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Backgrounder #837 on Latin America

June 20, 1991

A U.S. Role in Chile's Democratic and Economic Reforms

By

(Archived document, may contain errors)

837 JUne 20,1991 A US, ROLE INCHILETS DEMOCRATIC AND mNOMIC REFORMS INTRODUCI'ION Chile has become a model of economic and democratic progress in the developing wor ld. It has moved farther and faster than any other Latin American coulltry toward free market economic refonn and has posted seven straight years of economic growth. With last December's election of Christian Democrat Patricio Aylwin Azocar as President, Chile's "economic miracle has been accompanied by a peaceful transition from dictatorship to democracy.

Agreement with the United States and play a pivotal role in advancing George Bush's Enterprise for the AmericaslInitiative (EAT which would me ate a Western Hemisphere free trade zone 1 Welcome Desire. The Bush Administration should welcome Chile's desire to become a free market champion in Latin America. It should enlist Aylwin's help in drafting a working plan for the EAI, while beginning to es tablish a timetable for free trade area negotiations with Chile Now Chile hopes to go further. It is seeking to negotiate a FreeTrade 1 An FTAwould tcmovc suchbarriws to trade as tariffs and quotas and seck a broad liberalization in the ~mmctn. of- mviccs and investment between the US. and Chile.

Tense Years. U.S.-Chilean relations, of course, have not always been so cor dial. During the military government of General August0 Pinochet Ugarte from 1973 to 1990, tensions mounted between Washington and Santiago be cause of charges that Chile was violating human rights and denying political freedoms. Relations were fur t her soured after the September 21,1976, car bomb assassination in Washington of Orlmdo Letelier, an exiled former Chilean Foreign Minister who had served in the Marxist government of Sal vador Allende Gossens.The crime yas linked to Chiles secret police, t he Na tional Intelligence Agency (DINA As a result, economic and military cooperation between the U.S. and Chile was curtailed severely in the late 1970s and most of the 1980s Whatever the problems with Chiles external relations, Pinochet boldly rebuilt t he Chilean economy, laying the foundation for Chiles new role today as a regional engine of democratic and free market reform.

After his democratic election last year, Aylwin has upheld the Pinochet governments free market economic reform program and has i mproved Chiles protection of human rights record by forming on April 25,1990, the Presidential Commission for Truth and Reconciliation to investigate .human rights abuses.This commission on March 4 issued the so-called Rettig Report, named after the commi ssions president Raul Rettig. The report documents some 2,279 human rights abuses under the Pinochet government.

The report also offers a blueprint for judicial reform, continued humanqghts investigations and compensation to those who suffered under Pinoch et Return to Normal. The U.S. should want to see the Aylwin government suc ceed in institutionalizing democratic and free market reforms in Chile. For the first time in over fifteen years, the U.S. and Chile are enjoying full economic relations and are de v eloping joint security assistance, training and education programs. All sanctions and restrictions on U.S. military assistance loans, credits, and other economic or security aid to Chile, imposed by Con gress following the 1976 Letelier murder, were lifte d last December 1, open ing the way for a full normalization of US-Chilean relations. U.S. military help is vital to the Aylwin government for it faces continued threats from Chiles left-wing terrorist groups and drug traders.

Chiles economic and political success story may teach important lessons to other less developed countries in Asia, Africa, and Latin America. Most im portant, by striking a free trade deal with the U.S Chile can set an example for other Latin American countries including Argentina, B r azil, Colombia Peru, and Venezuela -by becoming the first country to participate in Bushs Enterprise for the Americas Initiative By linking its economy to the North 2 See James R. Whelan, Out of the Ashes: fife Death and Transfiguration of Democmcy in Chi le (Washington D.C Regnery Gateway, 1989 pp. 735-742 3 See Readon to the Ret

Report,Andeun Newsletter No. 53, April 8,1991, pp. 2-4 2

3 American Free Trade Area, which will in clude Canada Mexico and the U.S the Ayl win government could help accelerate free market economic reform and fiee trade throughout the Americas.

By developing good relations with the AylWin government, Washington can fortify Chiles free market and democratic leader ship, while helping to advance U.S economic and security interests in Latin America These include promoting free market reforms, strengthening democracy curbing the drug trade, and defeating ter rorism. By rewarding Chiles progress Washington will encourage the spread of similar economic and political reform throughout the Americas. By contrast a cold shoulder from Washington could trig ger a socialist and anti-democratic backlash throughout the region.

Understanding this, the Bush Administra tion should Stress Washingtons strong support for the Aylwin governments democr atic reforms and pursuit of a free market economy. This will ease Chiles difficult transition from military government to democracy. Argentina, Brazil, and Paraguay have suffered economic and political turmoil during such transitions. If Chile becomes an e ngine of reform in the region, these countries could look to it for solutions to their political and economic problems Pursue quickly a FreeTrade Agreement with Chile. Bush formally should announce his administrations intent to negotiate a free trade pact with the Aylwin government.The Office of the United StatesTrade Rep resentative (USTR) should draw up a timetable for launching U.S.-Chile Free Trade Agreement talks. The White House should urge Congress to task the International Trade Commission, an inde p endent U.S. govern ment body which rules on disputes concerning international trade law with producing a report on the effects of a free trade pact between the two countries Work closely with Santiago in launching the Enterprise for the Americas Initiativ e (EAI) throughout the region. Bush should establish an inter-agency EAI task force within the U.S. government to develop an action plan to create a hemisphere-wide free trade zone to spur economic reform and growth.The U.S. also should seek Chiles help in 4 forming an official hemispheric working group that would meet monthly to discuss how to promote the EAT Expand security cooperation with Chiles military and police forces to promote democratic values and respect for human rights and to counter terrorism U.S. contact with Chiles security forces could foster a greater respect for civilian authority. The U.S also could provide valuable train ing and material for countering Chiles communist terrorism threat. This assistance should focus primarily on educatio n programs for Chilean of ficers, intelligence sharing on terrorist groups, spare parts and main tenance for U.S.-manufactured military equipment, and urban warfare training to combat terrorism Work closely with the Aylwin government to defeat Chiles growi n g drug trade Because of the crackdown they face in Colombia, the Caribbean Mexico, and Peru, drug traffickers increasingly are using Chile as a tran sit point for cocaine and as a source of drug-related chemicals for cocaine processing. Before the cartels establish a strong foothold in Chile, Washington should give Santiago the resources, intelligence, and training to fight the war on drugs. The U.S. Drug Enforcement Ad ministration (DEA) and State Departments Bureau of International Nar cotics Matters (IN M ) should give Chiles anti-drug units technical intel ligence on drug shipments and training in drug interdiction strategy CHILES LEADERSHIP IN FREE MARKET ECONOMIC REFORM George Bush told a special joint session of the Chilean Congress last December 6 in V alparako, Chile that Chile has moved farther, faster than any other nation in South America toward real free market reform and the payoff is evident to all with seven straight years of economic growth; in exports alone a 15 to 20 percent increase in value in each of the past five years.This explosive growth has secured for Chile a growing impact on the world economy.

Bushs assessment of Chiles progress in on the mark. Chiles road to economic leadership in Latin America is the outcome of a process that began when Pinochet took office in 19

73. By pursuing such free market economic reforms as a bold privatization program, freer trade, and lower taxes Pinochet guided Chile down a road of economic prosperity. Chile now is next in line after Mexico to strike a FreeTrade Agreement with the Bush Ad ministration, and even more important, to play a leadership role in promoting Bushs Enterprise for the Americas Initiative 5 Allendes Socialism Pinochet had come to power after a coup, following prolonged internal tur m oil, toppled Salvador Allendes government. Its socialist policies of state ownership, high trade barriers, and excessive government regulation brought the Chilean economy to near collapse in the early 1970s. Writes Johns Hop kins University economist Stev e H. Hanke: The Allende government had engaged in price controls for most essential goods and services. With prices set at artificiallylow levels productionawai-discouraged particularly in the agriculture sector and the nations growth rate was retarded. Mo r eover, the fixing of prices for public services con ributed to Chiles enormous 19731 budget deficit of 13 percent of GNP Allende set tariffs at an average rate of 100 percent on such foreign goods as agricultural products, automobiles, and electronic equi p ment and further restricted imports by imposing quotas and import licensing fees. Before Pinochet came to power, Hanke explains: the domestic capital market in Chile was highly repressed: most banks were government-owned, negative real interests rates wer e typical, and quantitative restrictions on credit were pervasive. By setting interest rates below the level of inflation the incentives for savings were destroyed. The reason: Chileans would loose more money through inflation than they would gain by inter e st earned on their savings. Be cause of the negative real interest rates, Chileans were encouraged to go into debt by borrowing. In an effort to prevent this, Allende placed restrictions on the amount people could borrow from banks. The harvest of these e conomic policies was bitter. In 1973, Allendes last year in office, Chiles gross domes tic product shrank by 5.6 percent.

The Pinochet Free Market Revolution government launched far reaching free market economic reform.This ac celerated in 1985 when Hernan Buch became Finance Minister. During its sixteen years in power, the Pinochet economics team Introduced a debt-for-equity program. Chile was the first Latin American country to pursue debt-equity swap policies aggressively, and its debt management remain s a model for the developing world. Through this technique, investors purchase part of a countrys debt from a creditor bank at a substantial discount and exchange the debt for local yrrenq, bonds, or state-owned equity shares from the debtor government A T h is all has changed. When Pinochet seized power in September 1973, his 4 Steve H. Hade, Chiles Economic Revival, paper delivered at a Heritage Foundation Conference on The Unknown Revolution: ChilesTransition to Democracy, Washington, D.C. September 16,198 8 5 For more information see Melanie Tammen, Energizing Third World Economies: The Role of Debt-Equity Swaps, Heritage Foundation Buckpunder No. 736, November 8,1989 6 Privatized public enterprises. Approximately 39 percent of Chiles gross domestic product was in the hands of the Allende government in 1973.

Today only 25 percent is controlled by the government. Pinochets privatiza tion drive sold to the private sector roughly 460 large state companies, worth some $2 billion, including banks, the steel, elec tric, and telephone monopo lies, agro-industrial plants, textile companies, mining interests and airlines.

Even the once insolvent Chilean social security system was placed in private handsin 1981.-This program led to the birth.of Chiles popular capitalism strategy, a policy which dispersed economic power among various sectors of the economy.This programs succ e ss was largely achieved by permitting public sector workers to use accumulated retirement funds to buy shares in privatized firms 1974, foreign investors are offered favorable terms regarding taxation, ex patriation of profits, legal protection, and respe ct for property rights. Es timate experts at the U.S. Embassy in Santiago: some $6 billion of foreign in vestment has been attracted to Chile since 19

85. By the mid-l990s moreover, foreigners are expected to commit some $19.75 billion in new capi tal to C hiles economy Reduced trade barriers. Pinochet was an early champion of the free trade area concept. Chile eliminated between 1974 and 1979 all non-tariff barriers and reduced tariffs to a flat rate of 10 percent for all products.

During Chiles 1982-1983 recession, however, tariffs were hiked to 15 percent for all products, where they remain today. Chiles outward-looking economic liberalization policies have transformed it from an isolated economy to one of the worlds most open and dynamic Lowered taxes. During the Pinochet years, Chiles tax rates were cut across the board.The top individual rate was dropped from 65 percent to 50 percent; the top business rate was dropped from 30 percent to 10 percent.

The value added tax (VAT) was cut from 20 percent to 16 percent.

The results of Pinochets reforms are evident today: inflation is down from approximately 1,000 percent in 1973 to 27.3 percent last year, and is expected to drop to 18 percent this year; Chile attracted over $1.3 billion in foreign in vestment last year, an all-time record representing 5 percent of Chiles $27.8 billion gross domestic product (GDP overall foreign and domestic private investment in Chile is expected this year to reach some 20.1 percent of its GDP, the highest in 20 years; exports , which represent close to 30 percent of the GDP, should continue to grow 20 percent a year and reach about 35 per Liberalized the foreign investment codes. Through Decree Law 600 of 6 Mark Svolos, Chile Stays onlrack, The Ties of the Americas, November 11 , 1990 7 According to the US. Commerce Department, U.S. profits on investment in Chile have been above 40 percent per year for the past four years 7 cent of GDP by 1995; un employment has fallen from 15.1 percent in 1985 to 5.7 percent last year and accordi n g to Aylwins Finance Minister Alejandro Foxley, the economyis expected to grow at a out five percent this year. Most Latin American countries now are trying imitate the Chilean economic success story. Many of them are seeking to sign free trade pacts with the U.S. and participate in a program of regional economic in tegration through the Enterprise for the Americas Initiative P Chile Foreign Investment Authorized and Materialized 1981 1888 1887 W88 W89 AyMn Stays a Free Market Course Except for the Communi sts, who comprise less than 5 percent of the elec torate, all major Chilean political parties back the Pinochet economic model.

The disastrous experience of neighbors Argentina, Brazil and Peru, which suf fered from inflation, economic stagnation and high unemployment following their transitions to democracy in the 1980s has convinced Chiles leaders that their free market reform program should not be hampered by costly state supported social welfare programs To the relief of Chiles business com munity, whi c h feared that Aylwin might bring back socialism, the new govern ment has continued to privatize state-owned industri s, encourage the private sector to diversify exports, and limit public spending. Nor is there any sign of a return to the steep taxes and r epeated currency devaluations practiced by the Allende government.o The Chilean economic miracle has impressed the worlds financial com munity. After only one weeks discussions in New York, last September Chile and a group of international banks, includin g Chase Manhattan Bank Nation al Association and Citibank, N.A agreed to restructure Chiles 4.8 billion 8 8 This flgure was provided by Foxley at a May 3,1991, Heritage Foundation lecture 9 Arturo Valenzuela and Pamela Constable, Democracy in Chile, Curren t Hisrq, February, 1991, p. 53 10 InterAmerican Opportunities Brief% Money Matters, The International Freedom Foundation ApriVMay 1991, p. 3 8 commercial debt.The result is a postponement of $1.8 billion worth of equity payments due in the next four years. The debt restructuring plan also gives Chile a break on interest payments, stretching out the time in which they must be paid from once every six months to once a year. An estimated $462 million will be saved each year as a result of these two measures. A s a sign of bankers trust in Chile, Santiago received on March 20,1990 320 million worth of bonds from the same group of international private banks that renegotiated-its debt in September1990.This marks the first time since the Latin American debt crisis began in 1982 that a goveyent has obtained credit because of its good international credit record governments efforts to attract new trading and investment partners abroad.

Chiles traditional partners are Argentina, Australia, Brazil, Britain, France Germa ny, Italy, Japan, Spain and the U.S. Now Chile is seeking increased trade and investment opportunities with Canada, China, Mexico, the Soviet Union and other countries. The government hopes to stimulate with these new initiatives a 15 percent annual incre a se in such exports as wine, fruits vegetables, light manufactured goods, seafood, and fishery and lumber products, which account for 50 percent of Chiles total exports.12 Another sign of Aylwins commitment to a free market policy is his SEEKING A FREE TRA DE AGREEMENT WH THE US Since Chile has expressed its interest in negotiating a FreeTrade Agree ment (FIA) with the US., trade talks may begin prior to completion of the US-Mexico FTA.

There are five reasons why the U.S. should sign a free trade pact with C hile. A US.-Chile FIA would Reason #1: Launch Bushs Enterprise for the Americas Initiative. An FTA with Chile would be the cornerstone of a campaign to spur sup port for the Bush initiative; Argentina, Brazil, Peru and other South American states would no t want to isolate themselves from Chiles rapidly growing economy or from the eventual North American FreeTrade Area Reason #2: Promote long-term Chilean economic and political stability. A US.-Chile FTA would consolidate Chiles free market program and guar a ntee that reforms continue. The economic rewards generated in Chile by new jobs, additional foreign investment 11 Svolos, op. cir 12 Copper is Chiles primary export. It produces approximately one-quarter of the worlds supply, drawing in an estimated $4 bi l lion in 1989 9 Reason #3 Reason #4 Reason #5 and cheaper foreign goods, would generate support for the Ayl win administration and its free market policies Increase U.S. access to Chiles rapidly growing market. Chile is Latin Americas fastest groyhg market for U.S. capital equip ment, heavy machinery, computer and telecommunications equipment, engineering services, and chemical products Provide fhrther investment opportunities for U.S. companies in Chile. American companies, already have some $1.5 billion i n vested in Chile, mainly in banking, finance, insurance, invest ment funds, computer services, engineering mining, forestry agriculture, and telecommunications. According to the Com merce Department, U.S. profits on investments in Chile have been above 40 percent per year for the past four years. By lock ing in or improving Chiles favorable investment laws on tax treatment, property rights guarantees, and access to natural resources, an FIA would invite further U.S. investments Bolster the economic competi t iveness of both countries. Com petitions of U.S. and Chilean companies not only will improve in terms of Pacific Rim nations like Japan, South Korea, and the Republic of China onTaiwan, but also in terms of the European Community. The reason: American com p anies will be able to combine their technology and highly skilled labor with Chiles cheaper labor and resources to cut the prices of their products in the global market. The amount of capital available for U.S. and Chilean products will grow as global dem and for their products increases and their operations expand.

The U.S. and Chile signed a trade and investment framework agreement on October 1,1990, which paves the wayfor a U.S.-Chile FIAThe accord es tablishes a joint U.S.-Chile Council onTrade and Inve stment to monitor bilateral economic ties and to open markets further in both o ti on Accord ing, to a June 1 White House press release, agenda items for the, g~uncil in clude: cooperation in the Uruguay Round of multilateral trade negotiations in the Gen e ral Agreement onTariffs and Trade (GAW, increased market access, adequate and effective protection for intellectual property rights, in vestment policy, and the reduction of barriers to trade and investment in the 10 hemisphere. The Council-also will cons i der the-creation of-working group to address these and other issues.U Deputy U.S. Trade Representative Jules Katz told the Senate Finance Committee on April 24 that besides Mexico, Chile is the only other Latin American or Caribbean country whose economic liberalization efforts are at an advanced stage that would allow the [Bush] administration to consider negotiating a free trade agreement over the next two years.14 An FTA with Chile would not be difficult to achieve. The reasons: U.S Chilean relations ha v e been expanding for several years, Chile has a free market economy with low trade barriers, and an ITA would be a natural outgrowth of existing trends in trade. Trade be tween the U.S. and Chile totalled approximately 3.2 billion last year, up from $2.8 b illion i,n 1989 and $1.5 billion in 1985 U.S.-Chile Trade Balance US Millloni I 1800 1880 1881 1882 1883 1884 1885 1886 1987 1988 1988 Export8 lo US. Importi from U.8 Hmrltwo Dmt.Chmr1 Bourne: Fanion Trade Rchnloml Dmpartmmnl. Cmnrral Bank of Chllm The U. S. is Chiles principal trading partner, accounting for ab0 t 16 ercent of Chiles total imports and absorbing 22 percent of its exports.

According to the Central Bank of Chile, Chilean exports to the U.S. last year reached almost $1.46 billion. These export s consisted mainly of copper fresh fruit, gold, fresh seafood, wood products, ceramics, and some textiles lYP 13 Besides Chile, the US. has similar agreements with Bolivia, Colombia, Costa Ria, Ecuador, Honduras, and Venezuela, with others still under con s ideration. Chile is negotiating trade agreements with Mexico and Venezuela, and exploring the possibility of free trade talks with Canada and Colombia 14Inside the White House, May 2,1991, pp. 14-15 1schile Economic Tren& Report, Embassy of the United Sta tes, Santiago, Chile, November 1990, p. 19 11 Last year's U.S. trade surplus with Chile was $351 million, compared to $103 million in 19

89. U.S. exports to Chile, America's 34th largest market, totaled some 1.7 billion, an in crease of 18.5 percentfrom 19 89, and included heavy machinery, computer and telecommunications equip ment, chemical products, transportation equipment and consumer goods, includ ing beverages, clothing shoes d electronic equip ment Chile and Bush's Enterprise for the Americas Initiat i ve E Chilean Economic Growth 1984-1991 12 10 8 8 4 2 0 Parcant FreeTrade Area talks with Chile are only part of a larger campaign by the Bush Administration to expand free trade in Latin America and the Carib bean. On June 27,1990, BufP announced that he w as launching an Enterprise for the Americas Initiative. The U.S. seeks through the EAI to spur hemis pheric economic prosperity through expanded trade, increased foreign invest ment, and debt restructuring.ls The Bush plan has received strong support thro u ghout the Americas and was the main reason for his trip last December to Argentina, Brazil, Chile, Uruguay, and Venezuela. Chile was the first country to back the EAI, with Finance Minister Foxley pledging his support in a Washington press conference the d ay after the plan was announced 16 For more information see 'Trade and Investment Relations Between Chile and the United States During 1989 The Embassy of Chile, Washington, D.C June 1990, pp. 1-45 17 "Chile and US. Si Accord Seen Leading to Free Trade Pa c t The Wall S&et Jtnunul, October 2,1990 18According to testimony by Assistant Secretary of State Bernard Aronson at an April U,199l, Senate Foreign Relations Committee heariag, the EAI will help the U.S promote its other long-term interests in the Latin A m erica and the Caribbean, including "the strengthening oE 1) democracy, 2) political stability, 3) free market reform and stable economic growth, 4) anti-drug and terrorism cooperation, 5) environmental protection, and 6) regional cooperation to deal with p ost-Cold War crises and regional security. The EAI will help the US accomplish these goals because: 1) it establishes a closer-knit and more effective partnership with the countries in the region and 2) the economic growth which it stimulates will provide the resources to meet the goals of that partnership 12 Vast Market. If successful, the EAI will create a hemisphere-wide free trade area stretching from Alaska to Tierra del Fuego, on the southern tip of South America. A U.S.-Chile mA will put pressures o n other Latin American and Caribbean countries to negotiate FTAS with the U.S. and other countries in the region, and thus advance the EMS goal of a hemi sphere-wide free trade area.This could beachieved by a series of bilateral FMs, such as with Mexico an d Chile, or by the creation of regional free trade .blocs, such. as the Memmr .(for..southern.market Southern Cone Com mon Market consisting of Argentina, Brazil, Paraguay, and Uruguay.1g Be cause of Chiles free market leadership in the region, the Aylwin government will play a pivotal role in determining the success or failure of the EAI.

The Aylwin government, however, has made it clear to the Memmur countries that their free trade arrangement with Chile would not be feasible until they further reform the ir economies along free market lines. Chile could give free market expertise and technical advice to its neighbors launch ing new economic programs. By setting such an example, Chile can hasten the pace of regional economic reform which will make the EAI f easible ADVANCING INTER-AMERICAN SECURITY THROUGH U.S-CHILEAN COOPERATION Security cooperation between Washington and Santiago ceased in 1976 when the so-called Kennedy-Harkin legislation prohibited U.S. arms sales to Chile and banned all security assista n ce. This legislation arose from congres sional concerns over Chiles alleged human rights violations, possible spon sorship of terrorism, and the 1976 murder in Washington by the Chilean secret police of Orlando Letelier.The restrictions, however, were lif t ed last year following Secretary of State James Bakers December 1 certification that Chile is complying with internationally recognized principles of human rights, not aiding or abetting international terrorism, and is taking ap propriate steps to bring t o justice by all legal means available those indicted in the Letelier case. Bakers certification was required by section 726 (b) of the International Security Cooperation and Development Act of 1981, and clears the way for resumption of U.S. security ties with Chile.

Improved security ties are important to America and ChiIe. Communists within Chile continue to destabilize the government despite Aylwins democratic election and improved human rights program. Leading Chilean Congressman Albert0 Espina from the National Renovation Party (RN) told Heritage analysts this year in Washington that Chiles most critical problem 19 The presidents of Argentina, Brad, Paraguay, and Uruguay signed on March 26 theTreaty of Asuncion which formalizes an agreement to form a S o uthern Cone Common Market free trade area, to be completed by 1994, will have a population of 190 million and a total GNP of $416 billion 13 today is terrorism. As an example, he cited the April 1 terrorist assassination in Santiago of Jaime Guzman, a pro m inent Senator with the conservative In dependent Democratic Union Party (UDI) and a former close advisor to Pinwhet. Besides leading to greater death and destruction in Chile, a dramatic increase in terrorism also could fuel tensions between Chiles armed f orces and the Aylwin administration This kind of instability could jeopardize Aylwins free market reforms. And this could hamper Bushs EAI and diminish the prospects for free trade in Latin America The Terrorism Threat Public opinion polls in Chile show t h at terrorism is the top concern for over 30 percent of the Chilean people. Although it will not release the exact numbers, the State Department is on record that, Terrorism in Chile in creased significantly in 1990, notably since the March 23 inauguration of [Ayl win Mainly responsible are radical leftist Chilean splinter groups. The primary assailants are the communist-affiliated Manuel Rodriguez Patriotic Front (FPMR) and the LautaroYouth Movement (MJL).

Chiles largest terrorist group, the FPMR, was formed in 1983 and has a suspected membership of some 500 to 1,000 cadres. Its leadership is un known.The FPMR is associated with the Chilean Communist Party (PCCh and has received weapons and urban terrorism t raining from Cuba and other communist countries since the early 1980s. According to the Chilean govern ment and U.S. intelligence officials, these countries have sent such weapons as M-16 rifles and rocket launchers left behind by the American forces afte r the Vietnam War, as well as Soviet-made small arms, grenades, grenade launchers and AK47 rifles to the FPMR. The FPMR wants to expel all U.S influence from Chile and create a communist, pro-Soviet regime.

The Santiago-based MJL was created in 1982 and ha s several hundred hard core supporters. They are Marxist-Leninists and likely receive ter rorist training from Cuba and the Sandinista Party in Nicaragua. The MJL is a violent, anti-American group that advocates the overthrow of Chiles democracy. Accordin g to Chilean security officials, its leadership comprises radical leftists and known criminals.They tend to infiltrate and work most closely with radical students and the urban poor.They have assassinated policemen, robbed banks, bombed buildings and burne d churches.

South American country most plagued by terrorism! The State Departments Pattems of Global Terrorism: 1990 report asserts that Chile topped the list of nations worldwide where anti-U.S. attacks have occurred with 61 incidents in 1990 alone. Whil e most terrorist assaults have been Anti4J.S. Attacks. Chile comes in third, behind C lombia and Peru, as the 20 Pattems of GI& Temuism: 1990, United States Department of State, April 1991, p. 19 21 Government Will Fight Terrow Andean Newsletter No. 54, M a y 6,1991, p. 1 I 14 minor and directed against the U.S. Consular Annex in Santiago, U.S Chilean educational and business centers, Mormon churches and other American property, two incidents appear to have been intended to cause U.S casualties.The first was an attack last November 17 in which a Canadian citizen was killed and a U.S. Embassy employee injured by a bomb at a softball game in Santiago. The second ocairred later that month when three American sailors and five other people were injured by a bomb a t a res taurant in-the port city-of Valparais0.-The.FPMR released statements in San tiago soon afterwards claiming responsibility for both murders.

Maor Counterattack The Aylwin government has mounted a major anti terrorism drive to meet the terrorist chal lenge. Aylwin announced a 150 per cent hike in spending for Chiles police forces, called the Cambineros, and a 400 percent increase for its Department of Investigations, Chiles counterpart to the U.S. Federal Bureau of Investigation.22 Aylwin also declare d on April 3 that he will not negotiate with terrorists. A few days later, on April 18, he announced the creation of a Public Security Coordinating Office, which ser ves as an advisory organization overseen by the president and top civilian offi cials to c o ordinate all security and public order measures.a By placing the anti-terrorism command under civilian control, Aylwin hopes to undercut the terrorists claims that the military is still carrying out human rights abuses.The Public Security Coordinating Off ice also will serve as a central command center to coordinate all anti-terrorism investigative, in formation, intelligence, and policy activities. This should improve the efficien cy of Chiles anti-terrorism campaign.

The Chilean miliw intelligence service s support Aylwins anti-terrorism drive.They have turned over files on the guerrilla groups to the police forces and the Department of Investigations and have offered the civilian authorities anti-terrorism intelligence and expertise. Since their role will be purely advisory, the military will not be able to interfere with the civilian governments investigations Chile and the War on Drugs Next to terrorism, Chiles most pressing security problem is the illegal drug trade. Chile increasingly is used by drug s m ugglers as a transit route for Bolivian cocaine bound for the U.S. and Asia. The principal method for smug gling narcotics is by hiding packets of cocaine and other illegal drugs in ship ments of Chilean seafood. Because they are perishable, containers of fresh swordfish, mackerel, and salmon and other seafood are not inspected by Chilean authorities or U.S. customs agents. Bolivian cargo on its way though Chile to the U.S. and Europe also is not inspected by Chilean authorities 22 Nathaniel C. Nash, Chile a n Plan Anti-Terror Drive, nte New Yo& Times, April 3,1991 23Andem Newsletter, No. 54, Mays, 1991, p. 2 15 Another drug smuggling method is for drug traffickers to use Chilean passports to sneak drugs into the U.S. The reason: The U.S. does not identifv Ch i le as a major drug producing country, and therefore does not monitor its citizens closely at U.S. airports and border crossings acetone are used for such purposes in Bolivia, Colombia, and Peru. There are no restrictions on purchasing such precursor chemi cals from the Chilean companies that manufacture, export, and import them.This makes them easy for the drug cartels to obtain.

Restricting Drug-Related Chemicals. Chile is trying to tackle this problem.

In February 1990 Chile ratified a 1988 South America n agreement on nar cotic substances that places restrictions on the sale and transportation of drug related chemicals. Further, the Chilean legislature is considering additional measures aimed at making these chemicals more difficult to purchase. New laws would mandate background checks on potential customers and place restrictions on transportation of the chemicals.

Aylwh also established in October 1990 a National Council for Drug Con trol to combat the nar&tics trade. It is headed by Vice Minister of In terior Belisario Velasm, a long-time leader within the Christian Democratic Party. Comprised of high-level Chilean government officials, this anti-drug council will advise Aylwin on measures to stop the illegal drug trade through Chile. Its battle plan in c ludes increasing significantly the number of police assigned to anti-narcotics units and the construction of four new regional anti-drug command posts, which will direct Chilean anti-drug efforts at the local level These command posts will oversee drug in terdiction efforts along Chiles borders, monitor roads and highways used to smuggle drugs, and mor dinate drug raids on safehouses and landing strips.

The U.S. is pleased with the tough anti-drug policies of Chile and has launched a modest anti-narcotics p rogram with Chile funded by the State Departments Bureau of International Narcotics Matters (INM This programs fiscal 1990 budget was $153,000, which was used for training and equipment for Chiles police forces, customs agents, and Coast Guard. The amount for fiscal 1991 was increased slightly to $200,000?5 U.S.-Chilean Military Relations human rights record, are beginning to improve because of Santiagos democratic and human rights reforms Chile also is a source of chemicals for processing cocaine. Ether a n d U.S.-Chilean security ties, which were severed in 1976 because of Chiles 24 Narcotics Country Profile: Chile, US. Department of State, April 18,1991 25 The United States Information Service (USIS) also has a small program to assist Chilean authorities i n reducing their domestic drug abuse problem. This program provides anti-drug education and information to Chilean youth, and is helping the Chilean authorities develop anti-drug public relations campaign 16 As a result, the door has been opened for renewe d U.S. security coopera tion with Chile. American military aid to Chile stands today at around 500,000, but is expected to be increased to $1.15 million next year will be used primarily for military education programs, spare parts, maintenance and manuals f or Chiles U.S.-manufactured aircraft. Following a March 1991 visit to the U.S. by Chilean Defense Minister Patricio Rojas, Chile and the Bush Administration agreed on a program of military education and training for Chilean officers.at vari0us.U.S. milita r y institutions. Among them are the U.S. National War College in Washington, D.C the Air University at Max well Air Force Base in Montgomery, Alabama, and the Naval War College at Newport, Rhode Island. This is a university program that provides advanced d e grees in military-related fields to mid-level Chilean officers weapons, military equipment, spare parts and manuals from the U.S. Pre viously they could not do this because of the Kennedy-Harkin restrictions on military sales to Chile. Chiles Air Force wa n ts to obtain spare parts, com ponents, and manuals for its U.S.-made F-5 nger fighters, A-37 Dragonfly ground attack jets, C-130 Hercules transport planes, and UH-1H Huey helicopters. The Pentagon and the Chilean Defense Ministry also are explor ing wheth e r to establish joint-information networks and information banks to exchange up-to-date information on national security studies and medical science and technology According to the Pentagon, Chiles armed forces can now purchase ENLISTING CHILE AS AN ENGINE OF REFORM IN LATIN AMERICA Relations between the U.S. and Chile are no longer under a cloud of suspicion and mistrust. With Chiles return to democracy, strong support for free market reforms, and improved human rights conditions, the two countries are poi s ed to cooperate on spreading democracy and free markets throughout Latin America ves U.S. support. The Bush Administrations primary objectives should be to create a U.S.-Chile FreeTrade Area, which will cement further Chiles free market program; enlist th e Aylwin government in a campaign to promote Bushs Enterprise for the Americas Initiative, which will create a Western Hemisphere free trade zone; and assist Chile in its battle against terrorist violence and drug trafficking Chile is today a model of refo rm and progress in the region and thus deser To achieve this, the Bush Administration should Pursue quickly a FreeTrade Agreement with Chile.

Chiles impressive free market reforms make it a good candidate for an FIA with the U.S. An FIA would eliminate all tariff and non-tariff barriers between the two countries. A free trade pact with Chile would create economic growth and jobs in both countries 17 The problem is that the Ofice of the United StatesTrade Representative and the Commerce Department have hint e d that they would prefer postpon ing negotiations with Chile until the U.S.-Mexico FI'A is completed, probab ly sometime in mid-1992.This would be a mistake for four reasons. First, the U.S. should strike an FTA with Chile while Bush has the special negot iating power granted by Congress.This so-called fast track authority will expire in 19

93. Second, negotiating an FTA with Chile would be fairly easy because its economy is deregulated,-.relatively. small,.and open to international trade.

Third, such majo r American labor groups as the AFLCIO have stated that they would not be as concerned over an FTA with Chile as they have been with Mexico. Finally, an FTA with Chile will encourage other countries in the region to seek similar agreements, not only with t he U.S but with their neighbors as well.

The signing by Santiago and Washington of a free trade framework agree ment last October 1 is an important first step toward achieving a U.S.-Chile FI'A. A trade and investment framework agreement officially launche s talks between two countries on lowering trade barriers and expanding investment.

This agreement created a U.S.-C hile Council onTrade and Investment which will monitor commerce between the two countries and lay the groundwork for freer trade and an eventual FI'A The principal objectives of the FTA negotiations should be: the broad ex pansion of commerce, services, a nd investment between Chile and the U.S the gradual elimination of tariffs and non-tariff barriers to trade, guarantee ing access to markets in both countries; and the creation of a U.S.-Chilean commission to arbitrate and resolve trade disputes.

Negotiati ons should cover all sectors of the economy, which include such areas as agriculture, banking, energy, financial services, mining and telecom munications. The key benefits to Chile would the creation of jobs, increased export earnings, more American inves tment, a more competitive economy and greater political stability resulting from economic growth and prosperity.

The benefits for the U.S. would be increased markets for American goods lower priced, better quality products for consumers; more jobs; and a m ore stable and economically prosperous Latin America Work closely with Santiago in promoting the Enterprise for the Americas Initiative.

For other countries in Latin America and theCaribbean, a trade pact be tween the U.S. and Chile will serve as a powerf ul incentive to adopt free market reforms, pay their debts, and again become attractive markets for U.S. exports. The EAI seeks to create a Western Hemisphere free trade zone stretching from Alaska to the southern tip of South America, making it by far th e world's largest, most competitive, and dynamic market. The U.S. hopes to accomplish this by entering into free trade accords with individual countries or blocs of countries that have adopted market reform programs 18 Chile is the logical candidate for ex p anding the EAI in South America. As the Latin American vanguard of the EAI, a U.S.-Chile FI'A could convince other regional countries to adopt free market reforms and liberalize their trade policies thus laying the foundation for the EAI goal of a hemisph ere wide FI'A To make this a reality, the Bush Administration should create a EAI task force of key officials at the assistant secretary level from the Departments of Commerce, Treasury,'State, DefenseiJustice and Education plus the U.S.

Trade Represenativ e and the Environmental Protection Agency, to meet monthly to develop U.S. policy on the EAI. As a first policy suggestion, this task force should call for the U.S. International Trade Commission to prepare a study on the likely benefits of a U.S.-Chile F I 'A. Creation of an EAI task force also would give the Latin American governments confidence that Washington is serious about the EAI. Latin American leaders have com plained in recent months that Washington is ignoring the EAI proposal Expand security coo p eration with Chile's military and police forces to promote democratic values and respect for human rights and to counter ter rorism Santiago's democratic and free market gains, setting back hopes for a free trade area agreement and the EAI. These groups a lso threaten the Chilean people and the security of the country. Chile, meanwhile is still learning to manage its &agile relationship between the civilian authorities and the military, which governed the country for over sixteen years.

It is in Washington' s interest to help improve relations between civilian authorities and the armed forces in Latin America's emerging democracies to prevent a return of military dictatorships in the region. U.S. programs to help the Chilean security forces combat terrorism a nd drug trafficking, besides giving them the technical expertise to cope with these problems have the added benefit of spreading democratic values among these institutions way, but is limited. Called the International Military Education and Training IMET i t is administered by the Pentagon and gives technical training and educational opportunities to foreign military and security personnel.The Bush Administration has asked Congress for $150,000 for the IMET in Chile This is not enough and is 09 a fraction o f what other Latin American and Caribbean nations receive, Chile deserves more because of the threat posed to its elected government by terrorist groups and its need to launch a thorough program of military reform designed to improve human rights and The C h ilean terrorist groups FPMR and the MJL could undermine The Bush Administration has a security assistance program for Chile under 26 Belize, a thy Central American nation with no terrorist threat, a far smaller military, and no need for military reform, r e ceks roughly the mue amount of IMET funding as Chile 19 foster closer military-Civilian relations. A larger IMET grant also would show good U.S. faith that the Aylwin government is on the right track. At the very least, the IMET program should be doubled f or fiscal 1993.This new money could be used for education and training programs, which would foster greater respect for civilian authority within the armed forces, improve leader ship capabilities, teach military tactics andstrategy, provide instruction i n the use of new military equipment, and teach defense logistics. Such training would. bolster-the. caliber-of Chilean officers and improve overall U.S Chilean relations by encouraging closer military contacts.

Bush also has requested from Congress some $1 million of military assis tance to Chile for next year. Chiles neighbors receive roughly the same amount of military aid from the U.S and it is needed to help Chile combat terrorism and drug traffickers.The money should be used to purchase spare parts an d manuals for Chiles U.S.-manufactured aircraft and helicopters, in cluding their F-5 7Zger fighters, A-37 Drugonfly ground attack jets, C-130 Her cules transports, and UH-1H Huey helicopters. If Chile stays on its reformist come and requests additional U. S . military aid, Washington could provide more helicopters, coastal patrol boats, communications equipment, intel ligence information, and military training. This military equipment need not be new. It could be old helicopters and patrol boats which are al ready paid for and are being retired from U.S. service. This way there will be no addition al cost to the American taxpayer.

Washington also should consider launching with Chile what the U.S. Jus tice Department calls an International Criminal Investigativ eTraining Assis tance Program with Chile. Administered by the Justice Department and the Agency for International Development, this program offers foreign countries police training and expertise. Chile is not part of this program, but it should be. With a s sistance from U.S. anti-terrorist and anti-narcotics experts, Chiles security and police forces could improve the effectiveness of their anti-ter rorism and counternarcotics programs. Training should be designed to im prove police patrolling, intelligence gathering, criminal identification and in vestigation skills. The Bush Administration, moreover, should invite mem bers of Chiles security and police forces to attend training and education programs at the FBI Academy in Quantico, Virginia, where they cou ld train in these law enforcement skills Work closely with the Aylwin government to defeat Chiles growing il legal drug trade.

The Latin American drug network is spreading to Chile.The international drug cartels increasingly are using Chile not only as a t ransit point for cocaine smuggled to the U.S but as a source for drug producing chemicals. To help the Aylwin government prevent the drug trade from gaining ground in Chile Washington and Santiago should expand anti-drug cooperation. If Washington fails t o do this, the drug cartels will continue to expand their traf ficking routes in the Americas to elude Washingtons anti-drug operations in the northern Andes, the Caribbean, and Mexico. The U.S. now provides only 20 200,O00 for counternarcotics assistance t o Chile, which is primarily used to train and equip Chiles police forces, customs agents and the Coast Guard This amount should be increased to $500,000, With this additional assistance Chile could expand its program to detect drug shipments along its bor d ers with Bolivia and Peru; expand training in narcotics identification, radar use and surveillance operations for anti-drug personnel; increase the number of Coast Guard vessels allocated to drug interdiction; and bolster anti-drug sear ches at airports a n d port facilities.The U.S. also should establish joint programs between Chiles security forces and the U.S. Drug Enforcement Ad ministration. American and Chilean officials could share technical intel ligence on illegal drug operations, and DEA personnel c ould serve as liaisons on Chiles anti-drug operations. DEA teams also could train Chilean police to conduct raids on suspected shipments and drug safehouses, and mount undercover operations to penetrate drug trafficking organizations. Helping Chile in thi s way will prevent the drug cartels from further shifting their smug gling operations to Chile from Bolivia, Colombia, Mexico, and Peru Stress Washingtons strong support for the Aylwin governments democratic reform program and free market reforms Bush and A ylwin agreed in their second meeting, held in Santiago on December 6-7, to support Chiles free market program, strengthen its new democracy, and improve bilateral security ties. Bushs trip to Chile was the first by an American president in three decades. I t is vital for the U.S. that the Aylwin governments program succeed. Not only would it serve as an engine of reform for others in Latin America, it would also bring greater economic and political stability to Chile, which is in Washingtons interest. If Ch i le is rewarded for its economic and political progress by strong U.S. support and interest, then other important countries in the region, namely Argentina and Brazil, might follow as well To demonstrate U.S. support for Aylwins reform programs, the Bush A d ministration should propose creating a Binational Commission, consisting of cabinet-level representatives from both governments, which would meet once a year to explore avenues of cooperation on the Enterprise for the Americas Initiative, negotiating a U . S.-Chile =A, security relations and other key issues. A U.S.-Chile commission could advise Bush and Aylwin on trade, investment, debt, counternarcotics, anti-terrorism, education, health and environmental issues. Sub-cabinet level working groups also coul d be formed and meet every half year.This group could tackle economic, security and social policy concerns in great detail, including forging an FIA, and devising a tough counter-terrorism program. This commission could serve as a regular forum for discuss i on and would demonstrate that U.S.-Chilean rela tions have returned to normal 21 CONCLUSION Chile may be at the most important political and economic point in its his tory. Not only has it launched a democratic reform program, it stands poised to negotiat e a free trade area agreement with America. If properly cultivated by the Bush Administration, Chile could become a strong advocate of the American Residents dream of creating a hemisphere-wide free trade area in the Americas.

The success or failure of Chi lean President Patricio Aylwins democratic and free market reforms is important to U.S. economic and security interests in Latin America. Chiles economic leadership in Latin America and in the rest of the developing world will be crucial in Americas plans to champion free trade, market economies, and democracy in the Americas. Seeing U.S support for Aylwins political and security program, other countries will be more likely to reform their economies along the Chilean model. Chiles suc cess in combating com m unist terrorist groups and the drug cartels also will encourage others in the region to do the same Sign of Faith. The Bush Administration can fortify Chiles gains and create strong incentives for free market reform in Latin America by signing a free trad e pact with Chile An FTA with Santiago will help institutionalize Chiles free market revolution and advance Chiles economic growth Bush also must work with Chile to promote the Enterprise for the Americas Initiative.This will assure the U.S. new and vibran t markets throughout the Western Hemi sphere and help spread economic prosperity and political stability in the region. Further by giving Chile security assistance, Washington will help San tiago defend its new democracy from extremists on both the Left an d Right.

These policies would represent a sign of good faith in Aylwins leadership.

By contrast, indifference or inaction by Washington could result in a setback for free markets, democracy, and security in the region In the long run Aylwins success or fa ilure will help determine whether all of Latin America remains mired in poverty, debt, drugs and violence, or joins the U.S Canada Mexico and other Latin American countries in creating a vast, prosperous and stable free market in the Western Hemisphere.

Michael G. Wilson Policy Analyst 22

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