El Salvador's Threat to U.S. Revival Jude Wanniski March 27, 1981

Executive Summary: For 35 years, American foreign policy has swung narrowly from Democrats who place primary emphasis on economic aid as a policy instrument to Republicans who emphasize military and diplomatic toughness. Reagan must break this losing pattern or the systematic deterioration of the U.S. position will continue, diverting Washington's attention and resources, holding back the redirection and revival of the U.S. economy. Central America is on the margin; El Salvador is a replay of Vietnam, with U.S. foreign policy, not the Soviets, the central culprit. Democrats push income redistribution and land reform; Republicans underscore military assertiveness. The cast of characters remains the same, while Haig is immobilized by his Old Guard bureaucracy. A supply-side solution would be the recasting of the Central American Common Market. Continued aimlessness threatens an increased drain on U.S. productive resources and capital, to bail out Third World trouble spots, a major cloud over U.S. financial markets.

El Salvador's Threat to U.S. Revival

Since World War II, American foreign policy has swung back and forth between Democrats who urge greater emphasis on economic solutions and economic foreign aid, and Republicans who urge greater emphasis on defensive military/security alliance and military foreign aid. In parallel, there has been a gentlemanly struggle among the Republican and Democratic wise men of the Council on Foreign Relations along this military/economic axis. The State Department careerists and Foreign Service officers have learned to live and advance in this environment. The bureaucracy has learned the rhythm and resists direction from the White House that cuts against it. The National Security Council developed out of White House frustration, from Kennedy on, with the intractability of the "Fudge Factory" or State Department. But it really made very little difference to foreign policy on how the organizational charts were arranged. As long as the intellectual framework remained fixed by the Establishment and Establishment wisdom, policy remained the same: Economic aid/military aid.

The arrangement has been a comfortable one for the players, but devastating in its results. Whatever aid flowed out, military or economic, meant business for the U.S. industrial and financial community. The turf between the U.S. and Soviet communism was seen to be occupied by consumers and suppliers of strategic raw materials. The pattern was roughly as follows: We transfer aid, in the form of goods, to Country X; either the goods are received as a grant, with strings attached, disrupting local patterns of trade, or as a low-interest loan of goods, which must be repaid via future taxes on the people of Country X; the government of Country X would at first seem to be a benefactor, having control over this largesse. The cream of the Country X establishment would use its talents presiding over the central plan while the cream of its youth would join the bureaucracy; thus denied the commercial talents of its most able and educated people, the economy would slump; social unrest would become evident; local revolutionary groups would form and make connection with Soviet benefactors; the U.S. would seek to bolster the Country X establishment via military assistance and more economic grants and loans. The price would be added to the Country X tab and the process repeated. There is no difference between George Ball and George Shultz.

Observe in this scenario that the Soviets are not predators, but carrion, feeding off our mistakes. The Kremlin is as elitist as ours. Even the Afghanistan invasion grew out of Carter's pacifist handling of Cuba's Russian brigades, weakness inviting rape. The great U.S. foreign-policy successes came in those places where Moscow originally outbid us in the aid game; Egypt and China both came to loathe their benefactor. The recipient of the greatest amount of U.S. aid in the Eastern Hemisphere, Vietnam, went down the drain. In Latin America, Chile took the prize. We showered her with $894.4 million between 1962 and 1975 and then saw the Communists voted into power.

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Will this foreign-policy rhythm be broken under President Reagan and Secretary Haig? The question is crucial, for it must happen if the Reagan administration is to succeed in redirecting the U.S. economy to a path of sustained economic growth. Unless the margins of the global electorate are brought along economically, international terrorism, revolutions and wars of "liberation" will make sure we cannot move either. The resources of the White House and attention of Washington is already being diverted from the economic renewal plan.

It is not clear that President Reagan knows that he must break the conventional pattern of foreign policy if he is to succeed. So far the rhythms are as usual. The focus of foreign policy has fallen on El Salvador, which is exactly where it should be. But Secretary Haig is simply shouting at the buzzards — the Soviets and Cubans — emphasizing military solutions to the Soviet "imperialist threat" to Central America. Haig and his Fudge Factory team seem oblivious to the source of the Central American turmoil. The source is not Moscow or Havana or the "right" or "left" in Central America. It is the U.S. Establishment itself, the Trilateralist consensus and General Haig's old friends on the Council on Foreign Relations which triggered the turmoil via President Carter. Nothing has really changed yet. When asked by Walter Cronkite if he saw the parallel in Vietnam and El Salvador, President Reagan was far too quick to say no. The President and Haig still seem to believe we lost Vietnam because we did not let our boys win, i.e., the problem was a deficiency of military power. The implication is that El Salvador is different; it's small enough, close enough for us to handle, and there won't be a deficiency of military power.

El Salvador is Vietnam, almost exactly, in a geopolitical sense, except for the missing colonialist overtones. The focus of U.S. foreign policy 20 years ago was on Vietnam, which is also where it belonged. It was Ho Chi Minh and communism versus Ngo Dinh Diem and capitalism — a contest our man was winning when President Kennedy's team took over. What happened was that for the Kennedy best and the brightest, it was not enough to send resources to Diem, economic or military. In accepting our "help," Diem was forced to follow our development plan, announced Jan. 4, 1962, which involved a 71 percent tax on "luxury goods," (which covered almost everything but rice), a tax on foreign exchange, and a new import duty — "the economic development and national defense tax." A major influence was Walter Heller, JFK's chief economic adviser, who had in earlier years studied the plight of the developing nations and concluded that their people were consuming too much and not investing enough. Thus, Heller's prescription that government should tax consumption and finance investment.

The plan was to pump the revenues into public health, education, agriculture and industrial development, but the South Vietnam economy immediately went into recession. Diem's balanced budget blew up in red ink, and that was that. Prices on non-agricultural goods soared, whipping the peasants to their knees in trying to make ends meet. To pacify the peasantry, to win back their minds and hearts, the U.S. "helpers" pushed harder on the "land reform" program. The "land to the tiller" program, designed by Professor Roy Prosterman of the University of Washington Law School, was "Jeffersonian" in concept. Give a man his own plot of ground and by gosh he will defend it! Prosterman, a birdlike fellow with a squeaky voice and no agricultural background, became the toast of Manhattan, Capitol Hill and Foggy Bottom with his brilliant idea, and so was sent off to Vietnam. The Viet Cong were promising the peasants land. We would beat them to it.

Under the plan, large landowners received government bonds in exchange for their property. The land was subdivided and delivered to the peasants, who agreed to pay the amount received by the landowners over 20 or 30 years. The landowners packed their worthless bonds and valuable capital and moved to Saigon or Paris. The peasants not only had to make payments on the bonds; they also lost the capital pool —the local "bank" provided by the landowner. Each community also lost the human capital of the departed landowner, his political and organizational skills. The invisible fabric of the community having been destroyed, it became easy prey for the Viet Cong as productivity slumped and bills came due. The program was pushed even harder, right up to the end of the war in 1974; the last pockets to fall to the VC were those that had resisted land reform. Prosterman, nevertheless, returned to New York and Washington, D.C., describing his great success. (As a journalist with the National Observer and The Wall Street Journal, I supported Prosterman's efforts throughout the entire period, swept along by his Jeffersonian visions.)

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In 1977, as Jimmy Carter took office, he could have thumbed through the McGraw-Hill "Political Handbook of the World: 1977" and found that while there were worrisome spots around the world, the five countries of Central America were solid. Costa Rica "is a vigorous supporter of the inter-American system, and its relations with the U.S. have been especially cordial." El Salvador "maintains cordial relations with the U.S. while refusing to enter into formal relations with Cuba or other communist countries." Guatemala's "relations with the U.S. in recent years have generally been cordial, and have resulted in valuable military and domestic assistance programs." Honduras' "relations with the U.S. are good." In Nicaragua, "The conservative and generally pro-U.S. outlook of the Somoza regime is reflected in a favorable attitude towards North American investment, and the strongly pro-western, anti-communist position in the U.N., Organization of American States and other international bodies."

The President could have also checked with the Inter-American Development Bank and found the region prospering. Real GNP in 1977 advanced over real GNP in 1974 in each of the five countries by the following percentages: Costa Rica, 21.2; El Salvador, 15.4; Guatemala, 18.6; Honduras, 11.5; Nicaragua, 14.5. The similar figure for all of Latin American was 12.6.

This information would have been beside the point for Carter, who was eager to bring change to the Third World, spurred by Andrew Young's zealousness and Zbigniew Brzezinski's geopolitics. In 1979, Jeanne Kirkpatrick (now Reagan's UN Ambassador) captured the essence of this messianic combination for the The Washington Star:

The centerpiece of Brzezinski's analysis was the same theory of modernization that serves as the foundation of Carter administration foreign policy. According to that theory, the whole world is involved in a process of revolutionary change which will in the end render all societies modern in their technology; secular in their public attitudes; rational in their conduct of public affairs, and interdependent. This process of modernization will, it is understood, upset traditional patterns and create instabilities. In the long run, however, the modernization process is as beneficient as it is inexorable. Therefore, Americans should contribute to change instead of resisting it, tolerate any 'superficial' affront to the national interest and understand that our true interest lies at the end of the rainbow, where modernized nations live peaceably with one another.

The cast of characters brought in to effect this global change were essentially the identical foreign-policy activists who had cut their teeth on Vietnam, directly or indirectly serving Sen. J. William Fulbright. Anthony Lake, director of the State Department Policy Planning Staff, brought in Richard Moose as Assistant Secretary of State for African Affairs. The two had worked for Fulbright and in 1969 were hired by Henry Kissinger for the Nixon National Security Council. The circle included Robert Hormatz, an economist on the Nixon NSC staff, David Aaron, Brzezinski's deputy in the Carter years, and Robert Pastor, the NSC Latin American specialist. Lake, now 43, in 1970 quit the NSC in protest over the bombing of Cambodia; in 1976, he headed the Carter transition staff for State, Defense and Intelligence, essentially running an employment service for like-minded folks.

The idea in Central America was to "break the mold" in order to invite change and modernization, which meant breaking the grip of the "oligarchy" (the region's equivalent of the Fortune 500) on the landless peasantry. In so doing, the U.S. could control change instead of losing out to Marxist Cuba. As in Vietnam, we would win the minds and hearts of the common folk by taxing the rich and giving to the poor before the Marxists could do it. The cutting edge in accomplishing this was Carter's "human rights" agenda.

Again, the parallel with Vietnam was precise. In 1963, after U.S.-dictated economic reforms had poisoned the Vietnam political economy, blame for military failure was ascribed to Diem's insensitivity to human rights, i.e., political dissent. The State Department signaled withdrawal of support from Diem in October, he was assassinated on November 1, 1963, and for 11 years the country bled to death.

The Carter administration was much quicker on the trigger. In 1977, the Castro-backed Sandinista guerrillas attempted a Castro-type mountain offensive against the Somoza regime and were easily beaten back. The Carter administration protested this violation of the "human rights" of the revolutionaries and asked Congress to halt aid to Nicaragua. Thus, open season on Somoza was signaled. A river of arms flowed in from Cuba to the Sandinistas and by July 1979, when Somoza's national guard was about to run out of bullets, U.S. Ambassador Lawrence Pezzullo advised him the U.S. would supply arms if he stepped down in favor of his associate, Francisco Urcuyo. Somoza agreed and flew to Miami. Urcuyo lasted 43 hours. Pezzullo practically ordered him to turn power over to the Sandinistas, on what he said were his instructions from the White House. On July 18, Urcuyo flew into exile in Guatemala. The mold had been broken in Nicaragua.

"Human rights" also broke the mold in El Salvador. In 1977, Gen. Carlos Humberto Romero won the presidency in elections everyone agrees were crooked. Demonstrators protested and the government security forces killed 40. For the next two years, while the U.S. harassed the Romero government for its human-rights failures, terrorist groups in El Salvador made big business out of kidnapping foreign businessmen and ransoming them off. In 1979, the terrorist groups became leftist guerrilla movements, Cuban-armed, bumping off peasant leaders in mass executions. On October 15, the same security forces that had killed the 40 demonstrators in 1977 threw Romero out and announced a 5-man Junta, which it said would embark on a program of land and other reforms. The State Department immediately said it was "encouraged" by the Junta's program, and a spokesman said that Junta seemed to be composed of "centrists and moderates."

On March 25, 1980, John Bushnell, the Deputy Assistant Secretary of State for Inter-American Affairs, explained to a House committee what had happened: "October 15, 1979, was a watershed date for El Salvador's five million people, who for decades had suffered under the rule of a tiny oligarchy that monopolized land, credit and trade, and manipulated the armed forces to repress opposition. On Oct. 15, in a bloodless military coup, young military officers joined with moderate civilian leaders to undertake a peaceful and democratic revolution..."

The reforms included nationalization of the banking institutions to insure the more equitable allocation of credit, nationalization of the export trade, and most importantly, a sweeping land reform. Where Deputy Assistant Secretary of State James Cheek seems to have promoted the financial reforms, the Carter administration got the very best to design the land reforms: Roy Prosterman.

On March 6, 1980, government troops seized the 376 largest farms in El Salvador, those exceeding 1,250 acres. The families were allowed to leave the country with the promise of government bonds to compensate them for their loss. Compensation, which has still not been made a year later, is supposedly to be made at 1976-77 valuations (averaging about $1 million each), less income tax (the 60 percent rate is encountered at $80,000).

There is a difference with the Vietnam experience. The peasants till the same plots, but the government dictates what they must plant. In addition, they are not permitted to sell their plots for 30 years — a key ingredient of the old feudal system. The government thus replaces the landowners, who now sit in Miami with their transferred capital.

The front page of Sunday's New York Times of March 15 informs us that El Salvador's land reform is "taking hold," that harvests "on newly formed cooperatives are about the same as they were last year under their former owners." The Times, though, prints nonsense. The government switched much of the confiscated lands from production of coffee, sugar and cotton — the big earners of foreign exchange — to corn, rice and beans. The net result is a colossal impoverishment of the economy — it costs more to grow the staples than to import them. The Times blithely passes over this point while remarking that the Reagan administration is considering a $200 million emergency aid package to get seed to the farms for spring plantings. The Washington Post of March 17 informs us that Nicaragua needs $300 million for the spring planting; the Sandinistas blame "counter-revolutionaries."

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Secretary Haig has been barking around Washington about Soviet imperialism in Central America, sounding more and more like Al Capp's General Bullmoose. But nothing is changed. It's not even clear that he's been able to shoo off any of the buzzards. For the record, we are foursquare behind El Salvador's "President" Duarte, who is a "centrist" because he stands between the communist guerrillas and the "right wingers," those who have had their property confiscated. Duarte, in fact, is a manic egalitarian. The State Department is also officially in support of the "land reform," although the Reaganites are scared to death that Duarte will push through Stage II, confiscating all farms above 250 acres. Even Prosterman, who designed the program, has now finally had second thoughts about proceeding with Stage II.

At State itself, John Bushnell remains Acting Assistant Secretary for Inter-American Affairs. James Cheek remains Deputy Assistant Secretary for Latin America. Lawrence Pezzullo remains Ambassador to Nicaragua. Jack Binns remains Ambassador to Honduras. Haig has appointed Bob Hormatz his Assistant Secretary for Economic Affairs, and Mike Rashish his Undersecretary for Economic Affairs. It might as well be the Carter administration. The economic advisers on international affairs are uniformly free traders. But so what? If the Reagan administration is going to break the foreign-policy patterns of the last 35 years — which is to say end the decline of the United States — it must see beyond the question of Japanese auto imports.

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It does not seem within the realm of possibility that the land reform can be unraveled to the status quo ante. Uncle Sam, though, does seem responsible for guiding the confiscation of the property, and may wind up paying the bills. We certainly should emphatically nudge the Junta into liberalizing the reform, ending the feudal system and permitting the peasants to sell their claims. If Haig manages to shoo off the buzzards, and Duarte can be pummeled into calling elections (we should get something for $200 million), a rollback of the banking and other "reforms" is essential if El Salvador is ever going to get off our welfare rolls.

At some point, though, neoclassical solutions to the economic backwardness of Central America should be addressed. President Kennedy almost had such solutions in his grasp. But as in Vietnam, he did not see that the economic policies he prescribed for the United States would also work for Central America— or anywhere else. The Alliance for Progress at least focused attention on the region. And Central America's five nations, which used to be one country 150 years ago — immediately after liberation from Spain —several times tried reunification, and did so again in 1961. They formed the Central American Common Market, a great idea.

The CACM still exists; it was surely responsible in part for the region's economic advances during the late 1960s and, less so, the 1970s. There were cooperative development projects, a lowering of tariff barriers, and intraregional trading mushroomed.

Unfortunately, the CACM was put together without the assistance of a supply-side economist. The potential problem of having five separate tax systems and five separate currencies was not observed. As the dollar inflation of the late 1960s and 1970s rippled across the countries of Central America, the commercial impact varied from one country to another. The 1969 so-called "soccer war" between El Salvador and Honduras nearly ended the CACM altogether. Honduras has the lowest tax progressions, El Salvador the highest in the CACM. In 1969, worker migration from El Salvador to Honduras in quest of opportunity shook the social fabric of each nation.

It simply isn't possible in an inflationary era to put together such an integrated market without rationalizing the tax and monetary systems. Reagan has talked about a North American Common Market, linking the United States, Mexico and Canada. But the spur for that notion was too plainly tied to interest in Mexican and Canadian natural resources. It's not going anywhere. U.S. sponsorship of a CACM program of tax compatibility and currency linkage should be viewed more favorably because the CACM already exists, and because the object would be to buffer Central America from the rippling effects of the U.S. inflation.

The potential of such an integrated bloc would be enormous. Private sector profit opportunities would become great enough throughout CACM that Salvador's population, about the densest in the hemisphere, would be an asset rather than a liability, and its dispersal throughout the region would not invite great tensions. It wouldn't take much to set off an economic boom. Guatemala already produces oil. If there were a genuine Jeffersonian land reform in Central America, it would involve the governments selling the lands they hoard. The Junta in El Salvador confiscated private property when it held 200,000 acres itself. And, if any single nation in all of Latin America would permit their citizens to hold the mineral rights to their property, there would be a demonstration of the resource abundance yet to be discovered.

But there is no sign at all that neoclassical foreign-policy solutions are being considered in the Reagan administration, least of all in Foggy Bottom. It may not seem all that important now, with so much crucial domestic legislation at the top of the agenda, but the failure to begin shifting away from traditional foreign-policy approaches will catch up with the Reagan administration sooner rather than later. And it gets expensive when it happens. David Stockman will not like it one bit when he is told, as he might be down the line, that we have to send food stamps to Nicaragua and El Salvador and a dozen other trouble spots to get them from being overrun by revolutionaries. Remember the price tag on Vietnam?