolivia by the end of his term in 2002. His administration unveiled its five-year counternarcotics strategy in December 1997. The plan calls for significant funding from international donors.

President Clinton certified to the Congress in 1998 that Bolivia is cooperating fully with the U.S. on counternarcotics matters or has taken steps on its own to achieve full compliance with the 1988 UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. The U.S. Government is seeking Bolivia's cooperation in achieving a net reduction in the amount of coca under cultivation and in enacting legislation to criminalize money laundering. In 1996, the United States and Bolivia ratified a new extradition treaty which makes it easier for both nations to more effectively prosecute drug traffickers and other criminals. It replaces the previous extradition treaty, which came into force in 1990. The new treaty is significant because, unlike its predecessor, it requires both countries to extradite their own nationals for serious criminal offenses.

In 1991, the U.S. Government forgave all of the debt owed by Bolivia to the U.S. Agency for International Development ($341 million) as well as 80% (or $31 million) of the amount owed to the Department of Agriculture for food assistance. Increased U.S. assistance since the late 1980s has been designed to reinforce democracy, to ensure sustainable economic development, and to make Bolivia less dependent on the cocaine industry. U.S. economic and development assistance totaled $64.5 million in FY 1996, in addition to military and counternarcotics assistance.


Brazil

PEOPLE AND HISTORY

With an estimated 156 million inhabitants, Brazil has the largest population in Latin America and ranks sixth in the world. The majority live in the south-central area, which includes the industrial cities of Sao Paulo, Rio de Janeiro, and Belo Horizonte. Urban growth has been rapid: by 1991, 75% of the total population were living in urban areas. Rapid growth has aided economic development but has also created serious social, environmental, and political problems for major cities.

Four major groups make up the Brazilian population: the Portuguese, who colonized in the 16th century; Africans brought to Brazil as slaves; various other European, Middle Eastern, and Asian immigrant groups who have settled in Brazil since the mid-19th century; and indigenous people of Tupi and Guarani language stock. Intermarriage between the Portuguese and indigenous people or slaves was common. Although the major European ethnic stock of Brazil was once Portuguese, subsequent waves of immigration have contributed to a diverse ethnic and cultural heritage.

From 1875 until 1960, about 5 million Europeans emigrated to Brazil, settling mainly in the four southern states of Sao Paulo, Parana, Santa Catarina, and Rio Grande do Sul. Immigrants have come mainly from Italy, Germany, Spain, Japan, Poland, and the Middle East. The largest Japanese community outside Japan is in Sao Paulo. Despite class distinctions, national identity is strong, and racial friction is a relatively new phenomenon.

Indigenous full-blooded Indians, located mainly in the northern and western border regions and in the upper Amazon Basin, constitute less than 1% of the population. Their numbers are declining as contact with the outside world and commercial expansion into the interior increase. Brazilian Government programs to establish reservations and to provide other forms of assistance have existed for years, but are controversial and often ineffective.

Brazil is the only Portuguese-speaking nation in the Americas. Approximately 80% of all Brazilians belong to the Roman Catholic Church; most others are Protestant or follow practices derived from African religions.

Brazil was claimed for Portugal in 1500 by Pedro Alvares Cabral. It was ruled from Lisbon as a colony until 1808, when the royal family, having fled from Napoleon's army, established the seat of Portuguese Government in Rio de Janeiro. Brazil became a kingdom under Dom Joao VI, who returned to Portugal in 1821. His son declared Brazil's independence on September 7, 1822, and became emperor with the title of Dom Pedro I. His son, Dom Pedro II, ruled from 1831 to 1889, when a federal republic was established in a coup by Deodoro da Fonseca, marshal of the army. Slavery had been abolished a year earlier by the Regent Princess Isabel while Dom Pedro II was in Europe.

From 1889 to 1930, the government was a constitutional democracy, with the presidency alternating between the dominant states of Sao Paulo and Minas Gerais. This period ended with a military coup that placed Getulio Vargas, a civilian, in the presidency; Vargas remained as dictator until 1945. From 1945 to 1961, Eurico Dutra, Vargas, Juscelino Kubitschek, and Janio Quadros were elected presidents. When Quadros resigned in 1961, he was succeeded by Vice President Joao Goulart.

Goulart's years in office were marked by high inflation, economic stagnation, and the increasing influence of radical political elements. The armed forces, alarmed by these developments, staged a coup on March 31, 1964. The coup leaders chose as president Humberto Castello Branco, followed by Arthur da Costa e Silva (1967-69), Emilio Garrastazu Medici (1968-74), and Ernesto Geisel (1974-79) all of whom were senior army officers. Geisel began a liberalization which was carried further by his successor, Gen. Joao Baptista de Oliveira Figueiredo (1979-85). Figueiredo not only permitted the return of politicians exiled or banned from political activity during the 1960s and 1970s, but also allowed them to run for state and federal offices in 1982.

At the same time, an electoral college consisting of all members of congress and six delegates chosen from each state, continued to choose the president. In January 1985, the electoral college voted Tancredo Neves from the opposition Brazilian Democratic Movement Party (PMDB) into office as President. However, Tancredo Neves became ill in March and died a month later. His Vice President, former Senator Jose Sarney, became President upon Neves' death.

Brazil completed its transition to a popularly elected government in 1989, when Fernando Collor de Mello won 53% of the vote in the first direct presidential election in 29 years. In 1992, a major corruption scandal led to the impeachment and ultimate resignation of President Collor. Vice President Itamar Franco took his place and governed for the remainder of Collor's term culminating in the October 3, 1994 presidential elections, when Fernando Henrique Cardoso was elected President with 54% of the vote. He took office January 1, 1995.

President Cardoso has sought to establish the basis for long-term stability and growth and to reduce Brazil's extreme socioeconomic imbalances. His proposals to Congress include constitutional amendments to open the Brazilian economy to greater foreign participation and to implement sweeping reforms--including social security, government administration, and taxation--to reduce excessive public sector spending and improve government efficiency.

GOVERNMENT AND POLITICS

Brazil is a federal republic with 26 states and a federal district. The 1988 constitution grants broad powers to the federal government, made up of executive, legislative, and judicial branches. The president holds office for four years, with the right to re-election for an additional four-year term, and appoints his own cabinet. There are 81 senators, three for each state and the Federal District, and 513 deputies. Senate terms are for eight years, with election staggered so that two-thirds of the upper house is up for election at one time and one-third four years later. Chamber terms are for four years, with elections based on a complex system of proportional representation by states. Each state is eligible for a minimum of 8 seats; the largest state delegation (Sao Paulo's) is capped at 70 seats. The result is a system weighted in favor of geographically large but sparsely populated states.

Fifteen political parties are represented in Congress. Since it is common for politicians to switch parties, the proportion of congressional seats held by particular parties changes regularly. The following are the major ones, in order of the size of their congressional delegations:

PFL--Liberal Front Party (center-right)
PMDB--Brazilian Democratic Movement Party (center)
PSDB--Brazilian Social Democratic Party (center-left)
PPB--Brazilian Progressive Party (center-right)
PT--Workers Party (left)
PDT--Democratic Labor Party (left)
PTB--Brazilian Labor Party (center-right)
PSB--Brazilian Socialist Party (left)
PCdoB--Communist Party of Brazil (left)
PL--Liberal Party (center-right)

President Cardoso was elected with the support of a heterodox alliance of his own center-left Social Democratic Party, the PSDB, and two center-right parties, the Liberal Front Party (PFL) and the Brazilian Labor Party (PTB). Brazil's largest party, the centrist Brazilian Democratic Movement Party (PMDB), joined Cardoso's governing coalition after the election, as did the center-right PPB, the Brazilian Progressive Party, in 1996, after its formation from three conservative parties the previous year. Federal deputies and senators who belong to the parties comprising the government coalition do not always vote with the government. As a result, President Cardoso has had difficulty, at times, gaining sufficient support for some of his legislative priorities, despite the fact that his coalition parties hold an overwhelming majority of congressional seats. Nevertheless, as the Cardoso Administration ends its fourth year, it has accomplished many of its legislative and reform objectives.

States are organized like the federal government, with three government branches. Because of the mandatory revenue allocation to states and municipalities provided for in the 1988 Constitution, Brazilian governors and mayors have exercised considerable power since 1989.

Presidential, congressional, and gubernatorial elections last took place in October 1994. Fernando Henrique Cardoso won the presidential election with approximately 54% of the vote, while his closest challenger, Luiz Inacio Lula da Silva (PT), had about 27%. Elections for the nation's mayors were held in October and November 1996. The next national elections will be held October 4, 1998.

ECONOMY

Brazil is the eighth-largest economy in the world, with 1997 GDP over $800 billion. It is a highly diversified economy with wide variations in levels of development. Most large industry is concentrated in the south and southeast. Although traditionally the poorest part of Brazil, the northeast is beginning to attract new investment.

Brazil embarked on its most successful economic stabilization program, the Plano Real (named for the new currency, the real; plural: reais) in July 1994.

Inflation--which had reached an annual level of nearly 5000% at the end of 1993--has since dropped to its lowest level in over 40 years and is expected to be less than 5% in 1998. Brazil has accomplished this through a combination of a strong exchange rate, tight monetary policies, trade liberalization, and privatization.

In addition, the Cardoso Administration has introduced to Congress a series of constitutional reform proposals to replace a state-dominated economy with a market-oriented one and to restructure all levels of government on a financially sound basis. Congress has approved amendments to open the economy to greater private sector participation, including foreign investors. Reforms to bring order to government fiscal accounts have made less progress--because of their greater political sensitivity--but remain under consideration by the Congress. The Administration places great importance on these fiscal reforms for sustainable long-term growth. The Plano Real has raised the income of poor Brazilians, but Brazil continues to have one of the world's most inequitable distributions of income. The administration has acknowledged the need to invest more in education and health to redress this inequity.

Market liberalization and economic stabilization have significantly enhanced Brazil's growth prospects. Brazil's trade has almost doubled since 1990, from $50 billion to an estimated $114 billion in 1997. The United States represents about 20% of that trade, and ran trade surpluses in 1995, 1996, and 1997 after many years of deficits with Brazil. Foreign direct investment has increased from less than $1 billion in 1993 to an estimated $17 billion in 1997. The United States is the largest foreign investor in Brazil, accounting for almost $20 billion, or 34% of total foreign investment. Ongoing and upcoming privatization in the telecommunication, energy, and mining sectors of Brazil planned for 1998 and 1999 is of major interest to U.S. companies.

Brazil responded quickly and decisively to the Asian financial crisis in October 1997, which brought strong pressure to bear on the domestic currency. These actions included a near doubling of interest rates, maintenance of an exchange rate policy in the face of large capital outflows, and Congressional approval of a fiscal package aimed at saving $18 billion in 1998, 2.5% of GDP. Financial markets responded positively to these measures and capital inflows, including direct investment, increased strongly. By March 1998, international reserves recovered to their pre-crisis level of $62 billion.

Brazil is endowed with vast agricultural resources. There are basically two distinct agricultural areas. The first, comprised of the southern one-half to two-thirds of the country, has a semi-temperate climate and higher rainfall, the better soils, higher technology and input use, reasonable infrastructure, and more experienced farmers. It produces most of Brazil's grains and oilseeds and export crops. The other, located in the drought-ridden northeast region and in the Amazon basin, lacks well-distributed rainfall, good soil, adequate infrastructure, or sufficient development capital. Although producing mostly for self-sufficiency, the latter regions are becoming increasingly important in exports of forest products, cocoa, and tropical fruits. Central Brazil contains substantial areas of grassland with only scattered trees. The Brazilian grasslands are less fertile than those of North America and are generally more suited for grazing.

Brazilian agriculture is well diversified, and the country is largely self-sufficient in food. Agriculture accounts for 13% of the country's GDP, and employs about one-quarter of the labor force in more than six million agricultural enterprises. Brazil is the world's largest producer of sugarcane and coffee, and a net exporter of cocoa, soybeans, orange juice, tobacco, forest products, and other tropical fruits and nuts. Livestock production is very important in many sections of the country, with a large increase in the poultry, pork, and milk industries due mainly to demand changes. On a value basis, production is 60% field crop and 40% livestock.

Brazil is a net exporter of agricultural and food products, which account for about 35% of the country's exports. In 1996, farm and food exports totaled $17 billion. Record levels of imports amounted to nearly $8 billion. In 1994 and 1995, agricultural exports were hurt by the sharp appreciation of the Brazilian real, lack of export financing, and high taxes and port costs. On the other hand, agricultural and food imports grew substantially during this period as a result of production shortfalls, lower prices due to import liberalization and a strong currency, and increased consumer demand. In the long run, however, the annual growth of agricultural imports is expected to be more moderate in the future.

Half of Brazil is covered by forests, with the largest rain forest in the world located in the Amazon Basin. Recent migrations into the Amazon and large-scale burning of forest areas have placed the international spotlight on Brazil. The government has reduced incentives for such activity and is beginning to implement an ambitious environmental plan, and has just adopted an Environmental Crimes Law that requires serious penalties for infractions.

Brazil has one of the most advanced industrial sectors in Latin America. Accounting for one-third of GDP, Brazil's diverse industries range from automobiles, steel, and petrochemicals, to computers, aircraft, and consumer durables. With the increased economic stability provided by the Plano Real, Brazilian firms and multinationals have invested hundreds of millions of dollars in new equipment and technology, a large share of which has been purchased from U.S. firms. However, the country's power, transportation, and communications systems--particularly outside the more developed southern states--suffer from lack of investment and poor maintenance. The privatizations of the telecommunication, energy, and transportation sectors are expected to ameliorate these infrastructure problems.

Brazil has a diverse and sophisticated services industry as well. During the early 1990s, the banking sector accounted for as much as 16% of GDP. Although undergoing a major overhaul, Brazil's financial services industry provides local firms a wide range of products and is attracting numerous new entrants, including U.S. financial firms. The Sao Paulo and Rio de Janeiro stock exchanges have been among the fastest growing in the world in the last two years.

The Brazilian Government has undertaken an ambitious program to reduce dependence on imported oil. Imports previously accounted for more than 70% of the country's oil needs but now account for less than 50%. Brazil is one of the world's leading producers of hydroelectric power, with a potential of 106,500 megawatts.

Existing hydroelectric power provides 90% of the nation's electricity. Two large hydroelectrical projects, the 12,600 megawatt Itaipu Dam on the Parana River--the world's largest dam--and the Tucurui Dam in Para in northern Brazil, are in operation.

Brazil's first commercial nuclear reactor, Angra I, located near Rio de Janeiro, has been in operation for more than 10 years. Angra II is under construction, and Angra III is planned. The three reactors would have combined capacity of 3,000 megawatts when completed.

Proven mineral resources are extensive. Large iron and manganese reserves are important sources of industrial raw materials and export earnings. Deposits of nickel, tin, chromite, bauxite, beryllium, copper, lead, tungsten, zinc, gold, and other minerals are exploited. High-quality coking-grade coal required in the steel industry is in short supply.

FOREIGN RELATIONS

Traditionally, Brazil has been a leader in the inter-American community and has played an important role in collective security efforts as well as in economic cooperation in the Western Hemisphere. Brazil aligned with the allies in both World Wars. During World War II, its expeditionary force in Italy played a key role in the allied victory at Monte Castello. It is a party to the Inter-American Treaty of Reciprocal Assistance (Rio Treaty) and a member of the Organization of American States (OAS). Recently, Brazil has given high priority to expanding relations with its South American neighbors and is a founding member of the Amazon Pact, the Latin American Integration Association (ALADI), and Mercosul (Mercosur in Spanish), uniting Argentina, Uruguay, Paraguay, and Brazil. Along with Argentina, Chile, and the United States, Brazil is one of the guarantors of the Peru-Ecuador peace process.

Brazil is a charter member of the United Nations and participates in many of its specialized agencies. It has contributed troops to UN peacekeeping efforts in the Middle East, the former Belgian Congo, Cyprus, Mozambique, and most significantly, Angola. Brazil began serving a two-year term as a non-permanent member of the UN Security Council on January 1, 1998.

As Brazil's domestic economy has grown and diversified, the country has become increasingly involved in international politics and economics. The United States, Western Europe, and Japan are primary markets for Brazilian exports and sources of foreign lending and investment. As an indication of Brazil's broader international role, trade with other developing countries increased from 9% of the total in the 1970s to nearly 30% in 1993. Brazil has also bolstered its commitment to nonproliferation through the signing of a full-scale nuclear safeguard agreement with the International Atomic Energy Agency (IAEA), accession to the Treaty of Tlatelolco, and membership in the Missile Technology Control Regime and the Nuclear Suppliers Group.

U.S.-BRAZILIAN RELATIONS

The United States was the first country to recognize Brazil's independence in 1822. The two countries have traditionally enjoyed friendly, active relations encompassing a broad political and economic agenda.

With the inauguration of Brazil's internationally oriented, reformist President Fernando Henrique Cardoso on January 1, 1995, U.S.-Brazil engagement and cooperation have intensified. This is reflected in the unprecedented number of high-level contacts between the two governments, including President Cardoso's state visit to Washington in April 1995, visits to Brazil by President Clinton and First Lady Hillary Clinton, Secretaries of State Madeleine Albright and Warren Christopher, the late Secretary of Commerce Ronald Brown, current Secretary of Commerce William Daley, and many other exchanges between U.S. and Brazilian cabinet and sub-cabinet officials. Important topics of discussion and cooperation have included trade and finance, hemispheric economic integration, United Nations reform and peacekeeping efforts, nonproliferation and arms control, follow-up to the 1994 Miami Summit of the Americas, common efforts to help resolve the Peru-Ecuador border conflict, support for Paraguay's democratic development, human rights, counternarcotics, and environmental issues.

During President Clinton's October 1997 visit to Brazil, several agreements were signed, including: an Education Partnership Agreement, which enhances and expands cooperative initiatives in such areas as standards-based education reform, use of technology, and professional development of teachers; a Mutual Legal Assistance treaty; as well as agreements on cooperation in energy, the international space station, national parks, and government reform. There have been other recent agreements with Brazil: a new agreement for cooperation in counternarcotics signed in March 1995; an agreement signed in March 1998 to end Brazil's automotive investment incentive program earlier than scheduled; and a national drug control plan drafted. During a visit of former Under Secretary of State Timothy Wirth to Brazil in October 1995, the two countries signed a Common Agenda on the Environment, laying the foundation for cooperative efforts in environmental protection.

Former U.S. Trade Representative Mickey Kantor and Brazilian Foreign Minister Lampreia submitted a joint report to Presidents Clinton and Cardoso on the U.S.-Brazil Bilateral Trade Review, completed October 25, 1995. The Bilateral Trade Review lays the groundwork for closer cooperation in resolving bilateral trade issues as well as in joint efforts to advance progress toward a Free Trade Area of the Americas (FTAA) and to develop closer ties between NAFTA and Mercosul, the Common Market of the South. Brazil is a key player in hemispheric efforts to negotiate an FTAA by 2005, and hosted the May 1997 FTAA Trade Ministerial in Belo Horizonte.

President Cardoso is the first Brazilian president to discuss race relations frankly. He instituted an Inter-Ministerial Task Force on Race in 1995 and strengthened the mandate of the government-funded Palmares Foundation, dedicated to the promotion of Afro-Brazilian heritage. U.S. Embassy public diplomacy programs seek to support these efforts, which mirror President Clinton's National Dialogue on Race.

Relations are advancing well in various aspects of scientific and technical work as well. During his 1996 visit, former Secretary of State Christopher signed a Space Cooperation agreement and initialed an agreement on Peaceful Uses of Nuclear Energy.


Chile

PEOPLE

About 85% of Chile's population live in urban centers with 40% living in greater Santiago. Most have Spanish ancestry. A small, yet influential, number of Irish and English immigrants came to Chile during the colonial period. German immigration began in 1848 and lasted for 90 years; the southern provinces of Valdivia, Llanquihue, and Osorno show a strong German influence. Other significant immigrant groups are Italian, Croatian, French, and Middle Eastern. About 400,000 Native Americans, mostly of the Mapuche tribe, reside in the south-central area.

The northern Chilean desert contains great mineral wealth, primarily copper and nitrates. The relatively small central area dominates the country in terms of population and agricultural resources. This area is also the historical center from which Chile expanded until the late 19th century, when it incorporated its northern and southern regions. Southern Chile is rich in forests and grazing lands and features a string of volcanoes and lakes. The southern coast is a labyrinth of fjords, inlets, canals, twisting peninsulas, and islands. It also has small, rapidly declining petroleum reserves, which supplied about 8% of Chile's domestic requirements during 1996.

HISTORICAL HIGHLIGHTS

About 10,000 years ago, migrating Indians settled in fertile valleys and along the coast of what is now Chile. The Incas briefly extended their empire into what is now northern Chile, but the area's remoteness prevented extensive settlement.

In 1541, the Spanish, under Pedro de Valdivia, encountered hundreds of thousands of Indians from various cultures in the area that modern Chile now occupies. These cultures supported themselves principally through slash-and-burn agriculture and hunting. Although the Spanish did not find the extensive gold and silver they sought, they recognized the agricultural potential of Chile's central valley, and Chile became part of the Viceroyalty of Peru.

The drive for independence from Spain was precipitated by usurpation of the Spanish throne by Napoleon's brother Joseph. A national junta in the name of Ferdinand--heir to the deposed king--was formed on September 18, 1810. Spanish attempts to reimpose arbitrary rule during what was called the Reconquista led to a prolonged struggle under Bernardo O'Higgins, Chile's most renowned patriot. Chilean independence was formally proclaimed on February 12, 1818.

The political revolt brought little social change, however, and 19th century Chilean society preserved the essence of the stratified colonial social structure, family politics, and the influence of the Roman Catholic Church. The system of presidential power eventually predominated, but wealthy landowners continued to control Chile.

Toward the end of the 19th century, government in Santiago consolidated its position in the south by persistently suppressing the Mapuche Indians. In 1881, it signed a treaty with Argentina confirming Chilean sovereignty over the Strait of Magellan. As a result of the War of the Pacific with Peru and Bolivia (1879-83), Chile expanded its territory northward by almost one-third and acquired valuable nitrate deposits, the exploitation of which led to an era of national affluence.

Chile established a parliamentary-style democracy in the late 19th century, which tended to protect the interests of the ruling oligarchy. By the 1920s, the emerging middle and working classes were powerful enough to elect a reformist president, whose program was frustrated by a conservative congress. Continuing political and economic instability resulted in the quasi-dictatorial rule of General Carlos Ibanez (1924-32).

When constitutional rule was restored in 1932, a strong middle-class party, the Radicals, emerged. It became the key force in coalition governments for the next 20 years. In the 1920s, Marxist groups with strong popular support developed. During the period of Radical Party dominance (1932-52), the state increased its role in the economy.

The 1964 presidential election of Christian Democrat Eduardo Frei-Montalva (father of the current president) by an absolute majority initiated a period of major reform. Under the slogan "Revolution in Liberty," the Frei Administration embarked on far-reaching social and economic programs, particularly in education, housing, and agrarian reform, including rural unionization of agricultural workers. By 1967, however, Frei encountered increasing opposition from leftists, who charged that his reforms were inadequate, and from conservatives, who found them excessive.

In 1970, Dr. Salvador Allende, a Marxist and member of Chile's Socialist Party, who headed the "Popular Unity" (UP) coalition of Socialists, Communists, Radicals, and dissident Christian Democrats, was elected by a narrow margin. His program included the nationalization of most remaining private industries and banks, massive land expropriation, and collectivization. Allende's proposal also included the nationalization of U.S. interests in Chile's major copper mines. Elected with only 36% of the vote and by a plurality of only 36,000 votes, Allende never enjoyed majority support in the Chilean Congress or broad popular support. Domestic production declined, severe shortages of consumer goods, food, and manufactured products were widespread and inflation reached 1,000% per annum. Mass demonstrations, recurring strikes, violence by both government supporters and opponents, and widespread rural unrest ensued in response to the general deterioration of the economy. By 1973, Chilean society had split into two hostile camps. A military coup overthrew Allende on September 11, 1973. As the armed forces bombarded the presidential palace, Allende reportedly committed suicide.

GOVERNMENT AND POLITICAL CONDITIONS

Following a coup in 1973, Chile was ruled by a military regime headed by General Augusto Pinochet until 1990. The first years of the regime were marked by serious human rights violations. In its later years, however, the regime gradually permitted greater freedom of assembly, speech, and association, to include trade-union activity.

In contrast to its authoritarian political rule, the military government pursued decidedly laissez faire economic policies. During its 16 years in power, Chile moved away from economic statism toward a largely free-market economy and that fostered an increase in domestic and foreign private investment.

General Pinochet was denied a second 8-year term as President in a national plebiscite in 1988. In December 1989, Christian Democrat Patricio Aylwin, running as the candidate of a multi-party, center-left coalition, was elected president. In the 1993 election, Eduardo Frei Ruiz-Tagle of the Christian Democratic Party was elected president for a 6-year term and took office in March 1994.

Chile's constitution was approved in a September 1980 national plebiscite. It entered into force in March 1981. After Pinochet's defeat in the 1988 plebiscite, the constitution was amended to: ease provisions for future amendments to the constitution; create 9 appointed or "institutional" senators; and diminish the role of the National Security Council by equalizing the number of civilian and military members (4 members each).

Chile's bicameral Congress has a 48-seat Senate (38 elected, 9 appointed, 1 for life) and a 120-member Chamber of Deputies. Deputies are elected every 4 years. Senators serve for 8 years with staggered terms. The current Senate contains 20 members from the center-left governing coalition, 18 from the rightist opposition. In March 1998, 9 newly appointed institutional senators--replacing those appointed under the former military government in 1989--took seats, as did ex-President Pinochet, who became a "senator for life" (Chile's constitution provides that ex-Presidents who have served at least 6 years shall be entitled to a lifetime senate seat.) Both the Aylwin and Frei Administrations have proposed unsuccessfully the abolition of the 9 appointed Senate seats. The last congressional elections were held in December 1997. The current lower house (the Chamber of Deputies) contains 70 members of the governing coalition and 50 from the rightist opposition. The Congress is located in the port city of Valparaiso, about 140 kilometers (84 mi.) west of the capital, Santiago.

Chile's congressional elections are governed by a unique binomial system that rewards coalition slates. Each coalition can run two candidates for the two Senate and two lower chamber seats apportioned to each chamber's electoral districts. Typically, the two largest coalitions split the seats in a district. Only if the leading coalition ticket outpolls the second-place coalition by a margin of more than 2-to-1 does the winning coalition gain both seats.

The political parties with the largest representation in the current Chilean Congress are the centrist Christian Democrat Party and the center-right National Renewal Party. The Communist Party and the small Humanist Party failed to gain any seats in the 1997 elections.

Chile's judiciary is independent and includes a court of appeal, a system of military courts, a constitutional tribunal, and the Supreme Court.

National Security

Chile's armed forces are subject to civilian control exercised by the president through the Minister of Defense. Under the 1980 constitution, the services enjoy considerable autonomy, and the president cannot remove service commanders on his own authority.

Army. The Commander in Chief is Lt. General Ricardo Izurieta. The 55,000-person army is organized into 6 divisions, 1 separate brigade, and an air wing.

Navy. Admiral Jorge Arancibia directs the 29,000-person navy, including 5,200 marines. The fleet of 31 surface vessels and 4 submarines is based in Valparaiso. The navy operates its own aircraft.

Air Force. General Fernando Rojas Vender heads a force of 15,000. Air assets are distributed among 4 air brigades headquartered in Iquique, Santiago, Puerto Montt, and Punta Arenas. The Air Force also operates an airbase on King George Island, Antarctica.

The Chilean police are comprised of a national, uniformed police force (carabineros) and a smaller, plainclothes investigations police force. After the military coup in September 1973, the Chilean national police were incorporated into the Defense Ministry. With the return of democratic government, the police were placed under the operational control of the Interior Ministry, but remain under the nominal control of the Defense Ministry. General Manuel Ugarte, who directs the national police force of 27,000, is responsible for law enforcement, traffic management, narcotics suppression, border control, and counter-terrorism throughout Chile.

ECONOMY

Chile's economy, spurred by free market-oriented policies, has averaged a real growth rate of almost 8% per year over the past decade. A limited government role in the economy, openness to international trade and investment, high domestic savings and investment rates, and budget surpluses have made this performance possible. The economy's rapid growth has led to steady increases in wages and living standards.

In 1997, the economy grew by 7.1% in real terms as the inflation rate fell to 6.0%. With investment continuing at a record pace, the economy is expected to continue growing quite vigorously over the next several years. The late-1997/98 financial crisis in Asia is expected to negatively affect Chilean exports and reduce Chile's substantial trade surplus with the region; the Asian crisis is expected to reduce Chilean GDP expansion significantly, resulting in a growth rate between 4.5-5.0% in 1998. In 1999, observers expect growth to be in the 2.5-3.0% range.

Chile has achieved central government budget surpluses every year since 1988. In 1997, the surplus equaled 1.9% of GDP. The 1973-90 military government sold many state-owned companies, and the two democratic governments since 1990 have continued privatization at a more sporadic pace. Import tariffs are a flat 11% on nearly all products and the GOC plans to reduce the rate gradually over the next 5 years.

Policy measures such as the privatization of the national pension system encourage domestic investment, contributing to an estimated total domestic savings rate of approximately 23% of GDP in 1997. The foreign investment law offers investors basically the same treatment as domestic firms, along with some extra guarantees.

Wages have risen faster than inflation each year since 1990; nearly all of this growth reflects greater productivity. The higher wages have increased living standards and have brought more people into the labor force. The share of Chileans with incomes below the poverty line (roughly $4,000/year for a family of four) fell from 46% of the population in 1987 to 23% in 1997. Unemployment has varied with the business cycle in recent years, with annual rates of between 4.5%-6.0%.

Inflation has declined every year since 1990, when the indicator stood at 27%. In 1996, December-to-December inflation stood at 8.2%, and it fell to 6.1 % in 1997. Because most wage settlements and spending decisions are indexed, either formally or informally, it has been difficult to reduce inflation rapidly while maintaining high growth rates. Still, the independent Central Bank has been willing to raise interest rates when necessary to bring down inflation.

The establishment of a compulsory private sector pension system in 1981 was an important step toward increasing domestic savings and the pool of investment capital. Under this system, all workers must pay 10% of their salaries into privately managed funds. This large capital pool has been supplemented by substantial foreign investment.

Total public and private investment in the Chilean economy is very high; in 1997, investment accounted for 33% of GDP, a historical record. The government recognizes the necessity of steadily increasing private investment to boost worker productivity. The government is also encouraging diversification to non-traditional exports such as fruit, wine, and fish to gradually reduce the relative importance of basic traditional exports such as copper, timber, and other natural resources.

Chile's welcoming attitude toward foreign direct investment is codified in the country's Foreign Investment Law, which gives foreign investors the same treatment as Chileans. Registration is simple and transparent, and foreign investors are guaranteed access to the official foreign exchange market to repatriate their profits and capital. However, such capital must be kept in Chile for 1 year before being repatriated.

Foreign direct investment in Chile continued at a record pace in 1997, adding $5.0 billion to the total stock. Total foreign investment flows in 1998 (including portfolio and other indirect forms of investment) were $8.1 billion, or better than 10% of GDP.

Foreign Trade

Chile's economy is highly dependent on international trade. In 1997, exports reached $17.0 billion and imports $18.9 billion. Exports accounted for 22% of GDP. Chile has traditionally been dependent upon copper exports. The state-owned firm CODELCO is the world's largest copper producing company. Foreign private investment has developed many new mines, and the private sector produces more copper than CODELCO. Copper output is expected to increase significantly in the next few years as more private sector projects come on stream.

Non-traditional exports have grown faster than those of copper and other minerals. In 1975, non-mineral exports made up just over 30% of total exports; in 1997, they accounted for 52% of export earnings. The most important non-mineral exports are forestry and wood products, fresh fruit and processed food, fishmeal and seafood, and other manufactured products.

Chile's export markets are geographically diverse. Asia and the European Union are the largest regional markets. The U.S., the largest single market, takes in about 17% of Chile's exports. Latin America has been the fastest-growing export market in recent years. The government actively seeks to promote Chile's exports globally. Since 1991, Chile has signed free trade agreements with Canada, Mexico, Venezuela, Colombia, and Ecuador. An association agreement with MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay) went into effect in October 1996. Chile has joined the Asia-Pacific Economic Cooperation (APEC) organization in an effort to boost commercial ties to Asian markets. Also, Chile and the European Union plan to negotiate a trade agreement in the medium-term. Chile shares the U.S. interest in negotiating a comprehensive trade agreement between the two countries. This is due in large part because the United States is the country's most important single trading partner and source of foreign investment; both countries also recognize that the example it would set for broader hemispheric trade integration would be in each other's interest. Chile's 1996 free trade agreement with Canada was modeled largely on NAFTA in anticipation of an eventual trade pact with the United States; similarly, Chile broadened its bilateral free trade agreement with Mexico in March 1998.

Imports have grown along with the economy in the past few years. The country's high investment rate is reflected in the fact that capital goods make up almost 30% of total imports. The United States is Chile's largest single supplier, supplying 23% of the country's imports in 1997. Import tariffs are currently a flat 11% on nearly all products although higher effective tariffs can be charged on imports of wheat, wheat flour, vegetable oils, and sugar as a result of a system of import price bands.

Finance

Chile's financial sector has grown faster than other areas of the economy over the last few years; a banking law reform approved in 1997 broadened the scope of permissible foreign activity for Chilean banks. Domestically, Chileans have enjoyed the recent introduction of new financial tools such as home equity loans, currency futures and options, factoring, leasing, and debit cards. The introduction of these new products has been accompanied by increased use of traditional instruments such as loans and credit cards. Chile's private pension system, with assets worth over $30 billion at the end of 1997, has provided an important source of investment capital for the stock market. The number of firms with shares traded on the stock market continues to grow.

Chile's credit rating is one of the best in Latin America. In recent years, many Chilean companies have sought to raise capital abroad due to the relatively lower interest rates outside of Chile. There are three main ways Chilean firms raise funds abroad: bank loans, issuance of bonds, and the selling of stock on U.S. markets through American Depository Receipts (ADRs). Nearly all of the funds raised go to finance investment.

The government is rapidly paying down its foreign debt. The combined public and private foreign debt was roughly 35% of GDP at the end of 1997, low by Latin American standards.

FOREIGN POLICY

With its return to democracy in 1990, Chile became an active participant in the international political arena. It is an active member of the Rio Group, and it rejoined the Non-Aligned Movement. Chile was a driving force in the world summit for social development held in Copenhagen in March 1995. Chile is an active member of the United Nations and the UN family of agencies, serving on the UN Security Council 1995-97. Chile participates in UN peacekeeping activities, including UNSCOM in Iraq. The Chilean Government has diplomatic relations with most countries, including Cuba. Chile maintains only consular relations with Bolivia; Chile's acquisition of territory during the War of the Pacific (1879-83) continues to influence adversely its relations with Peru and Bolivia. Chile's association with the MERCOSUR countries in 1996 and its continuing interest in hemispheric free trade, as well as its membership in the Asia-Pacific Economic Cooperation grouping auger well for even closer international economic ties in the future. Politically, Chile has been one of the most active countries in supporting implementation of the 1994 Summit of the Americas, hosting the second Summit of the Americas in Santiago, April 1998.

U.S.-CHILEAN RELATIONS

Relations between the United States and Chile are better now than at any other time in history. The United States Government applauded the rebirth of democratic practices in Chile in the late 1980s and early 1990s and sees the maintenance of a vibrant democracy and a healthy and sustainable economy as among the most important U.S. interests in Chile. President Eduardo Frei's February 1997 state visit to the United States forged close ties with President Clinton, leading to the latter's state visit to Chile in April 1998. The two governments consult frequently on issues of mutual concern, and dialogue takes place in four bilateral commissions (covering defense, global security, agriculture, trade and investment, and bilateral issues).

Many other prominent Americans and senior U.S. officials visited Chile during the period 1995-1998, including Hillary Rodham Clinton, ex-Presidents Carter, Bush, and Ford, former Secretary of State Christopher, Secretary of State Albright, Secretary of Defense Cohen, many other members of the Cabinet and Congress, and senior members of the U.S. military, addressing issues ranging from education to international trade.

The warm relationship enjoyed by the United States and Chile today contrasts with the difficult period of relations during Augusto Pinochet's military regime from 1973-90. A 1976 car bomb attack in Washington, DC, which killed Orlando Letelier, former Chilean ambassador to the United States and a member of President Salvador Allende's cabinet, and U.S. citizen Ronni Moffitt, caused a sharp deterioration in relations, including a ban on security assistance and arms sales to Chile. In response to a commitment by President Aylwin's Government to pursue the Letelier-Moffitt case within the Chilean judicial system, President Bush lifted the sanctions. A Chilean court subsequently convicted two Chilean military officers of having ordered the assassination. The goal of U.S. foreign policy in Chile is to pursue expanded economic relations and to cooperate on a range of bilateral and multilateral issues of interest. Above all, the United States believes that an economically strong and democratically healthy Chile will benefit the entire hemisphere.


Colombia

PEOPLE

Colombia is the third-most populous country in Latin America, after Brazil and Mexico. Movement from rural to urban areas has been heavy. The urban population increased from 57% of the total population in 1951 to about 74% by 1994. The nine eastern departments, constituting about 54% of Colombia's area, have less than 3% of the population and a density of less than one person per square kilometer (two persons per sq. mi.). Thirty cities have 100,000 or more inhabitants. Residents of the high Andes Mountains must cope with sometimes deadly volcanic activity--more than 20,000 died in the 1985 eruption of the Nevada del Ruiz Volcano near the town of Armero in Tolima Department. The Galeras Volcano near Pasto (Narino Department) is active and under observation by the Colombian Government.

The ethnic diversity in Colombia is a result of the intermingling of indigenous Indians, Spanish colonists, and African slaves. Today, only about 1% of the people can be identified as fully Indian on the basis of language and customs. Few foreigners have immigrated to Colombia, unlike several other South American countries.

HISTORY

During the pre-Columbian period, the area now known as Colombia was inhabited by indigenous people who were primitive hunters or nomadic farmers. The Chibchas, who lived in the Bogota region, dominated the various Indian groups.

Spaniards first sailed along the north coast of Colombia as early as 1500, but their first permanent settlement, at Santa Marta, was not established until 1525. In 1549, the area was established as a Spanish colony with the capital at Santa fe de Bogota. In 1717, Bogota became the capital of the Viceroyalty of New Granada, which included what is now Venezuela, Ecuador, and Panama. The city became one of the principal administrative centers of the Spanish possessions in the New World, along with Lima and Mexico City.

On July 20, 1810, the citizens of Bogota created the first representative council to defy Spanish authority. Total independence was proclaimed in 1813, and in 1819 the Republic of Greater Colombia was formed.

The Republic

After the defeat of the Spanish army, the republic included all the territory of the former viceroyalty. Simon Bolivar was elected its first President and Francisco de Paula Santander, Vice President. Two political parties that grew out of conflicts between the followers of Bolivar and Santander--the Conservatives and the Liberals--have dominated Colombian politics. Bolivar's supporters, who later formed the nucleus of the Conservative Party, advocated a strong centralized government, alliance with the Roman Catholic Church, and a limited franchise. Santander's followers, forerunners of the Liberals, wanted a decentralized government, state rather than church control over education and other civil matters, and a broadened suffrage.

Throughout the 19th and early 20th centuries, each party held the presidency for roughly equal periods of time. Colombia, unlike many Latin American countries, maintained a tradition of civilian government and regular, free elections. The military has seized power three times in Colombia's history: in 1830, when Ecuador and Venezuela withdrew from the republic (Panama did not become independent until 1903); in 1854; and in 1953-57. In the first two instances, civilian rule was restored within 1 year.

Notwithstanding the country's commitment to democratic institutions, Colombia's history has been characterized by periods of widespread, violent conflict. Two civil wars resulted from bitter rivalry between the Conservative and Liberal parties. The War of a Thousand Days (1899-1902) cost an estimated 100,000 lives, and up to 300,000 people perished during "La Violencia" (The Violence) of the late 1940s and 1950s.

A military coup in 1953 brought Gen. Gustavo Rojas Pinilla to power. Initially, Rojas enjoyed considerable popular support, due largely to his success in reducing "La Violencia." When he did not restore democratic rule, however, he was overthrown by the military in 1957 with the backing of both political parties, and a provisional government was installed.

The National Front

In July 1957, former Conservative President Laureano Gomez (1950-53) and former Liberal President Alberto Lleras Camargo (1945-46) issued the "Declaration of Sitges," in which they proposed a "National Front" whereby the Liberal and Conservative parties would govern jointly. Through regular elections, the presidency would alternate between the two parties every 4 years; the parties also would have parity in all other elective and appointive offices.

The National Front ended "La Violencia." National Front administrations instituted far-reaching social and economic reforms in cooperation with the Alliance for Progress, an inter-American program of economic assistance which began in 1961 with major financial backing by the United States. The National Front government made efforts to resolve problems of inflation, unemployment, and inequitable income distribution while cutting government expenses.

Although the parity system established by the Sitges agreement was terminated in 1978, the 1886 Colombian constitution (in effect until 1991) required that the losing political party be given adequate and equitable participation in the government. Although the 1991 constitution does not have that requirement, subsequent administrations have included opposition parties in the government.

Post-National Front Years

Between 1978 and 1982, the government focused on ending the limited, but persistent, Cuban-backed insurgency that sought to undermine Colombia's traditional democratic system. The success of the government's efforts enabled it to lift the state-of-siege decree that had been in effect for most of the previous 30 years.

In 1984, President Belisario Betancur, a Conservative who won 47% of the popular vote, negotiated a cease-fire that included the release of many guerrillas imprisoned during the effort to overpower the insurgents. The cease-fire ended when Democratic Alliance/M-19 (AD/M-19) guerrillas resumed fighting in 1985.

A vicious attack on the Palace of Justice in Bogota by the AD/M-19 on November 6-7, 1985, and its violent suppression by the Army, shocked Colombia and the entire world. Of the 115 people killed, 11 were Supreme Court justices. Although the government and the Revolutionary Armed Forces of Colombia (FARC), the largest guerrilla group, renewed their truce in March 1986, peace with the AD/M-19 and dissident factions of other guerrilla groups seemed remote as Betancur left office.

The next administrations had to contend both with the guerrillas and with the narcotics traffickers, who operated with relative impunity within Colombia. Narco-terrorists assassinated three presidential candidates before Cesar Gaviria Trujillo was elected in 1990. Since the death of Medellin cartel leader Pablo Escobar in a shoot-out in December 1993, indiscriminate acts of violence associated with that organization have abated.

President Ernesto Samper assumed office in August 1994. Samper vowed to continue many of the economic and foreign policy goals of the Gaviria Administration, while also placing greater emphasis on addressing social inequities and eliminating poverty. However, a political crisis relating to contributions from drug traffickers to Samper?s 1994 presidential campaign diverted attention from these social programs, thus slowing, and in some cases, halting progress.

GOVERNMENT

On August 7, 1998, Andres Pastrana was sworn in as the President of Colombia. A member of the Conservative Party, Pastrana defeated Liberal Party candidate Horacio Serpa in a run-off election marked by high voter turn-out and little political unrest. In an August visit with President Clinton, then President-elect Pastrana expressed his hopes for bringing about a peaceful resolution of Colombia?s long-standing civil conflict, and conveyed his commitment to cooperate fully with the United States to combat the traffic in illegal drugs.

While this commitment and early initiatives in the Colombian peace process give reason for optimism, the Pastrana Administration will simultaneously have to deal with combating high unemployment and other economic problems, such as the fiscal deficit and the impact of global financial instability on Colombia. Additionally, the severity of the countrywide guerrilla attacks on August 3-5 by the FARC and ELN--which left at least 135 dead and more than 180 soldiers and police taken prisoner--highlighted the difficulties that President Pastrana will face in the future.

The new constitution, enacted on July 4, 1991, strengthened the administration of justice with the provision for introduction of an accusatorial system which ultimately is to replace entirely the previous Napoleonic Code system. Other significant reforms under the new constitution provide for civil divorce, dual nationality, the election of a vice president, and the election of departmental governors. The constitution expanded citizens' basic rights, including that of "tutela," under which an immediate court action can be requested by an individual if he or she feels that his or her constitutional rights are being violated and if there is no other legal recourse.

The national government has separate executive, legislative, and judicial branches. The President is elected for a 4-year term and cannot be re-elected. The 1991 constitution re-established the position of vice president, who is elected on the same ticket as the president. By law, the vice president will succeed in the event of the president's resignation, illness, or death.

Colombia's bicameral Congress consists of a 102-member Senate and a 161-member House of Representatives. Senators are elected on the basis of a nationwide ballot, while representatives are elected in multi-member districts co-located within the 32 national departments. The country's capital is a separate capital district and elects its own representatives. Members may be re-elected indefinitely, and, in contrast to the previous system, there are no alternate Congressmen. Congress meets twice a year, and the president has the power to call it into special session when needed.

DEFENSE

Colombia's Ministry of Defense, charged with the country's internal and external defense and security, has an army, navy (which includes both marines and a coast guard), air force, and national police under the leadership of a civilian Minister of Defense. Colombia has been plagued by a lengthy civil conflict which continues to take a heavy toll on the Colombian people. The conflict with the guerrilla groups continues to be the top priority for the military.

In 1998, Colombia assigned 3.4% of its GDP to defense. The armed forces number about 250,000 uniformed personnel: 145,000 military and 105,000 police. Many Colombian military personnel have received training in the United States or in U.S. military schools in Panama. The United States has provided equipment to the Colombian military through the military assistance program and foreign military sales.

Narcotics decertification in 1996 forced a temporary halt to U.S. military assistance programs, except for those related to counternarcotics. On August 1, 1997, the U.S. and Colombia signed an End Use Monitoring (EUM) memorandum of understanding which stipulates that U.S. counternarcotics assistance to the Colombian military is conditioned on human rights screening of proposed recipient units.

ECONOMY

Under the leadership of President Cesar Gaviria Trujillo, Colombia undertook a profound economic reform program in 1990-94 (the "apertura," an "opening" to economic liberalization and international trade and investment). The Gaviria Government pursued prudent fiscal, exchange rate, and monetary policies and implemented sweeping changes in the areas of finance, labor, exchange rates, and trade. These measures have been largely responsible for the sustained economic growth enjoyed by Colombia. GDP growth has been more than 4% during 5 of the last 8 years. Starting in 1996, however, growth slowed significantly. While the Samper Administration did not undermine the "apertura," it also did not push it forward. Privatization slowed under the Samper Government.

Allegations that Samper had accepted drug money in his presidential campaign weakened the administration and affected the economy through 1997. Samper made repeated concessions in labor disputes, including inflationary wage increases. This led the private sector in 1997 to abandon the "Social Pact for Productivity, Prices and Wages," a program instituted in 1995 in which the economy's major players (government, private sector, and labor) had agreed to exercise discipline over wages and prices to keep inflation in check. Continued internal security problems stemming from Colombia's civil conflict also affect economic growth.

Andres Pastrana, widely regarded as pro-business, took office on August 7. The new president has expressed his commitment to carrying forward the peace process, reducing the fiscal deficit, and promoting investment, employment, and savings.

The Colombian economy in 1997 produced real official growth of 3.2%, up from the 2.1% recorded in 1996. Economic performance in 1997 owed its strength largely to the 5.1% growth in the transportation and communications sector and the 4.4% growth in the mining and hydrocarbons sector. Exports grew only slightly, from $10.6 billion in 1996 to $11.5 billion in 1997. Unemployment rose to 14.8% by mid- 1998, its highest level in 20 years. The trade deficit of $3.8 billion was offset by capital flows in the form of foreign direct investment and private sector borrowing.

Colombia's foreign exchange reserves at the end of 1997 were approximately $9.88 billion. With these strong net international reserves, Colombia successfully remained in the international capital markets in Europe, Japan, and the United States. The rate of inflation in 1997 was 17.7%, down from 21.6% in 1996. Colombia is the only major Latin American country which did not have to reschedule its external debt during the debt crises of the 1980s. The nation continued to pay both principal and interest to its foreign creditors. Today it is one of the very few countries in the region to hold an investment grade international credit rating. Colombia's total foreign debt at the end of 1997 was $31.5 billion -- $16 billion in public sector debt, $15.5 billion in the private sector -- totaling 33% of GDP.

The new Finance Minister Restrepo and his team are implementing fiscal and monetary policies designed to get Colombia?s finances in order, and in particular, attack the serious fiscal problem. On September 2, 1998, Colombia?s central bank effectively devalued the peso by 9%. The administration plans to reduce the budget deficit substantially via cuts in expenditures and expanding the tax base, reducing tax exemptions, and attacking smuggling and tax evasion.

Mining and Energy

Colombia is well-endowed with minerals and energy resources. It has the largest coal reserves in Latin America and is second to Brazil in hydroelectric potential. Estimates of oil reserves in 1995 were 3.1 billion barrels. It also possesses significant amounts of ferronickel, gold, silver, platinum, and emeralds.

The discovery of 2 billion barrels of high-quality oil at the Cusiana and Cupiagua fields, about 125 miles east of Bogota, has enabled Colombia to become a net oil exporter since 1986. Total crude oil production averages 620,000 b/d; about 184,000 b/d is exported, and production from those fields is projected to reach 1 million barrels per day (b/d) by the year 2000. The Government of Colombia has come under pressure for the stringent requirements of its association contracts for the exploration and production of Colombia's oil. Refining capacity cannot satisfy domestic demand, so some refined products, especially gasoline, must be imported. Plans for the construction of a new refinery are under development.

The oil pipelines are a frequent target of extortion and bombing campaigns by both the ELN and FARC guerrillas. The bombings, which occur on average once every 5 days, have caused substantial environmental damage.

Colombia has 6.6 billion tons of proven coal reserves and its coal production totaled 21.7 million metric tons (mt) in 1995. Production from El Cerrejon -- the world's largest open pit coal mine -- located on Colombia's Guajira Peninsula, accounted for 65% of that amount. Colombia's exports of 18.4 million mt of steam coal in 1994 made it the world's fourth-largest exporter of this commodity. Coal exports were expected to reach 25 million tons in 1996, and private and public investments in Colombia's coal fields and related infrastructure projects are expected to enable the country to export about 35 million mt at the beginning of the next decade.

While Colombia has vast hydroelectric potential, a prolonged drought in 1992 forced severe electricity rationing throughout the country until mid-1993. The consequences of the drought on electricity-generating capacity caused the government to commission the construction or upgrading of 10 thermoelectric power plants. Half will be coal-fired and half will be fired by natural gas. The government has also begun awarding bids for the construction of a natural gas pipeline system that will extend from the country's extensive gas fields to its major population centers. Plans call for this project to make natural gas available to millions of Colombian households by the middle of the next decade.

Trade

Colombia's balance of trade showed a deficit of $3.8 billion in 1997, worse than the $2.2 billion deficit in 1996. Total imports reached $15.3 billion, while exports were $11.5 billion. Colombia's major exports continue to be petroleum, coffee, coal, nickel, gold, and non-traditional exports (e.g., cut flowers, semi-precious stones, sugar, and tropical fruits). Colombia's major trading partner in 1997 continued to be the United States, which took 38% of Colombia's exports and provided 41.5% of its imports. The EU and Japan remain important trading partners, as do Andean Pact partners, especially Venezuela. Diplomatic relations with a number of Pacific nations were established during the Gaviria Administration. Regular diplomatic exchanges with Japan, China, South Korea, and other Asian nations are designed to open these markets to Colombian products.

Foreign Investment

In 1991 and 1992, the government passed laws to stimulate foreign investment in nearly all sectors of the economy. The only activities closed to foreign direct investment are defense and national security, disposal of hazardous wastes, and real estate (the last of these restrictions is intended to hinder money laundering). Colombia established a special entity -- Coinvertir -- to assist foreigners in making investments in the country. Foreign direct investment continued to be strong in 1997, registering flows of $3.8 billion.

Major foreign investment projects underway include the $6 billion development of the Cusiana and Cupiagua oil fields, development of coal fields in the north of the country, and the recently concluded licensing for establishment of cellular telephone service. The United States accounted for 37.8% of the total $11.2 billion stock of non-petroleum foreign direct investment in Colombia at the end of 1997.

On October 21, 1995, under the International Emergency Economic Powers Act (IEEPA), President Clinton signed an Executive Order barring U.S. entities from any commercial or financial transactions with four Colombian drug kingpins and with individuals and companies associated with the traffic in narcotics, as designated by the Secretary of the Treasury in consultation with the Secretary of State and the Attorney General.

Industry and Agriculture

The most industrially diverse member of the five-nation Andean Community, Colombia has four major industrial centers--Bogota, Medellin, Cali, and Barranquilla, each located in a distinct geographical region. Colombia's industries include textiles and clothing, leather products, processed foods and beverages, paper and paper products, chemicals and petrochemicals, cement, construction, iron and steel products, and metalworking.

Agriculture accounted for 18% of Colombia's GDP in 1997. Its diverse climate and topography permit the cultivation of a wide variety of crops. In addition, all regions yield forest products, ranging from tropical hardwoods in the hot country to pine and eucalyptus in the colder areas.

Cacao, sugar cane, coconuts, bananas, plantains, rice, cotton, tobacco, cassava, and most of the nation's beef cattle are produced in the hot regions from sea level to 1,000 meters elevation. The temperate regions -- between 1,000 and 2,000 meters -- are better suited for coffee, certain flowers, corn and other vegetables, and fruits such as citrus, pears, pineapples, and tomatoes. The cooler elevations -- between 2,000 and 3,000 meters -- produce wheat, barley, potatoes, cold-climate vegetables, flowers, dairy cattle, and poultry.

Narcotics Cultivation and Control

Colombia is the world's leading supplier of refined cocaine and a growing supplier of heroin, especially to the United States. Colombia also has the largest area under coca cultivation. Despite the death of Medellin cartel drug lord Pablo Escobar in 1993 and the arrests of major Cali cartel kingpins in 1995 and 1996, the Colombian drug cartels remain among the most sophisticated criminal organizations in the world. They control cocaine processing, international wholesale distribution chains, and markets.

Colombia is engaged in a broad range of narcotics control activities. Through aerial spraying of herbicide and manual eradication, Colombia has attempted to keep coca, opium poppy, and cannabis cultivation from expanding. The government has committed itself to the eradication of all illicit crops, interdiction of drug shipments, and financial controls to prevent money laundering. A new alternative development program is being planned for initiation in 1999.

Corruption and intimidation by traffickers complicate the drug-control efforts of many institutions of government. Colombia passed a revised criminal procedures code in 1993 which permits traffickers to surrender and negotiate lenient sentences in return for cooperating with prosecutors. In December 1996 and February 1997, however, the Colombian Congress passed legislation to toughen sentencing, asset forfeiture, and money laundering penalties. Implementation, however, is still lagging. In November 1997, the Colombian Congress amended the constitution to permit the extradition of Colombian nationals, albeit not retroactively -- which could have the effect of shielding major traffickers from justice in the United States and other countries where they committed their crimes. (The Colombian Government permits extradition of foreigners resident in Colombia). The amendment was under review until October 5, 1998, when the Constitutional Court ruled that a proposed constitutional amendment permitting extradition without retroactivity was valid.

In 1996 and 1997, President Clinton made the decision not to certify Colombia as fully cooperating with the United States or taking adequate steps on its own to meet the objective of the 1988 U.N. convention on drugs. On February 26, 1998, the President determined that the vital national interests of the United States require that U.S. assistance to Colombia be provided to meet the increasing challenges posed to counternarcotics efforts in Colombia. The President granted Colombia a national interests certification, which waives the restrictions of decertification and allows for broader U.S. engagement with Colombia in the fight against illegal narcotics.

Colombia and other drug producing and drug transit countries will be reviewed annually by March 1 for counternarcotics performance.

FOREIGN RELATIONS

Colombia seeks diplomatic and commercial relations with all countries, regardless of their ideologies or political or economic systems. In 1969, it formed what is now the Andean Community along with Bolivia, Chile, Ecuador, and Peru (Venezuela joined in 1973 and Chile left in 1976). In the 1980s, Colombia broadened its bilateral and multilateral relations, joining the Contadora Group, the Group of Eight (now the Rio Group), and the Non-Aligned Movement -- which it chaired from 1994 until September 1998. In addition, it has signed free trade agreements with Chile, Mexico, and Venezuela.

Colombia has traditionally played an active role in the UN, in the Organization of American States, and in their subsidiary agencies. Former President Gaviria became Secretary General of the OAS in September 1994. Colombia was a participant in the December 1994 and April 1998 Summits of the Americas and followed up on initiatives developed at the summit by hosting two post-summit, ministerial-level meetings on trade and science and technology.

Colombia regularly participates in international fora, including CICAD, the Organization of American States' body on money laundering, chemical controls, and drug abuse prevention. Although the Colombian Government ratified the 1988 UN convention on narcotics in 1994 -- the last of the Andean Governments to do so --it took important reservations, notably to the anti-money-laundering measures, asset forfeiture and confiscation provisions, maritime interdiction, and extradition clauses. Colombia subsequently withdrew some of their reservations, most notably its reservation on extradition.

U.S.-COLOMBIAN RELATIONS

In 1822, the United States became one of the first countries to recognize the new republic and to establish a resident diplomatic mission. Today, about 25,000 U.S. citizens live in Colombia, most of them dual nationals. From October 1997 to September 1998, more than 158,000 Americans visited Colombia. Currently 250 private American businesses are registered in Colombia.

Despite the strain which decertification and related issues placed on bilateral relations during the Samper Administration, the U.S. and Colombian Governments continued to cooperate and consult. In 1995 and 1996, the U.S. and Colombia signed important agreements on environmental protection and civil aviation. The two countries have signed agreements on asset sharing and chemical control. In 1997, the U.S. and Colombia signed an important maritime ship-boarding agreement to allow for search of suspected drug-running vessels. During the period 1988-1996, the United States provided approximately $765 million in assistance to Colombia. In 1998, U.S. assistance will exceed $100 million. This funding supports Colombia's counternarcotics efforts, such as arresting drug traffickers, seizing drugs and illegal processing facilities, and eradicating coca and opium poppy.

Trade Development

Colombia is the United States' fifth-largest export market in Latin America (behind Mexico, Brazil, Venezuela, and Argentina) and the 26th-largest market for U.S. products worldwide. In 1997, two-way merchandise trade between the United States and Colombia totaled $9.7 billion, according to United States Government data. The United States is Colombia's principal trading partner. Colombia benefits from duty-free entry (for a 10-year period, through 2001) for certain of its exports to the United States under the Andean Trade Preferences Act. Colombia improved protection of intellectual property rights through the adoption of three Andean Pact decisions in 1993 and 1994, but the U.S. remains concerned over deficiencies in licensing, patent regulations, and copyright protection.

The petroleum and natural gas, coal mining, chemical, and manufacturing industries attract the greatest U.S. investment interest. U.S. investment accounted for 37.8% ($4.2 billion) of the total $11.2 billion in foreign direct investment at the end of 1997 (excluding petroleum and portfolio investment). Worker rights and conditions in the U.S.-dominated sectors are superior to general working conditions. Examples include shorter-than-average working hours, higher wages, and compliance with health and safety standards above the national average.


Costa Rica

PEOPLE AND HISTORY

Unlike many of their Central American neighbors, present-day Costa Ricans are largely of European rather than mestizo descent; Spain was the primary country of origin. Few of the native Indians survived European contact; the indigenous population today numbers about 29,000 or 1% of the population. Descendants of 19th century Jamaican immigrant workers constitute an English-speaking minority and--at 3% of the population--number about 96,000.

In 1502, on his fourth and last voyage to the New World, Christopher Columbus made the first European landfall in the area. Settlement of Costa Rica began in 1522. For nearly three centuries, Spain administered the region as part of the Captaincy General of Guatemala under a military Governor. The Spanish optimistically called the country "Rich Coast." Finding little gold or other valuable minerals in Costa Rica, however, the Spanish turned to agriculture.

The small landowners' relative poverty, the lack of a large indigenous labor force, the population's ethnic and linguistic homogeneity, and Costa Rica's isolation from the Spanish colonial centers in Mexico and the Andes all contributed to the development of an autonomous and individualistic agrarian society. An egalitarian tradition also arose; this tradition survived the widened class distinctions brought on by the 19th century introduction of banana and coffee cultivation and consequent accumulations of wealth.

In 1821, Costa Rica joined other Central American provinces in a joint declaration of independence from Spain. Although the newly independent provinces formed a Federation, border disputes broke out among them, adding to the region's turbulent history and conditions. Costa Rica's northern Guanacaste Province was annexed from Nicaragua in one such regional dispute. In 1838, long after the Central American Federation ceased to function in practice, Costa Rica formally withdrew and proclaimed itself sovereign.

An era of peaceful democracy in Costa Rica began in 1899 with elections considered the first truly free and honest ones in the country's history. This began a trend continued until today with only two lapses: in 1917-19, Federico Tinoco ruled as a dictator, and, in 1948, Jose Figueres led an armed uprising in the wake of a disputed presidential election.

With more than 2,000 dead, the 44-day civil war resulting from this uprising was the bloodiest event in 20th century Costa Rican history, but the victorious junta drafted a constitution guaranteeing free elections with universal suffrage and the abolition of the army. Figueres became a national hero, winning the first election under the new constitution in 1953. Since then, Costa Rica has held 11 presidential elections, the latest in 1998.

GOVERNMENT

Costa Rica is a democratic republic with a strong system of constitutional checks and balances. Executive responsibilities are vested in a president, who is the country's center of power. There also are two vice presidents and a 19-member Cabinet (that includes one of the vice presidents). The president and 57 Legislative Assembly deputies are elected for four-year terms. A constitutional amendment approved in 1969 limits presidents and deputies to one term, although a deputy may run again for an Assembly seat after sitting out a term.

The electoral process is supervised by an independent Supreme Electoral Tribunal--a commission of three principal magistrates and six alternates selected by the Supreme Court of Justice. Judicial power is exercised by the Supreme Court of Justice, composed of 22 magistrates selected for renewable eight-year terms by the Legislative Assembly, and subsidiary courts. A Constitutional Chamber of the Supreme Court, established in 1989, reviews the constitutionality of legislation and executive decrees and all habeas corpus warrants.

The country's seven provinces are headed by governors appointed by the president, but they exercise little power. There are no provincial legislatures. Autonomous state agencies enjoy considerable operational independence; they include the nationalized commercial banks, the state insurance monopoly, and the social security agency. Costa Rica has no military and maintains only domestic police and security forces for internal security.

POLITICAL CONDITIONS

Costa Rica long has emphasized the development of democracy and respect for human rights. Until recently, the country's political system has contrasted sharply with many of its Central American and Caribbean neighbors; it has steadily developed and maintained democratic institutions and an orderly, constitutional scheme for government succession. Several factors have contributed to this tendency, including enlightened government leaders, comparative prosperity, flexible class lines, and educational opportunities that have created a stable middle class, and high social indicators. Also, because Costa Rica has no armed forces, it has avoided the possibility of political intrusiveness by the military that some neighboring countries have experienced.

In the February 1998 national election, Social Christian Unity Party (PUSC) candidate Miguel Angel Rodriguez won the presidency over National Liberation Party (PLN) nominee Jose Miguel Corrales. President Rodriguez assumed office May 8, 1998. The PUSC also obtained 27 seats in the 57-member Legislative Assembly, for a plurality, while the PLN gained 23, and five minor parties seven.

Social Christian in philosophy, the PUSC generally favors free-market principles, conservative fiscal policies, and government reform. President-elect Rodriguez has pledged to reduce the country's large internal debt, attract additional foreign investment, impose greater control over public-sector spending, and promote the creation of jobs with decent salaries.

ECONOMY

Costa Rica's economy emerged from recession in 1997 and is poised for relatively healthy growth in 1998. Preliminary national account statistics from Costa Rica's Central Bank indicate a 1997 gross domestic product (GDP) of 2.2 trillion colones (USD 9.5 billion at the average exchange rate for the year), up 3.2% in real terms (measured in constant 1966 colones) from the year before, when GDP declines. Inflation, as measured by the Consumer Price Index, was 11.2%, less than the 12.5% that was forecast. The central government deficit decreased to 3.7% of GDP in 1997, down from 5.1% from the year before, but still above the 3.0% target. Controlling the budget deficit remains the single biggest challenge for the country's economic policy makers, as servicing the accumulated public sector debt consumes approximately 30% of the government's budget and limits the amount of resources available for needed investments in public infrastructure.

Costa Rica's major economic resources are its fertile land and frequent rainfall, its well-educated population, and its location in the Central American isthmus, which provides easy accessibility to North and South American markets and direct ocean access to the European and Asian continents. With one-fourth of its land dedicated to national forests, often adjoining picturesque beaches, the country has also become a popular destination for affluent retirees and eco-tourists.

The country has not discovered sources of fossil fuels (apart from minuscule coal deposits), but its mountainous terrain and abundant rainfall have permitted the construction of a dozen hydroelectric power plants, making it self-sufficient in all energy needs, except oil for transportation. Mild climate and trade winds make neither heating nor cooling necessary, particularly in the highland cities and towns where approximately 90% of the population lives.

Costa Rica has an extensive road system of more than 30,000 kilometers, although much of it is in disrepair. Most parts of the country are accessible by road. The main highland cities in the center of the country are connected by paved all-weather roads with the Atlantic and Pacific coasts and by the Pan American Highway with Nicaragua and Panama, the neighboring countries to the North and the South. Costa Rica needs to complete the Pacific coastal highway (and repair large sections of existing highway), build a new road along the Atlantic coast, and possibly construct a coast-to-coast highway across the northern plains of the country. These are probably the most pressing infrastructural needs of the country. A decision is also needed to sell or repair the now-defunct railroad from San Jose to Limon.

Tourism, which has overtaken bananas as Costa Rica's leading foreign exchange earner, is once again growing after stagnating in the mid-1990s. Earnings for 1997 from an estimated 812,000 visitors are reported at $750 million, up from $684 million the year before. The number of visitors in 1996 was 781,000. The numbers also show that tourists spend nearly $1,000 per person per visit. Based upon early projections from visitors arriving over the holiday season, the Ministry of Tourism is projecting a 4%-5% increase in arrivals for 1998.

Costa Rica is also aggressively pursuing investment in the high technology sector. Largely due to the personal efforts of former President Figueres to attract new investment in the sector, Intel corporation began construction of a plant in 1997 to produce Pentium II microchips with an investment that will reach $200 million by the end of 1998. Intel's total planned investment is $400-$500 million over the next 2-3 years. A number of other high technology companies were already present in Costa Rica, and more are expected to follow.

Reflecting the evolution away from agriculture, 1997 growth was strong in the construction sector (16.4%), in industry (4.5%), and in commerce, restaurants and hotels (4.0%). Agriculture declined by 0.7%. Preliminary statistics for 1997 indicate a widening of the trade deficit and an increase of the current account deficit from roughly 1.1% of GDP in 1996 to 4.5% of GDP in 1997. During 1996, roughly 40% of total trade was with the U.S. As usual, bananas led the list of merchandise exports, but tourism earned more foreign exchange. However, despite the current account deficit, strong private capital inflows brought international reserves to over $1 billion, a level approximating three months of imports.

Costa Rica has sought to widen its economic and diplomatic ties, both within and outside of the region. Costa Rica signed a bilateral trade agreement with Mexico in 1994, and President Rodriguez has begun discussions with Mexico's president on accelerating further the liberalization of trade between the two countries. On March 20, 1998, Costa Rica joined other Central American countries, plus the Dominican Republic, in establishing a Trade and Investment Council with the United States. Costa Rica is also actively lobbying for greater access to the U.S. market, be it by joining the North American Free Trade Agreement, through enhancement of the United States Caribbean Basin Initiative, or through negotiation of the hemispheric Free Trade Area of the Americas, a process that the Costa Rican Government chaired in preparation for the April 1998 Summit of the Americas in Santiago, Chile.

FOREIGN RELATIONS

Costa Rica is an active member of the international community and, in 1993, proclaimed its permanent neutrality. Its record on human rights and advocacy of peaceful settlement of disputes give it a weight in world affairs far beyond its size. The country lobbied strenuously for the establishment of the United Nations High Commissioner for Human Rights and became the first nation to recognize the jurisdiction of the Inter-American Human Rights Court, based in San Jose.

In 1987, then-President Oscar Arias authored a regional peace plan that served as the basis for the Esquipulas Peace Agreement. Arias' efforts earned him the 1987 Nobel Peace Prize. Subsequent agreements, supported by the United States, led to the Nicaraguan election of 1990 and the end of civil war in Nicaragua. Costa Rica also hosted several rounds of negotiations between the Salvadoran Government and the Farabundo Marti National Liberation Front (FMLN), aiding El Salvador's efforts to emerge from civil war and culminating in that country's 1994 free and fair elections. Costa Rica has been a strong proponent of regional arms limitation agreements.

With the establishment of democratically elected governments in all Central American nations by the 1990s, Costa Rica turned its focus from regional conflicts to the pursuit of democratic and economic development on the isthmus. It was instrumental in drawing Panama into the Central American development process and participated in the multinational Partnership for Democracy and Development in Central America.

Regional political integration has not proven attractive to Costa Rica. Under former President Calderon, the country debated its role in the Central American integration process. Costa Rica has been a cautious partner--looking for concrete economic ties with its Central American neighbors rather than political institutions--and has not become a member of the Central American Parliament. President Figueres promoted a higher profile for Costa Rica in regional and international fora. In 1995, Costa Rica gained election as President of the Group of 77 in the United Nations. That term ended in 1997 with the South-South Conference held in San Jose. Since 1997, Costa Rica has occupied a non-permanent seat in the Security Council and has exercised a leadership role in confronting crises in the Middle East and Africa, as well as in the former Republic of Yugoslavia.

Costa Rica broke relations with Cuba in 1961 to protest Cuban support of leftist subversion in Central America and has not renewed formal diplomatic ties with the Castro regime. In 1995, Costa Rica established a migration office in Havana.

Costa Rica strongly backed efforts by the United States to implement United Nations Security Council Resolution 940, designed to facilitate the departure of Haiti's de facto authorities from power. The country agreed to contribute civilian medical personnel to the Multinational Force, which restored the democratically elected Government of Haiti in October 1994.

U.S.-COSTA RICAN RELATIONS

The United States and Costa Rica have a history of close and friendly relations based on respect for democratic government, human freedoms, and other shared values. During the crisis in Central America in the 1980s, Costa Rica and the United States worked for the restoration of peace and the establishment of democracy on the isthmus. Costa Rica works cooperatively with the United States and other nations in the international fight against narcotics trafficking.

In May 1997, President Clinton met with Costa Rican President Jose Maria Figueres and other heads of state from Central America and the Dominican Republic in San Jose. The leaders signed the Declaration of San Jose, pledging to strengthen democratic institutions and international cooperation. As a follow-up to the summit, regional Public Security and Justice ministers met with Secretary of State Madeleine Albright, Attorney General Janet Reno, and National Drug Control Policy Director Barry McCaffrey in Washington in August to discuss cooperation against drug trafficking and other transnational crimes. In November 1997, Labor Secretary Alexis Herman met with Labor ministers from Central America and the Dominican Republic to discuss ways to strengthen labor ministries and promote greater respect for workers' rights.

The United States is Costa Rica's most important trading partner, and over 200 American companies produce a variety of goods in Costa Rica. The two countries share growing concerns for the environment and want to use wisely Costa Rica's important tropical resources and prevent environmental degradation.

The United States responded to Costa Rica's economic needs in the 1980s with significant economic and development assistance programs. Through provision of more than $1.1 billion in assistance, USAID supported Costa Rican efforts to stabilize its economy and broaden and accelerate economic growth through policy reforms and trade liberalization. Assistance initiatives in the 1990s concentrated on democratic policies, modernizing the administration of justice, and sustainable development. For decades, Peace Corps volunteers have provided technical assistance in the areas of environmental education, natural resources, management, small business development, basic business education, urban youth, and community education.

As many as 35,000 American private citizens, mostly retirees, reside in the country, and an estimated 150,000 to 200,000 American citizens visit Costa Rica annually.

There have been some vexing issues in the U.S.-Costa Rican relationship, principal among them long-standing expropriation and other U.S. citizen investment disputes, which have hurt Costa Rica's investment climate and produced bilateral tensions. During 1994 and 1995, significant progress has been made in resolving some expropriation cases. However, several important cases remain outstanding. Land invasions from organized squatter groups who target foreign landowners have also occurred, and some have turned violent. The U.S. Government has made clear to Costa Rica its concern that Costa Rican inattention to these issues has allowed U.S. citizens to be threatened and their land taken without timely compensation, and the Rodriguez Government has promised to address the matter.


Cuba

PEOPLE

Cuba is a multiracial society with a population of mainly Spanish and African origins. The largest organized religion is the Roman Catholic Church. Santeria, a blend of native African religions and Roman Catholicism, is the most widely practiced religion in Cuba. Officially, Cuba has been an atheist state for most of the Castro era. However, a constitutional amendment adopted on July 12, 1992 changed the nature of the Cuban state from atheist to secular, enabling religious believers to belong to the Cuban Communist Party (PCC).

HISTORY

Spanish settlers established sugar cane and tobacco as Cuba's primary products. As the native Indian population died out, African slaves were imported to work the plantations. Slavery was abolished in 1886.

Cuba was the last major Spanish colony to gain independence, following a 50-year struggle begun in 1850. The final push for independence began in 1895, when Jose Marti, Cuba's national hero, announced the "Grito de Baire" ("Call to arms from Baire"). In 1898, after the USS Maine sunk in Havana Harbor on February 15 due to an explosion of undetermined origin, the United States entered the conflict. In December of that year Spain relinquished control of Cuba to the United States with the Treaty of Paris. On May 20, 1902, the United States granted Cuba its independence, but retained the right to intervene to preserve Cuban independence and stability under the Platt Amendment. In 1934, the amendment was repealed and the United States and Cuba reaffirmed the 1903 agreement which leased the Guantanamo Bay naval base to the United States. The treaty remains in force and can only be terminated by mutual agreement or abandonment by the United States.

Until 1959, Cuba was often ruled by military figures, who either obtained or remained in power by force. Fulgencio Batista, an army sergeant who established himself as Cuba's dominant leader for more than 25 years, fled on January 1, 1959, as Castro's "26th of July Movement" gained control. Castro had established the movement in Mexico, where he was exiled after the failed July 26, 1953, attack on the Moncada army barracks at Santiago de Cuba. Within months of taking power, Castro moved to consolidate his power by imprisoning or executing opponents. Hundreds of thousands of Cubans fled the island.

Castro declared Cuba a socialist state on April 16, 1961. For the next 30 years, Castro pursued close relations with the Soviet Union until the advent of perestroika and the subsequent demise of the U.S.S.R. During that time Cuba received substantial economic and military assistance from the U.S.S.R.--generally estimated at $5.6 billion annually--which kept its economy afloat and enabled it to maintain an enormous military establishment. In 1962, Cuban-Soviet ties led to a direct confrontation between the United States and the Soviet Union over the installation of nuclear-equipped missiles in Cuba, resolved only when the U.S.S.R. agreed to withdraw the missiles and other offensive weapons. Soviet subsidies ended in 1991 with the end of the Soviet Union. Former Soviet military personnel in Cuba--numbering around 15,000 in 1990--were withdrawn by 1993.

Russia still maintains a signal intelligence-gathering facility at Lourdes and has provided funding to preserve the still uncompleted thermonuclear plant at Juragua.

GOVERNMENT

Cuba is a totalitarian state controlled by President Fidel Castro, who is Chief of State, Head of Government, First Secretary of the Communist Party (PCC), and commander in chief of the armed forces. Castro exercises control over all aspects of Cuban life through the Communist Party and its affiliated mass organizations, the government bureaucracy, and the state security apparatus. The Ministry of Interior is the principal organ of state security and control. In addition to the routine law enforcement functions of regulating migration, controlling the Border Guard and the regular police forces, the Ministry's Department of State Security investigates and actively suppresses organized opposition and dissent.

From January 1959 until December 1976, Castro ruled by decree. The 1976 constitution, extensively revised in 1992, enshrines the PCC as "the highest leading force of the society and state." In addition to Fidel Castro and his brother Raul Castro, the center of party power is the 24-member Politburo. There are 149 members in the Central Committee.

Executive and administrative power is vested in the Council of State and the subordinate Council of Ministers, over which Fidel Castro presides, supported by six vice presidents. Legislative authority rests with the National Assembly of People's Power, which meets annually for about five days, and is state-controlled. When not in session, the Assembly is represented by the Council of State. Fidel Castro is president of the Council of State, and his brother, Raul Castro, is first vice president, which places him first in the line of succession. Raul Castro is also the Minister of the Revolutionary Armed Forces.

The Communist Party is constitutionally recognized as Cuba's only legal political party. The party's Politburo and Central Committee together include most of the country's military and civilian leaders. The party monopolizes all government positions, including judicial offices. Though not a formal requirement, party membership is a de facto prerequisite for high-level official positions and professional advancement in most areas, although non-party members are sometimes allowed to serve in the National Assembly.

In 1992, the National Assembly amended the 1976 constitution, abolishing references to the former Soviet bloc, outlawing discrimination for religious beliefs, permitting foreign investment, giving Fidel Castro new emergency powers, and allowing direct elections to the National Assembly of candidates approved by "mass organizations" controlled by the Communist Party.

Although the constitution grants limited rights of assembly and association, these rights are subject to the requirement that they may not be "exercised against the existence and objectives of the socialist State." The government denies citizens the freedom of association. The Penal Code specifically outlaws "illegal or unrecognized groups." Cubans do not have the right to change their government, to freedom of expression, or freedom to travel to and from Cuba without restriction. The government and party control all electronic and print media. Since 1992, the Cuban Government has eased the harsher aspects of its repression of religious freedom. In preparation for the visit of Pope John Paul II in January 1998, the government further relaxed its restrictions on religion, especially toward the Roman Catholic Church.

Although the constitution theoretically provides for independent courts, it explicitly subordinates them to the National Assembly and to the Council of State. The People's Supreme Court is the highest judicial body. Due process is routinely denied to Cuban citizens, especially in cases involving political offenses. The constitution states that all legally recognized civil liberties can be denied to anyone who opposes the "decision of the Cuban people to build socialism."

The Cuban Government's human rights record is abysmal. It systematically violates fundamental civil and political rights of its citizens. The government uses incessant harassment in the form of detention, threat of long-term imprisonment, exile, physical injury, and search and seizure of private property to intimidate pro-democracy and human rights activists. There are hundreds of political prisoners. Since 1994, when it invited the UN High Commissioner for Human Rights to visit, the Cuban Government has refused permission for international human rights monitors, including the UN Special Rapporteur for Human Rights, to visit Cuba.

National Security

Under Castro, Cuba became a highly militarized society. From 1975 until the late 1980s, massive Soviet military assistance enabled Cuba to upgrade its military capabilities and project power abroad. The tonnage of Soviet military deliveries to Cuba throughout most of the 1980s exceeded deliveries in any year since the military build-up during the 1962 missile crisis. In 1990, Cuba's air force, with about 150 Soviet-supplied fighters, including advanced MiG-23 Floggers and MiG-29 Fulcrums, was probably the best equipped in Latin America. In 1994, Cuba's armed forces were estimated to have 235,000 active duty personnel.

Cuban military power has been sharply reduced by the loss of Soviet subsidies. Lack of fuel has resulted in reduced training and military exercises. Lack of spare parts and new material has resulted in the mothballing of planes, tanks, and other military equipment. Today, the Revolutionary Armed Forces number about 60,000 regular troops. The country's two paramilitary organizations, the Territorial Militia Troops and the Youth Labor Army, have a reduced training capability. Cuba also adopted a "war of the people" strategy that highlights the defensive nature of its capabilities. The government has, however, maintained a large state security apparatus, under the Ministry of Interior, to repress dissent within Cuba.

ECONOMY

Under the slogan "Socialism or Death," the Cuban Government continues to proclaim Cuba a socialist or communist nation with an economy organized under Marxist-Leninist precepts. Most means of production are owned and run by the government. About 75% of the labor force is employed directly by the state.

Responsibility for running the economy and for economic policy rests with the Council of State, although the government has devolved some authority to ministries and enterprises in recent years.

Minimal public services are provided by the state, either free of charge or for nominal fees. Access to education generally is adequate, but urban housing and medical facilities have deteriorated, as has transportation.

In 1997, the Cuban Government created the Cuban Central Bank to play a role in monetary policy similar to that of a central bank in a market economy. The National Bank of Cuba continued as a commercial bank, and the Cuban Government is creating additional commercial banks. Some foreign banks have begun limited operations in Cuba.

The major sectors of the Cuban economy are tourism, nickel mining, and agriculture, especially sugar and tobacco. Sugar, long the mainstay of the Cuban economy, was surpassed by tourism in the late 1990s as the main source of foreign exchange. Remittances from abroad, estimated at $500 - 800 million annually, are a major source of income in Cuba, and help sustain many families. An estimated 40% of the population have access to dollars. The Cuban Government stopped producing its annual statistical survey on the Cuban economy in 1990.

The Cuban Government defaulted on most of its international debt in 1986, and remains outside of international financial institutions such as the World Bank. To finance imports, the government relies heavily on short-term loans. Because of its poor credit rating, an $11 billion hard currency debt, and the risks associated with Cuban investment, interest rates have reportedly been as high as 22%.

The Cuban economy suffered a 35% decline in gross domestic product between 1989 and 1993 because of the loss of Soviet subsidies. In October 1990, Castro announced that Cuba had entered a "special period in time of peace" and that the economy would function as if in time of war until the crisis had passed. Most goods are now rationed, and many previously imported from the Soviet Union simply have disappeared.

Economic growth resumed in the mid-1990s after the Cuban Government launched a concerted program to attract foreign tourism and investment. The Cuban Government estimated growth in 1997 at 2.5%. Estimated per capita income in 1997 was $1,540. Living conditions in 1998 are well below the 1990 level.

To deal with the severe shortages brought on by the end of Soviet subsidies and the failure of socialist economic policies, the Cuban Government in the mid-1990s permitted Cubans to offer certain services privately under strict government regulation and scrutiny. It appears that employment in this sector peaked in 1996 at around 206,000 and fell in 1997 to about 170,000. In 1997, the Cuban Government introduced heavy taxes on this sector which forced many out of business. In 1994, the government introduced agricultural markets at which state and private farmers could sell at market prices what they have produced above the quota required by the state. This has helped to alleviate grave food shortages and nutritional problems.

A popular example of this kind of venture has been small restaurants in private homes, known as "paladares." These seek to serve international visitors, but are subject to rules limiting employment of anyone outside of the owner's immediate family and forbidding sales of lobster or shrimp. Such rules are frequently violated, but restaurants and other entities are often closed for minor infractions.

While continuing to limit private investment by Cuban citizens, the Cuban Government is actively courting international investment. It has attracted investment from Canada, Italy, the United Kingdom, Mexico, Spain, France, and other countries. Foreign entities cannot own 100% of the equity of an investment, and must include a Cuban Government entity as a majority partner in the venture. Estimates of the amount of international investment paid in vary widely, but it is thought to be between $1.1 billion to $1.4 billion since 1990.

Cuban officials said early in 1998, there were a total of 332 joint ventures. Many of these are loans or contracts for management, supplies or services, normally not considered equity investment in Western economies. Nevertheless, Cuban officials said in early 1998, that they intend to be more selective in the investment they permit in Cuba. Investors are constrained by the U.S. Cuban Liberty and Democratic Solidarity Act (also known as the Libertad or Helms-Burton Act) which provides for sanctions for those who "traffic" in property expropriated from U.S. citizens. As of March 1998, 15 executives of three foreign companies have been excluded from entry into the U.S. Over a dozen companies had pulled out of Cuba or altered their plans to invest there due to the threat of action under the Libertad Act.

Tourism, a top Cuban official said, is the "heart of the economy." The Cuban Government is stressing its beaches and has actively encouraged sex tourism to attract Europeans, Canadians, and Latin Americans. Cuban officials expect 1.4 million tourists in 1998, an increase of 20% over 1997. The Cuban Government forecasts 1998 gross revenue from tourism as $1.8 billion.

In 1993, the Cuban Government made it legal for its people to possess and use the U.S. dollar. Since then, the dollar has become the major currency in use. Many businesses, including many run by the Cuban Government, and individuals do not accept Cuban pesos.

Those with access to dollars can purchase imported goods at government-run dollar stores that are not accessible to average Cubans with pesos who must shop in understocked peso stores. Thus, those jobs that can earn dollar tips from foreign tourists and business travelers have become highly desirable. It is not uncommon to meet skilled doctors, teachers, engineers, and scientists working in restaurants or as taxi drivers.

Sugar remains an important part of the Cuban economy, with large amounts of land, labor, and other resources dedicated to its production. Sugar production in 1989 was over 8 million tons, but fell to about 3.5 million tons in the 1994-1995 sugar harvest, one of the worst on record. With increased fertilizers and management attention, the 1995-1996 harvest improved, according to official Cuban estimates, to about 4.4 million tons. Cuba was unable to sustain this level of output, however, and the 1996-1997 harvest declined. The threat of U.S. actions against those who finance the sugar harvest--where there are extensive numbers of confiscated properties--had a major impact on the 1996-97 harvest. Prospects for future harvests are considered poor unless the Cuban Government undertakes substantial reform of the sugar industry, something it has not been willing to do.

Cuba is not a party to the Nuclear Non-Proliferation Treaty (NPT). It signed the Treaty of Tlatelolco, a Latin American regional non-proliferation regime, but has not ratified the treaty and brought it into force. Cuba has entered into an agreement with the IAEA to apply safeguards to individual nuclear facilities, including the partially completed Juragua nuclear power plant. The reactors that would be installed are of the VVER-400 type, an advanced model of the Soviet pressurized water reactor. There are serious concerns about the safety of the plant. However, since the plant does not appear to be economically viable, no international investors have been willing to provide funds for completion of the facility.

Cuban failure to launch serious economic reforms has led to the development of a large black market and growing corruption.

FOREIGN RELATIONS

Cuba's once-ambitious foreign policy has been scaled back and redirected as a result of economic hardship and the end of the Cold War.

Cuba aims to find new sources of trade, aid, and foreign investment, and to promote opposition to U.S. policy, especially the trade embargo and the 1996 Libertad Act. Cuba has relations with over 160 countries and has civilian assistance workers--principally medical--in more than 20 nations.

Cuba has largely abandoned the support for guerrilla movements that typified its involvement in regional politics in Latin America and Africa. In 1959, Cuba aided armed expeditions against Panama, the Dominican Republic, and Haiti. During the 1960s and 1970s , Guatemala, Colombia, Venezuela, Peru, and Bolivia faced Cuban-backed guerrilla insurgencies. Although these movements failed to take control of governments, they inflicted heavy loss of life and economic damage in each of the countries. Cuba's support for Latin guerrilla movements, its Marxist-Leninist government, and its alignment with the U.S.S.R., contributed to its isolation in the hemisphere. In January 1962, the Organization of American States (OAS) suspended Cuba. Cuba now has diplomatic or commercial relations with most countries in Latin American and the Caribbean.

Throughout the 1970s and 1980s, Cuba expanded its military presence abroad--deployments reached 50,000 troops in Angola, 24,000 in Ethiopia, 1,500 in Nicaragua, and hundreds more elsewhere. In Angola, Cuban troops, supported logistically by the U.S.S.R., backed the Popular Movement for the Liberation of Angola (MPLA) in its effort to take power after Portugal granted Angola its independence. Cuban forces played a key role in Ethiopia's war against Somalia, and remained there in substantial numbers as a garrison force for a decade. Cubans served in a non-combat advisory role in Mozambique and the Congo. Cuba also used the Congo as a logistical support center for Cuba's Angola mission.

In the late 1980s, Cuba began to pull back militarily. Cuba unilaterally removed its forces from Ethiopia; met the timetable of the 1988 Angola-Namibia accords by completing the withdrawal of its forces from Angola before July 1991; and ended military assistance to Nicaragua following the Sandinistas' 1990 electoral defeat. In January 1992, following the peace agreement in El Salvador, Castro stated that Cuban support for insurgents was a thing of the past.

U.S.-CUBAN RELATIONS

The United States recognized the new Cuban Government on January 7, 1959. However, bilateral relations deteriorated rapidly as the regime expropriated U.S. properties and moved toward adoption of a one-party Communist system. In response, the United States began imposing economic sanctions in 1960, culminating with a comprehensive economic embargo in 1962. The United States broke diplomatic relations on January 3, 1961. Tensions between the two governments peaked during the abortive "Bay of Pigs" invasion by anti-Castro Cubans supported by the United States on April 7, 1961, and the October 1962 missile crisis.

In 1975, U.S.-Cuban normalization talks ended when Cuba launched a large-scale intervention in Angola. However, the U.S. and Cuba established interests sections in their respective capitals on September 1, 1977. Currently, the U.S. interests section in Havana and the Cuban interests section in Washington, DC, are under the protection of the Swiss embassy.

The deployment of Cuban troops to Ethiopia and the discovery of Soviet troops in Cuba in 1979 led President Carter to establish the Caribbean Joint Task Force Headquarters in Florida and warned that Cuban troops would not be allowed to move against neighboring countries.

In April 1980, 10,000 Cubans stormed the Peruvian embassy in Havana seeking political asylum. Eventually, the Cuban Government allowed 125,000 Cubans to illegally take to boats to go to the United States from the port of Mariel, or the "Mariel boatlift." Quiet efforts to explore the prospects for improving relations were initiated by the United States in 1981-82, but ceased as Cuba continued to intervene in the Latin region. In 1983, the United States and regional allies liberated Grenada, forcing the withdrawal of Cuban forces stationed there.

In 1984, the United States and Cuba negotiated an agreement to resume normal immigration, interrupted in the wake of the 1980 Mariel boatlift, and to return to Cuba persons who had arrived during the boatlift who were "excludable" under U.S. law. Cuba suspended this agreement in May 1985 following the U.S. initiation of Radio Marti broadcasts to Cuba, but it was reinstated in November 1987. In March 1990, TV Marti transmissions began to Cuba. Since its inception, Cuba has jammed TV Marti and blocked Radio Marti on the AM band. Radio Marti on short wave has a large audience.

The principal U.S. concerns regarding Cuba are its undemocratic system and lack of respect for human rights, and the potential danger of future mass exoduses. The principal objective of U.S. policy toward Cuba is to promote a peaceful transition to democracy and respect for human rights. U.S. policy seeks to do this by maintaining pressure on the Cuban Government; supporting the Cuban people; forging a multilateral effort to press for democratic change; and keeping migration in safe, legal, and orderly channels. President Bush set free and fair elections under international supervision, respect for human rights, and an end to efforts to subvert its neighbors as the conditions for improving relations with Cuba. In October 1992, the Cuban Democracy Act (CDA) was enacted, codifying portions of the embargo and providing for measures in support of the Cuban people and for improved telecommunications with Cuba and sale of medicines. Other provisions ban most U.S. subsidiary trade with Cuba and exclude any vessel which stops in Cuba from entering U.S. ports for 180 days. It provides for humanitarian donations by U.S. non-governmental organizations to Cuba. Since its enactment, more than $2 billion worth of humanitarian assistance for Cuba has been licensed, including $275 million in medical items. Since 1992, 50 licenses have been issued for sale of medicines or travel to Cuba by representatives of pharmaceutical companies. The U.S. Federal Communications Commission (FCC) approved five U.S. carriers to provide direct telecommunications service between the U.S. and Cuba.

In 1994, regular immigration talks were initiated between the United States and Cuba, prompted by another mass exodus of Cubans that summer. The two governments agreed in September 1994 to direct Cuban migration into safe, legal, and orderly channels. The U.S. committed itself to admit a minimum of 20,000 Cuban immigrants each year, and Cuba pledged to discourage irregular and unsafe departures. Under a May 1995 agreement, the United States began returning Cubans interdicted at sea or entering the U.S. Naval Base at Guantanamo Bay, and Cuba agreed to reintegrate the returnees into Cuban society, with no action to be taken against the returned migrants as a consequence of their attempt to immigrate illegally. The U.S. Interests Section verifies Cuban compliance with that provision through regular visits to the homes of returnees throughout Cuba. Interdicted Cubans who can demonstrate a well-founded fear of persecution in Cuba are resettled in third countries, rather than returned to Cuba.

While the United States engaged in efforts to promote democratic change, the development of an independent civil society, and support for the Cuban people, in February 1996 the Cuban Government moved aggressively against 140 groups of pro-democracy and human rights activists who were seeking to hold a meeting under the auspices of their umbrella organization "Concilio Cubano." The Cuban Government never responded to Concilio's request to legally hold a meeting, and in mid-February began an island-wide crackdown against dissidents--arresting, interrogating, and harassing them. On February 24, 1996, the day the meeting was to be held, the Cuban Government ordered the shootdown of two unarmed civilian aircraft in international airspace. Three U.S. citizens and one legal permanent resident, all members of the Miami-based exile organization Brothers to the Rescue, were killed when their planes were shot down by Cuban MiGs.

On February 26, 1996, President Clinton ordered five punitive measures in response to the shootdown. He suspended direct charter flights to Cuba; sought to obtain international condemnation of Cuba's actions; committed to reach agreement with Congress on the pending Helms-Burton legislation; announced that some form of justice was due to the families of the victims and ordered that funds be transferred from the Cuban Government's blocked accounts in the United States to the families; and set restrictions on the movement of Cuban diplomats in the U.S.

On March 12, 1996, President Clinton signed into law the Cuban Liberty and Democratic Solidarity Act (also known as the Libertad or Helms-Burton Act). The Libertad Act has four main parts:

In accordance with the provisions of the Act, the President suspended the Title III lawsuit provisions because he determined suspension to be necessary and in the national interest and that it will expedite a transition to democracy in Cuba.

On March 20, 1998, President Clinton announced measures intended to respond to the historic visit of Pope John Paul II to Cuba in January and to support the Cuban people. The measures include: resuming direct humanitarian charter cargo and passenger flights to Cuba; reinstituting legal remittances by Cuban Americans and Cuban families living in the United States to their close relatives in Cuba at the level of $300 per quarter (such remittances were suspended in August 1994 in response to the migration crisis); simplifying and expediting the issuance of licenses for the sale of medicines and medical supplies to Cuba. The President also said he would work with Congress to develop bipartisan legislation on the transfer of food and expansion of humanitarian assistance to the Cuban people.

Support for the Cuban people has been a key element of U.S. policy beginning with the CDA and strengthened by President Clinton's initiatives in October 1995 to encourage groups in the U.S. to develop contacts on the island. The 1995 initiatives included licensing U.S. non-governmental organizations (NGOs) to assist Cuban NGOs; allowing sales and donations of communications equipment to Cuban NGOs; establishing news bureaus; increasing academic, cultural, and educational exchanges; and allowing under a general Treasury license once-a-year visits to relatives in Cuba in cases of humanitarian emergencies.

The measures announced March 20 enhance this policy of support for the Cuban people. They support the religious opening, expand humanitarian assistance, and assist development of independent civil society. The measures are in response to the Cuban people, not to anything the Cuban Government has done. Hundreds of political prisoners remain in Cuban jails, including the four leaders of the Dissident Working Group. The U.S. Government has repeatedly made clear, however, that it will consider responding reciprocally if the Cuban Government initiates fundamental democratic change.


Dominican Republic

PEOPLE

About half of Dominicans live in rural areas; many are small landholders. Haitians form the largest foreign minority group. All religions are tolerated; the state religion is Roman Catholicism.

HISTORY

The island of Hispaniola, of which the Dominican Republic forms the eastern two-thirds and Haiti the remainder, was originally occupied by Tainos, an Arawak-speaking people. The Tainos welcomed Columbus in his first voyage in 1492, but subsequent colonizers were brutal, reducing the Taino population from about 1 million to about 500 in 50 years. To ensure adequate labor for plantations, the Spanish brought African slaves to the island beginning in 1503.

In the next century, French settlers occupied the western end of the island, which Spain ceded to France in 1697, and which, in 1804, became the Republic of Haiti. The Haitians conquered the whole island in 1822 and held it until 1844, when forces led by Juan Pablo Duarte, the hero of Dominican independence, drove them out and established the Dominican Republic as an independent state. In 1861, the Dominicans voluntarily returned to the Spanish Empire; in 1865, independence was restored.

Economic difficulties, the threat of European intervention, and ongoing internal disorders led to a U.S. occupation in 1916 and the establishment of a military government in the Dominican Republic. The occupation ended in 1924, with a democratically elected Dominican Government.

In 1930, Rafael L. Trujillo, a prominent army commander, established absolute political control. Trujillo promoted economic development--from which he and his supporters benefitted--and severe repression of domestic human rights. Mismanagement and corruption resulted in major economic problems. In August 1960, the Organization of American States (OAS) imposed diplomatic sanctions against the Dominican Republic as a result of Trujillo's complicity in an attempt to assassinate President Romulo Betancourt of Venezuela. These sanctions remained in force after Trujillo's death by assassination in May 1961. In November 1961, the Trujillo family was forced into exile.

In January 1962, a council of state that included moderate opposition elements with legislative and executive powers was formed. OAS sanctions were lifted January 4, and, after the resignation of President Joaquin Balaguer on January 16, the council under President Rafael E. Bonnelly headed the Dominican Government. In 1963, Juan Bosch was inaugurated President. Bosch was overthrown in a military coup in September 1963.

Another military coup, on April 24, 1965, led to violence between military elements favoring the return to government by Bosch and those who proposed a military junta committed to early general elections. On April 28, U.S. military forces landed to protect U.S. citizens and to evacuate U.S. and other foreign nationals. Additional U.S. forces subsequently established order.

In June 1966, President Balaguer, leader of the Reformist Party (now called the Social Christian Reformist Party--PRSC), was elected and then re-elected to office in May 1970 and May 1974, both times after the major opposition parties withdrew late in the campaign.

In the May 1978 election, Balaguer was defeated in his bid for a fourth successive term by Antonio Guzman of the PRD. Guzman's inauguration on August 16 marked the country's first peaceful transfer of power from one freely elected president to another.

The PRD's presidential candidate, Salvador Jorge Blanco, won the 1982 elections, and the PRD gained a majority in both houses of Congress. In an attempt to cure the ailing economy, the Jorge administration began to implement economic adjustment and recovery policies, including an austerity program in cooperation with the International Monetary Fund (IMF). In April 1984, rising prices of basic foodstuffs and uncertainty about austerity measures led to riots.

Balaguer was returned to the presidency with electoral victories in 1986 and 1990. Upon taking office in 1986, Balaguer tried to reactivate the economy through a public works construction program. Nonetheless, by 1988 the country slid into a two-year economic depression, characterized by high inflation and currency devaluation. Economic difficulties, coupled with problems in the delivery of basic services--e.g., electricity, water, transportation--generated popular discontent that resulted in frequent protests, occasionally violent, including a paralyzing nationwide strike in June 1989.

In 1990, Balaguer instituted a second set of economic reforms. After concluding an IMF agreement, balancing the budget, and curtailing inflation, the Dominican Republic is experiencing a period of economic growth marked by moderate inflation, a balance in external accounts, and a steadily increasing GDP.

The voting process in 1986 and 1990 was generally seen as fair, but allegations of electoral board fraud tainted both victories. A commission of electoral advisers, designated by President Jorge and led by the Archbishop of Santo Domingo, played an important role in keeping the electoral process on track. The elections of 1994 were again marred by charges of fraud. Following a compromise calling for constitutional and electoral reform, President Balaguer assumed office for an abbreviated term. In June 1996, Leonel Fernandez Reyna was elected to a four-year term as president.

GOVERNMENT AND POLITICAL CONDITIONS

The Dominican Republic is a representative democracy whose national powers are divided among independent executive, legislative, and judicial branches.

The president appoints the cabinet, executes laws passed by the legislative branch, and is commander in chief of the armed forces. The president and vice president run for office on the same ticket and are elected by direct vote for four-year terms.

Legislative power is exercised by a bicameral congress--the senate (30 members) and the chamber of deputies (120 members). Presidential elections are held in years evenly divisible by four. Congressional and municipal elections are held in even numbered years not divisible by four.

Under the constitutional reforms negotiated after the 1994 elections, the 16-member Supreme Court of Justice is appointed by a National Judicial Council, which is nominated by the three major political parties. The Court has sole jurisdiction over actions against the president, designated members of his cabinet, and members of Congress. The Supreme Court hears appeals from lower courts and chooses members of lower courts.

Each of the 29 provinces is headed by a presidentially appointed governor. Elected mayors and municipal councils administer the National District (Santo Domingo) and the 103 municipal districts.

The Dominican Republic has a multi-party political system with national elections every four years. In two rounds of presidential elections in 1996, nearly 80% of eligible Dominican voters went to the polls.

The leading parties in 1994 were the PRSC, linked to the International Christian Democratic political movement, whose candidate was President Joaquin Balaguer; the PRD, affiliated with the Socialist International, whose candidate was Jose Francisco Pena Gomez; and the Dominican Liberation Party (PLD), whose candidate was former President Juan Bosch.

On election day, international observers noted many irregularities in the voter lists, and the opposition PRD immediately charged the Central Electoral Board and the PRSC with fraud. A Verification Commission appointed by the Central Electoral Board, however, did not accept the PRD's charges. By all estimates, total disenfranchised voters far exceeded the 22,281-vote margin of victory in favor of President Balaguer on August 2, 1994.

Following an intense period of political activity, the competing political parties signed a Pact for Democracy on August 10, reducing President Balaguer's term of office from four to two years, setting early elections, and reforming the constitution. A new Central Electoral Board was named to work on electoral reform. The main candidates in 1996 were Vice-President Jacinto Peynado (PRSC); Jose Francisco Pena Gomez (PRD); and Leonel Fernandez (PLD).

Domestic and international observers saw the 1996 election as transparent and fair. After the first round in which Jacinto Peynado (PRSC) was eliminated, President Balaguer endorsed the PLD candidate. Results in the second round, 45 days later on June 30, were tabulated quickly, and although the victory margin was narrow (1.5%), it was never questioned. The transition from incumbent administration to incoming administration was smooth and ushered in a new, modern era in Dominican political life.

Fernandez' political agenda is one of economic and judicial reform. He is enhancing Dominican participation in hemispheric affairs, such as the Organization of American States and the follow up to the Miami Summit.

The military consists of about 24,000 active-duty personnel, commanded by the president. Its principal mission is to defend the nation, but it serves more as an internal security force. The army, twice as large as the other services combined, consists of four infantry brigades and a combat support brigade; the air force operates three flying squadrons; and the navy maintains 30 aging vessels. The Dominican Republic's military is second in size to Cuba's in the Caribbean.

The armed forces participate fully in counternarcotics efforts. They are also active in efforts to control contraband and illegal immigration from Haiti to the Dominican Republic and from the Dominican Republic to the United States.

ECONOMY

The Dominican Republic is a middle-income developing country primarily dependent on agriculture, trade, and services, especially tourism. Although the service sector has recently overtaken agriculture as the leading employer of Dominicans (due principally to growth in tourism and Free Trade Zones), agriculture remains the most important sector in terms of domestic consumption and is in second place (behind mining) in terms of export earnings. Tourism accounts for more than $1 billion in annual earnings. Free Trade Zone earnings and tourism are the fastest-growing export sectors. Remittances from Dominicans living in the United States are estimated to be about $1.1 billion per year.

Following economic turmoil in the late 1980s and 1990, during which the GDP fell by up to 5% and consumer price inflation reached an unprecedented 100%, the Dominican Republic entered a period of moderate growth and declining inflation. GDP in 1995 grew by 4.5% while the inflation rate was 9%. Data for 1996 showed inflation falling to an annualized rate of 4% and GDP growth at about 7.3%.

Despite a widening merchandise trade deficit, tourism earnings and remittances have helped build foreign exchange reserves. The Dominican Republic is current on foreign private debt, and has agreed to pay arrears of about $130 million to the U.S. Department of Agriculture's Commodity Credit Corporation.

The government faces several economic policy challenges: high real interest rates, fiscal imbalances caused by money-losing public enterprises and poor tax-collection rates, and reducing dependence on taxes on international trade. Years of tariff protection for domestic production have left the economy vulnerable in a rapidly integrating global economy. The deteriorating non-free trade zone merchandise trade balance is in part due to the failure of the exchange rate to reflect inflationary trends in the 1993-95 period.

FOREIGN RELATIONS

The Dominican Republic has a close relationship with the United States and with the other states of the Inter-American system. It has accredited diplomatic missions in most Western Hemisphere countries and in principal European capitals. The Dominican Republic and Cuba recently established consular relations, and there is contact in fields such as commerce, culture, and sports. Dominican relations with its closest neighbor, the Republic of Haiti, have never been extensive. There is a sizeable Haitian migrant community in the Dominican Republic.

The Dominican Republic belongs to the UN and many of its specialized and related agencies, including the World Bank, International Labor Organization, International Atomic Energy Agency, and International Civil Aviation Organization. It is also a member of the OAS, the Inter-American Development Bank, and INTELSAT.

U.S.-DOMINICAN REPUBLIC RELATIONS

The U.S. has a strong interest in a democratic, stable, and economically healthy Dominican Republic. Its standing as the largest Caribbean economy, the second-largest in terms of population and landmass, and its proximity to the United States and other smaller Caribbean nations make the Dominican Republic an important partner in hemispheric affairs. This close relationship was underscored when President Fernandez joined President Clinton at the summit with Central American leaders in May 1997 in Costa Rica.

U.S. relations with the Dominican Republic are excellent, and the U.S. has been an outspoken supporter of that country's democratic and economic development. In addition, the Dominican Government has been supportive of many U.S. initiatives in the United Nations and related agencies. The two governments cooperate in the fight against the traffic in illegal substances. The Dominican Republic has worked closely with U.S. law enforcement officials on issues such as the return of stolen cars to the U.S. and reducing illegal migration. The U.S. also supports the current administration's efforts to open the economy to more trade, increase foreign private investment, privatize state-owned firms, and modernize the tax system.

Bilateral trade is important to both countries, and U.S. firms--mostly apparel, footwear, and light electronics manufacturers--account for much of the foreign private investment in the Dominican Republic. U.S. exports to the Dominican Republic in 1996 totaled $3.8 billion and constituted 65% of that country's imports. The Dominican Republic exported $3.7 million to the U.S. in 1996, equaling some 65% of its exports. NAFTA has not caused any profound changes in Dominican trade with the U.S. The U.S. embassy works closely with U.S. business firms and Dominican trade groups, both of which can take advantage of the new opportunities in this growing market. At the same time, the embassy is working with the Dominican Government to resolve outstanding disputes U.S. firms have with the government as result of actions by previous administrations.

The embassy counsels U.S. firms through its written Country Commercial Guide and informally via meetings with businesspersons planning to or already investing in the Dominican Republic. It is a challenging business environment for U.S. firms, although agile exporters and investors can profit doing business in the Dominican Republic.

The U.S. Agency for International Development (USAID) mission is focused on four areas: availability of health care, increasing economic opportunity, improving participation in democratic processes, and environmentally sound energy production. About 90% of USAID resources are channeled through non-governmental organizations for reasons of efficiency.

The embassy estimates that 60,000 U.S. citizens live in the Dominican Republic although precise figures are unavailable; many are dual nationals. An important element of the relationship between the two countries is the more than 1 million Dominicans residing in the U.S. The majority of Dominicans live in metropolitan New York City.


Ecuador

PEOPLE

Ecuador's population is ethnically mixed. The largest ethnic groups are indigenous and mestizo (mixed Indian-Caucasian). Although Ecuadorans were heavily concentrated in the mountainous central highland region a few decades ago, today's population is divided about equally between that area and the coastal lowlands. Migration toward cities--particularly larger cities--in all regions has increased the urban population to about 55%. The tropical forest region to the east of the mountains remains sparsely populated and contains only about 3% of the population.

The public education system is tuition-free, and attendance is mandatory from ages 6 to 14. In practice, however, many children drop out before age 15, and, in rural areas only about one-third complete sixth grade. The government is striving to create better programs for the rural and urban poor, especially in technical and occupational training. In recent years, it has also been successful in reducing illiteracy. Enrollment in primary schools has been increasing at an annual rate of 4.4%--faster than the population growth rate--and, during the 1980s, the number of university students increased about 18% per year. According to the 1979 constitution, the central government must allocate at least 30% of its revenue to education; in practice, however, it allots a much smaller percentage.

Public universities have an open admissions policy. In recent years, however, large increases in the student population, budget difficulties, and extreme politicization of the university system have led to a decline in academic standards.

HISTORY

Advanced indigenous cultures flourished in Ecuador long before the area was conquered by the Inca empire in the 15th century. In 1534, the Spanish arrived and defeated the Inca armies, and Spanish colonists became the new elite. The indigenous population was decimated by disease in the first decades of Spanish rule--a time when the natives were also forced into the "encomienda" labor system for Spanish landlords. In 1563, Quito became the seat of a royal audiencia (administrative district) of Spain.

After independence forces defeated the royalist army in 1822, Ecuador joined Simon Bolivar's Republic of Gran Colombia, only to become a separate republic in 1830. The 19th century was marked by instability, with a rapid succession of rulers. The conservative Gabriel Garcia Moreno unified the country in the 1860s with the support of the Catholic Church. In the late 1800s, world demand for cocoa tied the economy to commodity exports and led to migrations from the highlands to the agricultural frontier on the coast. A coastal-based liberal revolution in 1895 under Eloy Alfaro reduced the power of the clergy and opened the way for capitalist development.

The end of the cocoa boom produced renewed political instability and a military coup in 1925. The 1930s and 1940s were marked by populist politicians such as five-time president Jose Velasco Ibarra. In January 1942, Ecuador signed the Rio Protocol to end a brief war with Peru the year before; Ecuador agreed to a border that conceded to Peru much territory Ecuador previously had claimed in the Amazon. After World War II, a recovery in the market for agricultural commodities and the growth of the banana industry helped restore prosperity and political peace. From 1948-60, three presidents--beginning with Galo Plaza--were freely elected and completed their terms.

Recession and popular unrest led to a return to populist politics and domestic military interventions in the 1960s, while foreign companies developed oil resources in the Ecuadoran Amazon. In 1972, a nationalist military regime seized power and used the new oil wealth and foreign borrowing to pay for a program of industrialization, land reform, and subsidies for urban consumers. With the oil boom fading, Ecuador returned to democracy in 1979, but by 1982 the government faced a chronic economic crisis, including inflation, budget deficits, a falling currency, mounting debt service, and uncompetitive industries.

The 1984 presidential elections were narrowly won by Leon Febres-Cordero of the Social Christian Party (PSC). During the first years of his administration, Febres-Cordero introduced free-market economic policies, took strong stands against drug trafficking and terrorism, and pursued close relations with the United States. His tenure was marred by bitter wrangling with other branches of government and his own brief kidnaping by elements of the military. A devastating earthquake in March 1987 interrupted oil exports and worsened the country's economic problems.

Rodrigo Borja of the Democratic Left (ID) party won the presidency in 1988. His government was committed to improving human rights and carried out some reforms, notably an opening of Ecuador to foreign trade. The Borja government concluded an accord leading to the disbanding of the small terrorist group, "Alfaro Lives." However, continuing economic problems undermined the popularity of the ID, and opposition parties gained control of Congress in 1990.

In 1992, Sixto Duran-Ballen won in his third run for the presidency. His government's popularity suffered from tough macroeconomic adjustment measures, but it succeeded in pushing a limited number of modernization initiatives through Congress. Duran-Ballen's vice president, Alberto Dahik, was the architect of the administration's economic policies, but in 1995 Dahik fled the country to avoid prosecution on corruption charges following a heated political battle with the opposition. A war with Peru erupted in January-February 1995 in a small, remote region where the boundary prescribed by the 1942 Rio Protocol is in dispute.

Abdala Bucaram, from the Guayaquil-based Ecuadorian Roldosista Party (PRE), won the presidency in 1996 on a platform that promised populist economic and social reforms and the breaking of what Bucaram termed as the power of the nation's oligarchy. During his short term of office, Bucaram's administration drew criticism for corruption. Bucaram was deposed by the Congress in February 1997 on grounds of alleged mental incompetence. In his place, Congress named Interim President Fabian Alarcon, who was President of Congress and head of the small Radical Alfarist Front party. Alarcon's interim presidency was endorsed by a May 1997 popular referendum. New presidential elections are scheduled for May 31, 1998. The elected president is to take office August 10, 1998.

GOVERNMENT

The 1979 constitution provides for concurrent four-year terms of office for the president, vice president, and the 12 members of congress (of a total of 82) who are elected as "national" (at large) legislators. The remaining 70 legislators, representing the country's 22 provinces, serve for 2 years. Presidents may be reelected after an intervening term, while legislators may be re-elected immediately.

Each year legislators elect from among themselves a president and vice president of Congress. Congress meets for two months a year. For the remainder of the year--unless an extraordinary plenary session is called--all legislative business is transacted by the 35 members of the Congress who serve on five permanent committees.

Ecuador has a three-tiered court system. Justices of the Supreme Court are appointed by the Congress for six-year terms. The Supreme Court names the members of the superior (provincial) courts, who, in turn, choose ordinary civil and penal judges.

The executive branch includes 17 ministries and several cabinet-level secretariats headed by presidential appointees. The president also appoints Ecuador's 21 provincial governors, who represent the central government at the local level. Provincial prefects and councilors, like municipal mayors and aldermen, are directly elected.

POLITICAL CONDITIONS

Ecuador's political parties have historically been small, loose organizations that depended more on populist, often charismatic, leaders to retain support than on programs or ideology. Frequent internal splits have produced extreme factionalism. However, a pattern has emerged in which administrations from the center-left alternate with those from the center-right as the electorate searches for leaders who will bring about necessary economic reforms at minimal social cost. Although Ecuador's political elite is highly factionalized along regional, ideological, and personal lines, a strong desire for consensus on major issues often leads to compromise. Structural reforms are difficult to legislate and implement, but widespread recognition of the need for change has enabled Ecuador to enjoy a relatively high degree of social stability.

The center-left of the political spectrum represents a large segment of the body politic, but it is divided among several parties and this often has prevented it from winning the presidency. In the 1996 elections, Abdala Bucaram was able to capitalize on these divisions to emerge from the first round as the alternative to the right-of-center PSC candidate, and he then went on to consolidate the support of the center-left to win handily in the runoff. Bucaram's PRE only won 19 of 82 seats in Congress, however, with the remaining deputies spread among nearly a dozen parties as well as independents. Alarcon's FRA controls only three seats, so his administration depends on the legislative cooperation of larger parties. Opposition forces in Congress are loosely organized, but historically they often unite to block the administration's initiatives and to remove cabinet ministers. Party discipline is weak, and routinely many deputies switch allegiance during each Congress.

In the 1996 election, the indigenous population abandoned its traditional policy of shunning the official political system and participated actively in support of the Pachakutik/New Country movement. This coalition obtained eight deputies, and although some disaffiliated themselves early in the new Congressional session, the indigenous population established itself as a significant force in Ecuadoran politics.

Mid-term Congressional elections are currently scheduled for 1998.

ECONOMY

Ecuador's gross domestic product (GDP) reached $18.0 billion in 1996. This represents growth of 2% over 1995. The economy is based on petroleum production, along with exports of agricultural commodities and seafood. The state oil industry makes up 10% of GDP, generates 37% of total exports, and provides about 30% of government revenue. Agriculture and fishing contribute 13% of GDP. Ecuador is a major world producer of bananas and shrimp. Cocoa, coffee, and tuna are also exported. Non-traditional agricultural products, such as flowers and winter vegetables, are becoming more important. Industry accounts for 38% of GDP, and is becoming increasingly oriented to the export market.

Ecuador's merchandise exports for 1996 were $4.9 billion for 1996 and its imports $3.5 billion. Lower trade barriers in the region, including free-trade agreements with Colombia, Venezuela, and Bolivia are helping manufacturers of vehicles and other products become more export oriented. Ecuador has reduced most tariffs to 5-20% and in January 1995 instituted a common external tariff with Colombia and Venezuela. Ecuador acceded to the World Trade Organization (WTO) in 1995. The government has committed to address remaining obstacles to trade, including agricultural price bands, minimum import prices, and sanitary registrations. Ecuador signed an intellectual property rights agreement with the United States in 1993 but has not yet implemented it. Ecuador has a unified, free market in foreign exchange.

During the oil boom of the 1970s, the government borrowed heavily from abroad, increased subsidies, and expanded the state's economic role. Such policies became unsustainable, leading to chronic macroeconomic instability in the 1980s. President Duran-Ballen took office in 1992 promising to stabilize the economy, modernize the state, and expand the free market. A sizable devaluation of the sucre in 1992, large public-sector price hikes, market pricing of fuel, and spending reductions--together with monetary, budget, and tax reforms--reduced the public deficit. Inflation also fell from 60% to about 25%, but increased again to 30% in 1997.

The structural reforms required to improve prospects for investment and growth have proven more difficult to achieve. Government staffing has been cut and many unnecessary regulations have been eliminated. Banks and capital markets are modernizing under new financial laws. Shares held by the state in private companies are being sold. The government has suggested plans to partially privatize some of the major state enterprises, and has obtained legal authority to privatize 35% of the telephone service. However, an auction of the telephone company scheduled for November 1997 had to be canceled when only one bidder participated. The government also hopes to reform the social security system. However, there is substantial political opposition to privatization proposals.

Liberalized investment regulations afford foreign investors national treatment--including equal tax rates--and do not require prior authorization for investment in most industries. A bilateral investment treaty with the United States approved in 1994 and ratified in May 1997 provides for transfers of capital and profits and a binding arbitration dispute settlement procedure. The 1994 agrarian development law has improved the security of agricultural land tenure. The 1993 hydrocarbons law made investment in petroleum exploration more attractive, and U.S. firms initiated and expanded projects. However, U.S. firms doing business in Ecuador have complained of being pressured into contract renegotiations by the government. Several U.S. firms have had large judgments entered against them in Ecuadoran courts under a law which permitted the firms' local partners to disregard the terms of their contracts. This law, the Dealer's Act, was repealed in 1997 but remains in effect with regard to contracts entered into prior to the repeal.

FOREIGN RELATIONS

A small country, Ecuador always has placed great emphasis on multilateral approaches to international problems. Ecuador is a member of the United Nations (and most of its specialized agencies) and the Organization of American States. Ecuador is also a member of many regional groups, including the Rio Group, the Latin American Economic System, the Latin American Energy Organization, the Latin American Integration Association, and the Andean Pact.

Ecuador's border dispute with Peru, festering since the independence era, is the nation's principal foreign policy issue. Ecuador maintains that the 1942 Rio Protocol of Peace, Friendship and Boundaries left several issues unresolved. For example, it asserts that geographic features in the area of the Cenepa River Valley do not match the topographical descriptions in the Protocol, thus making demarcation of the boundary there "inexecutable."

This long-running border dispute has occasionally erupted into armed hostility along the undemarcated sections. The most serious conflict since the 1941 war occurred in January-February 1995, when thousands of soldiers from both sides fought an intense but localized war in the disputed territory in the upper Cenepa valley. A peace agreement brokered by the four Guarantors of the Rio Protocol (Argentina, Brazil, Chile, and the United States) in February 1995 led to the cessation of hostilities and the establishment of the Military

Observers Mission to Ecuador-Peru (MOMEP) to monitor the zone. In 1996, Ecuador and Peru began a series of meetings intended to set the stage for substantive negotiations to resolve the dispute.

Those talks have shown significant progress. In January 1998, Ecuador and Peru initialed an historic agreement in Rio de Janeiro, Brazil, which provided a framework to resolve the major outstanding issues between the two countries through four commissions. Specifically, the commissions are to prepare a Treaty of Commerce and Navigation and a Comprehensive Agreement on Border Integration; to fix on the ground the common land boundary; and to establish a Binational Commission on Mutual Confidence Measures and Security. The four commissions began work in February, with the intention of reaching a definitive agreement by May 30, 1998.

U.S.-ECUADORAN RELATIONS

The United States and Ecuador have maintained close ties based on mutual interests in maintaining democratic institutions; combating narcotrafficking; building trade, investment and financial ties; cooperating in fostering Ecuador's economic development; and participating in inter-American organizations. Ties are further strengthened by the presence of an estimated 150,000-200,000 Ecuadorans living in the United States and by 24,000 U.S. citizens visiting Ecuador annually and by approximately 15,000 U.S. citizens residing in Ecuador. The United States assists Ecuador's economic development directly through the Agency for International Development (USAID) program in Ecuador and through multilateral organizations such as the Inter-American Development Bank and the World Bank. In addition, the U.S. Peace Corps operates a sizable program in Ecuador. Over 100 U.S. companies are doing business in Ecuador.

Both nations are signatories of the Rio Treaty of 1947, the Western Hemisphere's regional mutual security treaty. Ecuador shares U.S. concern over increasing narcotrafficking and international terrorism and has energetically condemned terrorist actions, whether directed against government officials or private citizens. The government has maintained Ecuador virtually free of coca production since the mid-1980s and is working to combat money laundering and the transshipment of drugs and chemicals essential to the processing of cocaine.

The United States claims jurisdiction for the management of coastal fisheries up to 320 kilometers (200 mi.) from its coast, but excludes highly migratory species. Ecuador, on the other hand, claims a 320-kilometer-wide (200-mi.) territorial sea, and imposes license fees and fines on foreign fishing vessels in the area, making no exceptions for catches of migratory species. In the early 1970s, Ecuador seized about 100 foreign-flag vessels (many of them U.S.) and collected fees and fines of more than $6 million. After a drop-off in such seizures for some years, several U.S. tuna boats were again detained and seized in 1980 and 1981. The U.S. Magnuson Fishery Conservation and Management Act then triggered an automatic prohibition of U.S. imports of tuna products from Ecuador. The prohibition was lifted in 1983, and although fundamental differences between U.S. and Ecuadoran legislation still exist, there is no current conflict. During the period that has elapsed since seizures which triggered the tuna import ban, successive Ecuadoran governments have declared their willingness to explore possible solutions to this problem with mutual respect for long-standing positions and principles of both sides.


El Salvador

PEOPLE AND HISTORY

El Salvador's population numbers about 5.8 million; almost 90% is of mixed Indian and Spanish extraction. About 1% is indigenous; very few Indians have retained their customs and traditions. The country's people are largely Roman Catholic-though Protestant groups are growing-and Spanish is the language spoken by virtually all inhabitants. The capital city of San Salvador has about 1.4 million people; an estimated 49% of El Salvador's population lives in rural areas.

Before the Spanish conquest, the area that is now El Salvador was made up of two large Indian states and several principalities. The indigenous inhabitants were the Pipils, a tribe of nomadic Nahua people long established in Central Mexico. Early in their history, they became one of the few Mesoamerican Indian groups to abolish human sacrifice. Otherwise, their culture was similar to that of their Aztec neighbors. Remains of Nahua culture are still found at ruins such as Tazumal (near Chalchuapa), San Andres (northeast of Armenia), and Joya De Ceren (north of Colon).

The first Spanish attempt to subjugate this area failed in 1524, when Pedro de Alvarado was forced to retreat by Pipil warriors. In 1525, he returned and succeeded in bringing the district under control of the Captaincy General of Guatemala, which retained its authority until 1821, despite an abortive revolution in 1811.

Independence

In 1821, El Salvador and the other Central American provinces declared their independence from Spain. When these provinces were joined with Mexico in early 1822, El Salvador resisted, insisting on autonomy for the Central American countries. Guatemalan troops sent to enforce the union were driven out of El Salvador in June 1822. El Salvador, fearing incorporation into Mexico, petitioned the U.S. Government for statehood.

But in 1823, a revolution in Mexico ousted Emperor Augustin Iturbide, and a new Mexican congress voted to allow the Central American provinces to decide their own fate. That year, the United Provinces of Central America was formed of the five Central American states under Gen. Manuel Jose Arce. When this federation was dissolved in 1838, El Salvador became an independent republic.

El Salvador's early history as an independent state-as with others in Central America-was marked by frequent revolutions; not until the period 1900-1930 was relative stability achieved. The economic elite ruled the country in conjunction with the military, and the power structure was controlled by a relatively small number of wealthy landowners, known as the 14 Families. The economy, based on coffee-growing, prospered or suffered as the world coffee price fluctuated.

From 1932-the year of Gen. Maximiliano Hernandez Martinez's coup following his brutal suppression of rural resistance-until 1980, all but one Salvadoran President was an army officer. Periodic presidential elections were seldom free or fair.

From Military to Civilian Rule

From the 1930s to the 1970s, authoritarian governments employed political repression and limited reform to maintain power, despite the trappings of democracy. During the 1970s, the political situation began to unravel. In the 1972 presidential election, the opponents of military rule united under Jose Napoleon Duarte, leader of the Christian Democratic Party (PDC). Amid widespread fraud, Duarte's broad-based reform movement was defeated. Subsequent protests and an attempted coup were crushed, and Duarte exiled. These events eroded hope of reform through democratic means and persuaded those opposed to the government that armed insurrection was the only way to achieve change. As a consequence, leftist groups capitalizing upon social discontent gained strength.

By 1979, leftist guerrilla warfare had broken out in the cities and the countryside, launching what became a 12-year civil war. A cycle of violence took hold as rightist vigilante death squads in turn killed thousands. The poorly trained Salvadoran Armed Forces (ESAF) also engaged in repression and indiscriminate killings. After the collapse of the Somoza regime in Nicaragua that year, the new Sandinista government provided large amounts of arms and munitions to five Salvadoran guerrilla groups.

On October 15, 1979, reform-minded military officers and civilian leaders ousted the right-wing government of Gen. Carlos Humberto Romero (1977-79) and formed a revolutionary junta. PDC leader Duarte joined the junta in March 1980, leading the provisional government until the elections of March 1982. The junta initiated a land reform program and nationalized the banks and the marketing of coffee and sugar. Political parties were allowed to function again, and on March 28, 1982, Salvadorans elected a new constituent assembly. Following that election, authority was peacefully transferred to Alvaro Magana, the provisional president selected by the assembly.

The 1983 constitution, drafted by the assembly, strengthened individual rights; established safeguards against excessive provisional detention and unreasonable searches; established a republican, pluralistic form of government; strengthened the legislative branch; and enhanced judicial independence. It also codified labor rights, particularly for agricultural workers. The newly initiated reforms, though, did not satisfy the guerrilla movements, which had unified under Cuban auspices-while each retained their autonomous status-as the Farabundo Marti National Liberation Front (FMLN).

Duarte won the 1984 presidential election against rightist Roberto D'Aubuisson of the Nationalist Republican Alliance (ARENA) with 54% of the vote and became the first freely elected president of El Salvador in more than 50 years.

In 1989, ARENA's Alfredo Cristiani won the presidential election with 54% of the vote. His inauguration on June 1, 1989, marked the first time that power had passed peacefully from one freely elected civilian leader to another.

Ending the Civil War

Upon his inauguration in June 1989, President Cristiani called for direct dialogue to end the decade of conflict between the government and guerrillas. An unmediated dialogue process involving monthly meetings between the two sides was initiated in September 1989, lasting until the FMLN launched a bloody, nationwide offensive in November that year.

In early 1990, following a request from the Central American presidents, the United Nations became involved in an effort to mediate direct talks between the two sides. After a year of little progress, the government and the FMLN accepted an invitation from the UN Secretary-General to meet in New York City. On September 25, 1991, the two sides signed the New York City Accord. It concentrated the negotiating process into one phase and created the Committee for the Consolidation of the Peace (COPAZ), made up of representatives of the government, FMLN, and political parties, with Catholic Church and UN observers.

On December 31, 1991, the government and the FMLN initialed a peace agreement under the auspices of then Secretary-General Perez de Cuellar. The final agreement, called the Accords of Chapultepec, was signed in Mexico City on January 16, 1992. A nine-month cease-fire took effect February 1, 1992, and was never broken. A ceremony held on December 15, 1992, marked the official end of the conflict, concurrent with the demobilization of the last elements of the FMLN military structure and the FMLN's inception as a political party.

GOVERNMENT AND POLITICAL CONDITIONS

El Salvador is a democratic republic governed by a president and an 84-member unicameral Legislative Assembly. The president is elected by universal suffrage and serves for a five-year term. Members of the assembly, also elected by universal suffrage, serve for three-year terms. The country has an independent judiciary and Supreme Court.

In March 1994, the first post-civil war elections were held with FMLN participation, featuring simultaneous presidential, legislative, and municipal races. ARENA won 39 seats in the Legislative Assembly, the FMLN 21 seats, the PDC 18, the National Conciliation Party (PCN) four, and the Democractic Convergence (CD) and Unity Movement (MU) one each. (The FMLN and PDC caucuses subsequently split.) ARENA presidential candidate Armando Calderon Sol faced FMLN-CD coalition candidate Ruben Zamora in a runoff in April and won with 68% of the vote. UN observers declared the elections free and fair. Armando Calderon Sol of the ARENA party began his five-year term as President on June 1, 1994, and cannot succeed himself.

The March 1997 legislative and municipal elections were conducted in a free and transparent manner, depite the fact that important electoral reforms agreed to three years earlier were not in place, and voter turnout barely reached 40%. The FMLN and opposition coalitions scored impressive gains in both the assembly and throughout the country's 262 municipalities, capturing the mayoral seats in six of 14 departmental capitals, including San Salvador. In the 1997-2000 assembly ARENA will have 28 deputies, the FMLN 27, the PCN 11, and the PDC 7. Several small centrist parties and coalitions will split the remaining 11 seats.

Political Parties

ARENA is El Salvador's leading political party. It was created in 1982 by Roberto D'Aubuisson and other ultra-rightists, including some members of the military. His electoral fortunes were diminished by credible reports that he was involved in organized political violence. Following the 1984 presidential election, ARENA began reaching out to more moderate individuals and groups, particularly in the private sector.

By 1989, ARENA had attracted the support of business groups, and Alfredo Cristiani won the presidency. Despite sincere efforts at reform, Duarte's PDC administration had failed to either end the insurgency or improve the economy. Allegations of corruption, poor relations with the private sector, and historically low prices for the nation's main agricultural exports also contributed to ARENA victories in the 1988 legislative and 1989 presidential elections.

The 1989-94 Cristiani administration's successes in achieving a peace agreement to end the civil war and in improving the nation's economy helped ARENA, led by standard-bearer Calderon Sol, keep both the presidency and a working majority in the Legislative Assembly in the 1994 elections. ARENA's legislative position was weakened in the 1997 elections, but it remains the country's single largest and best organized political party.

In December 1992 the FMLN became a political party, composed of the political factions of the wartime guerrilla movement, and maintained a united front during the 1994 electoral campaign. The FMLN also came in second in the legislative assembly races. Internal political differences, however, among the FMLN's constituent parties led to the breakaway of two of the FMLN's original five factions after the 1994 elections. Despite the defections, the FMLN was able to consolidate its remaining factions and present itself as a viable option to ARENA. It is the second-largest block in the new assembly and due to its strategic control of the mayorships of many departmental cities, over 50% of Salvadorans have an FMLN or coalition-led municipal government.

The right wing of the National Conciliation Party (PCN), which ruled the country in alliance with the military from the 1960s until 1979, maintains a small but steady electoral base. Its fortunes were recently boosted by the addition of high-profile ARENA defectors and a reinvigorated electoral showing in the assembly. Several other smaller parties represented in Legislative Assembly in El Salvador fight for the political center with limited success. The PDC, which had won more municipal elections in 1994 than did the FMLN, continued to splinter. Following the 1994 election, those opposed to the then party leadership formed the Social Christian Renovation Party (PRSC). Subsequently, the remaining PDC leadership split into two factions that battled each other in court and before the Supreme Electoral Tribunal for most of 1996. The CD, which had been the principal party of the left before the peace accords, and the MU, a party based in the Salvadoran evangelical movement, combined with the FMLN to elect a coalition candidate as mayor of San Salvador.

Compliance With the Peace Accords

While most aspects of the accords have been largely implemented, important components such as judicial reform remain incomplete. The peace process set up under the Chapultepec Accords was monitored by the United Nations from 1991 until June 1997 when it closed its special monitoring mission in El Salvador.

Human Rights

During the 12-year civil war, human rights violations by both left- and right-wing forces were rampant. The accords established a Truth Commission under UN auspices to investigate the most serious cases. The commission reported its findings in 1993. It recommended that those identified as human rights violators be removed from all government and military posts, as well as recommendingjudicial reforms. Thereafter, the Legislative Assembly granted amnesty for political crimes committed during the war. Among those freed as a result were the ESAF officers convicted in the November 1989 Jesuit murders and the FMLN ex-combatants held for the 1991 murders of two U.S. servicemen.

The peace accords also required the establishment of the Ad Hoc Commission to evaluate the human rights record of the ESAF officer corps. In 1993, the last of the 103 officers identified by this commission as responsible for human rights violations were retired, and the UN observer mission declared the government in compliance with the Ad Hoc Commission recommendations.

Also in 1993, the Government of El Salvador and the UN established the Joint Group to investigate whether illegal, armed, politically motivated groups continued to exist after the signing of the peace accords. The group reported its findings in 1994 stating that death squads were no longer active but that violence was still being used to obtain political ends. The group recommended a special National Civilian Police (PNC) unit be created to investigate political and organized crime and that further reforms be made in the judicial system. The government created the PNC's Organized Crime Investigation Unit (DICO) and took other steps in response to the report, although not all the group's recommendations have been implemented.

The peace accords provided for the establishment of a Human Rights Ombudsman's Office. Victoria Velasquez de Aviles succeeded Carlos Molina Fonseca as Ombudsman in 1995.

Military Reform

In accordance with the peace agreements, the constitution was amended to prohibit the military from playing an internal security role except under extraordinary circumstances. Demobilization of Salvadoran military forces generally proceeded on schedule throughout the process. The Treasury Police and National Guard were abolished, and military intelligence functions were transferred to civilian control. By 1993-nine months ahead of schedule-the military had cut personnel from a wartime high of 63,000 to the level of 32,000 required by the peace accords. By early 1997, ESAF strength stood at less than 17,000 (including uniformed and non-uniformed personnel). A purge of military officers accused of human rights abuses and corruption was completed in 1993 in compliance with the Ad Hoc Commission's recommendations. Clear institutional guidance from the Minister of Defense proscribing the military from any political involvement in the electoral process was clearly followed in the March 1997 elections.

National Civilian Police

The new civilian police force, created to replace the discredited public security forces, deployed its first officers in March 1993 and was present throughout the country by the end of 1994. As of late 1996, the PNC had over 10,500 officers. The United States, through the Department of Justice's International Criminal Investigative Training Assistance Program (ICITAP), has led international support for the PNC and the National Public Security Academy (ANSP), providing over $28 million in non-lethal equipment and training since 1992.

The PNC faces many challenges in building a completely new police force. With common crime rising dramatically since the end of the war, over 110 PNC officers had been killed in the line of duty by late 1996. PNC officers have also arrested a number of their own in connection with various high-profile crimes.

Judiciary

Both the Truth Commission and the Joint Group identified weaknesses in the judiciary and recommended solutions, the most dramatic being the replacement of all the magistrates on the Supreme Court. This recommendation was fulfilled in 1994 when an entirely new court was elected. The process of replacing incompetent judges in the lower courts, and of strengthening the attorney general's and public defender's offices, has moved more slowly. The government continues to work in all of these areas with the help of international donors, including the United States. Action on peace-accord driven constitutional reforms designed to improve the administration of justice was largely completed in 1996 with legislative approval of several amendments and the revision of the Criminal Procedure Code-with broad political consensus.

Land Transfers

Over 35,000 eligible beneficiaries from among the former guerrillas and soliders who fought the war received land under the Peace Accord-mandated land transfer program which ended in January 1997. The majority of them have also received agricultural credits. The international community, the Salvadoran Government, the former rebels, and the various financial institutions involved in the process continue to work closely together to deal with follow-on issues resulting from the program.

ECONOMY

The Salvadoran economy continues to benefit from a commitment to free markets and careful fiscal management. The impact of the civil war on El Salvador's economy was devastating; from 1979 to 1990, losses from damage to infrastructure and means of production due to guerrilla sabotage as well as from reduced export earnings totaled about $2.2 billion. But since attacks on economic targets ended in 1992, improved investor confidence has led to increased private investment. Rich soil, moderate climate, and a hard-working and enterprising labor pool comprise El Salvador's greatest assets.

Much of the improvement in El Salvador's economy is due to free market policy initiatives launched by the Cristiani government in July 1989, including the privatization of the banking system, reduction of import duties, and elimination of price controls on virtually all consumer products. The successor government of President Calderon Sol has continued market liberalization, further reducing tariffs and enhancing the investment climate through measures such as improved enforcement of intellectual property rights. Perhaps its most significant achievement has been the opening of the telecommunications and electrical sector to competition, a step that establishes the framework for the privatization of the telephone and electric companies set to begin in 1997.

The post-war boom in the Salvadoran economy began to fade in July 1995 after an abrupt shift in monetary policy was followed by a June increase in the value added tax (VAT) and price hikes in basic public services. The slowdown lingered into the new year and the Volume Index of Economic Activity (IVAE) declined throughout the first half of 1996, led by a dismal performance in the retail sector. Inflation remained stubbornly higher than expected, reaching a 10% annual rate by July 1996. The slump contributed to a larger-than-expected government deficit. Tax revenues were down from early projections and expenditures were up, due to an increase in teachers' salaries and government downsizing at the end of 1995 that required payment of a special severance package. Virtually every sector lobbied for a sectoral stimulus package, including tariff protection, tax cuts, and special credit lines. The government took considerable criticism for its perceived neglect, but steadfastly refused to intervene and spend the economy back to health.

The outlook improved toward the end of 1996. Key indicators, such as industrial electrical consumption, cement consumption, and air cargo traffic were all up. The IVAE index began to move up, but more importantly, the retail sector showed improved performance in the third and fourth quarters. Prices of basic foodstuffs fell in September and October. Inflation for the year was projected at 9% and real GDP growth was estimated at 4%.

In mid-1995, the government of El Salvador flirted briefly with the idea of switching to a dollar economy, going a step further than the fixed exchange rate proposed by the President. The government took a number of administrative steps that substantially increased the liquidity in the economy and helped fuel 1995's boom. Following intense pressure from the World Bank, the government made the political decision to abandon the dollarization idea in early 1996. Subsequent tightening of the monetary policy by the Central Bank contributed to the onset of what the government called deceleration.

Fiscal policy has been the biggest challenge for the Salvadoran Government. The 1992 peace accords committed the government to heavy expenditures for transition programs and social services. Although international aid has been generous, the government has focused on improving the collection of its current revenues. A 10% value-added tax (VAT), implemented in September 1992, was raised to 13% in July 1995. The VAT is estimated to have contributed 54% of total tax revenues in 1996; collections in the first nine months of the year were up 21% over 1995, in part due to the rate increase, but also to improved collection techniques.

A multiple exchange rate regime that had been used to conserve foreign exchange was phased out during 1990 and replaced by a free-floating rate. The colon depreciated from five to the dollar in 1989 to eight in 1991, and in 1993 was informally pegged at 8.75 colones to the dollar. Large inflows of dollars in the form of family remittances from Salvadorans working in the United States offset a substantial trade deficit and support the exchange rate. The monthly average of remittances reported by the Central Bank is around $85 million, with the total estimated at more than $1 billion for 1996. As of August 1996, net international reserves equaled roughly four months of imports.

Foreign Debt and Assistance

El Salvador's external debt decreased sharply in 1993, chiefly as a result of an agreement under which the United States forgave about $461 million of official debt. As a result, total debt service decreased by 16% over 1992. Total external debt went down from $2.245 billion in 1994 to approximately $2.2 billion in 1995 and did not rise significantly in 1996. Debt service fell correspondingly from 3.3% of GDP in 1994 to 3.0% in 1996. El Salvador has eliminated all payment arrears, and its debt burden is considered moderate.

The Government of El Salvador has been successful in obtaining significant new credits from the international financial institutions. Among the most significant loans are a second structural adjustment loan from the World Bank for $52.5 million, another World Bank loan of $40 million for agricultural reform, a $20 million loan from the Central American Bank for Economic Integration to be used to repair roads, and a $60 million Inter-American Development Bank loan for poverty alleviation projects. Although official figures show relatively small and diminishing aid flows, the total is probably larger. Significant amounts come in through non-governmental organizations and are channeled to groups not generally included in official statistics, such as political parties, unions, and churches. Total non-United States Government aid reached $800 million in 1995 and 1996.

Manufacturing

El Salvador historically has been the most industrialized nation in Central America, though a decade of war eroded this position. In 1995, manufacturing accounted for 22% of GDP. The industrial sector has shifted since 1993 from a primarily domestic orientation to include free zone (maquiladora) manufacturing for export. Maquila exports have led the growth in the export sector and in the last three years have made an important contribution to the Salvadoran economy.

Trade

El Salvador's balance of payments continued to show a net surplus. Exports in 1996 grew 11% while imports declined, narrowing El Salvador's almost 2-to-1 trade deficit. As in the previous year, the large trade deficit ($1.5 billion) was offset by foreign aid and family remittances. Private foreign capital continued to flow in, though mostly as short-term import financing and not at the levels of previous years. The Central American Common Market (CACM) continued its dynamic reactivation process, now with most regional commerce duty-free. In September 1996, El Salvador, Guatemala, and Honduras opened free trade talks with Mexico. Although tariff cuts that were expected in July 1996 were delayed until 1997, the Government of El Salvador is committed to a free and open economy. President Calderon Sol has indicated that he expects to implement a tariff regime between 0 and 6% for all traded goods by 1999.

Total U.S. exports to El Salvador reached $1.7 billion in 1995, while El Salvador exported $844 million to the U.S. Salvadoran exports to the U.S. grew in 1996 to $895 million. U.S. exports are projected at $1.68 million. U.S. support for El Salvador's privatization of the electrical and telecommunications markets has markedly expanded opportunities for U.S. investment in the country. Over 300 U.S. companies have established either a permanent commercial presence in El Salvador or work through representative offices in the country. The Department of State maintains a Country Commercial Guide for U.S. businesses seeking detailed information on business opportunities in El Salvador.

Agriculture and Land Reform

Before 1980, a small economic elite owned most of the land in El Salvador and controlled a highly successful agricultural industry. About 70% of farmers were sharecroppers or laborers on large plantations. Many farm workers were under- or unemployed and impoverished.

The civilian-military junta which came to power in 1979 instituted an ambitious land reform program to redress the inequities of the past, respond to the legitimate grievances of the rural poor, and promote more broadly based growth in the agricultural sector. The ultimate goal was to develop a rural middle class with a stake in a peaceful and prosperous future for El Salvador.

At least 525,000 people-more than 12% of El Salvador's population at the time and perhaps 25% of the rural poor-benefited from agrarian reform, and more than 22% of El Salvador's total farmland was transferred to those who previously worked the land but did not own it. But when agrarian reform ended in 1990, about 150,000 landless families still had not benefited from the reform actions.

The 1992 peace accords made provisions for land transfers to all qualified ex-combatants of both the FMLN and ESAF, as well as to landless peasants living in former conflict areas. The United States undertook to provide $300 million for a national reconstruction plan. This included $60 million for land purchases and $17 million for agricultural credits. USAID remains actively involved in providing technical training, access to credit, and other financial services for many of the land beneficiaries.

FOREIGN RELATIONS

In May 1997, President Calderon Sol met with President Clinton and his counterparts from Central America, Belize, and the Dominican Republic at the Costa Rica summit to celebrate the remarkable democratic transformation in the region and reaffirm support for strengthening democracy, good governance, and promoting prosperity through economic integration, free trade, and investment. The leaders also expressed their commitment to the continued development of just and equitable societies and responsible environmental policies as integral elements of sustainable development.

El Salvador is a member of the United Nations and several of its specialized agencies; the Organization of American States (OAS); the Central American Common Market (CACM); the Central American Parliament (PARLACEN); and the Central American Integration System (SICA). It actively participates in the Central American Security Commission (CASC), which seeks to promote regional arms control. El Salvador also is a member of the World Trade Organization and is pursuing regional free trade agreements. An active participant in the Summit of the Americas process, El Salvador chairs a working group on market access under the Free Trade Area of the Americas initiative. El Salvador has joined its six Central American neighbors in signing the Alliance for Sustainable Development, known as the Conjunta Centroamerica-USA or CONCAUSA to promote sustainable economic development in the region.

In July 1969, El Salvador and Honduras fought the 100-hour Soccer War over disputed border areas and friction resulting from the 300,000 Salvadorans who had emigrated to Honduras in search of land and employment. The catalyst was nationalistic feelings aroused by a series of soccer matches between the two countries. The two countries formally signed a peace treaty on October 30, 1980, which put the border dispute before the International Court of Justice.

In September 1992, the court issued a 400-page ruling, awarding much of the disputed land to Honduras. Although there have been tensions between citizens on both sides of the border, the two countries have worked to maintain stability, and signed an agreement in November 1996 to establish a framework for negotiating the final disposition of citizens and property in the affected areas. El Salvador and Honduras share normal diplomatic and trade relations.

U.S.-SALVADORAN RELATIONS

U.S.-Salvadoran relations remain close and cordial. U.S. policy toward El Salvador seeks to promote:

In FY1996, U.S. Government assistance to El Salvador was about $60 million, including $10 million of PL-480 (food assistance). Bilateral aid in general has declined since the end of the war with 1997 total economic assistance projected at $32 million. The Salvadoran government relies increasingly on loans from international lending institutions to finance special projects.

In February 1996, Secretary of State Warren Christopher visited El Salvador to sign an agreement providing $10 million to complete the Land Transfer Program. In his address to the Legislative Assembly the Secretary reiterated U.S. support for hemispheric commitments to sustainable development and free trade. Continued U.S. and international engagement has been instrumental in keeping the Salvadoran peace process on track.


Grenada

PEOPLE

Most of Grenada's population is of African descent; there is some trace of the early Arawak and Carib Indians. A few East Indians and a small community of the descendants of early European settlers reside in Grenada. About 50% of Grenada's population is under the age of 30. English is the official language; only a few people still speak French patois. A more significant reminder of Grenada's historical link with France is the strength of the Roman Catholic church, to which about 60% of Grenadians belong. The Anglican church is the largest Protestant denomination.

HISTORY

Before the arrival of Europeans, Grenada was inhabited by Carib Indians who had driven the more peaceful Arawaks from the island. Columbus landed on Grenada in 1498 during his third voyage to the new world. He named the island "Concepcion." The origin of the name "Grenada" is obscure but it is likely that Spanish sailors renamed the island for the city of Granada. By the beginning of the 18th century, the name "Grenada," or "la Grenade" in French, was in common use.

Partly because of the Caribs, Grenada remained uncolonized for more than 100 years after its discovery; early English efforts to settle the island were unsuccessful. In 1650, a French company founded by Cardinal Richelieu purchased Grenada from the English and established a small settlement. After several skirmishes with the Caribs, the French brought in reinforcements from Martinique and defeated the Caribs, the last of whom leaped into the sea rather than surrender.

The island remained under French control until its capture by the British in 1762, during the Seven Years' War. Grenada was formally ceded to Great Britain in 1763 by the Treaty of Paris. Although the French regained control in 1779, the island was restored to Britain in 1783 by the Treaty of Versailles. Although Britain was hard pressed to overcome a pro-French revolt in 1795, Grenada remained British for the remainder of the colonial period.

During the 18th century, Grenada's economy underwent an important transition. Like much of the rest of the West Indies, it was originally settled to cultivate sugar, which was grown on estates using slave labor. But natural disasters paved the way for the introduction of other crops. In 1782, Sir Joseph Banks, the botanical adviser to King George III, introduced nutmeg to Grenada. The island's soil was ideal for growing the spice, and, because Grenada was a closer source of spices for Europe than the Dutch East Indies, the island assumed a new importance to European traders.

The collapse of the sugar estates and the introduction of nutmeg and cocoa encouraged the development of smaller land holdings and the island developed a land-owning yeoman farmer class. Slavery was outlawed in 1834. In 1833, Grenada became part of the British Windward Islands Administration. The governor of the Windward Islands administered the island for the rest of the colonial period. In 1958, the Windward Islands Administration was dissolved, and Grenada joined the Federation of the West Indies. After that federation collapsed in 1962, the British Government tried to form a small federation out of its remaining dependencies in the Eastern Caribbean.

Following the failure of this second effort, the British and the islands developed the concept of associated statehood. Under the Associated Statehood Act of 1967, Grenada was granted full autonomy over its internal affairs in March 1967. Full independence was granted on February 7, 1974.

After obtaining independence, Grenada adopted a modified Westminster parliamentary system based on the British model, with a governor general appointed by and representing the British monarch (head of state) and a prime minister who is both leader of the majority party and the head of government. Sir Eric Gairy was Grenada's first prime minister.

On March 13, 1979, the new joint endeavor for welfare, education, and liberation (New Jewel) movement ousted Gairy in a nearly bloodless coup and established a people's revolutionary government (PRG), headed by Maurice Bishop, who became prime minister. His Marxist-Leninist Government established close ties with Cuba, the Soviet Union, and other communist-bloc countries.

In October 1983, a power struggle within the government resulted in the arrest and subsequent murder of Bishop and several members of his cabinet by elements of the people's revolutionary army. Following a breakdown in civil order, a U.S.-Caribbean force landed on Grenada on October 25 in response to an appeal from the governor general and to a request for assistance from the Organization of Eastern Caribbean States. U.S. citizens were evacuated, and order was restored.

An advisory council, named by the governor general, administered the country until general elections were held in December 1984. The New National Party (NNP), led by Herbert Blaize, won 14 out of 15 seats in free and fair elections and formed a democratic government. Grenada's constitution had been suspended in 1979 by the PRG, but it was restored after the 1984 elections.

The NNP continued in power until 1989 but with a reduced majority. Five NNP parliamentary members-including two cabinet ministers-left the party in 1986-87 and formed the National Democratic Congress (NDC), which became the official opposition.

In August 1989, Prime Minister Blaize broke with the NNP to form another new party-The National Party (TNP)-from the ranks of the NNP. This split in the NNP resulted in the formation of a minority government until constitutionally scheduled elections in March 1990. Prime Minister Blaize died in December 1989 and was succeeded as prime minister by Ben Jones until after the elections.

The NDC emerged from the 1990 elections as the strongest party, winning seven of the 15 available seats. Nicholas Brathwaite added two TNP members and one member of the Grenada United Labor Party (GULP) to create a 10-seat majority coalition. The governor general appointed him to be prime minister.

In parliamentary elections on June 20, 1995, the NNP won eight seats and formed a government headed by Dr. Keith Mitchell. The leader of the opposition in parliament is NDC leader George Brizan.

GOVERNMENT AND POLITICAL CONDITIONS

Grenada is governed under a parliamentary system based on the British model; it has a governor general, a prime minister and a cabinet, and a bicameral parliament with an elected house of representatives and an appointed senate.

Citizens enjoy a wide range of civil and political rights guaranteed by the constitution. Grenada's constitution provides citizens with the right to change their government peacefully. Citizens exercise this right through periodic, free, and fair elections held on the basis of universal suffrage.

Grenada's political parties range from the moderate TNP, NNP, and NDC to the left-of-center Maurice Bishop Patriotic Movement (MBPM--organized by the pro-Bishop survivors of the October 1983 anti-Bishop coup) and the populist GULP of former prime minister Gairy.

ECONOMY

The economy of Grenada is based upon agricultural production (nutmeg, mace, cocoa, and bananas) and tourism. Agriculture accounts for over half of merchandise exports, and a large portion of the population is employed directly or indirectly in agriculture. Recently, the performance of the agricultural sector has not been good. Grenada's banana exports declined markedly in volume and quality in 1996, and it is a question to what extent the country will remain a banana exporter. Tourism remains the key earner of foreign exchange.

Grenada is a member of the Caribbean Community and Common Market (CARICOM). Most goods can be imported into Grenada under open general license, but some goods require specific licenses. Goods that are produced in the Eastern Caribbean receive additional protection; in May 1991, the CARICOM common external tariff (CET) was implemented. The CET aims to facilitate economic growth through intra-regional trade by offering duty-free trade among CARICOM members and duties on goods imported from outside CARICOM.

National Security

Security in Grenada is maintained by the 650 members of the Royal Grenada Police Force (RGPF), which included an 80-member paramilitary special services unit (SSU) and a 30-member coast guard. The U.S. army and the U.S. coast guard provide periodic training and material support for the SSU and the coast guard.

FOREIGN RELATIONS

The United States, Venezuela, and Taiwan have embassies in Grenada. The United Kingdom is represented by a resident commissioner (as opposed to the governor general, who represents the British monarch). Grenada has been recognized by most members of the United Nations and maintains diplomatic missions in the United Kingdom, the United States, Venezuela, and Canada.

Grenada is a member of the Caribbean Development Bank, CARICOM, the Organization of Eastern Caribbean States (OECS), and the Commonwealth of Nations. It joined the United Nations in 1974, and the World Bank, the International Monetary Fund, and the Organization of American States in 1975. Grenada is also a member of the Eastern Caribbean's Regional Security System (RSS).

As a member of CARICOM, Grenada strongly backed efforts by the United States to implement UN Security Council Resolution 940, designed to facilitate the departure of Haiti's de facto authorities from power. Grenada subsequently contributed personnel to the multinational force, which restored the democratically elected government of Haiti in October 1994.

Prime Minister Mitchell joined President Clinton, in May 1997, for a meeting with 14 other Caribbean leaders during the first-ever U.S.-regional summit in Bridgetown, Barbados. The summit strengthened the basis for regional cooperation on justice and counter-narcotics issues, finance and development, and trade.

U.S.-GRENADIAN RELATIONS

The U.S. Government established an embassy in Grenada in November 1983. The U.S. ambassador to Grenada is resident in Bridgetown, Barbados. The embassy in Grenada is staffed by a charge d'affaires who reports to the ambassador in Bridgetown.

The U.S. Agency for International Development (USAID) has played a major role in Grenada's development, providing more than $120 million in economic assistance from 1984 to 1993. Following the closure in July 1996 of the USAID regional mission for the Eastern Caribbean, U.S. assistance is channeled primarily through multilateral agencies such as the World Bank. About 10 Peace Corps volunteers in Grenada teach remedial reading, English-language skills, and vocational training. Grenada also is a beneficiary of the U.S. Caribbean Basin Initiative. In addition, Grenada receives counternarcotics assistance from the U.S. and benefits from U.S. military exercise-related construction and humanitarian civic action projects.

Grenada and the U.S. cooperate closely in fighting narcotics smuggling and other forms of transnational crime. in 1995, the U.S. and Grenada signed a maritime law enforcement treaty. In 1996, they signed a mutual legal assistance treaty and an extradition treaty as well as an overflight/order-to-land amendment to the maritime law enforcement treaty. Some U.S. military training is given to Grenadian security and defense forces.

Grenada continues to be a popular destination for Americans. Of the nearly 267,000 cruise ship passengers arriving in 1996, the majority were U.S. citizens. In addition, there were more than 30,000 other U.S. visitors in 1996. It is estimated that some 2,600 Americans reside in the country, plus the 800 U.S. medical students who study at the St. George's University School of Medicine. (Those students are not counted as residents for statistical purposes.)


Guatamala

PEOPLE AND HISTORICAL HIGHLIGHTS

More than half of Guatemalans are descendants of Mayan Indians. Westernized Mayans and mestizos (mixed European and Indian) are known as ladinos. Most of Guatemala's population is rural, though urbanization is accelerating.

The predominant religion is Roman Catholicism, into which many Indians have incorporated traditional forms of worship. Protestantism and traditional Mayan religions are practiced by an estimated 30% of the population. Though the official language is Spanish, it is not universally understood among the indigenous population. However, the peace accords signed in December 1996 provide for the translation of some official documents and voting materials into several indigenous languages (see summary of main substantive accords).

The Mayan civilization flourished throughout much of Guatemala and the surrounding region long before the Spanish arrived, but it was already in decline when the Mayans were defeated by Pedro de Alvarado in 1523-24. During Spanish colonial rule, most of Central America came under the control of the Captaincy General of Guatemala.

The first colonial capital, Ciudad Vieja, was ruined by floods and an earthquake in 1542. Survivors founded Antigua, the second capital, in 1543. In the 17th century, Antigua became one of the richest capitals in the New World. Always vulnerable to volcanic eruptions, floods, and earthquakes, Antigua was destroyed by two earthquakes in 1773, but the remnants of its Spanish colonial architecture have been preserved as a national monument. The third capital, Guatemala City, was founded in 1776, after Antigua was abandoned.

Guatemala gained independence from Spain on September 15, 1821; it briefly became part of the Mexican Empire and then for a period belonged to a federation called the United Provinces of Central America. From the mid-19th century until the mid-1980s, the country passed through a series of dictatorships, insurgencies (particularly beginning in the 1960s), coups, and stretches of military rule with only occasional periods of representative government.

1944 to 1986

In 1944, Gen. Jorge Ubico's dictatorship was overthrown by the "October Revolutionaries"--a group of dissident military officers, students, and liberal professionals. A civilian president, Juan Jose Arevalo, was elected in 1945 and held the presidency until 1951. Social reforms initiated by Arevalo were continued by his successor, Col. Jacobo Arbenz. Arbenz permitted the communist Guatemalan Labor Party to gain legal status in 1952. By the mid-point of Arbenz's term, communists controlled key peasant organizations, labor unions, and the governing political party, holding some key government positions. Despite most Guatemalans' attachment to the original ideals of the 1944 uprising, some private sector leaders and the military viewed Arbenz's policies as a menace. The army refused to defend the Arbenz Government when a group led by Col. Carlos Castillo Armas invaded the country from Honduras in 1954 and eventually took over the government.

In response to the increasingly autocratic rule of General Ydigoras Fuentes, who took power in 1958 following the murder of Col. Castillo Armas, a group of junior military officers revolted in 1960. When they failed, several went into hiding and established close ties with Cuba. This group became the nucleus of the forces that were in armed insurrection against the government for the next 36 years.

Three principal left-wing guerrilla groups--the Guerrilla Army of the Poor (EGP), the Revolutionary Organization of Armed People (ORPA), and the Rebel Armed Forces (FAR)--conducted economic sabotage and targeted government installations and members of government security forces in armed attacks. These three organizations, plus a fourth--the outlawed communist party, known as the PGT--combined to form the Guatemalan National Revolutionary Unity (URNG) in 1982. At the same time, extreme right-wing groups of self-appointed vigilantes, including the Secret Anti-Communist Army (ESA) and the White Hand, tortured and murdered students, professionals, and peasants suspected of involvement in leftist activities.

Shortly after President Julio Cesar Mendez Montenegro took office in 1966, the army launched a major counterinsurgency campaign that largely broke up the guerrilla movement in the countryside. The guerrillas then concentrated their attacks in Guatemala City, where they assassinated many leading figures, including U.S. Ambassador John Gordon Mein in 1968. Between 1966 and 1982, there were a series of military or military-dominated governments.

In March 1982, army troops commanded by junior officers staged a coup to prevent the assumption of power by former Defense Minister Gen. Anibal Guevara, whose electoral victory was marred by fraud. The coup leaders asked Brig. Gen. Efrain Jose Rios Montt to negotiate the departure of presidential incumbent General Lucas Garcia. Rios Montt had been the candidate of the Christian Democratic Party in the 1974 presidential elections and was also widely believed to have lost by fraud. Rios Montt formed a three-member junta that annulled the 1965 constitution, dissolved the Congress, suspended political parties, and canceled the election law. Shortly thereafter, Rios Montt assumed the title of President of the Republic. Responding to a wave of violence, the government imposed a state of siege, while at the same time forming an advisory Council of State to guide a return to democracy. In 1983, electoral laws were promulgated, the state of siege was lifted, political activity was once again allowed, and constituent assembly elections scheduled.

Guerrilla forces and their leftist allies then denounced the new government and stepped up attacks. Rios Montt sought to combat the threat with military actions and economic reforms, in his words, "rifles and beans." The government formed civilian defense forces which, along with the army, successfully contained the insurgency. However, on August 8, 1983, Rios Montt was deposed by the Guatemalan army, and Minister of Defense, Gen. Oscar Humberto Mejia Victores, was proclaimed head of state. General Mejia claimed that certain "religious fanatics" were abusing their positions in the government and that corruption had to be weeded out. Constituent assembly elections were held on July 1, 1984.

On May 30, 1985, after nine months of debate, the constituent assembly finished drafting a new constitution, which took immediate effect. Mejia called general elections. The Christian Democratic Party (DCG) candidate, Vinicio Cerezo, won the presidency with almost 70% of the vote and took office in January 1986.

1986 to 1996

Upon its inauguration in January 1986, President Cerezo's civilian government announced that its top priorities would be to end the political violence and establish the rule of law. Reforms included new laws of habeas corpus and amparo (court-ordered protection), the creation of a legislative human rights committee, and the establishment in 1987 of the office of Human Rights Ombudsman. The Supreme Court also embarked on a series of reforms to fight corruption and improve legal system efficiency.

With Cerezo's election, the military returned to its more traditional role of fighting against the insurgents. The first two years of Cerezo's Administration were characterized by a stable economy and a marked decrease in political violence. Two coup attempts were made in May 1988 and May 1989 by dissatisfied military personnel, but military leadership supported the constitutional order. The government was heavily criticized for its unwillingness to investigate or prosecute cases of human rights violations. The final two years of Cerezo's Government also were marked by a failing economy, strikes, protest marches, and allegations of widespread corruption. The government's inability to deal with many of the nation's problems--such as infant mortality, illiteracy, deficient health and social services, and rising levels of violence--contributed to popular discontent.

Presidential and congressional elections were held on November 11, 1990. After a runoff ballot, Jorge Serrano was inaugurated on January 14, 1991, thus completing the first transition from one democratically elected civilian government to another. Because his Movement of Solidarity Action (MAS) party gained only 18 of 116 seats in Congress, Serrano entered into a tenuous alliance with the Christian Democrats and the National Union of the Center (UCN).

The Serrano Administration's record was mixed. It had some success in consolidating civilian control over the army, replacing a number of senior officers and persuading the military to participate in peace talks with the URNG. He took the politically unpopular step of recognizing the sovereignty of Belize. The Serrano Government reversed the economic slide it inherited, reducing inflation and boosting real growth from 3% in 1990 to almost 5% in 1992. On May 25, 1993, Serrano illegally dissolved Congress and the Supreme Court and tried to restrict civil freedoms, allegedly to fight corruption. The "autogolpe" (or autocoup) failed due to unified, strong protests by most elements of Guatemalan society, international pressure, and the army's enforcement of the decisions of the Court of Constitutionality, which ruled against the attempted takeover.

In the face of this pressure, Serrano fled the country. On June 5, 1993, the Congress, pursuant to the 1985 constitution, elected the Human Rights Ombudsman, Ramiro De Leon Carpio, to complete Serrano's presidential term. De Leon, not a member of any political party and lacking a political base, but with strong popular support, launched an ambitious anti-corruption campaign to "purify" Congress and the Supreme Court, demanding the resignations of all members of the two bodies. Despite considerable congressional resistance, presidential and popular pressure led to a November 1993 agreement brokered by the Catholic Church between the government and Congress. This package of constitutional reforms was approved by popular referendum on January 30, 1994. In August 1994, a new Congress was elected to complete the unexpired term. Controlled by the anti-corruption parties--the Populist Republican Front (FRG) headed by ex-General Efrain Rios Montt, and the center-right National Advancement Party (PAN)--the new Congress began to move away from the corruption that characterized its predecessors.

Under De Leon, the peace process, now brokered by the United Nations, took on new life. The government and the URNG signed agreements on Human Rights (March 1994), Resettlement of Displaced Persons (June 1994), Historical Clarification (June 1994), and Indigenous Rights (March 1995). They also made significant progress on a Socio-economic and Agrarian Agreement.

National elections for President, the Congress, and municipal offices were held in November 1995. With almost 20 parties competing in the first round, the presidential election came down to a January 7, 1996 runoff in which PAN candidate Alvaro Arzu defeated Alfonso Portillo of the FRG by just over 2% of the vote. Arzu won because of his strength in Guatemala City, where he had previously served as mayor, and in the surrounding urban area. Portillo won all of the rural departments. The biggest surprise of the election was the strong showing of the newly formed New Guatemala Democratic Front (FDNG), the first legitimate party of the left to compete in 40 years. The FDNG presidential candidate won almost 8% of the vote, and six FDNG deputies, including several internationally known human rights advocates, were elected to Congress. In the other November races, the PAN won 43 of the 80 seats in Congress and leadership of one-third of the municipal governments. The FRG won 21 seats to become the principal opposition party. The formerly powerful but discredited DCG and UCN elected only seven deputies between them.

GOVERNMENT

Guatemala's 1985 Constitution provides for a separation of powers among the executive, legislative, and judicial branches of government. The 1993 constitutional reforms included a reduction in the number of congressional representatives in the unicameral structure, from 116 to 80, and an increase in the number of Supreme Court justices from nine to 13. The terms of office for president, vice president, and congressional representatives were reduced from five years to four years and for Supreme Court justices from six years to five years.

The president and vice president are directly elected through universal suffrage and limited to one term. Supreme Court justices are elected by the Congress from a list submitted by the bar association, law school deans, a university rector, and appellate judges. The Supreme Court and local courts handle civil and criminal cases. There also is a Constitutional Court.

Guatemala has 22 administrative subdivisions (departments) administered by governors appointed by the president. Guatemala City and 330 other municipalities are governed by popularly elected mayors or councils.

National Security

Guatemala is a signatory to the Rio Pact and is a member of the Central American Defense Council (CONDECA). The president is commander-in-chief. The Defense Minister is responsible for policy. Day-to-day operations are the responsibility of the chief of staff and the national defense staff. An agreement signed in September 1996 (which is one of the substantive peace accords), mandated that the mission of the armed forces change to focus exclusively on external threats, although President Arzu has ordered the army to support the police in response to public concern about a nationwide wave of violent crime. The accord calls for a one-third reduction in the army's authorized strength and budget, and for a constitutional amendment to permit the appointment of a civilian Minister of Defense.

The army has met its accord-mandated target of 33,000, including subordinate air force (1,000) and navy (1,000) elements. It is equipped with armaments and materiel from the United States, Israel, Yugoslavia, Taiwan, Argentina, Spain, and France. As part of the army downsizing, the operational structure of 19 military zones and 3 strategic brigades are being recast as several military zones are eliminated and their area of operations absorbed by others. The air force operates three air bases; the navy has two port bases.

POLITICAL CONDITIONS

Upon taking office, the Arzu Administration made resolution of the 36-year internal conflict before the end of 1996 its highest priority. President Arzu took the bold steps necessary to breathe life into the peace process and to increase civilian control over the military. He traveled to Mexico and El Salvador to meet with guerrilla leaders, thus adding impetus to the peace process and leading to subsequent agreements on: socio-economic/agrarian issues which were signed in May; the strengthening of civil society and the role of the military in a democracy in September; a definitive ceasefire, constitutional and electoral reforms, and an agreement on the reinsertion of the URNG into political life in Guatemala in December. The final agreement, signed on December 29, 1996, contributed significantly to an improvement in Guatemala's human rights (see last page for summary of main substantive accords).

Within two weeks of taking office, President Arzu initiated a major shakeup of the military high command and oversaw the firing of almost 200 corrupt police officials. In September 1996, the government uncovered a large smuggling scheme involving a number of government officials and military and police officers. The case, which is expected to take a number of years to resolve, resulted in the dismissal of several additional military, police, and customs officials. The Arzu Administration also began a series of actions to boost the economy, including a reform of the tax system, and demonopolization and privatization of the electricity and telecommunication sectors.

President Alvaro Arzu has strongly and publicly condemned human rights abuses. Positive political developments and the demobilization of 200,000 members of the Civilian Defense Patrols were major factors in the positive change. In contrast to past years, there was a marked decline in new cases of human rights abuse, but problems remain in some areas. Common crime, aggravated by a legacy of violence and vigilante justice, presents a serious challenge to the government. Impunity remains a major problem, primarily because democratic institutions, including those responsible for the administration of justice, have developed only a limited capacity to cope with this legacy.

The human rights accord signed in March 1994 called for the immediate establishment of a UN Human Rights Verification Mission in Guatemala (MINUGUA), which began to operate in November 1994. The presence of MINUGUA has been a highly positive factor in improving respect for human rights.

ECONOMY

Guatemala's GDP for 1997 is estimated at $16 billion, with real growth of approximately 4%. The government has initiated a number of programs aimed at liberalizing the economy and improving the investment climate. After the signing of the final peace accord in December 1996, Guatemala is well-positioned for rapid economic growth over the next several years.

Guatemala's economy is dominated by the private sector, which generates about 85% of GDP. Agriculture contributes 24% of GDP and accounts for 75% of exports. Most manufacturing is light assembly and food processing, geared to the domestic, U.S., and Central American markets. Over the past several years, tourism and exports of textiles, apparel, and non-traditional agricultural products such as winter vegetables, fruit, and cut flowers have boomed, while more traditional exports such as cotton, sugar, and coffee continue to represent a large share of the export market. The United States is the country's largest trading partner, providing 44% of Guatemala's imports and receiving 31% of its exports. The government sector is small and shrinking, with its business activities limited to public utilities (which are to be privatized) and several development-oriented financial institutions.

Current economic priorities include:

Import tariffs have been lowered in conjunction with Guatemala's Central American neighbors so that most now fall between 1% and 20%, with further reductions planned. Responding to Guatemala's changed political and economic policy environment, the international community has mobilized substantial resources to support the country's economic and social development objectives. The United States, along with other donor countries--especially France, Italy, Spain, Germany, Japan, and the international financial institutions--have increased development project financing. Donors' response to the need for international financial support funds for implementation of the peace accords is expected to be good.

Problems hindering economic growth include illiteracy and low levels of education; inadequate and underdeveloped capital markets; and lack of infrastructure, particularly in the transportation, telecommunications, and electricity sectors. The distribution of income and wealth remains highly skewed. The wealthiest 10% of the population receives almost one-half of all income; the top 20% receives two-thirds of all income. As a result, more than half the population lives in poverty, and two-thirds of that number live in extreme poverty. Guatemala's social indicators, such as infant mortality and illiteracy, are among the worst in the hemisphere.

FOREIGN RELATIONS

Guatemala's major diplomatic interests are regional security and, increasingly, regional development and economic integration. The Central American Ministers of Trade meet on a regular basis to work on regional approaches to trade issues. In March 1997, Guatemala hosted the second annual Trade and Investment Forum, under the sponsorship of the U.S. Department of Commerce. The two-day event highlighted the growing relationship that Guatemala has with its closest trading partners and offer regional opportunities to foreign investors. In March 1998, Guatemala joined its Central American neighbors in signing a Trade and Investment Framework Agreement (TIFA). Guatemala also originated the idea for, and is the seat of, the Central American Parliament (PARLACEN).

Guatemala participates in several regional groups, particularly those related to the environment and trade. For example, President Clinton and the Central American presidents signed the CONCAUSA (Conjunto Centroamerica-USA) agreement at the Summit of the Americas in December 1994. CONCAUSA is a cooperative plan of action to promote clean, efficient energy use; conserve the region's biodiversity; strengthen legal and institutional frameworks and compliance mechanisms; and improve and harmonize environmental protection standards.

Guatemala long laid claim to Belize; the territorial dispute caused problems with the United Kingdom and later with Belize following its 1981 independence from the U.K. Relations have since improved. In 1986, Guatemala and the U.K. re-established commercial and consular relations; in 1987, they re-established full diplomatic relations. In December 1989, Guatemala sponsored Belize for permanent observer status in the Organization of American States (OAS). In September 1991, Guatemala recognized Belize's independence and established diplomatic ties, while acknowledging that the boundaries remained in dispute. Although Belize has recognized Guatemalan diplomatic representation at the ambassadorial level for several years, the Guatemalan Government did not accredit the first ambassador from Belize until December 1996.

While Belize continues to be a difficult domestic political issue in Guatemala, the two governments have quietly maintained constructive relations. The Arzu Administration has indicated its intent to resolve the dispute with Belize, making it the number one priority now that the final peace accord has been signed. In anticipation of an effort to bring the border dispute to an end, in early 1996, the Guatemalan Congress ratified two long-pending international agreements governing frontier issues and maritime rights.

U.S.-GUATEMALAN RELATIONS

Relations between the United States and Guatemala traditionally have been close, although at times strained by human rights and civil/military issues in earlier periods. U.S. policy objectives in Guatemala include:

The United States, as a member of "the Friends of Guatemala," with Colombia, Mexico, Spain, Norway, and Venezuela, played an important role in the UN-moderated peace accords, providing public and behind-the-scenes support. The U.S. strongly supports the six substantive and three procedural accords, which, along with the signing of the December 29, 1996 final accord, form the blueprint for profound political, economic, and social change.

In Costa Rica in May 1997, President Arzu met with President Clinton and his counterparts from Central America, Belize, and the Dominican Republic to celebrate the remarkable democratic transformation in the region and reaffirm support for strengthening democracy, good governance, and promoting prosperity through economic integration, free trade, and investment. The leaders also expressed their commitment to the continued development of just and equitable societies and responsible environmental policies as integral elements of sustainable development.

Tangible support for the implementation of the accords will come from a number of sources. Development assistance through the U.S. Agency for International Development (USAID) is concentrated in programs to strengthen democratic institutions, improve health and education, and protect the environment. The U.S. will also provide up to $25 million dollars in FY 1998 Economic Support Funds, including an immediate grant of $5 million, focused on the most immediate needs associated with the implementation of the peace accords, such as demobilization of the ex-combatants. The U.S. hopes to be able to continue this level of support for another two years. To address the issue of impunity, USAID and the Department of Justice are funding programs to strengthen the courts, the public prosecutor's office, and the civilian police. Other federal agencies such as the Departments of Agriculture, Labor, and the Treasury have programs either in place or in the planning stages to support specific aspects of the peace accords.

The U.S. Government suspended military aid to Guatemala in 1977 following an upsurge in death squad activity and the publication of the Department's first human rights report. Modest training assistance was reinstated in 1983, but suspended again in 1990 in response to the murder of U.S. citizen Michael Devine and the Guatemalan military's lack of cooperation in that investigation. The U.S. Government eliminated access to IMET funds in 1995 over human rights concerns. Currently, Guatemala is eligible for expanded IMET and a program began in 1997.

The United States is Guatemala's largest trading partner, providing 44% of the country's imports and receiving 31% of its exports. U.S. official assistance to Guatemala since 1986 totals about $965 million, and in 1997, the U.S. provided $65 million in bilateral economic development assistance.

More than 150,000 U.S. citizens visit the diverse attractions in Guatemala each year, although as stated in the Consular Information Sheet for Guatemala, "While violent crime has been a serious and growing problem in Guatemala for years, 1997 has seen a marked increase in incidents involving American citizens." When visitors have problems, their first contacts are often with the U.S. Embassy. Whether it is replacing a lost passport, arranging for additional funds to be wired to a visitor in distress, or assisting in locating a lost loved one, the embassy is prepared to help American citizens traveling in Guatemala. Likewise, American businesses find a relatively open and accommodating market in Guatemala, which is particularly receptive to U.S.-origin products. Fifty U.S. businesses have set up assembly plants, while other investors are finding an attractive climate in which to establish their companies.


Haiti

PEOPLE

Haiti is densely populated, with approximately 250 people per square kilometer (650 per sq. mi.). About 95% of the Haitians are of African descent; the rest of the population is mostly of mixed African-Caucasian ancestry. A few are of European or Levantine stock. About 70% of the people live in rural areas.

French is one of two official languages, but it is spoken by only about 10% of the people. All Haitians speak Creole, the country's other official language. English is increasingly spoken among the young and in the business sector.

The state religion is Roman Catholicism which most of the population professes. Some have been converted to Protestantism by missionaries active throughout the country. Haitians, however, tend to see no conflict with voodoo traditions of African origin co-existing with Christian faiths.

Although public education is free, private and parochial schools provide perhaps 75% of educational programs offered. Only 63% of those enrolled will complete primary school; on average, it takes 16 years to produce a single graduate of the six-year cycle. Though Haitians place a high value on education, most families cannot afford to send their children to secondary school.

Recent large-scale emigration to the U.S., and secondarily to Canada and Caribbean neighbors, has created what Haitians refer to as the Tenth Department. About one out of every six Haitians lives abroad.

HISTORY

The Spaniards used Hispaniola (of which Haiti is the western part and the Dominican Republic is the eastern) as a launching point to explore the rest of the Western Hemisphere. French buccaneers later used the western third of the island as a point from which to harass English and Spanish ships. In 1697, Spain ceded the western third of Hispaniola to France. As piracy was gradually suppressed, some French adventurers became planters, making Saint-Domingue--as the French portion of the island was then called--one of the richest colonies of the 18th century French empire.

During this period, African slaves were brought to work the sugarcane and coffee plantations. In 1791, the slave population--led by Toussaint L'Ouverture, Jean Jacques Dessalines, and Henri Christophe--revolted and gained control of the northern part of Saint-Domingue.

In 1804, local forces defeated an army deployed by Napoleon Bonaparte, established independence from France, and renamed the area Haiti. The defeat of the French in Haiti is widely credited with contributing to Napoleon's decision to sell the Louisiana territory to the United States in 1804. Haiti is the world's oldest black republic and the second-oldest republic after the United States in the Western Hemisphere. Haitians actively assisted the American Revolution and independence movements of Latin American countries.

Two separate regimes (north and south) emerged after independence but were unified in 1820. Two years later, Haiti conquered Santo Domingo, the eastern, Spanish-speaking portion of Hispaniola. In 1844, however, Santo Domingo broke away from Haiti and became the Dominican Republic. With 22 changes of government from 1843 until 1915, Haiti experienced numerous periods of intense political and economic disorder, prompting United States military intervention in 1915. U.S. military forces were withdrawn in 1934 at the request of the elected Government of Haiti.

From 1986--when the 30-year dictatorship of the Duvalier family ended--until 1991, Haiti was ruled by a series of provisional governments. In 1987, a constitution was adopted that provides for an elected bicameral parliament, an elected president who serves as head of state, and a prime minister, cabinet of ministers, and supreme court appointed by the president with Parliament's consent. The Haitian Constitution also provides for the election of mayors and administrative bodies responsible for local government.

Aristide and the 1991 Coup d'Etat

In December 1990, Jean-Bertrand Aristide, a charismatic Roman Catholic priest, won 67% of the vote in a presidential election that international observers deemed largely free and fair. Aristide took office in February 1991, but was overthrown by dissatisfied elements of the army and forced to leave the country in September of the same year. It is estimated that between 300 and 500 Haitians were killed in the days following the September coup, and 3,000 in the following three years. The coup created a large-scale exodus from the country; in fact, the U.S. Coast Guard rescued a total of 41,342 Haitians from 1991 to 1992, more than the number of rescued refugees from the previous 10 years combined.

From October 1991 to June 1992, Joseph Nerette, as president, led an unconstitutional de facto regime and governed with a parliamentary majority and the armed forces. In June 1992, he resigned and Parliament approved Marc Bazin as prime minister of a de facto government with no replacement named for president. Bazin sought to negotiate a solution with exiled President Aristide and to end the economic embargo and diplomatic isolation of Haiti imposed after Aristide's ouster. In June 1993, Bazin resigned and the UN imposed an oil and arms embargo, bringing the Haitian military to the negotiating table.

Transition to Democracy

President Aristide and Gen. Raoul Cedras, head of the Haitian armed forces, signed the UN-brokered Governors Island Agreement on July 3, 1993, establishing a 10-step process for the restoration of constitutional government and the return of President Aristide by October 30, 1993. As part of this process, Robert Malval was sworn in as Prime Minister on August 30, 1993. The military derailed the process and the UN reimposed economic sanctions. Malval resigned on December 15, 1993, but remained as acting Prime Minister for 11 more months. The political and human rights climate continued to deteriorate as the military and the de facto government sanctioned repression, assassination, torture, and rape in open defiance of the international community's condemnation.

In May 1994, the military selected Supreme Court Justice Emile Jonassaint to be provisional president of its third de facto regime. The UN and the U.S. reacted to this extraconstitutional move by tightening economic sanctions (UN Resolution 917). On July 31, 1994, the UN adopted Resolution 940 authorizing member states to use all necessary means to facilitate the departure of Haiti's military leadership and restore constitutional rule and Aristide's presidency.

In August 1994, Haiti had parallel governments, the illegitimate military-backed Jonassaint regime that controlled the government apparatus in Haiti, and the constitutional government, whose members, like President Aristide, were in exile or who, like acting Prime Minister Malval, were blocked from carrying out their duties.

In the weeks that followed, the United States took the lead in forming a multinational force (MNF) to carry out the UN's mandate by means of a military intervention. In September, with U.S. troops prepared to enter Haiti in a matter of hours, President Clinton dispatched a negotiating team led by former President Jimmy Carter to discuss with the de facto Haitian leadership the terms of their departure. As a result, the MNF deployed peacefully, Cedras and other top military leaders left Haiti, and restoration of the legitimate government began, leading to Aristide's return on October 15.

Current Conditions

Elections for parliament and local government offices were held successfully between June and October 1995, although they were delayed by seven months and marred by serious administrative problems and some violence. President Aristide's Lavalas party and its affiliates swept into power at all levels. In the December 1995 presidential election, with Aristide barred by the Haitian Constitution from succeeding himself, prominent Lavalas figure Rene Preval (who was Aristide's first prime minister in 1991) overwhelmed his 13 opponents by garnering 88% of the vote and took office the following February. Territorial elections designed to decentralize political power were held in early April 1997. The government of Prime Minister Rosny Smarth resigned on June 9, 1997. He continued in caretaker status until November 1997.

With the situation in Haiti gradually stabilizing, the international security presence has been reduced. The MNF, which at one time had more than 20,000 troops in Haiti, gave way in March 1995 to a UN peacekeeping mission (UN Mission in Haiti) under U.S. leadership, including about 6,000 troops. By mid-1996, the UN forces no longer included any U.S. military personnel, and the UN Special Mission in Haiti (UNSMIH) had been scaled back to about 600 troops under Canadian leadership, as well as 300 international police monitors from six different countries. The UNSMIH mission, originally set to expire at the end of November 1996, was extended through July 31, 1997. The United Nations Transition Mission in Haiti (UNTMIH) replaced UNSMIH to November 30, 1997. The 12-month UN Civilian Police Mission in Haiti (MIPONUH) was established by the Security Council and began operations on December 1, 1997, after the conclusion of UNSMIH. Its 300 authorized civilian police (CIVPOL) are divided into two groups. Up to 160 CIVPOL mentors, including 30 U.S. police officers, are tasked with bringing the Haitian National Police (HNP) to levels of operational competence required before UN specialized agencies, including the UN Development Program (UNDP), can assume responsibility for further long-term institutional development. The remaining 140 CIVPOL are Argentine gendarmes who, as part of a special police unit (SPU), are on call to ensure the safety of CIVPOL from situations where HNP may not be able to do so. MIPONUH does not have a military element.

The judicial system in Haiti is still weak and remains a high priority for international donors. USAID programs focus on improving administration in prosecutors' offices and the courts, establishing a case-tracking system, legal aid, and training for judges, court, and prosecutorial staff. International and Haitian officials are cooperating to investigate several high-profile murders that may have been politically motivated, including the murders of opposition politicians Antoine Leroy and Mireille Durocher Bertin. The U.S. Government helped the Government of Haiti set up a Special Investigative Unit within the Haitian National Police, and the investigation of several of these crimes is in progress. Steps have been taken to end the culture of impunity that has dominated Haiti for decades. The Office of Inspector General of the Haitian National Police investigates complaints against police officers, and around 200 have been dismissed. Training continues in an effort to build the fledgling National Police into a non-political, fully professional force committed to the rule of law.

ECONOMY

Haiti's economic reform agenda under President Preval includes trade/tariff liberalization, modernization (understood to mean privatization) of state-owned enterprises, measures to control government expenditure and increase tax revenues, civil service downsizing, and financial sector reform. Structural adjustment agreements with the International Monetary Fund, World Bank, Inter-American Development Bank, and other international financial institutions are aimed at creating necessary conditions for private sector growth. The government did show commitment to economic reform with the implementation of sound fiscal and monetary policies and the enactment of a "modernization" (privatization) law, along with the creation of the privatization council (CMEP), and the launching of its ambitious plan to privatize nine parastatals. The state-owned flour mill has been privatized, and privatization of the cement plant is in progress. Much of the population expected more immediate results from tough reforms. The views of former President Aristide, still popular, also influence discussions of economic reforms. President Aristide has been skeptical of economic reform, but he remains a popular figure in Haitian politics.

External aid is essential to Haiti's future economic development. Haiti is the least-developed country in the Western Hemisphere and one of the poorest in the world. Comparisons of social and economic indicators show that Haiti has been falling behind other low-income developing countries (particularly in the hemisphere) since the 1980s. Haiti's economic stagnation is the result of earlier inappropriate economic policies, political instability, a shortage of good arable land, environmental deterioration, continued use of traditional technologies, undercapitalization, migration of large portions of the skilled population, and a weak national savings rate.

The consequences of the 1991 coup d'etat and irresponsible economic and financial policies of the de facto authorities greatly accelerated Haiti's economic decline. Following the coup, the United States adopted mandatory sanctions, and the OAS instituted voluntary sanctions aimed at restoring constitutional government. International sanctions culminated in the May 1994 UN embargo of all goods entering Haiti except humanitarian supplies such as food and medicine. The assembly sector, heavily dependent on U.S. markets for its products, employed up to 80,000 workers in the mid-1980s. During the embargo, employment fell from 33,000 workers in 1991 to 400 in October 1994. Since the return of constitutional rule, assembly sector employment has gradually recovered to a level of nearly 20,000 in February 1998.

Private domestic and foreign investment has been slow to return to Haiti. The investor community is concerned about political conditions and economic reform. International financial institutions and donor agencies have committed substantial sums to assist Haiti in restoring and expanding its physical infrastructure. High domestic interest rates and poorly developed internal capital markets are other factors restraining economic performance.

As political stability increases in Haiti, tourism could take its place next to export-oriented manufacturing (the assembly sector) as a potential source of foreign exchange. Remittances from abroad now constitute a significant source of financial support for many Haitian households.

Workers in Haiti are guaranteed the right of association, and trade organizing activities are protected by the labor code. A legal minimum wage of 36 gourdes a day (approximately U.S. $2.25) applies to most workers in the formal sector.

FOREIGN RELATIONS AND INTERNATIONAL SUPPORT

Haiti is one of the original members of the United Nations and several of its specialized and related agencies, as well as the Organization of American States (OAS). It maintains diplomatic relations with 37 countries.

The international community rallied to Haiti's defense during the three years of illegal military rule from 1991 to 1994. In the end, a total of 31 countries participated in the U.S.-led MNF which, acting under UN auspices, intervened in September 1994 to help restore the legitimate government and create a secure and stable environment in Haiti. At its peak, the MNF had over 23,000 troops, mostly Americans, and more than 1,000 international police monitors. Within six months, the troop level was gradually reduced as the MNF was replaced smoothly by the UN Mission in Haiti (UNMIH), consisting of some 6,000 UN peacekeeping troops and 900 civilian police, who were charged with maintaining the secure environment which the MNF had helped establish. A total of 38 countries participated in UNMIH.

In order to spur Haiti's economic recovery, international development banks and donor agencies have pledged to provide over $2 billion in assistance by 1999, although much of this amount has not been disbursed. Disbursement is contingent on progress in economic reform. Major bilateral donors are led by the United States, with the largest bilateral assistance program, and include Canada, France, Germany, and Japan. Led by the U.S., the international community feeds 1.3 million Haitian people a day. USAID's food assistance program, PL 480, plays a large role in providing necessary food supplies to the population.

U.S.-HAITI RELATIONS

U.S. policy toward Haiti is designed to foster democracy, help alleviate poverty in the Western Hemisphere's poorest country, and promote respect for human rights. As President Clinton stated on the eve of the U.S.-led intervention in 1994, "U.S. involvement was based on the need to protect our interests, to stop the brutal atrocities that threaten. . .Haitians; to secure our borders and to preserve stability and promote democracy in our hemisphere." The United States has taken a leading role in organizing international efforts at the United Nations, the Organization of American States, with the Caribbean Community (CARICOM) and individual countries to achieve these objectives.

Maintaining good relations with and fostering democracy in Haiti are important for many reasons, not the least of which is its geographical proximity to the continental United States. In addition to a steady stream of legal immigrants in the U.S., tens of thousands of undocumented Haitian migrants were intercepted at sea by the U.S. Coast Guard during the 1991-94 period of illegal military rule. With the return of the de jure government in 1994, the flow of migrants has virtually stopped, although if unrest arises again, the potential remains for a mass influx of migrants yet again. Thus, the U.S. is determined to promote a stable democracy in Haiti--a country historically plagued by autocratic rule and recurring political violence. In addition, the U.S. provides relief to Haiti to prevent severe poverty, environmental degradation, and improve poor public health conditions.

President Preval joined President Clinton and 14 other Caribbean leaders in May 1997 in Bridgetown, Barbados, for the first-ever U.S.-regional summit. The meeting strengthened the basis for regional cooperation on justice and counternarcotics, finance and development, and trade.

U.S. Economic and Development Assistance

Many of Haiti's conditions can be attributed to its history of unstable regimes. To bolster the stability of Haiti's fragile democracy, the U.S. has led the effort to rebuild Haiti's economy. The U.S. has been the largest donor since 1973, with a total aid package of $135 million in FY 1996 and $101 million in FY 1997. In addition to financial support, the U.S. provides human resources. U.S. Peace Corps volunteers to Haiti returned in 1995. U.S. assistance provides support for democracy initiatives, agriculture, and improving health standards.

Additional U.S. efforts include the establishment of the U.S.-Haiti Business Development Council, an Overseas Private Investment Corporation commercial loan program, and the Caribbean Basin Initiative, all providing greater market opportunities for American and Haitian businesses.

Democratic gains cannot be sustained without demonstrable improvement in the economy and access to opportunities for Haiti's poor. For this reason, objectives of providing assistance to Haiti include policy reform and expanding credit availability. Initiatives advancing democratic processes and institutions, promoting economic recovery, reorienting humanitarian relief activities toward developmental activities, stemming environmental degradation, and enhancing agricultural yields and incomes, lay a solid foundation for political stability and sustainable development.

The loss of between 50,000 to 70,000 jobs in the formal sector alone since 1991 provides perspective on the challenges the government faces in revitalizing the economy. Notwithstanding this challenge, efforts to increase commercial bank lending in productive activities in the agricultural sector through guarantees have already resulted in thousands of new jobs for unemployed Haitian agricultural workers. A transitional program has also been established to ease rural mass unemployment which employed as many as 50,000 workers per day. To combat unemployment, the U.S. helped secure an additional $55 million from the World Bank to continue a highly successful job creation program started with $35 million from USAID.

Humanitarian assistance from Haitian and U.S. NGOs includes food for up to 1 million Haitians and helps reinforce the planning and management capacities of the Ministry of Public Health and Population. In addition to sponsoring vaccination programs, the U.S. Government has financed basic health care services accessed by more than 2 million people. Health services are also provided for child survival, reproductive health, and rape victims. By providing economic assistance, the U.S. seeks to improve the quality of life for Haitians.

Security Assistance

The Government of Haiti is committed to the success of the Haitian National Police (HNP). More than 6,000 recruits have completed training in modern law enforcement. U.S. instructors from the International Criminal Investigative Training Assistance Program (ICITAP) are providing specialized training to select HNP officers in such areas as crowd control, operation of firearms, and VIP protection. Most importantly, experts within ICITAP are working closely with the Haitian Government in recruiting and training qualified individuals to fill mid-level supervisory positions. Finally, the U.S. provided equipment to support the HNP.

U.S. Business Opportunities

The U.S. has been and remains Haiti's largest trading partner. A number of U.S. firms, including banks, airlines, oil companies, agribusiness, and U.S.-owned assembly plants, maintain a strong economic presence in this new democracy.

Further opportunities for U.S. businesses include the development and trade of medical supplies and equipment, rebuilding and modernizing Haiti's depleted infrastructure, tourism, waste disposal, transportation, energy, telecommunications, and export assembly operations. Because of the assembly sector's importance, opportunities exist for U.S. exporters to supply this industry. Primary inputs include textiles, electronics components, packaging materials, and raw materials used in the manufacture of toys and sporting goods. Other U.S. export prospects include construction materials, plumbing fixtures, hardware, and lumber. Benefits for both Haitian and American importers and exporters are available under the 806 and 807/HTSUS Programs (U.S. Customs laws on products assembled from U.S. components or materials), and under the Caribbean Basin Initiative.

Markets exist for four-wheel-drive vehicles, consumer electronics, rice, wheat, flour, sugar, and processed foodstuffs. The government wants to reactivate and develop agricultural industries where Haiti enjoys considerable comparative advantages, among which are essential oils, spices, fruits and vegetables, and sisal. The government encourages the inflow of new capital and technological innovations.

Establishing a Business

For foreigners to set up a business in Haiti, one must obtain a residence visa, and a transient businessman or woman must have a locally licensed agent to conduct business transactions within the country. Requirements for individuals wishing to practice a trade in Haiti include obtaining an immigrant visa from a Haitian Consulate; obtaining a work permit, with some exceptions; and all transient and resident traders must have a professional ID card.

Property restrictions still exist for foreign individuals. Property rights of foreigners are limited to 1.29 hectares in urban areas and 6.45 hectares in rural areas. No foreigner may own more than one residence in the same district nor own property or buildings near the border. To own real estate, authorization from the Ministry of Justice is necessary.

Hurdles for businesses in Haiti include poor infrastructure, crime, a high-cost port, and customs delays. The government places a 30% withholding tax on all profits received. There is little direct investment, though more is incoming than outgoing (see Economy).

Foreign investment protection is provided by the constitution of 1987, which permits expropriation of private property for public use or land reform with payment in advance. American firms enjoy free transfer of interest, dividends, profits, and other revenues stemming from their investments, and are guaranteed just compensation paid in advance of expropriation, as well as compensation in case of damages or losses caused by war, revolution, or insurrection.

Policy Background

After the September 1991 coup d'etat ousted Haiti's democratically elected government, the United States was pressured to take action. The United States imposed a series of economic sanctions on Haiti, followed by the OAS and ultimately the UN adopting a series of economic sanctions aimed at restoring constitutional rule to the country. As political conditions worsened, however, the United States intervened militarily in Haiti under UN auspices with Operation Uphold Democracy. Launched on September 19, 1994, Operation Uphold Democracy's aim was initially to restore Haiti's democratically elected government, and later to establish and maintain a safe and secure environment for institutional reform and democracy (see History). A peaceful operation set the stage for a multinational force to be established.

The U.S. has supported training for police personnel and judicial officials and the reform of the court and prison systems. The U.S., along with the international financial institutions, has encouraged the privatization of inefficient parastatals. The U.S. has also encouraged open markets in the Haitian economy.


Honduras

PEOPLE AND HISTORY

About 90% of the population is mestizo. There also are small minorities of European, African, Asian, Arab, and indigenous Indian descent. Most Hondurans are Roman Catholic, but Protestant proselytization has resulted in significant numbers of converts. Spanish is the predominant language, although some English is spoken along the northern coast and on the Caribbean Bay Islands. Indigenous Indian dialects and the Garifuna dialect also are spoken.

The restored Mayan ruins near the Guatemalan border in Copan reflect the great Mayan culture that flourished there for hundreds of years until the early 9th century. Mayan artifacts also can be found at the National Museum in Tegucigalpa. Columbus landed at mainland Honduras (Trujillo) in 1502. He named it "Honduras" (meaning "depths") for the deep water off the coast. Spaniard Hernan Cortes arrived in 1524. The Spanish began founding settlements along the coast, and Honduras came under the control of the Captaincy General of Guatemala. The cities of Comayagua and Tegucigalpa developed as early mining centers.

Independence

Honduras, along with the other Central American provinces, gained independence from Spain in 1821; it then briefly was annexed to the Mexican Empire. In 1823, Honduras joined the newly formed United Provinces of Central America. Before long, social and economic differences between Honduras and its regional neighbors exacerbated harsh partisan strife among Central American leaders and brought on the federation's collapse in 1838. Gen. Francisco Morazan--a Honduran national hero--led unsuccessful efforts to maintain the federation, and restoring Central American unity remained the chief aim of Honduran foreign policy until after World War I.

Since independence, Honduras has been plagued with nearly 300 internal rebellions, civil wars, and changes of government, more than half occurring during this century. The country traditionally lacked both an economic infrastructure and social and political integration. Its agriculturally based economy came to be dominated in this century by U.S. companies that established vast banana plantations along the north coast. Foreign capital, plantation life, and conservative politics held sway in Honduras from the late 19th until the mid-20th century.

During the relatively stable years of the Great Depression, Honduras was controlled by authoritarian Gen. Tiburcio Carias Andino. His ties to dictators in neighboring countries and to U.S. banana companies helped him maintain power until 1948. By then, provincial military leaders had begun to gain control of the two major parties, the Nationalists and the Liberals.

From Military to Civilian Rule

In October 1955--after two authoritarian administrations and a general strike by banana workers on the north coast in 1954--young military reformists staged a palace coup that installed a provisional junta and paved the way for constituent assembly elections in 1957. This assembly appointed Dr. Ramon Villeda Morales as president and transformed itself into a national legislature with a six-year term. The Liberal Party ruled during 1957-63. At the same time, the military took its first steps to become a professional institution independent of leadership from any one political party, and the newly created military academy graduated its first class in 1960.

In October 1963, conservative military officers preempted constitutional elections and deposed Villeda in a bloody coup. These officers exiled Liberal Party members and took control of the national police. The armed forces, led by Gen. Lopez Arellano, governed until 1970.

A civilian president--Ramon Cruz of the National Party--took power briefly in 1970, but proved unable to manage the government. Popular discontent had continued to rise after a 1969 border war with El Salvador; in December 1972, General Lopez staged another coup. Lopez adopted more progressive policies, including land reform, but his regime was brought down in the mid-1970s by scandals.

General Lopez' successors continued armed forces modernization programs, building army and security forces, and concentrating on Honduran air force superiority over its neighbors. The regimes of General Melgar Castro (1975-78) and General Paz Garcia (1978-83) largely built the current physical infrastructure and telecommunications system of Honduras. The country also enjoyed its most rapid economic growth during this period, due to greater international demand for its products and the availability of foreign commercial lending.

Following the overthrow of Anastasio Somoza in Nicaragua in 1979 and general instability in El Salvador at the time, the Honduran military accelerated plans to return the country to civilian rule. A constituent assembly was popularly elected in April 1980, and general elections were held in November 1981. A new constitution was approved in 1982, and the Liberal Party government of President Roberto Suazo Cordoba assumed power.

Suazo relied on U.S. support to help with a severe economic recession and with the threat posed by the revolutionary Sandinista Government in Nicaragua and a brutal civil war in El Salvador. Close cooperation on political and military issues with the United States was complemented by ambitious social and economic development projects sponsored by USAID. Honduras became host to the largest Peace Corps mission in the world, and non-governmental and international voluntary agencies proliferated.

As the November 1985 election approached, the Liberal Party had difficulty settling on a candidate and interpreted election law as permitting multiple presidential candidates from one party. The Liberal Party claimed victory when its presidential candidates collectively outpolled the National Party candidate, Rafael Leonardo Callejas, who received 42% of the vote. Jose Azcona Hoyo, the candidate receiving the most votes (27%) among the Liberals, assumed the presidency in January 1986. With strong endorsement and support from the Honduran military, the Suazo Administration had ushered in the first peaceful transfer of power between civilian presidents in more than 30 years.

Four years later, Rafael Callejas won the presidential election, taking office in January 1990. Callejas concentrated on economic reform, reducing the deficit, and taking steps to deal with an overvalued exchange rate and major structural barriers to investment. He began the movement to place the military under civilian control and laid the groundwork for the creation of the public ministry (Attorney General's office).

Despite the Callejas Administration's economic reforms, growing public dissatisfaction with the rising cost of living and with seemingly widespread government corruption led voters in 1993 to elect Liberal Party candidate Carlos Roberto Reina over National Party contender Oswaldo Ramos Soto, with Reina winning 56% of the vote.

President Reina, elected on a platform calling for a "Moral Revolution," actively prosecuted corruption and pursued those responsible for human rights abuses in the 1980s. He created a modern attorney general's office and an investigative police force, and reduced Honduras' historic and endemic corruption and elite impunity. As a result, a notable start has been made in institutionalizing the rule of law in Honduras.

A hallmark of the Reina Administration was his successful efforts to increase civilian control over the armed forces, making his time in office a period of fundamental change in civil-military relations in Honduras. Important achievements--including the abolition of the military draft and passage of legislation transferring the national police from military to civilian authority--have brought civil-military relations closer to the kind of balance normal in a constitutional democracy. Additionally, President Reina in 1996 named his own defense minister, breaking the precedent of accepting the nominee of the armed forces leadership.

Reina restored national fiscal health. After a rough start in 1994-95, the Reina Administration substantially increased Central Bank net international reserves, reduced inflation to 12.8% a year, restored a healthy pace of economic growth (about 5% in 1997), and, perhaps most important, held down spending to achieve a 1.1% non-financial public sector deficit in 1997.

Carlos Roberto Flores Facusse took office on January 27, 1998, as Honduras' fifth democratically elected President since free elections were restored in 1981. Like three of his four predecessors, including his immediate predecessor, Flores is a member of the Liberal Party. He was elected with a 10% margin over his main opponent, National Party nominee, Nora de Melgar, in free, fair, and peaceful elections on November 30, 1997. These elections, probably the cleanest in Honduran history, reflected the maturing of Honduras' democratic institutions. On the eve of his electoral victory, Flores presented a platform that is a blueprint for reform and modernization of the Honduran Government and economy, with emphasis on helping Honduras' poorest citizens while maintaining the country's fiscal health and improving international competitiveness.

GOVERNMENT

The 1982 constitution provides for a strong executive, a unicameral National Congress, and a judiciary appointed by the National Congress. The president is directly elected to a four-year term by popular vote. The congress also serves a four-year term; congressional seats are assigned the parties' candidates in proportion to the number of votes each party receives.

The judiciary includes a Supreme Court of Justice, courts of appeal, and several courts of original jurisdiction, such as labor, tax, and criminal courts. For administrative purposes, Honduras is divided into 18 departments, with departmental and municipal officials selected for two-year terms.

National Security

Events during the 1980s in El Salvador and Nicaragua led Honduras, with U.S. assistance, to expand its armed forces considerably, laying particular emphasis on its air force, which came to include a squadron of U.S.-provided F-5s. The resolution of the civil wars in El Salvador and Nicaragua, and across-the-board budget cuts made in all ministries have brought reduced funding for the Honduran armed forces. The abolition of the draft has created staffing gaps in the now all volunteer armed forces. The military now is far below its authorized strength and further reductions are expected.

POLITICAL CONDITIONS

Reinforced by the media and several political watchdog organizations, human rights and civil liberties are reasonably well protected. There are no known political prisoners in Honduras, and the privately owned media frequently exercises its right to criticize without fear of reprisals. Organized labor now represents less than 15% of the work force, and its economic and political influence have declined.

Honduras held its fifth consecutive democratic elections in November 1997, to elect a new president, unicameral Congress and mayors; for the first time, voters were able to cast separate ballots for each office.

Political Parties

The two major parties--the Liberal Party and the National Party--run active campaigns throughout the country. Their ideologies are mostly centrist, with diverse factions in each centered on personalities.

The three smaller registered parties, the Christian Democratic Party, the Innovation and Unity Party, and the Democratic Unification Party remain marginal, slightly left-of-center groupings with few campaign resources and little organization. Despite significant progress in training and installing more skillful advisers at the top of each party ladder, electoral politics in Honduras remain traditionalist and paternalistic.

Honduras will hold its next general elections--which will choose the nation's next president, Congress, and mayors--in November 2001.

ECONOMY

Honduras is one of the poorest and least-developed countries in Latin America. The economy is based mostly on agriculture, which accounted for 24% of GDP in 1997. Coffee and bananas accounted for 37% of total Honduran export revenues in 1997. Honduras has extensive forest, marine, and mineral resources, although widespread slash-and-burn agricultural methods continue to destroy Honduran forests. Hondurans, however, are becoming more concerned about protecting their environmental patrimony. Unemployment is estimated at 15%, and combined unemployment and underemployment is about 40%.

Preliminary data show that the Honduran economy grew 4.9% in 1997, led by strong growth in the manufacturing, financial services, utilities, and mining sectors. The Honduran Government cut the inflation rate nearly in half in 1997, bringing it from 25.3% in 1996 down to 12.8%. The nation's balance of payments continued to strengthen in 1997, with gross international reserves approaching $500 million at the end of the year, equivalent to more than three months' imports. The government's non-financial public sector deficit was brought down to 1.1% of GDP, a significant improvement over the corresponding figure for 1996. A particularly bright spot in the Honduran economy in 1997 was the performance of the large and growing maquiladora sector. Maquiladoras provided employment to almost 100,000 Honduran workers in 1997 and generated more than $300 million in value added.

The economic outlook for Honduras in 1998 is positive. Government authorities expect real growth to exceed 5%, inflation to be no higher than the 12.8% recorded in 1997, and the government deficit to be in line with the figures recorded last year. The Honduran Government will be meeting in 1998 with the International Monetary Fund in an effort to agree on an Enhanced Structural Adjustment Facility, which could lead to foreign bilateral debt forgiveness in the Paris Club. Honduran public foreign debt is approximately $3.8 billion, and the service of that debt consumes more than 30% of government revenues.

FOREIGN RELATIONS

Honduras is a member of the United Nations, the World Trade Organization (WTO), the Organization of American States (OAS), the Central American Parliament (PARLACEN), the Central American Integration System (SICA), and the Central American Security Commission (CASC). During 1995-96, Honduras, a founding member of the United Nations, for the first time served as a non-permanent member of the UN Security Council.

President Flores consults frequently with the other Central American presidents on issues of mutual interest. He has continued his predecessor's strong emphasis on Central American cooperation and integration, which resulted in an agreement easing border controls and tariffs among Honduras, Guatemala, Nicaragua, and El Salvador. Honduras also joined its six Central American neighbors at the 1994 Summit of the Americas in signing the Alliance for Sustainable Development, known as the Conjunta Centroamerica-USA, or CONCAUSA, to promote sustainable economic development in the region.

In 1969, El Salvador and Honduras fought the brief "Soccer War" over disputed border areas and friction resulting from the 300,000 Salvadorans who had emigrated to Honduras in search of land and employment. The catalyst was nationalistic feelings aroused by a series of soccer matches between the two countries. The two countries formally signed a peace treaty on October 30,1980, which put the border dispute before the International Court of Justice. In September 1992, the court awarded most of the disputed territory to Honduras. In January 1998, Honduras and El Salvador signed a border demarcation treaty that will implement the terms of the ICJ decree. The treaty awaits legal ratification in both countries. Honduras and El Salvador maintain normal diplomatic and trade relations.

At the 17th Central American Summit in 1995, hosted by Honduras in the northern city of San Pedro Sula, the region's six countries (excluding Belize) signed treaties creating confidence and security-building measures and combating the smuggling of stolen automobiles in the isthmus. In subsequent summits (held every six months), Honduras has continued to work with the other Central American countries on issues of common concern.

U.S. POLICY TOWARD HONDURAS

U.S. policy toward Honduras is aimed at consolidating stable democracy with a justice system that protects human rights and is fair and effective. We promote a healthy and more open economy capable of sustainable growth, improving the climate for business and investment while protecting U.S. citizen and corporate rights. The U.S. works with Honduras to meet transnational challenges, including the fight against narcotrafficking. We encourage and support Honduran efforts to protect the environment. The goals of strengthening democracy and promoting viable economic growth are especially important given the geographical proximity of Honduras to the United States. To the extent U.S. policy is successful in helping democracy and economic opportunity to flourish in Honduras, the pressures that compel many Hondurans to attempt to migrate illegally to the U.S. will be reduced while creating export markets for U.S. goods and services. U.S.-Honduran ties are further strengthened by numerous private sector contacts, with an average of 110,000 U.S. citizens visiting Honduras annually, and approximately 13,000 Americans residing there. More than 100 American companies operate in Honduras.

U.S. Economic and Development Assistance

In order to help strengthen Honduras' democratic institutions and improve living conditions, the U.S. has provided substantial economic assistance. The U.S. has historically been the largest bilateral donor to Honduras. Total aid from the U.S. to Honduras for the period 1991 to 1995 was $322 million. U.S. Agency for International Development (USAID) obligations to Honduras totaled $24.3 million for development assistance and $4.7 million for foodstuffs in 1997. Over the years, such appropriations have been used to achieve such objectives as fostering democratic institutions, increasing private sector employment and income, helping Honduras fund its arrears with international financial institutions, providing humanitarian aid, increasing agricultural production, and providing loans to micro-businesses. Of the $29 million in aid, more than $16 million is spent directly on goods and services from the United States. In addition, since about half of Honduras' imports come from the U.S., development assistance that stimulates growth of the Honduran economy indirectly stimulates U.S. exports and thus supports additional employment and growth in the U.S. economy.

Other forms of U.S. economic assistance to Honduras include the Caribbean Basin Economic Recovery Act, Overseas Private Investment Corporation financing and insurance against risks of war and expropriation, U.S. Trade Development Agency grant loans for pre-feasibility studies of projects with U.S. product and services export potential, and U.S. Export-Import Bank short- and medium-term financing for U.S. exports to Honduran importers. All of these provide greater economic opportunity for U.S. and Honduran businessmen and women.

The Peace Corps has been active in Honduras since 1962, and at one time the program there was the largest in the world. During that time some 5,000 American women and men, ranging in age from 22 to 65, have helped the people of Honduras. In 1997, there were 200 Peace Corps volunteers working in the poorest parts of Honduras.

The government of President Flores is committed to the full implementation of a civilian police force, and the congress has taken essential constitutional steps to effect that. The U.S. Government strongly supports this action. The American Embassy in Tegucigalpa provides specialized training to police officers through the International Criminal Training Assistance Program (ICITAP).

Security Assistance

The role of the Honduran armed forces has changed significantly in recent years as many institutions formerly controlled by the military have been taken over by civilians. The defense and police budgets have hovered at around $30 million during the past few years. The abolition of conscription resulted in a decrease in the size of the armed forces. The volunteer system has helped to increase troop strength somewhat but many military units are still significantly below authorized strength levels. Formal security assistance has declined from over $500 million provided between 1982 and 1993 to $500,000 annually in International Military Education and Training (IMET) courses. Some residual credits are still available from previous military aid, but will be exhausted within the next few years.

In the absence of a large security assistance program, defense cooperation has taken the form of increased participation by the Honduran armed forces in military-to-military contact programs and bilateral and multilateral combined exercises oriented toward peacekeeping, disaster relief, humanitarian/civic assistance, and counternarcotics. The U.S. Joint Task Force stationed at the Honduran Soto Cano Air Base plays a vital role in supporting combined exercises in Honduras and in neighboring Central American countries. JTF-Bravo has been involved in several multilateral exercises and numerous smaller humanitarian deployments, providing medical services and construction of much-needed school and clinical facilities in remote areas of Honduras.

U.S. Business Opportunities

The United States has historically been, and remains today, Honduras' largest trading partner. Bilateral trade between the two nations totaled $2.29 billion in 1997. American business exported $1.1 billion worth of goods and services to Honduras in 1997.

U.S. investors account for nearly three-quarters of the estimated $900 million in foreign direct investment in Honduras, and more than 100 American companies operate there. The largest U.S. investment in Honduras is in the agribusiness sector. Other important sectors include petroleum products marketing, maquiladoras (in bond assembly plants), electric power generation, banking, insurance, and tobacco. U.S. franchises have taken off in recent years, mostly in the fast food sector.

Opportunities for U.S. business include agricultural machinery and equipment, automotive parts and service equipment, tourism, medical equipment, electrical power systems, and construction equipment and products. Best prospects for agricultural products are corn, milled rice, wheat, soybean meal, and consumer-ready products.

U.S. citizens contemplating investment in real estate in Honduras should proceed with caution, especially in coastal areas or on the Bay Islands, because of frequently conflicting legislation and problems with land titles. Such investors, or their attorneys, should check property titles not only with the property registry office having jurisdiction in the area in which the property is located (being especially observant of marginal annotations on the deed and that the property is located within the area covered by the original title), but also with the National Agrarian Institute (INA) and the National Forestry Administration (COHDEFOR).

U.S.-HONDURAN RELATIONS

Honduras and the United States have close and friendly relations. In Costa Rica in May 1997, former Honduran President Reina met with President Clinton, his Central American counterparts, and the president of the Dominican Republic to celebrate the remarkable democratic transformation in the region and reaffirm support for strengthening democracy, good governance, and promoting prosperity through economic integration, free trade, and investment. The leaders also expressed their commitment to the continued development of just and equitable societies and responsible environmental policies as an integral element of sustainable development.

Honduras is supportive of U.S. policy in the UN and other fora. In 1996, Honduras' overall voting coincidence with the United States in the United Nations was 44.3%, and in 1997 it was 40.3%. As a non-permanent member of the UN Security Council, Honduras played a very helpful role in 1996, most notably in advancing the process of selecting a new UN Secretary General during its October presidency of the Council. The U.S. also continued to be able to count on Honduras' strong support against Iraq.

The U.S. favors stable, peaceful relations between Honduras and its Central American neighbors. During the 1980s, Honduras supported U.S. policy in Central America opposing a revolutionary Marxist Leninist government in Nicaragua and an active leftist insurgency in El Salvador. The Honduran Government also played a key role in negotiations that culminated in the 1990 Nicaraguan elections. Honduras contributed troops for the UN peacekeeping mission in Haiti, and continues to participate in the UN observers mission in the Western Sahara.

The U.S. works with Honduras for sustained economic, political, and social development and to combat drug trafficking in the region. Because of economic needs and security concerns, U.S. material assistance and political support are important to Honduras. USAID is active in Honduras, although official U.S. assistance to the country has been reduced--from $51 million in 1993 to $29 million in 1997--due to worldwide reductions in U.S. bilateral assistance.

The United States is Honduras' chief trading partner, supplying 43% of its imports and purchasing 53% of its exports. Leading Honduran exports to the United States include coffee, bananas, textile products, other fruits and vegetables, seafood, and beef.

The United States encourages U.S. investment that contributes to Honduran development and bilateral trade. The United States accounts for about 75% of total direct foreign investment in Honduras; this is worth about $675 million. The largest U.S. investments in Honduras are in fruit production--particularly banana and citrus--petroleum refining and marketing, and mining. In addition, U.S. corporations have invested in tobacco, apparel, shrimp culture, beef, poultry and animal-feed production, insurance, leasing, food processing, brewing, and furniture manufacturing. U.S. apparel facilities or maquilas are responsible for the majority of the approximately 100,000 jobs in that sector of Honduran businesses.

The U.S. maintains a small presence at a Honduran military base; the two countries conduct joint counternarcotics, humanitarian, and civic action exercises. U.S. troops conduct and provide logistics support for a variety of exercises (medical, engineering, peacekeeping, counternarcotics, and disaster relief) for the benefit of the Honduran people and their Central American neighbors. U.S. forces--regular, reserve, and national guard--benefit greatly from the training and exercises.

U.S. troops--in collaboration with counterparts from Brazil and Colombia--since 1994 have assisted Honduran soldiers in clearing land mines from the country's border with Nicaragua. As of early 1998, approximately 180,000 square meters had been cleared of mines and approximately 2,000 mines had been destroyed.


Mexico

PEOPLE

Mexico is the most populous Spanish-speaking country in the world and the second most-populous country in Latin America after Portuguese-speaking Brazil. About 70% of the people live in urban areas. Many Mexicans emigrate from rural areas that lack job opportunities--such as the underdeveloped southern states and the crowded central plateau--to the industrialized urban centers and the developing areas along the U.S.-Mexico border. According to some estimates, the population of the area around Mexico City is about 20 million, which would make it the largest concentration of population in the world. Cities bordering on the United States, such as Tijuana and Ciudad Juarez, and cities in the interior, such as Guadalajara, Monterrey, and Puebla, have undergone sharp rises in population.

HISTORY

Highly advanced cultures, including those of the Olmecs, Mayas, Toltecs, and Aztecs, existed long before the Spanish conquest. Hernando Cortes conquered Mexico during the period 1519-21 and founded a Spanish colony that lasted nearly 300 years. Independence from Spain was proclaimed by Father Miguel Hidalgo on September 16, 1810; this launched a war for independence. An 1821 treaty recognized Mexican independence from Spain and called for a constitutional monarchy. The planned monarchy failed; a republic was proclaimed in December 1822 and established in 1824.

Prominent figures in Mexico's war for independence were Father Jose Maria Morelos; Gen. Augustin de Iturbide, who defeated the Spaniards and ruled as Mexican emperor from 1822-23; and Gen. Antonio Lopez de Santa Ana, who went on to control Mexican politics from 1833 to 1855.

Santa Ana was Mexico's leader during the conflict with Texas, which declared itself independent from Mexico in 1836, and during Mexico's war with the United States (1846-48). The presidential terms of Benito Juarez (1858-71) were interrupted by the Hapsburg monarchy's rule of Mexico (1864-1867). Archduke Maximilian of Austria, whom Napoleon III of France established as Emperor of Mexico, was deposed by Juarez and executed in 1867. General Porfirio Diaz was President during most of the period between 1877 and 1911.

Mexico's severe social and economic problems erupted in a revolution that lasted from 1910-20 and gave rise to the 1917 constitution. Prominent leaders in this period--some of whom were rivals for power--were Francisco I. Madero, Venustiano Carranza, Pancho Villa, Alvaro Obregon, Victoriano Huerta, and Emiliano Zapata. The Institutional Revolutionary Party (PRI), formed in 1929 under a different name, continues to be the most important political force in the nation. It emerged as a coalition of interests after the chaos of the Revolution as a vehicle for keeping political competition in peaceful channels. For almost 70 years, Mexico's national government has been controlled by the PRI, which has won every presidential race and most gubernatorial races.

GOVERNMENT

The 1917 constitution provides for a federal republic with powers separated into independent executive, legislative, and judicial branches. In practice, the executive is the dominant branch, with power vested in the president, who promulgates and executes the laws of the Congress. The president also legislates by executive decree in certain economic and financial fields, using powers delegated from the Congress. The president is elected by universal adult suffrage for a 6-year term and may not hold office a second time. There is no vice president; in the event of the removal or death of the president, a provisional president is elected by the Congress.

The Congress is composed of a Senate and a Chamber of Deputies. Consecutive re-election is prohibited. Senators are elected to 6-year terms. Implementing constitutional changes made in 1996, for the first time in the July 1997 elections, 32 of the 128 Senate seats were proportionally elected from national party lists. The 32 Senators elected in 1997 will only serve 3-year terms, in order to bring the entire Senate back into the same cycle in the year 2000. Deputies serve 3-year terms. In the lower chamber, 300 deputies are directly elected to represent single-member districts, and 200 are selected by a modified form of proportional representation from five electoral regions created for this purpose across the country. The 200 proportional representation seats were created to help smaller parties gain access to the Chamber.

The judiciary is divided into federal and state court systems, with federal courts having jurisdiction over most civil cases and those involving major felonies. Under the constitution, trial and sentencing must be completed within 12 months of arrest for crimes that would carry at least a 2-year sentence. Practice often does not meet this requirement. Trial is by judge, not jury, in most criminal cases. Defendants have a right to counsel, and public defenders are available. Other rights include defense against self-incrimination, the right to confront one's accusers, and the right to a public trial. Supreme Court Justices are appointed by the President and approved by the Senate.

National Security

Mexico's armed forces in 1997 numbered about 175,000. The army makes up about three-fourths of the total. One year of limited training is required of all males at age 18. Principal military roles include national defense, narcotics control, and civic action assignments such as road-building, search and rescue, and disaster relief.

POLITICAL CONDITIONS

Ernesto Zedillo Ponce de Leon was sworn in on December 1, 1994, as the President of Mexico. A trained economist with degrees from Yale, Zedillo served as Secretary of Programming and Budget and Secretary of Education in the Salinas administration prior to being elected.

President Zedillo continued the process already underway of opening Mexico's political system, reforming the justice system, curtailing corruption, strengthening the fight against narcotics trafficking, and furthering Mexico's market-oriented economic policies. A severe financial crisis occupied much of the Zedillo administration's attention in 1995-96, creating a need for difficult emergency economic stabilization policies and intensified longer-term economic restructuring.

Political Scene

Unexpected and traumatic events in early 1994 convulsed the Mexican political scene. In January 1994, peasants in the state of Chiapas briefly took up arms against the government, protesting alleged oppression and governmental indifference to poverty. After nearly 2 weeks of fighting, clashes were halted by a cease-fire that remains in effect. The government and the Zapatista Army of National Liberation (EZLN) have negotiated on topics such as granting greater autonomy to indigenous people since then, although the partial accords that were reached have not been implemented.

Following the massacre of 45 indigenous peasants in Acteal, Chiapas in December 1997, tensions in the state increased and pressures for a negotiated settlement were renewed. Draft legislation to change the Mexican Constitution's provisions on indigenous rights has been introduced in the Mexican Congress. Government attempts to re-engage the EZLN in direct talks have so far been unsuccessful. In March 1994, PRI presidential candidate Luis Donaldo Colosio was assassinated. In September 1994, PRI Secretary General Jose Francisco Ruiz Massieu was also assassinated. Although the gunmen in both murders and co-conspirators in the Ruiz Massieu murder were tried and convicted, the Mexican public is not satisfied that all the truth behind these crimes has been uncovered. A flurry of public scandals followed in 1995 regarding supposed attempts at obstruction of justice and allegations of major corruption in police, judicial, military, and other authorities, as well as big business, including allegations of ties to narcotics trafficking. The atmosphere of scandal around former President Carlos Salinas has turned him into something of an arch-villain in the popular mind.

A new group of uncertain origin and size, the Popular Revolutionary Army (EPR), made its appearance in southern Mexico on June 28, 1996. The government considers the EPR a terrorist organization and has vowed to bring the group to justice. After a period of inactivity following mid-term elections in July 1997, the EPR has, in the summer of 1998, again begun engaging in small-scale actions in the southern state of Guerrero.

Recent Elections and Electoral Reform

A record 78% of registered voters cast ballots in the 1994 presidential election. Election officials declared Zedillo of the PRI the winner with 49% of the vote, followed by National Action Party (PAN) candidate Diego Fernandez de Cevallos with 26% and Cuauhtemoc Cardenas of the Party of the Democratic Revolution (PRD) with 17%. Despite isolated incidents of irregularities and problems, there was no evidence of systematic attempts to manipulate the elections or their results, and critics concluded that the irregularities which did occur did not alter the outcome of the presidential vote. Civic organizations fielded more than 80,000 trained electoral observers; foreigners--many from the United States--were invited to witness the process, and numerous independent "quick count" operations and exit polls validated the official vote tabulation.

Numerous electoral reforms implemented since 1989 have aided in the opening of the Mexican political system, and opposition parties have made historic gains in elections at all levels. Most of the concerns shifted from fraud to campaign fairness issues. During 1995-96 the political parties negotiated constitutional amendments to address these issues. Implementing legislation included major points of consensus that had been worked out with the opposition parties. The thrust of the new laws is to have public financing predominate over private contributions to political parties, to tighten procedures for auditing the political parties, and to strengthen the authority and independence of electoral institutions. The court system was also given greatly expanded authority to hear civil rights cases on electoral matters brought by individuals or groups. In short, a serious effort was made to "level the playing field" for the parties.

Even before the new electoral law was passed, opposition parties had obtained an increasing voice in Mexico's political system. A substantial number of candidates from opposition parties won election to the Chamber of Deputies and Senate. Many municipalities were governed by opposition mayors, and the PAN won the governorships of four states.

Mid-term elections held July 6, 1997, saw large gains for opposition parties and marked a significant step in Mexico's political transformation. For the first time in its 68-year history, the PRI lost its absolute majority in the Chamber of Deputies. The opposition majority is split among four parties: the PRD, the PAN and two small parties, the Labor Party (PT), and the Green Ecological Party (PVEM). The opposition also gained ground in the Senate, where the PRI still retains an overall majority but fell below the two-thirds majority needed on constitutional amendment questions.

In another important electoral development, the PRD candidate, Cuauhtemoc Cardenas, won the first modern election for mayor of Mexico City (this post was previously appointed by the Mexican president). In state elections, the PAN won two additional governorships, giving it a total of six. More than 50% of Mexico's population is now governed by an opposition party at the state or municipal level.

State-level elections held through October 1998 have tended to confirm the increasing political pluralism in Mexico. While the PRI regained the governorship of one state from the PAN and held on to several others, the PAN won the state house in yet another state for the first time. A PRD candidate also won a gubernatorial election for the first time.

Other Reforms

To help reorganize the Mexican justice system, President Zedillo appointed as Attorney General a respected member of the opposition PAN party, the first time an opposition member has held a cabinet post in Mexico. However, Attorney General Antonio Lozano was dismissed in late 1996 amid controversy regarding investigations into prominent murder and corruption cases. Constitutional and legal changes were adopted to improve the performance and accountability of the Supreme Court and the Office of the Attorney General and the administration of federal courts. The Supreme Court, relieved of administrative duties for lower courts, was given responsibilities for judicial review of certain categories of law and legislation. A variety of laws was also passed in 1995-96 to help control organized crime.

Although the constitution provides for three branches of government, the Mexican presidency traditionally occupies a dominant position. In order to overcome this "presidentialism," the Zedillo administration has sought to develop a greater role for the Congress, notably by inviting the participation of a multi-party legislative commission in the Chiapas peace negotiations and seeking congressional approval of the financial assistance package signed by the U.S. and Mexico in February 1995. Congress' role as a co-equal balance to the Executive also received a boost after the July 1997 increase in opposition strength to control a majority in the Chamber of Deputies. The judicial reforms mentioned above are in part designed to allow the judicial branch of government to become a more effective counter-weight to the other two branches. The Zedillo administration has also promoted a "New Federalism" to devolve more power to state and local governments, starting with pilot programs in education and health.

Education

Although educational levels in Mexico have improved substantially in recent decades, the country still faces daunting problems. Education is one of the Government of Mexico's highest priorities and it has increased the education budget 7.2% over 1996 to $15 billion for 1997--one-fourth of the total budget. Education in Mexico is also being decentralized from federal to state authority in order to improve accountability.

Education is mandatory from ages 6 through 18. The increase in school enrollments during the past two decades has been dramatic. By 1994, an estimated 59% of the population between the ages of 6 and 18 were enrolled in school. Primary (including preschool) enrollment in public schools from 1970 through 1994 increased from less than 10 million to 17.5 million. Enrollment at the secondary public school level rose from 1.4 million in 1972 to as many as 4.5 million in 1994. A rapid rise also occurred in higher education. Between 1959 and 1994, college enrollments rose from 62,000 to more than 1.2 million. Although education spending has risen dramatically, given increased enrollment, a net decline occurred in per student expenditures. The Mexican Government concedes that despite this progress, 2 million children still do not have access to basic education, and hopes to provide access to half of those children by the year 2000.

ECONOMY

Sustained economic growth is vital to Mexico's prospects for a successful evolution to a more competitive democracy. Mexico's level of economic prosperity has a direct, though proportionally smaller impact on the U.S. as it affects trade and migration. In recent years, Mexico has sought economic prosperity through liberalization of its trade regime. In January 1994, Mexico joined Canada and the United States in the North American Free Trade Agreement (NAFTA), which will phase out all tariffs over a 15-year period. Four months later, in April 1994, Mexico joined the Organization for Economic Cooperation and Development (OECD). Mexico was the first Latin American member of the Asia-Pacific Economic Cooperation forum (APEC), joining in 1993, and in January 1996, became a founding member of the World Trade Organization (WTO). Mexico's NAFTA membership helped the Mexican economy grow by 3.5% in 1994. Following the December 1994 devaluation of the peso, however, Mexico experienced a severe financial crisis that also threatened the stability of other emerging market economies, especially in Latin America.

The United States responded by leading a group of international lenders in making available to Mexico over $40 billion in international financial assistance, including $20 billion from the United States. This action helped stabilize the Mexican economy, allowing Mexico to repay the loans to the United States more than 3 years ahead of schedule and with $580 million in interest.

In 1996, Mexico's economy grew over 5%, recovering from the recession more briskly than anticipated. Inflation fell, unemployment fell, and the peso stabilized. Mexican real GDP grew about 7% in 1997. The global financial turmoil of 1998 has caused the peso to fall against the dollar, a sharp decline in the Mexican stock market, and three reductions in government spending. However, economic growth for 1998 will still be about 4%.

Although the 1995 recession was severe, with real GDP falling 6.2%, tough stabilization measures averted an even more serious collapse and brought about a rapid recovery. NAFTA contributed to the process of adjustment by enabling Mexico to reduce its current account deficit through increased exports rather than through slashing imports from the United States, as it had following the 1982 debt crisis.

Trade

Mexico was the United States' third-ranked trading partner in 1997, accounting for 10% of U.S. trade. In 1997, $71.4 billion in merchandise exports to Mexico surpassed our exports to Japan, making Mexico our second-most important export market, even though the Mexican economy is just one-seventh the size of Japan's. The United States was Mexico's predominant trading partner, accounting for 85% of Mexican exports and 77% of Mexican imports. The chief U.S. exports to Mexico were motor vehicle parts, electronic equipment, and agricultural products; the top imports from Mexico included petroleum, motor vehicles, and electronic equipment. The United States in 1996 was the source of 60% of all direct foreign investment in Mexico.

U.S.-Mexico trade increased during NAFTA's first 4 years. In 1997, U.S. exports to Mexico were up 72% and U.S. imports from Mexico were up 118% over 1993 levels. Our trade balance with Mexico shifted from surplus to deficit in 1995 when strong growth in U.S. demand, along with the Mexican recession and devaluation of the peso, increased U.S. imports from Mexico while slowing growth in U.S. exports. Our bilateral trade deficit began to shrink in 1997 as the Mexican recovery gathered steam.

NAFTA eliminates restrictions on the flow of goods, services, and investment in North America. In addition to phasing out tariffs, NAFTA eliminates, as far as possible, non-tariff barriers and promotes safeguards for intellectual property rights-patents, copyrights, and trademarks. The pact also includes provisions on trade rules and dispute settlement, and its parallel labor agreement seeks to ensure full protection of workers' rights.

Through its supplemental environmental cooperation agreement, NAFTA marked the first time in the history of U.S. trade policy that environmental concerns have been addressed in a comprehensive trade agreement. The pact also serves as a basis for enhancing ongoing U.S.-Mexico cooperation on a host of other issues that do not respect national borders.

Agriculture

Mexico's agrarian reform program began in 1917, when the government began distribution of land to farmers. Extended further in the 1930s, this cooperative agrarian reform, which guaranteed small farmers a means of subsistence livelihood, also caused land fragmentation and lack of capital investment, since commonly held land could not be used as collateral. This, combined with poor soil, several recent years of low rainfall, and rural population growth, has made it difficult to raise the productivity and living standards of Mexico's subsistence farmers.

Mexico's agricultural sector continues to experience heavy debt problems, even as the government seeks to foster a shift to a market-oriented and competitive farming industry. High interest rates for loans have compounded the difficulty for producers, and the 1994 peso crisis exacerbated the decline in productivity. Agriculture accounted for 5.3% of GDP in 1997.

In an effort to raise rural productivity and living standards, Article 27 of the Mexican Constitution was amended in 1992 to allow for the transfer of communal land to the farmers cultivating it. They then could rent or sell it, opening the way for larger farms and economies of scale. By early 1996, however, only six farmers' cooperatives had voted to disincorporate. Since communal land use is formally reviewed only every 2 years, privatization of these communal lands may continue to be very slow.

In the past, the government encouraged production of basic crops such as corn and beans by maintaining support prices. In order to rationalize its agricultural sector, Mexico is phasing out its support price scheme. Corn production dropped in 1995 and 1996 as more was imported. The government in 1996 crafted federal-to-state agreements targeted at each states' most urgent needs, with the goal of increasing the use of modern equipment and technology in order to increase per-acre productivity.

In addition to this new initiative, the government is continuing PROCAMPO, the rural support program which provides the approximately 3.5 million farmers who produce basic commodities--about 64% of all farmers--with a fixed payment per hectare of cropland.

Manufacturing and Foreign Investment

Mexico's manufacturing sector in the first 9 months of 1997 accounted for 19% of Mexico's GDP and 15% of employment. Manufacturing grew at a 10% annual rate through September 1997 after growing about 11% in 1996. Manufacturing declined 5% during Mexico's recession in 1995.

The industrial sector as a whole, which along with manufacturing includes construction, electricity, and mining, grew at a better than 9% rate in 1997, after 10% growth in 1996, which followed a drop of 8% in 1995. Construction grew at an 11% rate in early 1997; it had rebounded with 11% 1996 growth after declining 23% in 1996.

In December 1993, Mexico passed a new foreign investment law which promotes competitiveness and established clear rules for the entry of international capital into productive activities. The law also permits foreigners to own non-residential property in the "restricted zones"--within 100 kilometers (62 miles) of the border and 50 kilometers of the coasts. Residential property in these zones still must be acquired via a trust through a Mexican financial institution. Total new direct foreign investment in 1995 was $7 billion, down from $11 billion in 1994. Direct foreign investment of at least $8 billion is widely expected to have taken place in 1996, although the final tallies have not been released.

Transportation and Communications

The Zedillo Administration is continuing the previous government's modernization of infrastructure and services, de-regulation and development of more efficient transport systems, and increased privatization. Mexico's land transportation network is one of the most extensive in Latin America. More than 4,000 kilometers (2,400 miles) of four-lane highway have been built through government concessions to private sector contractors since 1989. The 36,000 kilometers (22,000 miles) of government-owned railroads in Mexico are currently being privatized through sale of 50-year operating concessions. The Northeast railroad, Mexico's primary freight carrier, was privatized early in 1997 for $1.4 billion. Another significant section, the Northwest railroad, was privatized in June 1997 for $400 million.

Tampico and Veracruz, on the Gulf of Mexico, are Mexico's two primary seaports. Recognizing that the low productivity of Mexico's 79 ports poses a threat to trade development, the government has steadily been privatizing port operations to improve their efficiency.

A number of international airlines serve Mexico, with direct or connecting flights from most major cities in the United States, Canada, Europe, Japan, and Latin America. Most Mexican regional capitals and resorts have direct air service to Mexico City or the United States. Airport privatization, based on the successful experience with ports, is underway.

Mexico has taken significant steps to modernize its telecommunications system. A key element was the privatization in 1990 of the national telephone company, Telefonos de Mexico (TELMEX), which was sold to a consortium of Mexican investors, Southwestern Bell, and France Telcom. This privatization has meant an increased rate of infrastructure enhancement. In addition, eight regional companies are providing cellular telephone service to various parts of Mexico, resulting in a dramatic expansion of cellular telephone users. Two larger communications satellites have been ordered to replace the two now in use. The government has also opened the telecommunications sector to greater foreign investment. Competition in long-distance telecommunications service began in 1997, and competitors quickly gained a 30% share of the market.

FOREIGN RELATIONS

The Government of Mexico has sought to maintain its interests abroad and project its influence largely through moral persuasion. In particular, Mexico champions the principles of non-intervention and self-determination. In its efforts to revitalize its economy and open up to international competition, Mexico has sought closer relations with the U.S., Western Europe, and the Pacific Basin. While the United States and Mexico are often in agreement on foreign policy issues, some differences remain--in particular, relations with Cuba. The U.S. and Mexico agree on the ultimate goal of establishing a democratic, free-market regime in Cuba but disagree on tactics to reach that goal.

Mexico actively participates in several international organizations. It is a supporter of the United Nations and Organization of American States systems and also pursues its interests through a number of ad hoc international bodies. Mexico has been selective in its membership in other international organizations. It declined, for example, to become a member of the Organization of Petroleum Exporting Countries. Nevertheless, Mexico does seek to diversify its diplomatic and economic relations, as demonstrated by its accession to GATT in 1986; its joining APEC in 1993; becoming, in April 1994, the first Latin American member of the OECD; and a founding member of the World Trade Organization (WTO) in 1996. Mexico attended the 1994 Summit of the Americas, held in Miami, and managed coordination of the agenda item on education for the 1998 Summit of the Americas in Santiago.

U.S.-MEXICAN RELATIONS

U.S. relations with Mexico are as important and complex as with any country in the world. A stable, democratic, and economically prosperous Mexico is fundamental to U.S. interests. Our relations with Mexico have a direct impact on the lives and livelihoods of millions of Americans--whether the issue is trade and economic reform, drug control, migration, or the promotion of democracy. The U.S. and Mexico are partners in NAFTA, and enjoy a rapidly developing trade relationship.

The scope of U.S.-Mexican relations goes far beyond diplomatic and official contacts; it entails extensive commercial, cultural, and educational ties, as demonstrated by the annual figure of nearly 290 million legal crossings from Mexico to the United States. In addition, more than a half-million American citizens live in Mexico. More than 2,600 U.S. companies have operations there, and the U.S. accounts for 60% of all foreign direct investment in Mexico. Along the 2,000-mile shared border, state and local governments interact closely. Since 1981, the management of the broad array of U.S.-Mexico issues has been formalized in the U.S.-Mexico Binational Commission, composed of numerous U.S. cabinet members and their Mexican counterparts. The Commission holds annual plenary meetings, and many sub-groups meet during the course of the year to discuss trade and investment opportunities, financial cooperation, consular issues and migration, legal affairs and anti-narcotics cooperation, cultural relations, education, energy, border affairs, environment and natural resources, labor, agriculture, health, housing and urban development, transportation, fisheries, tourism, and science and technology. The Commission met most recently on June 10-11, 1998 in Washington, during which we signed new agreements on border affairs, the environment, public health, transportation safety, energy, education and cultural heritage.

A strong partnership with Mexico is critical to controlling the flow of illicit drugs into the United States. The U.S. has certified Mexico as fully cooperating in this effort based on an unprecedented level of cooperation on counternarcotics and Mexico's own initiatives in fighting drug trafficking. This is the best way to ensure that Mexico's cooperation and anti-drug efforts grow even stronger.

During 1996, the U.S. and Mexico established a High-Level Contact Group (HLCG) on narcotics control to explore joint solutions to the shared drug threat, to coordinate the full range of narcotics issues and to promote closer law enforcement coordination. President Zedillo formalized his government's commitment to counternarcotics cooperation with the United States by signing the "Declaration of the Mexican-U.S. Alliance Against Drugs" with President Clinton in May 1997. The binational alliance worked throughout 1997 to produce a "U.S.-Mexico Binational Drug Strategy," a document which contains 16 alliance objectives, ranging from drug shipment interdiction to extradition of drug traffickers. Following the controversy in 1998 over a U.S. money laundering investigation of Mexican banks and individuals (Operation Casablanca), the two governments agreed on procedures to improve communication and coordination in cases of sensitive law enforcement investigations.

Border and Environmental Affairs

Cooperation between the United States and Mexico along our 2,000-mile common border includes state and local problem-solving mechanisms, transportation planning, and institutions to address resource and environment issues. The Border Liaison Mechanism (BLM), established in 1993, provides a means for the rapid mobilization of civic and law enforcement officials in response to problems or incidents. Eight BLMs are chaired by U.S. and Mexican consuls in "border pair" cities. BLMs work to resolve problems such as accidental violation of sovereignty by law enforcement officials, charge of mistreatment of foreign nationals, and coordination of port security. As the number of people and the volume of cargo crossing the U.S.-Mexico border grows, so too does the need for coordinated infrastructure development. The multi-agency U.S.-Mexico Binational Group on Bridges and Border Crossings meets twice-yearly to improve the efficiency of existing crossings and coordinate planning for new ones. The Binational Group also conducts an annual "Border Walk" to gain a first-hand impression of how border crossings work.

The United States and Mexico have a long history of cooperation on environmental and natural resource issues, particularly in the border area, where there are serious environmental problems caused by rapid population growth, urbanization, and industrialization. Cooperative activities between the U.S. and Mexico take place under a number of agreements such as:

-- An 1889 convention establishing the International Boundary Commission, reconstituted by the Water Treaty of 1944 as the International Boundary and Water Commission, United States and Mexico (IBWC). The IBWC has settled many difficult U.S.-Mexico boundary and water problems, including the regularization of the Rio Grande near El Paso through the 1967 Chamizal settlement. The IBWC built the Bridge of the Americas (BOTA) as part of that settlement, and is now replacing this bridge, making it a model crossing between the U.S. and Mexico. The IBWC divides the use of international waters, builds and operates water conservation and flood control projects, and constructs and maintains boundary markers on the land boundary and on international bridges. In recent years, the IBWC has worked to resolve long-standing border sanitation problems, to monitor the quantity and quality of border groundwaters, and to address water delivery and sedimentation problems of the Colorado River.

-- A series of agreements on border health (since 1942), wildlife and migratory birds (since 1936), national parks, forests, marine and atmospheric resources.

-- The 1983 La Paz Agreement to protect and improve the border environment and Border XXI, a binational, interagency planning program, begun in 1996, to address environmental, natural resource, and environmental health concerns in the border area by identifying and addressing long-term objectives and goals into the 21st century.

-- The 1993 North American Agreement on Environmental Cooperation (NAAEC), creating the North American Commission on Environmental Cooperation under NAFTA by the U.S., Mexico, and Canada, to strengthen environmental laws and address common environmental concerns.

-- A November 1993 agreement between the U.S. and Mexico, also under NAFTA, establishing the Border Environment Cooperation Commission (BECC) which works with local communities to build or upgrade environmental infrastructure such as wastewater treatment plants, drinking water systems, and solid waste disposal facilities; and the North American Development Bank (NADBank), which leverages private sector capital to finance border environmental infrastructure projects certified by the BECC.


Nicaragua

PEOPLE

Most Nicaraguans have both European and Indian ancestry, and the culture of the country reflects the Ibero-European and Indian heritage of its people. Only the Indians of the eastern half of the country remain ethnically distinct and retain tribal customs and languages. A large black minority (of Jamaican origin) is concentrated on the Caribbean coast. In the mid-1980s, the central government divided the eastern half of the country--the former department of Zelaya--into two autonomous regions and granted the people of the region limited self-rule. The 1995 constitutional reform guaranteed the integrity of the regions' several unique cultures, and gave the inhabitants a say in the use of the area's natural resources. Roman Catholicism is the major religion, but Evangelical Protestant groups have grown recently, and there are strong Anglican and Moravian communities on the Caribbean coast. Most Nicaraguans live in the Pacific lowlands and the adjacent interior highlands. The population is 54% urban.

HISTORICAL HIGHLIGHTS

Nicaragua takes its name from Nicarao, chief of the indigenous tribe then living around present-day Lake Nicaragua. In 1524, Hernandez de Cordoba founded the first Spanish permanent settlements in the region, including two of Nicaragua's two principal towns: Granada on Lake Nicaragua and Leon east of Lake Managua. Nicaragua gained independence from Spain in 1821, briefly becoming a part of the Mexican Empire and then a member of a federation of independent Central American provinces. In 1838, Nicaragua became an independent republic.

Much of Nicaragua's politics since independence has been characterized by the rivalry between the Liberal elite of Leon and the Conservative elite of Granada, which often spilled into civil war. Initially invited by the Liberals in 1855 to join their struggle against the Conservatives, an American named William Walker and his "filibusters" seized the presidency in 1856. The Liberals and Conservatives united to drive him out of office in 1857, after which a period of three decades of Conservative rule ensued.

Taking advantage of divisions within the Conservative ranks, Jose Santos Zelaya led a Liberal revolt that brought him to power in 1893. Zelaya ended the long-standing dispute with Britain over the Atlantic Coast in 1894, and reincorporated that region into Nicaragua. However, due to differences over an isthmian canal and concessions to Americans in Nicaragua as well as a concern for what was perceived as Nicaragua's destabilizing influence in the region, in 1909 the United States provided political support to Conservative-led forces rebelling against President Zelaya and intervened militarily to protect American lives and property. Zelaya resigned later that year. With the exception of a nine-month period in 1925-26, the United States maintained troops in Nicaragua from 1912 until 1933. From 1927-1933, U.S. marines stationed in Nicaragua engaged in a running battle with rebel forces led by renegade Liberal general Augusto Sandino, who rejected a 1927 negotiated agreement brokered by the United States to end the latest round of fighting between Liberals and Conservatives.

After the departure of U.S. troops, National Guard Commander Anastasio Somoza Garcia outmaneuvered his political opponents, including Sandino, who was assassinated by National Guard officers, and took over the presidency in 1936. Somoza, and two sons who succeeded him, maintained close ties with the U.S. The Somoza dynasty ended in 1979 with a massive uprising led by the Sandinista National Liberation Front (FSLN), which since the early 1960s had conducted a low-scale guerrilla war against the Somoza regime.

The FSLN established an authoritarian dictatorship soon after taking power. U.S.-Nicaraguan relations deteriorated rapidly as the regime nationalized many private industries, confiscated private property, supported Central American guerrilla movements, and maintained links to international terrorists. The United States suspended aid to Nicaragua in 1981. The Reagan Administration provided assistance to the Nicaraguan Resistance and in 1985 imposed an embargo on U.S.-Nicaraguan trade.

In response to both domestic and international pressure, the Sandinista regime entered into negotiations with the Nicaraguan Resistance and agreed to nationwide elections in February 1990. In these elections, which were proclaimed free and fair by international observers, Nicaraguan voters elected as their president the candidate of the National Opposition Union, Violeta Barrios de Chamorro.

During President Chamorro's nearly seven years in office, her government achieved major progress toward consolidating democratic institutions, advancing national reconciliation, stabilizing the economy, privatizing state-owned enterprises, and reducing human rights violations. In February 1995, Sandinista Popular Army Commander General Humberto Ortega was replaced, in accordance with a new Military Code enacted in 1994, by General Joaquin Cuadra, who has espoused a policy of greater professionalism in the renamed Army of Nicaragua. A new police organization law, passed by the National Assembly and signed into law in August 1996, further codified both civilian control of the police and the professionalization of that law enforcement agency.

The October 20, 1996 presidential, legislative, and mayoral elections were also judged free and fair by international observers and by the ground-breaking national electoral observer group "Etica y Transparencia" (Ethics and Transparency) despite a number of irregularities, due largely to logistical difficulties and a baroquely complicated electoral law. This time Nicaraguans elected former-Managua Mayor Arnoldo Aleman, leader of the center-right Liberal Alliance. More than 76% of Nicaragua's 2.4 million eligible voters participated in the elections. The first transfer of power in recent Nicaraguan history from one democratically elected president to another took place on January 10, 1997, when the Aleman government was inaugurated.

GOVERNMENT AND POLITICAL CONDITIONS

Nicaragua is a constitutional democracy with executive, legislative, judicial, and electoral branches of government. In 1995, the executive and legislative branches negotiated a reform of the 1987 Sandinista constitution which gave impressive new powers and independence to the legislature--the National Assembly--including permitting the Assembly to override a presidential veto with a simple majority vote and eliminating the president's ability to pocket veto a bill. Both the president and the members of the unicameral National Assembly are elected to concurrent five-year terms. The National Assembly consists of 90 deputies elected from party lists drawn at the department and national level, plus the defeated presidential candidates who obtained a minimal quotient of votes. In the 1996 elections, the Liberal Alliance won a plurality of 42 seats, the FSLN won 36 seats, and nine other political parties and alliances won the remaining 15 seats.

The Supreme Court supervises the functioning of the still largely ineffective and overburdened judicial system. As part of the 1995 constitutional reforms, the independence of the Supreme Court was strengthened by increasing the number of magistrates from 9 to 12. Supreme Court justices are elected to seven-year terms by the National Assembly.

Led by a council of five magistrates, the Supreme Electoral Council is the co-equal branch of government responsible for organizing and conducting elections, plebiscites and referendums. The magistrates and their alternates are elected to five-year terms by the National Assembly.

Freedom of speech is a right guaranteed by the Nicaraguan constitution and vigorously exercised by its people. Diverse viewpoints are freely and openly discussed in the media and in academia. There is no state censorship in Nicaragua.

Other constitutional freedoms include peaceful assembly and association, freedom of religion, and freedom of movement within the country, as well as foreign travel, emigration, and repatriation. The government also permits domestic and international human rights monitors to operate freely in Nicaragua. The constitution prohibits discrimination based on birth, nationality, political belief, race, gender, language, religion, opinion, national origin, economic condition, or social condition. All public and private sector workers, except the military and the police, are entitled to form and join unions of their own choosing, and they exercise this right extensively. Nearly half of Nicaragua's work force, including agricultural workers, is unionized. Workers have the right to strike. Collective bargaining is becoming more common in the private sector.

Political Parties

In all, Nicaragua's 35 political parties participated in the 1996 elections, independently or as part of one of five electoral coalitions. With nearly 52% of the vote, the Liberal Alliance, a coalition of five political parties and sectors of another two, won the presidency, a plurality in the national legislature and a large majority of the mayoral races. The FSLN ended in second place with 38%.

Most other parties fared poorly. A new political party, the Nicaraguan Christian Path, ended a distant third with 4% of the vote and four seats in the 93-member National Assembly. The traditional alternative to the Liberals, the National Conservative Party, ended in fourth place with slightly over 2% of the vote and three seats in the National Assembly. The remaining 24 parties and alliances together obtained less than 5% of the vote. Seven of these smaller parties control eight seats in the National Assembly. Only two of 145 mayors belong to third parties.

According to Nicaraguan law, those political parties that did not win at least one seat in the National Legislature automatically lose their legal status and must repay government campaign financing. There are 19 parties represented in the National Assembly independently or as part of an alliance.

ECONOMY

Nicaragua began free market reforms in 1991 after 12 years of economic free-fall under the Sandinista regime. Despite some setbacks, it has made dramatic progress: privatizing 351 state enterprises, reducing inflation from 13,500% to 12%, and cutting the foreign debt in half. The economy began expanding in 1994 and grew a strong 4.5% in 1996 (its best performance since 1977). As a result, GDP reached $1.969 billion.

Despite this growing economy, Nicaragua remains the second-poorest nation in the hemisphere with a per capita GDP of $438 (below where it stood before the Sandinista take-over in 1979). Unemployment, while falling, is 16% and another 36% are underemployed. Nicaragua suffers from persistent trade and budget deficits and a high debt service burden, leaving it highly dependent on foreign assistance (22% of GDP in 1996).

One of the key engines of economic growth has been production for export. Exports rose to $671 million in 1996, up 27% from 1995. Although traditional products such as coffee, meat, and sugar continued to lead the list of Nicaraguan exports, during 1996 the fastest growth came in non-traditional exports: maquila goods (apparel), bananas, gold, seafood, and new agricultural products such as sesame, melons, and onions.

Nicaragua is primarily an agricultural country, but construction, mining, fisheries, and general commerce have also been expanding strongly during the last few years. Foreign private capital inflows saw a net increase in 1996, totaling an estimated $215 million. The private banking sector continues to expand and now holds 70% of the nation's deposit base.

Rapid expansion of the tourist industry has made it the nation's third-largest source of foreign exchange. Some 51,000 Americans visited Nicaragua in 1996 (primarily business people, tourists, and those visiting relatives). An estimated 5,300 U.S. citizens reside in the country. The U.S. Embassy's consular section provides a full range of consular services, from passport replacement and veteran's assistance to prison visitation and repatriation assistance.

Nicaragua now appears poised for rapid economic growth. However, long-term success at attracting investment, creating jobs, and reducing poverty depend on its ability to comply with an International Monetary Fund (IMF) program, resolve the thousands of Sandinista-era property confiscation cases, and open its economy to foreign trade.

The U.S. is the country's largest trading partner by far--the source of 32% of Nicaragua's imports and the destination of 42% of its exports. About 25 wholly or partly owned subsidiaries of U.S. companies operate in Nicaragua. The largest of those investments are in the energy, communications, manufacturing, fisheries, and shrimp farming sectors. Good opportunities exist for further investments in those same sectors, as well as in tourism, mining, franchising, and the distribution of imported consumer, manufacturing, and agricultural goods.

The U.S. embassy's Economic/Commercial Section advances American economic and business interests by: briefing U.S. firms on opportunities and stumbling blocks to trade and investment in Nicaragua; encouraging key Nicaraguan decision makers to work with American firms; helping to resolve problems that affect U.S. commercial interests; and working to change local economic and trade ground rules in order to afford U.S. firms a level playing field on which to compete. The Economic/Commercial Section counseled 112 U.S. and 148 Nicaraguan firms in 1996 on trade and investment opportunities. U.S. businesses may access key Embassy economic reports via the Mission's Internet home page at http://www.usia.gov/posts/managua.html.

FOREIGN RELATIONS

The 1990 election victory of President Violeta Chamorro placed Nicaragua in the ranks of Latin American democracies. Nicaragua pursues an independent foreign policy. President Chamorro was instrumental in obtaining considerable international assistance for her government's efforts to improve living conditions for Nicaraguans (the country is the second-poorest in the Western Hemisphere after Haiti). Her administration also negotiated substantial reductions in the country's foreign debt burden. A participant of the Central American Security Commission (CASC), Nicaragua also has taken a leading role in pressing for regional demilitarization and peaceful settlement of disputes within states in the region.

The Aleman administration has expressed a commitment to follow the major tenets of its predecessor's foreign policy, to promote Central American political and economic integration, and to resolve outstanding boundary disputes peacefully. At the 1994 Summit of the Americas, Nicaragua joined six Central American neighbors in signing the Alliance for Sustainable Development, known as the Conjunta Centroamerica-USA or CONCAUSA, to promote sustainable economic development in the region.

In Costa Rica in May 1997, President Aleman met with President Clinton, his Central American counterparts, and the president of the Dominican Republic to celebrate the remarkable democratic transformation in the region and reaffirm support for strengthening democracy, good governance and promoting prosperity through economic integration, free trade, and investment. The leaders also expressed their commitment to the continued development of just and equitable societies and responsible environmental policies as an integral element of sustainable development.

Nicaragua belongs to the UN and several specialized and related agencies, including the World Bank, the International Monetary Fund (IMF), World Trade Organization (WTO), UN Educational, Scientific, and Cultural Organization (UNESCO), World Health Organization (WHO), Food and Agriculture Organization (FAO), International Labor Organization (ILO), and the UN Human Rights Commission (UNHRC). Nicaragua is also a member of the Organization of American States (OAS), the Non-aligned Movement (NAM), International Atomic Energy Commission (IAEA), the Inter-American Development Bank (IDB), the Central American Common Market (CACM), and the Central America Bank for Economic Integration (CABEI).

U.S.-NICARAGUAN RELATIONS

U.S. policy is to support the consolidation of the democratic process initiated in Nicaragua with the 1990 election of President Chamorro. The U.S. has promoted national reconciliation, encouraging Nicaraguans to resolve their problems through dialogue and compromise. It recognizes as legitimate all political forces that abide by the democratic process and eschew violence. U.S. assistance is focused on strengthening democratic institutions, stimulating sustainable economic growth, and supporting the health and basic education sectors.

The resolution of U.S. citizen claims arising from Sandinista-era confiscations and expropriations still figure prominently in our bilateral policy concerns. Section 527 of the Foreign Relations Authorization Act (1994) prohibits certain U.S. assistance and support for a government of a country that has confiscated U.S. citizen property, unless the government has taken certain remedial steps. In July 1997, the Secretary of State issued a fourth annual national interest waiver of the Section 527 prohibition because of Nicaragua's record in resolving U.S. citizen claims as well as its overall progress in implementing political and economic reforms.

Other key U.S. policy goals for Nicaragua are:

Since 1990, the U.S. has provided $1.2 billion in assistance to Nicaragua. Approximately $260 million of that was for debt relief and another $450 million was for balance-of-payments support. The levels of assistance have fallen incrementally to reflect the improvements in Nicaragua, and FY 1997 assistance is estimated at approximately $25 million. This assistance is focused on promoting more citizen political participation, compromise, and government transparency; stimulating sustainable growth and income; and fostering better educated, healthier, and smaller families.


Panama

PEOPLE

The culture, customs, and language of the Panamanians are predominantly Caribbean Spanish. Ethnically, the majority of the population is mestizo (mixed Spanish and Indian) or mixed Spanish, Indian, Chinese, and West Indian. Spanish is the official and dominant language; English is a common second language spoken by the West Indians and by many in business and the professions. More than half the population lives in the Panama City-Colon metropolitan corridor.

Panama is rich in folklore and popular traditions. Brightly colored national dress is worn during local festivals and the pre-Lenten carnival season, especially for traditional folk dances like the tanborito. Lively salsa--a mixture of Latin American popular music, rhythm and blues, jazz, and rock--is a Panamanian specialty. Indian influences dominate handicrafts such as the famous Kuna textile molas. Artist Roberto Lewis' Presidential Palace murals and his restoration work and ceiling in the National Theater are well known and admired.

Over 65,000 Panamanian students attend the University of Panama, the Technological University, and the University of Santa Maria La Antigua, a private Catholic institution. Including smaller colleges, there are 14 institutions of higher education in Panama.

The first six years of primary education are compulsory, and there are 357,000 students currently enrolled in grades one through six. The total enrollment in the six secondary grades is 207,000. Nearly 90% of Panamanians are literate.

HISTORY

Panama's history has been shaped by the evolution of the world economy and the ambitions of great powers. Rodrigo de Bastidas, sailing westward from Venezuela in 1501 in search of gold, was the first European to explore the Isthmus of Panama. A year later, Christopher Columbus visited the isthmus and established a short-lived settlement in the Darien. Vasco Nunez de Balboa's tortuous trek from the Atlantic to the Pacific in 1513 demonstrated that the isthmus was indeed the path between the seas, and Panama quickly became the crossroads and marketplace of Spain's empire in the New World. Gold and silver were brought by ship from South America, hauled across the Isthmus, and loaded aboard ships for Spain. The route became known as the Camino Real, or Royal Road.

Panama was part of the Spanish empire for 300 years (1538-1821). From the outset, Panamanian identity was based on a sense of "geographic destiny," and Panamanian fortunes fluctuated with the geopolitical importance of the isthmus. The colonial experience also spawned Panamanian nationalism as well as a racially complex and highly stratified society, the source of internal conflicts that ran counter to the unifying force of nationalism.

BUILDING THE CANAL

Modern Panamanian history has been shaped by its trans-isthmian canal, which had been a dream since the beginning of Spanish colonization. From 1880 to 1900, a French company under Ferdinand de Lesseps attempted unsuccessfully to construct a sea-level canal on the site of the present Panama Canal. In November 1903, with U.S. encouragement and French financial support, Panama proclaimed its independence and concluded the Hay/Bunau-Varilla Treaty with the United States. The treaty conceded rights to the United States "as if it were sovereign" in a zone roughly 10 miles wide and 50 miles long. In that zone, the U.S. would build a canal, then administer, fortify, and defend it "in perpetuity." In 1914, the United States completed the existing 83-kilometer (50-mile) lock canal, which today is one of the world's greatest engineering triumphs. The early 1960s saw the beginning of sustained pressure in Panama for the renegotiation of this treaty. (See discussion of United States-Panama relations and the 1977 Panama Canal Treaties below.)

MILITARY COUPS AND COALITIONS

From 1903 until 1968, Panama was a constitutional democracy dominated by a commercially oriented oligarchy. During the 1950s, the Panamanian military began to challenge the oligarchy's political hegemony. In October 1968, Dr. Arnulfo Arias Madrid, twice elected president and twice ousted by the Panamanian military, was again ousted as president by the National Guard after only 10 days in office. A military junta government was established, and the commander of the national guard, Brigadier General Omar Torrijos, emerged as the principal power in Panamanian political life. Torrijos' regime was harsh and corrupt, but he was a charismatic leader whose populist domestic programs and nationalist foreign policy appealed to the rural and urban constituencies largely ignored by the oligarchy.

Torrijos' death in 1981 altered the tone but not the direction of Panama's political evolution. Despite 1983 constitutional amendments which appeared to proscribe a political role for the military, the Panama Defense Force (PDF), as they were then known, continued to dominate Panamanian political life behind a facade of civilian government. The PDF's hand-picked candidate won the presidential election in 1984. Pro-government parties also won a majority of Legislative Assembly seats, in races tainted by charges of corruption. By this time, General Manuel Noriega was firmly in control of both the PDF and the civilian government.

The rivalry between civilian elites and the Panamanian military, a recurring theme in Panamanian political life since the 1950s, developed into a grave crisis in the 1980s. Prompted by government restrictions on media and civil liberties, in the summer of 1987 more than 100 business, civic, and religious groups formed a loose coalition that organized widespread anti-government demonstrations.

Panama's developing domestic crisis was paralleled by rising tensions between the Panamanian Government and the United States. The United States froze economic and military assistance to Panama in the summer of 1987 in response to the political crisis and an attack on the U.S. embassy. The Government of Panama countered by ousting the U.S. Agency for International Development in December 1987; before the end of the year, the U.S. Congress cut off all assistance to Panama. General Noriega's February 1988 indictment in U.S. courts on drug trafficking charges sharpened tensions; in April 1988, President Reagan invoked the International Emergency Economic Powers Act, freezing Panamanian Government assets in U.S. banks and prohibiting payments by American agencies, firms, and individuals to the Noriega regime.

When national elections were held in May 1989, Panamanians voted for the anti-Noriega candidates by a margin of over three-to-one. Although the size of the opposition victory and the presence of international observers thwarted regime efforts to control the outcome of the vote, the Noreiga regime promptly annulled the election and embarked on a new round of repression.

By the fall of 1989, the regime was barely clinging to power. An unsuccessful PDF coup attempt in October produced bloody reprisals. Deserted by all but a small number of cronies, and distrustful of a shaken and demoralized PDF, Noriega began increasingly to rely on irregular paramilitary units called Dignity Battalions. In December 1989, the regime's paranoia made daily existence unsafe for U.S. forces and other U.S. citizens.

On December 20, President Bush ordered the U.S. military into Panama to protect U.S. lives and property, to fulfill U.S. treaty responsibilities to operate and defend the Canal, to assist the Panamanian people in restoring democracy, and to bring Noriega to justice. The U.S. troops involved in Operation Just Cause achieved their primary objectives quickly, and troop withdrawal began on December 27. Noreiga eventually surrendered to U.S. authorities voluntarily. He is now serving a 40-year sentence in Florida for drug trafficking.

Rebuilding Democracy

Panamanians moved quickly to rebuild their civilian constitutional government. On December 27, 1989, Panama's Electoral Tribunal invalidated the Noreiga regime's annulment of the May 1989 election and confirmed the victory of opposition candidates under the leadership of President Guillermo Endara, and Vice Presidents Guillermo Ford and Ricardo Arias Calderon.

President Endara took office as the head of a four-party minority government, pledging to foster Panama's economic recovery, transform the Panamanian military into a political force under civilian control, and strengthen democratic institutions. During its five-year term, the Endara Government struggled to meet the public's high expectations. Its new police force proved to be a major improvement in outlook and behavior over its thuggish predecessor, but was not fully able to deter crime. Its overall record was not enough to convince a skeptical public that it deserved re-election in 1994.

GOVERNMENT AND POLITICAL CONDITIONS

Panama is a representative democracy with three branches of government: executive and legislative branches elected by direct, secret vote for five-year terms, and an independent appointed judiciary. The executive branch includes a president and two vice presidents. The legislative branch consists of a 72-member unicameral Legislative Assembly. The judicial branch is organized under a nine-member Supreme Court and includes all tribunals and municipal courts. An autonomous Electoral Tribunal supervises voter registration, the election process, and the activities of political parties. Everyone over the age of 18 is required to vote, although those who fail to do so are not penalized.

Ernesto Perez Balladares was sworn in as President on September 1, 1994, after an internationally monitored election campaign. The campaign was Panama's largest, with seven candidates for the presidency, over 2,500 for the legislature, 2,000 for mayoral posts, and more than 10,000 at the local level and was peaceful, orderly, and efficient.

Ernesto Perez Balladares ran as the candidate for a three-party coalition dominated by the Democratic Revolutionary Party (PRD), the erstwhile political arm of the military dictatorship during the Torrijos and Noreiga years. A long-time member of the PRD, Perez Balladares worked skillfully during the campaign to rehabilitate the PRD's image, emphasizing the party's populist Torrijos roots rather than its association with Noriega. He won the election with only 33% of the vote when the major non-PRD forces, unable to agree on a joint candidate, splintered into competing factions.

President Perez Balladares has broad powers under Panama's current constitution, but must work with a Legislative Assembly in which his PRD party and its political allies have only a bare majority. Although the assembly lacks strong budgetary authority, it does play a crucial role in designing political, economic, and social initiatives; President Perez Balladares has governed with a multi-party cabinet that includes prominent experts in their fields as well as several members who publicly opposed Noriega. His administration has carried out economic reforms and worked closely with the U.S. on implementation on the Canal treaties.

National Security

The Panamanian Government has converted the former Panama Defense Forces (PDF) into a civilian "public force," subordinate to civilian officials and composed of four independent units: the Panamanian National Police, the National Maritime Service (Coast Guard), the National Air Service, and the Institutional Protective Service (VIP Security). A constitutional amendment, passed in 1994, abolished the military permanently.

Law enforcement units that have been separated from the public force, such as the Technical Judicial Police, are also directly subordinate to civilian authorities. The public force budget--in contrast to the former PDF--is on public record and under control of the executive.

The United States, with congressional approval, is delivering assistance to help train and establish truly professional law enforcement agencies. In fiscal year 1997, the United States provided police skills training and technical assistance in civilian law enforcement development through a program managed by the International Criminal Investigative and Training Assistance Program (ICITAP).

ECONOMY

Panama's economy is primarily based on a well-developed services sector that accounts for 72% of GDP. Services include the Panama Canal, banking, insurance, government, and the Colon Free Zone--the world's second-largest free trade zone after Hong Kong. Mining, tourism, and maritime services are projected sources of future growth.

A major challenge the Balladares Administration faces is turning to productive use the 70,000 acres of U.S. military land and more than 5,000 buildings which will revert to Panama by the end of 1999. As the U.S. military departs, Panama will have to replace jobs and income earned from U.S. bases. Estimates of Department of Defense contribution to the Panamanian economy through employing Panamanians, local procurement, and expenditures by personnel range from $170-$350 million.

Although the economic recovery of the early 1990s returned the economy to 1987, pre-crisis levels, sustained growth depends on Panama's ability to resolve long-standing problems of inequitable distribution of wealth, external debt, and dependence on U.S. Government and Canal revenues. Under- and unemployment continue to weigh down the national economy. Panama's working-age population is expected to grow 2.5% per year during the 1990s. Panama acceded to the World Trade Organization (WTO) in October 1996. To bring its regime into compliance with the WTO, Panama has reduced tariffs over a broad range of products and eliminated non-tariff barriers.

In 1997, U.S. merchandise exports to Panama were $1.2 billion; U.S. imports from Panama were $231 million, for an overall U.S. trade surplus of just under $1 billion. Trade with the U.S. comprises roughly 40% of Panama's total merchandise trade.

To rationalize its economy and help to sustain economic growth, the government of Panama intends to continue privatizing parastatals. The water and electricity companies are slated for privatization in 1998. In recent years, Panama has privatized the ports of Cristobal and Balboa, the cement and telecom companies and the casinos. In addition to sustaining the pace of privatizations, the Perez Balladares Administration must also take steps to reduce public sector employment and rigidities in the labor code which tend to perpetuate unemployment.

U.S. companies play an important role in the Panamanian economy. They are particularly active in banking, bananas, ports, and other services. Approximately 100 U.S. companies operate in Panama.

Role of Business

The government of Panama actively promotes Panama's long-standing reputation as an international trading, banking, and services center, and as a site for foreign direct investment. Panama's economy is characterized by low inflation and zero foreign exchange risk. In early 1998, Panama enacted a new banking law which is intended to detect and deter money laundering. The country is taking steps to improve its infrastructure with private and international financial institution financing.

FOREIGN RELATIONS

Panama is a member of the UN General Assembly, most major UN agencies, and has served three terms as a member of the UN Security Council. It maintains membership in several international financial institutions, including the World Bank, the Inter-American Development Bank, and the International Monetary Fund. Panama is a member of the Organization of American States, and was a founding member of the Rio Group. Although it was suspended from the Latin American Economic System (known informally both as the Group of Eight and the Rio Group) in 1988 due to its internal political system under Noriega, Panama was re-admitted in September 1994 as an acknowledgment of its present democratic credentials. Panama is also one of the founding members of the Union of Banana Exporting Countries and belongs to the Inter-American Tropical Tuna Commission.

Panama is an active participant in Central American regional meetings, although it is not a formal participant in integration activities. Panama is a member of the Central American Parliament (PARLACEN) as well as the Central American Integration System (SICA). Panama joined its six Central American neighbors at the 1994 Summit of the Americas in signing the Alliance for Sustainable Development known as the Conjunta Centroamerica-USA or CONCAUSA to promote sustainable economic development in the region and participates in some Miami summit follow-on meetings.

Panama strongly backed efforts by the United States to implement UN Security Council Resolution 940, which was designed to facilitate the departure of Haiti's de facto authorities from power. Panama offered to contribute personnel to the Multinational Force, which restored the democratically elected government to Haiti in October 1994, and granted asylum to some former Haitian military leaders. Also in 1994, Panama agreed to accept 9,000 Cuban "rafters," who were housed temporarily on U.S. military range areas until 1995.

U.S.-PANAMANIAN RELATIONS

The Panama Canal Treaties have provided the foundation for an enduring partnership. The U.S. and Panama are implementing the treaties by preparing for the transfer to Panama of the Canal and the U.S. base properties. Headquarters of the U.S. Southern Command transferred to Miami in 1997. U.S. development assistance through USAID in FY 1997 was $3 million. Panama does not have a military, therefore the United States provides no bilateral military assistance to the country. However, civic action projects, direct, and indirect military spending pump several hundred million dollars annually into the Panamanian economy.

The United States cooperates with the Panamanian Government in promoting economic, political, and social development through U.S. and international agencies. Cultural ties between the two countries are strong, and many Panamanians come to the United States for higher education and advanced training. Approximately 6,000 Americans reside in Panama, most of whom are retirees from the Panama Canal Commission and individuals who hold dual nationality. The number of U.S. visitors to Panama from July 1995 to June 1996 averaged around 3,600. President Perez Balladares, a Notre Dame and Wharton School graduate, has pursued a close relationship with the United States.

Panama continues to fight against illegal narcotics. The country's proximity to major cocaine-producing nations and its role as a commercial and financial crossroads make it a country of special importance in this regard. Although money laundering remains a problem, a new banking law of 1998 should help combat this crime. Panama has worked closely with the U.S. Treasury Department's Financial Crimes Enforcement Network.


Paraguay

PEOPLE

Paraguay's population is distributed unevenly throughout the country. The vast majority of the people live in the eastern region, most within 160 kilometers (100 mi.) of Asuncion, the capital and largest city. The Chaco, which accounts for about 60% of the territory, is home to less than 2% of the population.

Ethnically, culturally, and socially, Paraguay has one of the most homogeneous populations in South America. About 95% of the people are of mixed Spanish and Guarani Indian descent. Little trace is left of the original Guarani culture except the language, which is understood by 90% of the population. About 75% of all Paraguayans speak Spanish. Guarani and Spanish are official languages. Germans, Japanese, Koreans, ethnic Chinese, Arabs, Brazilians, and Argentines are among those who have settled in Paraguay.

HISTORY

Pre-Columbian civilization in the fertile, wooded region that is now Paraguay consisted of numerous semi-nomadic, Guarani-speaking tribes of Indians, who were recognized for their fierce warrior traditions. They practiced a mythical polytheistic religion, which later blended with Christianity.

Spanish explorer Juan de Salazar founded Asuncion on the Feast day of the Assumption, August 15, 1537. The city eventually became the center of a Spanish colonial province. Paraguay declared its independence by overthrowing the local Spanish authorities in May 1811.

The country's formative years saw three strong leaders who established the tradition of personal rule that lasted until 1989: Jose Gaspar Rodriguez de Francia, Carlos Antonio Lopez, and his son, Francisco Solano Lopez. The younger Lopez waged a war against Argentina, Uruguay, and Brazil (War of the Triple Alliance, 1864-70) in which Paraguay lost half its population; Brazilian troops subsequently occupied the country until 1874. A succession of presidents governed Paraguay under the banner of the Colorado Party from 1880 until 1904, when the liberal party seized control, ruling with only a brief interruption until 1940.

In the 1930s and 1940s, Paraguayan politics were defined by the Chaco War against Bolivia, a civil war, dictatorships, and periods of extreme political instability. General Alfredo Stroessner took power in May 1954. Elected to complete the unexpired term of his predecessor, he was re-elected president seven times, ruling almost continuously under the state-of-siege provision of the constitution with support from the military and Colorado Party.

During Stroessner's 34-year reign, political freedoms were severely limited and opponents of the regime were systematically harassed and persecuted in the name of national security and anti-communism. Though a 1967 constitution gave dubious legitimacy to Stroessner's control, Paraguay became progressively isolated from the world community.

On February 3, 1989, Stroessner was overthrown in a military coup headed by General Andres Rodriguez. Presidential and congressional elections were held on May 1, 1989. Rodriguez, as the Colorado Party candidate, easily won the presidency, and the Colorado Party dominated the Congress. In 1991 municipal elections, however, opposition candidates won several major urban centers, including Asuncion. As president, Rodriguez instituted political, legal, and economic reforms and initiated a rapprochement with the international community. The June 1992 constitution established a democratic system of government and dramatically improved protection of fundamental rights.

On May 9, 1993, Colorado Party presidential candidate Juan Carlos Wasmosy was elected as Paraguay's first civilian president in almost 40 years in what international observers deemed fair and free elections. A majority-opposition Congress also was elected, which quickly demonstrated its independence from the executive by rescinding legislation passed by the previous Colorado-dominated Congress. Wasmosy has worked to consolidate Paraguay's democratic transition, reform the economy and the state, and improve respect for human rights. His major accomplishments to date have been exerting civilian control over the armed forces and undertaking fundamental reform of the judicial and electoral systems. With support from the United States, the Organization of American States, and other countries in the region, the Paraguayan people rejected an April 1996 attempt by then-Army Chief General Lino Oviedo to oust President Wasmosy, taking an important step to strengthen democracy.

GOVERNMENT AND POLITICAL CONDITIONS

Paraguay's highly centralized government was fundamentally changed by the 1992 constitution, which provides for a division of powers. The president, popularly elected for a five-year term, appoints a cabinet. The next presidential elections are scheduled for May 10, 1998. The bicameral Congress consists of a 45-member Senate and an 80-member Chamber of Deputies, elected concurrently with the president through a proportional representation system. Deputies are elected by department and Senators nationwide. Paraguay's highest court is the Supreme Court. The Senate and the president select its members on the basis of recommendations from a constitutionally created Magistrates Council. Each of Paraguay's 17 departments is headed by a popularly elected governor.

ECONOMY

Paraguay has a predominantly agricultural economy, with a thriving commercial sector. There is a large subsistence sector (including sizable urban underemployment) and a larger underground re-export sector. The country has vast hydroelectric potential (including the world's largest hydroelectric generation facility at the Itaipu Dam), but lacks significant mineral or petroleum resources. The government welcomes and provides national treatment to foreign investors and businesses.

The economy is dependent on exports of soybeans, cotton, cattle, and timber; on electricity generation; and on the lucrative business of re-exporting products made elsewhere. It is therefore vulnerable to the vagaries of weather and to the fortunes of the Argentine and Brazilian economies.

According to Paraguayan Government statistics, Paraguay's GDP of $10 billion in 1997 represented real growth of 2.0% over 1996. However, given the importance of the informal sector, accurate economic measures are difficult to ascertain.

Paraguay generally maintains a small balance-of-payments surplus. Official foreign exchange reserves decreased to $900 million and foreign official debt remained about $1.3 billion. On a per capita basis, GDP declined by 1.0% at the end of 1997. Inflation continued to drop, standing at 6.2%.

Agriculture and Commerce

Agricultural activities represents about 20% of GDP, most of which is for export. More than 200,000 families depend on subsistence farming activities and maintain marginal ties to the larger, productive sector of the economy.

The commercial sector is primarily engaged in the import of goods from Asia and the United States for re-export to neighboring countries. In general, Paraguayans prefer imported goods, and local industry relies on imported capital goods. The underground economy, which is not included in the national accounts, is estimated to generate transactions amounting to $3 billion to $7 billion per year. The bulk of underground activity centers on the unregistered sale of imported goods--including computers, sound equipment, cameras, liquor, and cigarettes--to Argentina and Brazil.

Post-Stroessner Reforms

Since 1989, the government has deregulated the economy, previously tightly controlled by President Stroessner's authoritarian regime. The Rodriguez and Wasmosy Administrations eliminated foreign exchange controls and implemented a free-floating exchange rate system; reformed the tax structure and established tax incentives to attract investment; reduced tariff levels; launched a stock exchange market; and began a process of financial reform.

The Wasmosy Government has pledged to strengthen market-based economic reforms initiated since 1989. To do this, the government pledged to: keep government expenditures in line with revenues; combat inflation; eliminate restrictions on capital flows; reform and deregulate the financial sector; keep customs duties low and uniform; encourage production and exports; privatize state-owned enterprises; and fight official corruption.

In order to rationalize resources, President Wasmosy has vowed to privatize state enterprises which produce goods and services, but privatization has stalled due to opposition from many parts of the society long accustomed to a large public sector. The total public sector budget represents close to one-third of GDP. Of the $3.75 billion 1997 government budget, 40% was assigned to the central government, with the remaining 60% targeted for the decentralized agencies and state-owned enterprises.

DEFENSE

The constitution designates the president as commander in chief of the armed forces. Military service is compulsory, and all 17-year-old males are liable for one year of active duty. Although the 1992 constitution allows for conscientious objection, no enabling legislation has yet been approved. Of the three services, the army has the majority of personnel, resources, and influence. With about 12,000 personnel, it is organized into three corps, with six infantry divisions and three cavalry divisions. The army has two primary functions: to maintain the national defense (including internal order) and to manage some civic action projects in the countryside. The navy consists of about 2,000 personnel divided into three service branches. The air force, newest and smallest of the services, has about 1,500 personnel.

FOREIGN RELATIONS

Paraguay is a member of the United Nations and several of its specialized agencies, the Organization of American States, the Latin American Integration Association (ALADI), the Rio Group, INTELSAT, INTERPOL, and most recently, MERCOSUR (Southern Cone Common Market). Its foreign policy has followed closely the Rio Group's lead on many issues of wide-ranging political importance.

U.S.-PARAGUAY RELATIONS

U.S. Interests in Paraguay

The United States and Paraguay have an extensive relationship at the government, business, and personal level. Paraguay is a partner in hemispheric initiatives to improve counternarcotics cooperation, combat money laundering and other illicit cross-border activities, and adequately protect intellectual property rights. With substantial rain forest and riverine resources, the U.S. looks to Paraguay to engage in hemispheric efforts to ensure sustainable development. As a member of the Southern Cone Common Market (MERCOSUR in Spanish), Paraguay supports the move toward a Free Trade Area of the Americas early in the next century. The U.S. and Paraguay also cooperate in a variety of international organizations.

The U.S. strongly supports consolidation of Paraguay's democracy and continued economic reform, cornerstones of cooperation among countries in the hemisphere. The U.S. played an important role in helping resolve the April 1996 crisis that threatened Paraguay's seven-year-old democracy.

U.S. exports to Paraguay approach $1 billion per year, according to U.S. Customs data. More than a dozen U.S. multinational firms have subsidiaries in Paraguay. These include firms in the computer, manufacturing, agro-industrial, and banking and other service industries. Some 75 U.S. businesses have agents or representatives in Paraguay, and over 3,000 U.S. citizens reside there.

U.S. Assistance

The U.S. Government has assisted Paraguayan development since 1937. The U.S. Agency for International Development (USAID) currently supports a variety of programs to strengthen Paraguay's democratic institutions, particularly in the legislative and judicial branches, local government, and elections, as well as to protect the environment and stabilize population growth. USAID anticipates an assistance program of over $5 million per year for FY 1997-1999.

The U.S. Department of State and the Drug Enforcement Administration are providing technical assistance, equipment, and training to strengthen counternarcotics enforcement and to assist in the development and implementation of money laundering legislation. The U.S. Department of Defense is providing technical assistance and training to help modernize, professionalize, and democratize the military. The Peace Corps has about 170 volunteers working throughout Paraguay on projects ranging from agriculture and natural resources to education, rural health, and urban youth development. The U.S. Information Service (USIS) is also active in Paraguay, providing information on the United States to the press and public, as well as helping to arrange educational and citizen exchanges to promote democracy.


Peru

PEOPLE

Most Peruvians are mestizo, a term that usually refers to a mixture of Amerindians and Peruvians of European descent. Peruvians of European descent make up about 15% of the population; there are also smaller numbers of persons of African, Japanese, and Chinese descent. In the past decade, Peruvians of Asian heritage have made significant advancements in business and political fields; the president, a cabinet member, and several members of the Peruvian Congress are of Japanese or Chinese descent. Socio-economic and cultural indicators are increasingly important as identifiers. For example, Peruvians of Amerindian descent who have adopted aspects of Hispanic culture are also considered mestizo. With economic development, access to education, intermarriage, and large-scale migration from rural to urban areas, a more homogeneous national culture is developing, mainly along the relatively more prosperous coast.

Peru has two official languages--Spanish and the foremost indigenous language, Quechua. Spanish is used by the government and the media, and in education and commerce. Amerindians who live in the Andean highlands speak Quechua and Aymara and are ethnically distinct from the diverse indigenous groups who live on the eastern side of the Andes and in the tropical lowlands adjacent to the Amazon basin.

Peru's distinct geographical regions are mirrored in a socio-economic divide between the coast's mestizo-Hispanic culture and the more diverse, traditional Andean cultures of the mountains and highlands. The indigenous populations east of the Andes speak various languages and dialects. Some of these groups still adhere to traditional customs, while others have been almost completely assimilated into the mestizo-Hispanic culture.

Education

Under the 1993 constitution, primary education is free and compulsory. The system is highly centralized, with the Ministry of Education appointing all public school teachers. Eighty-four percent of Peru's students attend public schools at all levels.

School enrollment has been rising sharply for years, due to a widening educational effort by the government and a growing school-age population. The illiteracy rate is 25.3 % (37.5% for women) in rural areas and is estimated at 5.3% (8.1% for women) in urban areas. Elementary and secondary school enrollment is approximately 6.l million. Peru's 65 universities (1997), roughly divided between public and private institutions, enrolled about 380,000 students in 1996.

Culture

The relationship between Hispanic and Indian cultures determines much of the nation's cultural expression. During pre-Columbian times, Peru was one of the major centers of artistic expression in America. Pre-Inca cultures, such as Chavin, Paracas, Nazca, Chimu, and Tiahuanaco, developed high quality pottery, textiles, and sculpture. Drawing upon earlier cultures, the Incas continued to maintain these crafts but made even more impressive achievements in architecture. The mountain town of Machu Picchu and the buildings at Cuzco are excellent examples of Inca architectural design.

Peru has passed through various intellectual stages--from colonial Hispanic culture to European Romanticism after independence. The early 20th century brought "indigenismo," expressed in a new awareness of Indian culture. Since World War II, Peruvian writers, artists, and intellectuals have participated in worldwide intellectual and artistic movements, drawing especially on U.S. and European trends.

During the colonial period, Spanish baroque fused with the rich Inca tradition to produce mestizo or creole art. The Peruvian (Cuzco) school followed the Spanish baroque tradition with influence from the Italian, Flemish, and French schools. Painter Francisco Fierro made a distinctive contribution with his portrayals of typical events, manners, and customs of mid-19th century Peru. Francisco Lazo, forerunner of the indigenous school of painters, also achieved fame for his portraits, as did others. Peru's 20th century art is widely known for its extraordinary variety of styles and originality.

In the decade after 1932, the "indigenous school" of painting headed by Jose Sabogal dominated the cultural scene in Peru. Nevertheless, a reaction among Peruvian artists led to the beginning of modern Peruvian painting. Sabogal's resignation as director of the National School of Arts in 1943 coincided with the return of several Peruvian painters from Europe who revitalized "universal" and international styles of painting in Peru. During the 1960s, Fernando de Szyszlo, an internationally recognized Peruvian artist, became the main advocate for abstract painting and pushed Peruvian art toward modernism. Peru continues to be an art-producing center with painters such as Gerardo Chavez, Alberto Quintanilla, and Jose Carlos Ramos, along with sculptor Victor Delfin, gaining international stature. Promising young artists continue to develop now that Peru's economy allows more promotion of the arts.

HISTORY

When the Spanish landed in 1531, Peru's territory was the nucleus of the highly developed Inca civilization. Centered at Cuzco, the Inca Empire extended over a vast region from northern Ecuador to central Chile. In search of Inca wealth, the Spanish explorer Francisco Pizarro, who arrived in the territory after the Incas had fought a debilitating civil war, conquered the weakened people. The Spanish had captured the Incan capital at Cuzco by 1533 and consolidated their control by 1542. Gold and silver from the Andes enriched the conquerors, and Peru became the principal source of Spanish wealth and power in South America.

Pizarro founded Lima in 1535. The viceroyalty established at Lima in 1542 initially had jurisdiction over all of South America except Portuguese Brazil. By the time of the wars of independence (1820-24), Lima had become the most distinguished and aristocratic colonial capital and the chief Spanish stronghold in America.

Peru's independence movement was led by Jose de San Martin of Argentina and Simon Bolivar of Venezuela. San Martin proclaimed Peruvian independence from Spain on July 28, 1821. Emancipation was completed in December 1824, when General Antonio Jose de Sucre defeated the Spanish troops at Ayacucho, ending Spanish rule in South America. Spain made futile attempts to regain its former colonies, but in 1879 it finally recognized Peru's independence.

After independence, Peru and its neighbors engaged in intermittent territorial disputes. Chile's victory over Peru and Bolivia in the War of the Pacific (1879-83) resulted in a territorial settlement. Following a clash between Peru and Ecuador in 1941, the Rio Protocol--of which the United States is one of four guarantors--sought to establish the boundary between the two countries. Continuing boundary disagreement led to brief armed conflicts in early 1981 and early 1995.

The military has been prominent in Peruvian history. Coups have repeatedly interrupted civilian constitutional government. The most recent period of military rule (1968-80) began when General Juan Velasco Alvarado overthrew elected President Fernando Belaunde Terry of the Popular Action Party (AP). As part of what has been called the "first phase" of the military government's nationalist program, Velasco undertook an extensive agrarian reform program and nationalized the fish meal industry, some petroleum companies, and several banks and mining firms.

Because of Velasco's economic mismanagement and deteriorating health, he was replaced by General Francisco Morales Bermudez Cerruti in 1975. Morales Bermudez moved the revolution into a more pragmatic "second phase," tempering the authoritarian abuses of the first phase and beginning the task of restoring the country's economy. Morales Bermudez presided over the return to civilian government in accordance with a new constitution drawn up in 1979. In the May 1980 elections, President Belaunde Terry was returned to office by an impressive plurality.

Nagging economic problems left over from the military government persisted, worsened by an occurrence of the "El Nino" weather phenomenon in 1982-83, which caused widespread flooding in some parts of the country, severe droughts in others, and decimated the schools of ocean fish that are one of the country's major resources. After a promising beginning, Belaunde's popularity eroded under the stress of inflation, economic hardship, and terrorism.

During the 1980s, cultivation of illicit coca was established in large areas on the eastern Andean slope. Rural terrorism by Sendero Luminoso (SL) and the Tupac Amaru Revolutionary Movement (MRTA) increased during this time and derived significant financial support from their alliances with the narcotraffickers. In 1985, the American Popular Revolutionary Alliance (APRA) won the presidential election, bringing Alan Garcia Perez to office. The transfer of the presidency from Belaunde to Garcia on July 28, 1985, was Peru's first exchange of power from one democratically elected leader to another in 40 years.

Extreme economic mismanagement by the Garcia Administration led to hyperinflation from 1988 to 1990. Concerned about the economy, the increasing terrorist threat from Sendero Luminoso, and allegations of official corruption, voters chose a relatively unknown mathematician-turned-politician, Alberto Fujimori, as president in 1990.

GOVERNMENT

The president is popularly elected for a 5-year term, and the 1993 Constitution permits one consecutive re-election. The first and second vice presidents also are popularly elected but have no constitutional functions unless the president is unable to discharge his duties. The principal executive body is the Council of Ministers, headed by a prime minister. The prime minister and the Cabinet are appointed by the president. All presidential decree laws or draft bills sent to Congress must be approved by the Council of Ministers.

The legislative branch consists of a unicameral Congress of 120 members. In addition to passing laws, Congress is empowered to approve treaties, authorize government loans, and approve the government budget. The president has the power to block legislation with which the executive branch does not agree.

The judicial branch of government is headed by a 16-member Supreme Court seated in Lima. The Constitutional Tribunal interprets the constitution on matters of individual rights. Superior courts in departmental capitals review appeals from decisions by lower courts. Courts of first instance are located in provincial capitals and are divided into civil, penal, and special chambers. The judiciary has created several temporary specialized courts, in an attempt to reduce the large backlog of cases pending final court action. In 1996, a Human Rights Ombudsman's office was created to address human rights issues.

Peru is divided into 24 departments and the constitutional province of Callao, the country's chief port, adjacent to Lima. The departments are subdivided into provinces, which are composed of districts. Local authorities below the departmental level are elected.

POLITICAL CONDITIONS

Peru is a republic with a dominant executive branch headed by President Alberto Fujimori. President Fujimori won re-election to a second five year term in 1995, and his "Change 90/New Majority" supporters enjoy a substantial majority in Congress. In 1996, the Congress passed legislation interpreting the Constitutional term limits for president, making it possible for President Fujimori to seek re-election in 2000.

In April 1992, two years after his election, President Fujimori carried out an "auto-coup," dissolving Congress and regional governments and assuming control over the judiciary. There was broad popular support for the coup, which reflected deep public frustration with politicians' inefficiency and corruption. The president subsequently convened elections for a constituent congress on November 1992, and won public approval of the new constitution in an October 1993 referendum.

The Fujimori Government has substantially reduced the terrorist threat of Shining Path (SL) and the MRTA. Although greatly weakened since the 1992 capture of its leader Abimael Guzman, Shining Path remains capable of launching violent attacks, particularly in the coca-producing Upper Huallaga Valley and occasionally in Lima. Elements of SL are reported to be actively recruiting in some of Lima's shantytowns. Despite the December 1995 arrest of MRTA leader Miguel Rincon Rincon and others at a safe house in a Lima suburb, remaining armed militants of the MRTA were able to carry out an attack on a diplomatic reception at the residence of the Japanese Ambassador to Peru in December 1996. More than 500 guests were initially held captive by the MRTA, which demanded the release of all MRTA members being held in Peruvian prisons. On April 22, 1997, after 126 days, Peruvian commandos stormed the residence and freed 71 of the remaining 72 hostages. One hostage, two commandos and all of the hostage-takers were killed.

Human rights violations by the security forces dropped considerably over the last four years, although their use of torture, and the lack of accountability and due process remain areas of concern. In 1995, the Peruvian Congress passed a law which granted amnesty from prosecution to those who committed human rights abuses during the war on terrorism from May 1980 to June 1995. The Peruvian Government established in 1996 the Human Rights Ombudsman's office to address human rights issues and an ad hoc commission to review and recommend for presidential pardon those unjustly detained for terrorism or treason.

ECONOMY

Peru's economy rebounded in 1997, spurred mainly by a growth in exports (especially, so-called "non-traditional" exports). GDP grew 7.4% in 1997, much improved from the previous year's slump, during which the economy grew only 2.8%, and much better than most observers predicted. January 1998's output grew only 0.2%--clearly affected by "El Nino." The Lima Stock Exchange had an extraordinary year in 1997, despite significant declines in October (along with most other stock exchanges worldwide). The general index rose 25.5% in nominal terms in 1997; the selective ("blue chip") index rose 32.2%. Both experienced severe declines since the end of 1997.

1997's inflation rate was at a 25-year low, at 6.5%. This measure far exceeded expectations, which at the beginning of the year were that inflation might reach 9% under optimal conditions. Due to the two exogenous shocks--the "El Nino" weather phenomenon and the Asian economic and financial crisis--1998 inflation is officially predicted at 8%, due to supply bottlenecks domestically (especially on food items) and higher dollar costs of imports (due to faster depreciation of the sol vis-a-vis the dollar). Although accumulated inflation for January and February was 2.2%, inflation is predicted to slow significantly in the second half of the year, after the effects of "El Nino" are expected to have moderated.

Foreign Trade and Balance of Payments

After falling between 1995 and 1996, Peru's merchandise trade deficit was expected to rise slightly in 1997. Instead, the deficit narrowed significantly, as exports grew much faster than did imports. Overall, export revenues rose 14.5% (compared to early 1997 estimates of 2%) to $6.8 billion. Imports also rose faster than expected (8.5% vs. 2.0%) to $8.6 billion. Peru's total capital inflows (including estimated illicit narcotics earnings of $300 million to $600 million) are forecast to be more than enough to cover the country's 1997 current account deficit (equal to about 5.2% of GDP.) The effects of "El Nino" and the Asian crisis are expected to cause the current account deficit to increase to about 6% of GDP in 1998.

During 1997, Peru re-inserted itself into the international financial system, beginning with a Brady debt restructuring in March. In December, it also completed a debt swap with the United States Government, by which it repaid part of its debt (part of which had already been written-off by the U.S.) in return for using part of the funds for environmental projects or projects that will enhance child survival.

Net international reserves of the Central Bank stood at $10.2 billion at the end of 1997, $1.6 billion higher than at the end of the previous year.

Foreign Investment

The Peruvian Government actively seeks to attract both foreign and domestic investment in all sectors of the economy. International investment has been spurred by the significant progress Peru has made over the last seven years toward economic, social, and political stability. While Peru was previously marked by terrorism, hyperinflation, and government intervention in the economy, the Government of Peru under President Alberto Fujimori has taken the steps necessary to bring those problems under control. However, democratic institutions, especially the judiciary, remain weak.

The Government of Peru's economic stabilization and liberalization program has lowered trade barriers, eliminated restrictions on capital flows, and opened the economy to foreign investment, with the result that Peru now has one of the most open investment regimes in the world. Between 1991 and 1997, Peru attracted over $7 billion in foreign direct investment in Peru, mainly from Spain (34%), the United States (21%), the United Kingdom (13%), and Panama and the Netherlands (7% each). The basic legal structure for foreign investment in Peru is formed by the 1993 Constitution, the Private Investment Growth Law, and the Investment Promotion Law of November 1996. While Peru has neither a bilateral investment treaty nor a bilateral taxation treaty with the United States, it has signed an agreement (1993) with the Overseas Private Investment Corporation concerning OPIC-financed loans, guarantees, and investments. Peru has also committed itself to arbitration of government-to-government investment disputes under the auspices of ICSID--the World Bank's International Centre for the Settlement of Investment Disputes.

Economic Outlook

Although 1997 was a good year for Peru's macroeconomy, 1998 will be substantially more difficult. The Asian economic and financial crisis and the unexpectedly harsh effects of the "El Nino" weather phenomenon will both adversely affect Peru's economy, which is not likely to meet 1997's 7.4% GDP growth rate and 6.5% inflation rate. Official forecasts are for 3% output growth and 8% inflation. Forecasts for the medium- and long-term remain bright, as the country continues to attract both domestic and foreign investment in the tourism, mining, petroleum and natural gas, and electric power industries.

Narcotics

The fight against narcotics trafficking in Peru has resulted in an unprecedented 40% decline in the number of acres of illegal coca leaf under production in the past two years: however, most of the world's cocaine supply still originates from coca leaf grown in Peru. The contribution of this illicit industry to the national economy is difficult to measure, but estimates range from $300-600 million. An estimated 200,000 Peruvians are engaged in the production, refining, or distribution of the narcotic. Many economists believe that large flows of dollars into the banking system contribute to the traditional depression in the dollar exchange rate vis-a-vis the sol, prompting the Central Bank to engage in open market activities to prevent the price of the sol from rising to levels that would otherwise hurt Peruvian exports.

Confronted by effective Peruvian Air Force interdiction efforts, drug traffickers are increasingly using land and river routes to transport cocaine paste around the country. Peru continues to seize drug traffickers and drugs, destroy coca labs, disable clandestine airstrips, and prosecute security officers involved in narcotics corruption.

Working with the U.S. Agency for International Development (USAID), the Peruvian Government has begun alternative development programs in the leading coca-growing areas in an effort to convince coca farmers not to grow that crop. The government also has programs to eradicate coca seed beds and is working to eliminate precursor chemicals. In 1996, the Fujimori Administration created a new office--"Contradrogas"--to facilitate coordination among Peruvian Government agencies working on counternarcotics issues.

FOREIGN RELATIONS

Armed conflict broke out between Peru and Ecuador in January 1995 over an undemarcated portion of their border. Both countries agreed to a cease-fire in February 1995. The United States, along with Argentina, Brazil, and Chile, are guarantors of the 1942 Rio Protocol and supported Peruvian and Ecuadorian efforts to find a permanent viable solution to the border demarcation issue. In April 1997, Peruvian and Ecuadorian delegations began substantive discussions aimed at this objective, and reached agreement on a treaty of commerce and navigation, and agreement on border integration, and an agreement on confidence- and security-building measures. In October 1998, Presidents Fujimori and Mahuad requested that the Rio Protocol Guarantors propose a solution to the remaining unresolved border issues. As a condition for proposing a solution, the Guarantors asked that the Ecuadorian and Peruvian congresses agree to accept the Guarantors' proposal as binding. The Guarantors' decision led to the signing of a border demarcation agreement, and the other agreements, in Brasilia on October 26, 1998.

President Fujimori is increasing Peru's ties to Japan and other countries on the Pacific Rim. In 1996, the Prime Minister of Japan and the President of South Korea visited Peru. In the wake of the December 1996 hostage-taking by MRTA terrorists at the Japanese ambassadorial residence in Lima, the Japanese and Peruvian Governments consulted closely on the means of resolving the crisis. Prime Minister Hashimoto of Japan visited Lima in April 1997 to express gratitude for the rescue operation by Peruvian security personnel which claimed the life of only one of the 72 remaining hostages.

Peru has been a member of the United Nations since 1949, and Peruvian Javier Perez de Cuellar served as UN Secretary General from 1981 to 1991. The April 1992 auto-coup strained Peru's relations with many Latin American and European countries, but relations improved as the government returned to democratic processes. Peru recently reached agreement with the other members of the Andean community on full integration into the Andean Free Trade Area, and is joining APEC at the November summit in Kuala Lumpur.

U.S.-PERUVIAN RELATIONS

The United States enjoys friendly relations with Peru. Relations were strained after the 1992 auto-coup, but improved subsequently as Peru undertook steps to restore democratic institutions and to address human rights problems related to its counter-terrorism efforts. The United States continues to promote the strengthening of democratic institutions and human rights safeguards in Peru.

The United States and Peru cooperate on efforts to interdict the flow of narcotics, particularly cocaine, to the United States. The Peruvian Air Force has successfully interdicted narcotics trafficking aircraft, and appears to have significantly curbed the flow of narcotics through Peruvian air space. In tandem with successful law enforcement operations, the United States and Peru cooperate on promoting programs of alternative development in coca-growing regions.

The United States has supported Peru's efforts to become more integrated with the international financial community. Those efforts, together with increased economic and social stability, have resulted in a substantial increase in U.S. investment and tourism in Peru in recent years. U.S. exports to Peru (1997) were valued at $1.96 billion, accounting for about 25% of Peru's imports. In the same year, Peru exported $1.77 billion in goods to the United States ($1.58 billion according to Peruvian statistics), accounting for about 23% of Peru's exports to the world.

In 1997, approximately 140,000 U.S. citizens visited Peru for business, tourism, and study. About 10,000 Americans reside in Peru and over 200 U.S. companies are represented in the country.

U.S. Economic Assistance

U.S. bilateral assistance to Peru, including food aid and disaster relief and rehabilitation, totaled more than $950 million during the 1990-97 period. The Agency for International Development's largest South American program is in Peru. USAID has provided resources for priority development projects at a time when Peru's own domestic resources have been severely restricted by the need for austerity in public spending.

U.S. assistance to Peru is focused on achieving five strategic objectives: broader citizen participation and more responsive government; increased incomes for Peru's poor; improved health of high risk populations; improved environmental conditions; and, perhaps most importantly, reduced production of illicit narcotics.

Broader Citizen Participation. The United States Government, through USAID, provides support to Government of Peru electoral bodies and non-governmental organizations (NGO's) to strengthen the electoral system, to the Controller General to improve public accountability, and to local NGO's to promote greater civic action and public interest in governmental affairs. A significant amount of funding is given to the Human Rights Ombudsman's Office and NGO's working in the human rights field. USAID also has a program to strengthen local governments and promote community participation in targeted areas.

Increased Incomes. USAID has sought to provide much needed services to the 20% of Peru's population characterized as "extremely poor." Working principally through private sector and not-for-profit organizations, USAID has provided assistance to 270,000 nutritionally at-risk children and 200,000 heads of households in poor areas.

Improved Health. The United States Government supports immunization, family planning, prenatal care, safe childbearing, and oral rehydration programs in Peru. USAID assistance has contributed to decreases in infant and child mortality over the past decade.

Improved Environmental Conditions. USAID provides assistance to help Peru (a) improve its legal, policy, and regulatory framework governing environmental protection; (b) prevent pollution in selected settings; and (c) protect biologically diverse areas.

Alternative Development. The United States Government provides integrated development services to farmers in five target areas in order to wean them from coca production. USAID hopes to reduce coca cultivation by 50% in the targeted areas within several years.


Uruguay

PEOPLE

Uruguayans share a Spanish linguistic and cultural background, even though 25% of the population is of Italian origin. Most are Roman Catholic. Church and state are officially separated. Uruguay is distinguished by its high literacy rate, large urban middle class, and relatively even distribution of income. The average Uruguayan standard of living compares favorably with that of most other Latin Americans. Metropolitan Montevideo, with about 1.4 million inhabitants, is the only large city. The rest of the urban population lives in about 20 towns. During the past two decades, an estimated 500,000 Uruguayans have emigrated, principally to Argentina and Brazil. As a result of the low birth rate and relatively high rate of emigration of younger people, Uruguay's population is quite mature.

HISTORY

The only inhabitants of Uruguay before European colonization of the area were the Charrua Indians, a small tribe driven south by the Guarani Indians of Paraguay. The Spanish discovered the territory of present-day Uruguay in 1516, but the Indians' fierce resistance to conquest, combined with the absence of gold and silver, limited settlement in the region during the 16th and 17th centuries. The Spanish introduced cattle, which became a source of wealth in the region. Spanish colonization increased as Spain sought to limit Portugal's expansion of Brazil's frontiers. Montevideo was founded by the Spanish in the early 18th century as a military stronghold; its natural harbor soon developed into a commercial center competing with Argentina's capital, Buenos Aires.

Uruguay's early-19th century history was shaped by ongoing fights between the British, Spanish, Portuguese, and colonial forces for dominance in the Argentina-Brazil-Uruguay region. In 1811, Jose Gervasio Artigas--who became Uruguay's national hero--launched a revolt against Spain which resulted in the formation of a regional federation with Argentina. In 1821, Uruguay was annexed to Brazil by Portugal, but Uruguayan patriots declared independence from Brazil in 1825. With the support of Argentine troops and after three years of fighting, they defeated Brazilian forces.

The 1828 Treaty of Montevideo brought Uruguay independence, and the nation's first constitution was adopted in 1830. The remainder of the 19th century under a series of elected and appointed presidents saw interventions by, and conflicts with, neighboring states, political and economic fluctuations, and large inflows of immigrants, mostly from Europe.

Jose Batlle y Ordoñez, president from 1903 to 1907 and again from 1911 to 1915, set the pattern for Uruguay's modern political development. He established widespread political, social, and economic reforms, such as a welfare program, government participation in many facets of the economy, and a plural executive. Some of these reforms were continued by his successors.

By 1966, economic, political, and social difficulties led to constitutional amendments, and a new constitution was adopted in 1967. In 1973, amid increasing economic and political turmoil, the armed forces closed the Congress and established a civilian-military regime. A new constitution drafted by the military was rejected in a November 1980 plebiscite. Following the plebiscite, the armed forces announced a plan for return to civilian rule. National elections were held in 1984; Colorado Party leader Julio Maria Sanguinetti won the presidency and took office in 1985.

The Sanguinetti Administration implemented economic reforms and consolidated democratization following the country's years under military rule. Sanguinetti's economic reforms, focusing on the attraction of foreign trade and capital, achieved some success and stabilized the economy. In order to promote national reconciliation and facilitate the return of democratic civilian rule, Sanguinetti secured popular approval of a controversial plebiscite which granted general amnesty for military leaders accused of committing human rights violations under the military regime, and sped the release of former guerrillas.

The National Party's Luis Alberto Lacalle de Herrera won the 1989 presidential election. President Lacalle executed major economic structural reforms and pursued further liberalization of trade regimes, including Uruguay's inclusion in the Southern Cone Common Market (MERCOSUR) in 1991. However, economic adjustment and privatization efforts provoked political opposition. Thus, while the country achieved economic growth under the Lacalle Administration, social problems and austerity measures combined to foster increasing popular discontent and further political polarization by 1992. The result was the overturn of some reforms by referendum. In the November 1994 presidential and legislative elections, Colorado Party candidate and former President Sanguinetti won a new term of office which he began on March 1, 1995. President Sanguinetti has used his second term to consolidate Uruguay's economic reforms and integration into MERCOSUR, increasing economic growth and reducing inflation.

GOVERNMENT AND POLITICAL CONDITIONS

Uruguay's 1967 constitution institutionalizes a strong presidency, subject to legislative and judicial checks. The president's term is five years. Twelve cabinet ministers, appointed by the president, head executive departments.

The Constitution also provides for a bicameral General Assembly responsible for enacting laws and regulating the administration of justice. The General Assembly consists of a 30-member Senate, presided over by the vice president of the Republic, and a 99-member Chamber of Deputies.

The highest court is the Supreme Court; below it are appellate and lower courts and justices of the peace. In addition, there are electoral and administrative ("contentious") courts, an accounts court, and a military judicial system.

Following the 1994 elections, no single party had a majority in the General Assembly. Distribution of seats was as follows: Colorado Party 33%, National Party 33%, Frente Amplio (Broad Front) 30%, and New Space Party 4%. As a result, the National Party joined with the Colorado Party in a coalition government. Working with this coalition, President Sanguinetti secured important reforms aimed at improving the electoral system, education, social security, and public safety.

National Security

The armed forces are constitutionally subordinate to the president through the Minister of Defense. By offering early retirement incentives, the government has trimmed the armed forces to about 16,100 for the army, 4,200 for the navy, and 3,400 for the air force. As of November 1997, Uruguay has about 105 soldiers deployed in UN peacekeeping missions, with the largest group (around 60) in the Sinai peninsula.

ECONOMY

Uruguay's economy remains dependent on agriculture. Although agricultural production accounts for 10% of the gross domestic product (GDP), it comprises more than 50% of exports. The industrial sector, which produces 18% of GDP, is largely based on the transformation of agricultural products. Leading industrial sectors include meat processing, agribusiness, leather production, textiles, leather footwear, handbags, and leather apparel.

The country's strategy to stimulate growth and meet its debt service obligations is based on exports. The bulk of its trade is with its neighbors and partners in MERCOSUR. Uruguay is committed to an open financial system and maintains a floating exchange rate; the government intervenes in the exchange market to maintain a peso devaluation rate of about 1% per month.

The government has carried out a cautious program of economic liberalization similar to that of many other Latin American countries. The program has included lowering tariffs, eliminating deficit spending, controlling inflation--reduced from 129% in 1990 to an estimated 1997 rate of 15%--and reducing the size of government. But weak public support, the conservative nature of the Uruguayan people, and the fragmented political system suggest continued slow modernization.

The Lacalle Administration failed to reform completely the bloated and inefficient public sector. Privatization stalled when 72% of voters rejected the sale of the state telephone company, ANTEL, in a December 1992 referendum. However, the government continued implementation of those parts of the 1991 state enterprise reform law not overturned in the 1992 referendum.

Port services were privatized, improving efficiency and reducing prices. In May 1994, the state relinquished its monopoly on automobile insurance. Other activities which have been transferred to the private sector either under contract, concession, or sale, include: ground services and operation of the cargo terminal at Montevideo's Carrasco International Airport, the national airline (PLUNA), gas distribution, road construction and maintenance, construction and operation of the sewage and water supply systems for the zone east of Punta del Este, and operation of a mobile telephone system. The Sanguinetti Administration has deepened reforms, including partial privatization of the social security system.

FOREIGN RELATIONS

Uruguay has strong political and cultural links with the democratic countries of the Americas and Europe. Uruguay supports constitutional democracy, political pluralism, and individual liberties. Its international relations historically have been guided by the principles of non-intervention, respect for national sovereignty, and reliance on the rule of law to settle disputes.

The government seeks export markets and financial support. Uruguay is a member of the Southern Cone Common Market (MERCOSUR) with Argentina, Brazil, and Paraguay. Uruguay also is a member of the Rio Group, an informal group of Latin American states which deals with multilateral regional issues. It is a party to the Inter-American Treaty of Reciprocal Assistance (Rio Treaty), the World Trade Organization (formerly the General Agreement on Tariffs and Trade), and the Latin American Nuclear Free Zone.

Uruguay's location between Argentina and Brazil makes close relations with these two larger neighbors particularly desirable. The three countries have been working closely on integrating their economic systems and improving relations. Uruguay also has been working with Brazil, Argentina, Paraguay, and Bolivia--under terms of the River Plate Basin Treaty--on an economic integration plan whose centerpiece is the development of the River Plate Basin as a major shipping and commercial transportation link known as Hidrovia.

U.S.-URUGUAYAN RELATIONS

U.S.-Uruguayan relations traditionally have been based on a common outlook and emphasis on democratic ideals. Uruguay works with the United States bilaterally and internationally to foster economic and political cooperation and to improve regional cooperation. More than 90 U.S.-owned companies operate in Uruguay, and many more market U.S. goods and services.

An early proponent of the Enterprise for the Americas Initiative, Uruguay also is a leader in the follow-up process to the 1994 Summit of the Americas. It serves as a "responsible coordinator" for two Summit actions: tourism and invigorating civil society. The Uruguayan Government cooperates with the United States on law enforcement matters, such as regional efforts to reduce drug trafficking.


Venezuela

 

PEOPLE AND HISTORY

The Venezuelan people comprise a combination of European, indigenous, and African heritages. About 85% of the population lives in urban areas in the northern portion of the country. While almost half of Venezuela's land area lies south of the Orinoco River, this region contains only 5% of the population.

The indigenous people ranged from agriculturists to less advanced groups living on islands offshore. The first permanent Spanish settlement in South America--Nuevo Toledo--was established in Venezuela in 1522. However, Venezuela was a relatively neglected colony in the 1500s and 1600s as the Spaniards focused on extracting gold from other areas of their empire in the Americas.

The Venezuelans began to grow restive under colonial control toward the end of the 18th century. After several unsuccessful uprisings, the country achieved independence from Spain in 1821 under the leadership of its most famous son, Simon Bolivar. Venezuela, along with what are now Colombia, Panama, and Ecuador, was part of the Republic of Gran Colombia until 1830, when it separated and became a sovereign country.

Much of Venezuela's 19th century history was characterized by periods of political instability, dictatorial rule, and revolutionary turbulence. The first half of the 20th century was marked by periods of authoritarianism--including dictatorships from 1908-35 and from 1950-58. The Venezuelan economy shifted from a primarily agricultural orientation to one centered on petroleum production and export after the first world war.

Since the overthrow of Gen. Marcos Perez Jimenez in 1958, Venezuela has enjoyed an unbroken tradition of civilian democratic rule marked by the military's withdrawal from direct involvement in national politics. Until 1993, when Rafael Caldera won the presidential election on a coalition "Convergence" ticket, the presidency had passed back and forth between the country's main political parties, Accion Democratica (AD) and the Christian Democratic (COPEI) Party.

GOVERNMENT

The president is elected by a plurality vote with direct and universal suffrage. The term of office is five years, and a president cannot be re-elected until at least two terms have been served by others. The president decides the size and composition of the cabinet and makes appointments to it with the involvement of the Congress. The executive branch initiates most legislation, which the legislature debates and approves, alters, or rejects. The Congress has the authority to override a presidential veto, but the president can also ask the Congress to reconsider the portions of bills found objectionable.

The Congress is bicameral, and elections for the Senate and the Chamber of Deputies are held at the same time every five years. Until 1993, voters cast ballots for a party list of candidates. The 1993 national election permitted, for the first time, the direct election of one-half of the Chamber of Deputies by name and district. When the Congress is not in session, its delegated committee acts on matters relating to the executive and in oversight functions.

All courts in Venezuela are part of the federal system. The 18 members of the Supreme Court of Justice are elected by a joint session of the Congress to nine-year terms; one-third of the court is elected every three years, and each justice can serve only one term. The Judicial Council oversees the selection of judges to the lower civilian courts, which include district courts, municipal courts, and courts of first instance.

National Security

The armed forces number 80,000 personnel in four service branches--army, navy (including the marine corps), air force, and the Armed Forces of Cooperation (FAC), commonly known as the national guard.

POLITICAL CONDITIONS

Venezuela's history of free and open elections since 1958 and its prohibition of military involvement in national politics earned it a reputation as one of the more stable democracies in Latin America. But the country suffered a series of political and economic crises at the beginning of this decade, which culminated in a temporary suspension of constitutional rights in 1994-95. The current government has returned political stability and social peace to Venezuela.

Venezuela experienced political turbulence in response to a 1989 economic austerity program launched by then-President Carlos Andres Perez. Disgruntled military officers unsuccessfully mounted two coup attempts in 1992 and, in 1993, Congress impeached Perez on corruption charges. President Rafael Caldera was elected in December 1993. His administration's primary concerns were economic problems, particularly a financial crisis in 1994 and, in 1996, it introduced a new economic plan, the "Agenda Venezuela," to liberalize Venezuela's economy and promote economic growth.

The economic and financial crisis in 1994 led to restrictions on some civil liberties. President Caldera gave the police the power to detain people and enter homes without warrants, and to seize property without compensation.

When the Congress voted to restore civil liberties in July 1994, the President signed a decree suspending them again. He then challenged the Congress to put the matter to a national referendum; congressional leaders agreed to uphold the President's decree. Full civil liberties were restored in July 1995, except in some border areas.

Despite these conditions, Venezuela's political and electoral system in recent years has become more open. The 1993 presidential elections, won by Caldera's coalition, were the first since democracy was re-established in 1958 that were not won by the two major political parties. In addition, half the members of the Chamber of Deputies were elected directly for the first time in 1993. This reform resulted in a national Congress comprised of five main political forces of roughly equal size, in contrast to the AD- and COPEI-dominated political system of the recent past.

Venezuela's armed forces have rejected a direct role in national politics since 1958. Civil-military relations in Venezuela are good. The two 1992 coup attempts failed because senior military commanders remained loyal to civilian authorities and suppressed the rebels.

On the local level, the decentralization of power from the national government to state and municipal authorities began in 1989 with the direct election of governors, state legislators, mayors, and city council members every three years. Until that year, governors had been appointed by the president.

ECONOMY

Venezuela is rich in oil and other mineral resources. Its per capita income is about average for Latin America. The country's public external debt (excluding the obligations of the central bank and PDVSA, the parastatal oil company) stood at approximately $26.5 billion in 1996. The economy grew by 4.5% in real terms in 1997. Consumer prices rose only 37.6% in 1997 compared to the record 103% of 1996. The government is hoping for inflation of 24% during 1998.

The Venezuelan economy is making a comeback under the Agenda Venezuela, propelled primarily by the opening of the petroleum sector to foreign investment (the "apertura"), a far-reaching privatization program, and plans to reform public sector operations. Oil prices have shown a continual decline since 1996, which is serving to erode the budgetary surplus from 4.5% in 1996 to an estimated 1.5% in 1997.

In July 1996, the Venezuelan Government and the IMF formally announced a $1.4 billion stand-by loan. The World Bank and Inter-American Development Bank are also contributing to efforts to promote fundamental structural reforms--in the judiciary, electoral system, and social security/severance pay programs.

Petroleum and Other Resources

Venezuela's economy is dominated by petroleum, and the country is a founding member of the Organization of Petroleum Exporting Countries (OPEC). In 1997, this sector accounted for more than one-quarter of GDP, almost three-quarters of export earnings, and almost half of central government's revenues. Most of Venezuela's energy exports consist of crude oil, but the country is also the United States' leading foreign source of refined petroleum products.

The Government of Venezuela has opened up much of the hydrocarbon sector to foreign investment, promoting the establishment of massive new petrochemical joint ventures and reactivation of inactive fields. The Venezuelan petroleum corporation and foreign oil companies signed eight contracts for exploration and production joint ventures in July 1996. These contracts are expected to generate over $15 billion in foreign investment.

A range of other natural resources, including iron ore, diamonds, coal, bauxite, hydroelectric power, gold, and nickel are in various stages of development. In 1996, CVG, the state-owned mining firm, announced its first joint venture with a foreign company to develop the Las Cristinas gold mine. Congress is also considering legislation which would update Venezuela's 1945 mining law in an effort to encourage greater private sector participation in mineral extraction.

Manufacturing, Agriculture, and Trade

Manufacturing contributed 15.6% of GDP in 1997. The manufacturing sector grew slightly (2.2%) in direct contrast with the contraction in 1996. Venezuela manufactures and exports steel, aluminum, textiles, apparel, beverages, and foodstuffs. It also produces cement, tires, paper, and fertilizers, and assembles cars for both the domestic and export market. The "Agenda Venezuela" envisions the privatization of a range of state-owned enterprises, including banks.

Agriculture accounts for 4% of GDP, 12% of the labor force, and 24% of Venezuela's land area. Venezuela exports beef, rice, coffee, and cocoa. However, the country is not self-sufficient in most areas of agricultural production and imports about 60% of food consumed. In 1996, U.S. firms exported approximately $475 million of agricultural products including wheat, soybeans, corn, soymeal, and cotton to Venezuela, our third-largest agricultural export market in Latin America. The U.S. usually accounts for slightly more than a third of Venezuela's food imports.

Thanks to petroleum exports, Venezuela usually posts a trade surplus. In recent years, non-traditional (i.e. non-petroleum) exports have been growing rapidly but still constitute only about one-fourth of total exports. The United States is Venezuela's leading trade partner. During the first 10 months of 1997, the United States registered $3.0 billion in exports (about 38% of Venezuela's total) and purchased $12.9 billion in imports (about 55% of Venezuela's total). Venezuela's trade with other Andean Pact members, particularly Colombia, is growing in importance.

Labor and Infrastructure

Venezuela's labor force of about 8.8 million is growing faster than total employment. At the end of 1997, official unemployment was 12.8%, but unofficial estimates are higher. The public sector employs 14% of the work force, while less than 1% work in the capital-intensive oil industry. About 25% of the labor force is unionized. Unions are particularly strong in the public sector.

Venezuela has an extensive road system. With the exception of air service, transportation and communications have failed to keep pace with the country's needs. Much of the infrastructure suffers from inadequate maintenance. Caracas has a modern subway, but only one functioning rail line serves the rest of the country.

FOREIGN RELATIONS

Venezuela traditionally has said that its international conduct will be governed by:

The Caldera Government has made hemispheric cooperation and integration its foreign policy priorities. Venezuela worked closely with its neighbors following the Summit of the Americas in many areas, particularly energy integration, and championed the OAS decision to adopt an Anti-Corruption Convention. Venezuela also participates in the UN Friends of Haiti, of El Salvador, and of Guatemala groups. It is pursuing efforts to join the Mercosur trade bloc to expand the hemisphere's trade integration prospects.

Venezuela has long-standing border disputes with Colombia and Guyana, but seeks to resolve them peacefully. Bilateral commissions have been established by Venezuela and Colombia to address a range of pending issues, including resolution of the maritime boundary in the Gulf of Venezuela. Relations with Guyana are complicated by Venezuela's claim to over half of Guyana's territory. Since 1987, the two countries have held exchanges on the boundary under the auspices of the "good offices" of the United Nations.

U.S.-VENEZUELAN RELATIONS

U.S. relations with Venezuela are close and we share a strong mutual commitment to democracy. As our number-one supplier of foreign oil, U.S.-Venezuelan commercial ties are close. Major U.S. interests in Venezuela include protection and promotion of U.S. exports and investment; continuation of the economic reform program; preservation of constitutional democracy; closer counternarcotics cooperation; and maintaining access to a leading source of foreign petroleum. Underscoring the importance of this bilateral relationship, President Clinton's October 1997 visit launched a "Partnership for the 21st Century" to promote common solutions for energy development, trade and investment, and protecting the environment, as well as a strategic alliance against crime and drug trafficking.

The United States is Venezuela's most important trading partner, representing approximately half of both imports and exports. In turn, Venezuela is our-third largest export market in Latin America, purchasing U.S. machinery, transportation equipment, agricultural commodities, and auto parts. Venezuela's opening of its petroleum sector to foreign investment in 1996 created tremendous trade and investment opportunities for U.S. companies. The Department of State is committed to promoting the interests of U.S. companies in overseas markets. For contact information and a list of government publications, please refer to the last page of this document.

Venezuela is a minor source country for opium poppy and coca, but a major transit country for cocaine and heroin. Money laundering and judicial corruption are major concerns. The United States is working with Venezuela to combat drug trafficking. In FY 1998, the United States earmarked $600,000 for counternarcotics assistance and about $400,000 through the International Military Education and Training program. In addition, the United States plans to deliver excess U.S. military equipment worth $13.25 million to the Venezuelan armed forces for counternarcotics use. There is no USAID or Peace Corps mission in Venezuela.

Approximately 23,000 U.S. citizens living in Venezuela have registered with the U.S. Embassy, an estimated three-quarters of them residing in the Caracas area. An estimated 12,000 U.S. tourists visit Venezuela annually. About 500 U.S. companies are represented in the country.