PROGRESS HAS BEEN MADE

The country reports, and particularly the reports of the six special committees established in Mexico, should reveal that in the second year of the Alliance substantial progress has been made in the fields of planning and project formulation, agricultural development and agrarian reform, fiscal and financial policies and administration, education and training, industrial development and financing of the private sector and health programs. These reports will reflect the magnitude and complexity of this ambitious program. This second meeting should mark a turning point in revealing the need for emphasis during the coming year on the economic rather than the social aspect of the program. If this is accompanied by adequate recognition of the necessity of involving the private sector in every phase of the program, economic development should accelerate remarkably despite the slow beginning.

INVESTMENT RECORD CITED

Since the earliest phases of the expansion of U.S. enterprises into foreign countries, special attention has focused on the countries south of us. Of the total invested abroad up to 1929, nearly half was in Latin America. Though other areas attracted a larger share of new investments after World War II, and depreciating currencies hit especially hard at the value of the Latin American investments, nearly $5 billion was added to investments in that area between 1947 and 1957, and they still accounted for nearly 30 percent of all direct investments abroad.

Since 1957 the rate of growth in Latin America has slowed, while it has risen for other areas. By the beginning of 1963, direct investments in Latin America totaled $8.5 billion, but this was less than one-quarter of the world total.

It is important, however, to look closely at the record of the past few years, and especially at the record since the middle of 1961, to gage accurately the nature and severity of the apparent decline in U.S. investment activity in the area.

There are several different kinds of statistics on this subject, each of which can contribute to the whole picture. The most frequently used data are the figures for net capital flows between U.S. parent companies and their foreign subsidiaries and branchesthis is the series entering the balance-ofpayments accounts. A newer statistical series, current and projected expenditures for plant and equipment, comes closer to measuring the full impact of these investments on economic development.

NET CAPITAL OUTFLOW

First, it is necessary to have some perspective on net capital outflows from U.S. companies to the Latin American Republics. These spurted immediately after World War II and then leveled out until the great peak of petroleum investments in 1956-57. In the first 10 years after the war the annual flow averaged about $215 million; in 1956-57, the average was nearly $900 million; for the entire period from 1946 through 1957 the flow averaged somewhat over $300 million.

Since 1957 the rate of flow has declined sharply, averaging under $200 million through 1961. Beginning in the middle of 1961, there have been, on balance, net inflows to the United States. For 1962 the net inflow was $32 million, and in the first half of 1963 about $7 million.

Looking more closely at the experience of each industry and of individual countries, however, a considerably different picture emerges.

In the manufacturing sector, the aggregate capital outflow in the whole 1950-61 period was $800 million, or less than $80 million per

1 The change in value between 1950 and 1960 reflects not only the annual capital flow and reinvested earnings, but also adjustments, usually downward, to take account of depreciating exchange rates, writeoffs, etc. 2 Excluding Cuba.

3 Less than $500,000.

4 Excluding Republic of South Africa.

5 Excluding Japan.

NOTE.-Details may not add to totals because of rounding.

Source: U.S. Department of Commerce, Office of Business Economics.

There has been a sharp drop since 1960 in flows to Brazil, which received 43 percent of the total capital flow in the previous 10 years, and flows to Cuba, which had also been sizable in some years, have been nonexistent since 1958. On the other hand, capital flows to Argentina and Mexico have risen enough to maintain the overall average.

This means that if it were not for the

dropping out of Brazil and Cuba, the record for capital flows to manufacturing since 1960 would look comparatively good. Moreover, investments out of retained earnings have also risen, notably in Brazil, so that in 1962 U.S. companies added about $200 million to the value of their manufacturing investments in the area. As shown in table 1, this is a very large share of all manufacturing investments in less-developed countries.

Turning to capital flows for petroleum investments, and to a lesser extent for mining, a dramatic shift shows up from a peak of nearly $1 billion in 1957 to an actual net inflow in 1960 and again in 1962. Venezuela is the country principally affected by the changes in the petroleum flow; for the rest of the region capital flows by this industry have been rising slightly. The change in mining flows has affected mainly Chile and Venezuela.

CAPITAL EXPENDITURES STEADY

In contrast to the variability of capital flows, expenditures for fixed investments in plant and equipment show a relatively wellsustained level of activity. Information on these capital expenditures began with data for 1957, as part of integrated statements of sources and uses of funds of each foreign affiliate of U.S. companies. The results of the most recent study appear in the Survey of Current Business for October, and are summarized in table 2.

According to the data supplied by most of the large companies operating in the area, plant and equipment expenditures were at a record peak in 1957 because of the extraordi

nary outlays of the petroleum and mining companies. Unlike capital flows, however, the total for these expenditures leveled out in the 1959-62 period at a very substantial annual average of over $800 million, and projections by the companies made early this year indicated that this average would be at least matched in 1963 and 1964.

For manufacturing, the projections made early this year indicated capital outlays at a record rate of about $300 million a year in 1963 and 1964, well over the 1957-62 average. Large continuing outlays are projected by the companies for Argentina, Bra

zil, Mexico, and Venezuela.

Plant and equipment expenditures by the petroleum and mining companies have weakened considerably over the years since 1957, but are currently at a rate of $400 million. Sizable outlays are being made in Argentina, Chile, Colombia, and Peru, as well as $175 to $185 million by the petroleum companies in Venezuela. The maintenance of large capital outlays for plant and equipment while capital flows are sometimes negative requires explanation, and this is provided in part by an analysis of the sources and uses of funds of the enterprises.

MANUFACTURING DATA

Data for the manufacturing enterprises in Latin America controlled in the United States show that total funds available, after distributing dividends, is about one-half billion dollars annually. Capital flows from the United States, undistributed profits, and depreciation charges each contribute about one-fifth of this amount-the remainder is supplied by external sources abroad, probably largely through increased tax and other liabilities. About half of the one-half billion dollars available is spent for property, plant, and equipment, and the rest is needed for working capital. Income distributions are $75-85 million annually.

Total sources of funds of the petroleum and mining enterprises (after income distributions) are about of the same magnitude

currently, but have been falling since 1957, while they are now larger in manufacturing than at that time. For the mining and petroleum companies, however, there is a relatively small amount made available by capital flows from the United States, undistributed profits, or funds obtained abroad. Depreciation charges are the dominating source of cash flow in these industries. Using funds from this source, the firms involved are able to finance current levels of

capital outlays and working capital requirements.

These figures for actual capital expenditures for plants and working capital show that the total investment activity of U.S. companies in Latin America is very much greater than the data on net capital flows alone suggest. Over 70 percent of the capital formation in this region is carried out by the private sector, and U.S. firms undoubtedly contribute substantially to the total.

also applies in the area of economic integration.

The charter of Punta del Este points specifically to the Central American Common Market (CACM) and the Latin American Free Trade Association (LAFTA) as the vehicles for broadening of present national markets in Latin America, which is essential to accelerate the process of economic development in the Hemisphere.

One of the major economic forces congealing CACM and LAFTA and a primary objective of the Alliance is the need of in

PRODUCTION GAINING

The benefits of this investment effort are manifold, in terms of employment, government revenues, productivity, etc. One direct measure currently available is the value of manufacturing production in Latin America coming from the U.S. affiliated plants, as shown in table 3. Growth has clearly been substantial and quite steady, although there have been some temporary setbacks, as in Argentina in 1962, when local conditions are depressed or disturbed.

Some comparisons are made in the October issue of the Survey of Current Business between exports from the United States and local manufacture by U.S. companies of some important commodities. These figures show a decline of about $500 million in exports from the United States since 1957 while local production in the area of these items has risen by nearly $12 billion. In chemicals, for instance, export sales have fallen off somewhat, but local production has risen from sales of $500 million in 1957 to about $1 billion in 1962.

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From the point of view of Latin America, therefore, a much greater volume and variety of manufacturers is being made available than would be if they had to be imported.

The general impression that can be derived from the figures is that investment activity by U.S. companies in Latin America is being very well sustained by comparison with any earlier period except the huge temOn the other porary bulge in 1956–57. hand, the flow is not widely distributed among the countries of the area, and can shift quickly as projects are completed or local conditions become unsettled.

Given the needs of the area for economic development, a considerably larger flow than has been experienced over any extended period in the past could make a highly significant contribution. To restore the share of Latin America in the total foreign investment program of U.S. industry, however, the relative attractiveness of the area in terms of growth with stability, security of investment, and expectation of returns, must be greatly enhanced.

diversified market so that increased efficiency and better allocation of resources will result.

The Central American Common Market (described in International Commerce, Mar. 18, 1963), comprised of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, is an achievement which has been sought by the Central Americans for over 100 years. It represents an initial achievement of Alliance for Progress goals of increasing trade and stimulating investment. Trade among the Central American countries, while still small in absolute terms, has more than doubled between 1958 and 1962.

U.S. INVESTORS INTERESTED

Potential U.S. investors have shown much interest in Central America, particularly in manufacturing, and a number are already well established within the areas as a result of the common market.

In the public sector, the Central American Bank was established for the purpose of financing industrial integration and development in Central America. The U.S. Agency for International Development (AID) initially committed $10 million to the Bank's capitalization. Each of the participating countries contributed $4 million each. Further Alliance for Progress assistance has been received by the Central American Bank in the form of grants and loans. For example, AID made grants of $2 million for industrial credit and another grant of $1 million to be used for financing general studies. AID has also made a loan of $5 million for industrial credit. The Inter-American Development Bank (IDB) has also participated in the Central American Bank. For example, a $6 million loan for financing an industrial and infrastructure development program was made in April 1963. In addition, the Central American Bank with assistance from AID, is undertaking to prepare a regional transportation plan and industrial surveys.

For their own part, the Central American countries are currently drafting a regional telecommunications agreement to develop a Central American communications system. The World Bank is assisting in this project and is expected to provide a credit of approximately $100 million for its implementation.

ROCAP CREATED

AID has created the Regional Office for Central America and Panama (ROCAP) to assist in the coordination of common market activities at the regional level.

The Organization of American States (OAS) in conjunction with the IDB and the Economic Commission for Latin America (ECLA) has been providing technical assistance through the creation of the Joint Planning Mission, the task of which is to provide coordination of national development plans at the regional level.

ECLA has, since 1951, been a prime mover in fostering the development of the economic integration treaties and in the establishment of regional organizations in Central America.

The CACM is not yet an unqualified success and more progress is required for mellowing the institution. For example, the Regional System of Integration Industries, which may have the effect of establishing

monopolies in the isthmus and therefore stifling competition, runs counter to Alliance aims in this regard.

In addition, despite the combination of the five countries' economies into one market, the Central American market remains small. The population of the area is approximately 12 million with a combined gross national product of $2.4 billion in 1962. Yet the association of Panama with the CACM, which would broaden the market and which was called for in the Declaration of Central America in March 1963, was recently postponed. This action was reportedly due in part to the low Panamanian tariff rates and the fear on the part of some Central American businessmen that the Colon Free Trade Zone would provide escape from the common external tariff for non-Central American merchandise.

Nevertheless, while Central America has been advancing with ever-increasing strides, a less ambitious plan for economic unification in South America, LAFTA, appears to be progressing, albeit in halting and at times in indecisive steps. The members of LAFTA are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Paraguay, and Uruguay. (A description of LAFTA appears in the October 21 issue of International Commerce.)

It must be remembered that the members of LAFTA are as heterogeneous as the Central American countries are homogeneous and the former have no historical background of unification as do the latter. The LAFTA treaty provides for eventual free trade among the member States over a 12-year period. But, unlike the Central American Common Market, there is no provision for a common external tariff. Nevertheless, the very creation of LAFTA per se represents progress in broadening the Latin market.

In the area of trade liberalization many trade barriers have been reduced and certain shifts in the former trading patterns are discernible, although small. Nevertheless, the overall trade, both imports and exports, among members of the area in relation to their total trade has remained at approximately 7 percent over the last 3 years. However, it is perhaps too early to make a judgment as to the ultimate effect of LAFTA on intra-area trade.

A future stimulant to intra-Latin American trade was the recent announcement of the Inter-American Development Bank that it was instituting a system of export financing for Latin American capital goods. This should lead to increased area trade in these goods and the Bank has initially allocated $30 million for this purpose.

In the investment area, a considerable number of U.S. businessmen have expressed interest in manufacturing within the LAFTA framework. The lack of a common external tariff surrounding LAFTA continues to be a deterring factor for increased investment.

On the other hand, potential investors are becoming increasingly aware of the possibilities of investment within the framework of complementation agreements. These special agreements permit the negotiation of preferential treatment through bilateral or multilateral agreements for the purpose of achieving what are referred to as "vertically integrated industries." These agreements up to a point may help to reallocate more efficiently scarce Latin resources but at the same time there is a danger of monopoly creation and a limitation on competition.

There is a sense of urgency among many of the LAFTA members and among those closely associated with the LAFTA movement. In a number of documents the need for a common external tariff has been stressed. Also the tendency for LAFTA members to be particularly reluctant to reduce trade barriers to a meaningful extent has been emphasized.

Both ECLA and the Organization of American States have been active in promoting

and encouraging the development of LAFTA. Both organizations have provided experts in many fields and many studies on economic integration have been made.

A further indication that the LAFTA countries are desirous of strengthening their organization was the announcement of a Foreign Ministers meeting, originally scheduled for October 1963. This conference, however, was postponed until 1964. The tentative agenda of the conference deals with many fundamental questions of LAFTA's structure and direction.

Other measures have been taken to implement the objectives of the Alliance. great potential significance in meeting fluctuations in the short-term balance of payments not only of LAFTA and CACM members but also other Latin countries is the recently instituted system of compensatory financing. This project of the International Monetary Fund will permit the use of IMF funds in cases of payments difficulties produced by short-term export shortfalls of member countries. The system will enable the countries to eliminate the more adverse effects of short-term difficulties and will result in more orderly development of their economies.

PERU PLANNING MEETING

In the area of planning, a Conference on Planning and Industrial Development was held in Lima, Peru, in April. This was the first meeting of planning authorities of the LAFTA countries and as such was limited largely to the establishment of contacts and an exposition of the planning institutions of the nine countries—their organizaton, methods, objectives.

In a reference document of the InterAmerican Economic and Social Council entitled "Regional Economic Integration in the Development of Latin America," by Harvey S. Perloff and Romulo Almeida, stress was placed on the fact the present approaches to economic integration in Latin America are too timid and inadequate. Emphasis was placed on regional planning and regional development programs as a means of implementing Alliance objectives.

TAX REFORM IS MAJOR OBJECTIVE OF ALLIANCE IN LATIN AMERICA

The institution of tax reform in most of the Latin American countries has been a major objective of the Alliance for Prog

It is one that is generally accepted to be a key prerequisite, under the Charter of Punta del Este, in accelerating the develop ment process of the Latin American area.

A special conference on fiscal policy for the economic development of Latin America was held in Santiago, Chile, in December 1962 under the auspices of the joint tax program of the Organization of American States (OAS), the Inter-American Development Bank (IDB) and the Economic Commission for Latin America (ECLA). There was a full exchange of views between academic experts and those having administrative duties. Although general consensus was eventually achieved, (as reported in UP/G 15/1 Rev., Apr. 18, 1963, OAS-IDB-ECLA joint tax program) the problems were great and the points of view were not always unanimous. However, its members did agree that there was need to reform tax laws, demanding more from those who have most, to punish tax evasion severely, and to redistribute the national income to benefit those who are most in need.

The achievement of these results necessitated, among other things, a reorganization of the fiscal systems of the Latin American countries as these relate to:

1. The reform, simplification, and updating of the system of indirect taxation; 2. The creation of a comprehensive unitary system of progressive personal income tax, which includes the taxation of capital gains

both on real and personal property, complemented by a net wealth tax where feasible;

3. The collection of more revenue from taxes on urban and rural property, additional to personal income taxes on the income derived from such property, and coordinated with other reforms of special taxation of income from property;

4. The strengthening of the system of inheritance and gift taxation;

5. The placing of public enterprises on a self-sustaining basis through the adoption of adequate rates for services rendered;

6. The harmonization of the tax treatment of the income of international enterprises, and the imposition of taxes on the income which residents receive from abroad;

7. The creation of a fiscal climate which, with the cautious use of incentives, will be attractive to the formation of private capital and its investment in productive enterprise;

8. The reform of budgetary practices and the inclusion in budgets of the operating results of autonomous agencies; and

9. The establishment of an objective and coordinated system of tax administration, using each tax to give more solidity to the others, so as to guarantee that the benefits of substantial reform will not be lost in administration.

NEW LEGAL PROCEDURES

Special attention was given to a number of legal and administrative procedures that need to be established to enable the beneficial ownership of real property and of financial assets to be identified. Thus, compulsory registration of all real property in the name of the beneficial owner and the adoption of means whereby the ownership and the transfer of securities are comprehensively registered with the tax authorities. Under existing conditions in most of Latin America, it is undisputed that a significant strengthening is needed of both the technical and administrative capacity of the tax enforce

ment authorities.

Since much of Latin America produces agricultural income, attention was given to the administrative problem of calculating such income for purposes of income taxation. While there was almost universal agreement that some form of presumed income rather than actual income had to be used, there was a difference of opinion with respect to the best way to determine such income. One group suggested that presumed income should be calculated on the basis of average yield of lands with similar characteristics.

Others questioned this method because it

presumed the availability of such information and the necessary technicians. It was suggested, therefore, that some self-assessed valuation of property might be used as a measure of presumed farm income.

All were in agreement that the traditional taxes in the area include the corporation income tax, the tax on urban real estate and the tax on agricultural property. Consequently, an effort must be made to rationalize the taxation of income from the different classes of property.

CHANGES TAKING PLACE

The Pan American Union reports that noteworthy changes in tax legislation are taking place throughout Latin America. The reforms being introduced, in general, call for (a) raising existing tax rates (b) lowering the level of exemptions and (c) taxing capital gains. They tend to provide exemptions to certain types of investments, or stimulate them in other ways such as adopting a more liberal system of depreciation.

A few examples in countries where tax reform is practiced:

Ecuador has enacted a new income tax law in 1963. Undistributed corporation profits are taxed at 20 percent when their activities are considered essential for economic growth; otherwise at 30 percent. Personal income

tax is levied at rates ranging from 10 to 43 percent.

Dominican Republic now classifies income into five categories, each subject to a proportional tax rate. There is also a complementary tax on total income at rates from 3 to 40 percent.

El Salvador in 1961 modified the structure of its income tax rates substantially.

Guatemala this year enacted the first income tax legislation in its history.

Panama has substantially increased tax rates. Additional reforms are being considered.

Peru has increased the complementary tax on nondistributed corporation profits.

Colombia has introduced complete tax reform modifying the concept of income, the tax rate structure and additional measures for promoting social progress and economic development.

Mexico, Venezuela, Haiti, Paraguay, Argentina, and Brazil have enacted legislation introducing changes in the tax rate structure and in the level of exemptions in order to promote better distribution of revenues, or to promote investment.

Bolivia and Honduras are studying significant income tax reforms.

There is a clear tendency to increase taxes on luxury goods and to lower those on raw materials.

OVERALL LATIN AMERICAN TREND IS UPWARD FOR IMPORTS AND EXPORTS

Latin America increased the dollar volume of its foreign trade in 1962. Both imports and exports rose-favorable indicators in terms of the goals of the Alliance for Progress. However, the United States occupied a less favorable position in the Latin American market in 1962 than in previous years,

and available 1963 data show a further drop. in our participation in the area's trade.

Imports of the Latin American Republics from the United States were valued at about $3.5 billion in each of the years 1960, 1961, and 1962. The United States continued as the principal supplier in these years, but its percentage-share of the market fell. The area's total imports from all supply sources showed an upward trend in the 1960-62 period, rising from $7.6 billion in 1960 to $7.9 billion in 1962.

Shipments into Argentina, Brazil, and Mexico-the three principal importing countries in Latin America-registered only minor variations in dollar value during the period. Venezuela, fourth largest importer in the area, recovered somewhat after reaching a low point in import volume for recent years in 1961. Most of the other Republics imported larger volumes of goods in 1962. Increases ranged from small to substantial. In the case of Peru the rise was $163 million or about 43 percent when 1960 and 1962 figures are compared.

The limited overall increase in imports reflects the generally worsened 1962-63 foreign-exchange position of many of the countries. Import and exchange control measures aimed at conserving supplies of foreign exchange, trade controls to foster local industry, and currency stabilization efforts all had their effect in holding down imports.

Exports of the Latin American Republics totaled $8.5 billion in 1962 a substantial rise (about 10 percent) over the $7.7 billion in exports in 1961. Among the countries having important increases in the dollar volume of exports in 1962 were Argentina, Mexico and Peru. More moderate rises were made by many of the other countries, while,

of the larger countries in the area, Brazil showed a drop.

The United States is the principal market for Latin American exports, but in the years 1960, 1961, and 1962 shipments to the United States dropped in relative position as compared with other markets. In 1962, Western European countries received $3.6 billion in Latin American goods, a 12 percent rise over 1960.

Trade among the countries of the Latin American area was larger in 1962, but the volume was relatively small and was not of major significance in the total trade of the Republics.

The upward trend in the value of the area's exports is attributable to a number of factors, including expanding world markets for certain commodities, favorable prices for a number of products and export-product diversification carried forward under country development-planning. In the case of Argentina, the increase in export trade was due largely to greater grain and linseed shipments. In Mexico, efforts to develop production for export had a favorable effect. Peru's greatly expanded fishmeal output, new (1960) large copper development, and a favorable sugar market all contributed to larger export earnings. Expanding world markets for petroleum aided Venezuela in raising the level of exports.

Since late 1962, the world price trend for the major mineral exports of Latin America (copper, lead, zinc, tin and silver) has been steady or upward. In agricultural products, the trend has been mixed. On balance, it would appear that the favorable price position of the export products of the area is the major contributing factor to the area's 1962 export advance, expected to continue through 1963.

Country

Country

171.4

255.8

866.3

291.8

1 U.S. import statistics used.

treated to an expense-paid, 4-day trip to Hollywood. Apparently only five newspapers paid the expenses for their reporters. Transportation for all the othporters. Transportation for all the others as well as their hotel rooms, food, and liquor bills were all paid for by the movie maker. The financial "hospitality" went so far that the movie maker even paid for the newsmen's cable and telephone charges run up sending stories-most of which the producer characterized as "favorable"-back to their newspapers.

The newspaper junket on behalf of a movie may be defended by some because of its relatively harmless objective. I would remind my colleagues and the members of the press that our recent hearings on foreign lobbying showed hearings on such activities were carried on by foreign interests-with similar "favorable" acceptance by the press-where the objectives were more serious and sometimes even conflicted with policies of our Government.