7. Special Report by the Operations Coordinating Board to the National Security Council 1

SPECIAL REPORT ON LATIN AMERICA (NSC 5613/1)

(Policy Approved by the President, September 25, 1956)

(Period Covered: From May 22, 1958 through November 26, 1958)

1. Purpose

To prepare an abbreviated Report to be used by the National Security Council in the review of policy towards Latin America.

2. Current Status

a.
Since the submission of the last OCB report—issued on May 21 shortly after the Vice President’s visit to South America—good progress has been made towards the development of an expanded program of U.S. Government operations designed to be more effective in achieving U.S. policy objectives for Latin America. But the underlying political and economic maladjustments in the area which were reported as the problems six months ago remain much the same and are not subject to rapid solution. The principal advances to date in US/Latin American relationships have been in the adoption by the United States of a more sympathetic and constructive interest in the problems of the area. Continued progress will depend on the ability of the United States and Latin American Governments to move smoothly from the phase of consultation and planning to the phase of concrete action which lies immediately ahead.
b.
The implications of the new steps described below as well as the continued problems facing the achievement of U.S. objectives in the area are that NSC 5613/1 should now be reviewed as was recommended in the previous report, and as is now in process.
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3. Recent Major U.S. Actions

The United States Government in recent months has taken key actions which contributed towards adopting a more constructive posture towards Latin America.

a.
Increased high-level attention to Latin America was reflected in the visits to the area of the Vice President, the Secretary of State, and Dr. Milton Eisenhower, as well as by the informal meeting of Foreign Ministers held in Washington in September.2
b.
Inter-American Regional Economic Development Institution. The United States decision to support a special regional lending institution for economic development met a long-standing Latin American desire.
c.
Regional Common Markets. United States participation in the decision to prepare a report on this subject for the Inter-American Conference, to be held towards the end of 1959, represented another step towards working with Latin America in solving the area’s problems.
d.
Commodity Agreements. The United States played a helpful role in bringing about a new Inter-American coffee producers agreement.
e.
Special Committee of the Organization of American States (OAS). The establishment of this body provided a mechanism for examining further economic proposals and assured that these would be handled within the framework of the OAS.
f.
Special Latin American Student Program was approved by the Operations Coordinating Board (OCB) in an effort to influence attitudes of Latin American university students towards a more sympathetic view of the United States.
g.
Financial Assistance. The United States has made considerable effort to encourage Latin American governments to confront more courageously their fiscal and balance of payments problems. Material assistance has also been given which included the approval during the six months period ending September 30, 1958 of loans amounting to $261.7 million from the Eximbank; $61.1 million from the International Bank for Reconstruction and Development (IBRD), and $11.6 million from the Development Loan Fund (DLF). Net disbursements (disbursements less collections on principal only) amounted to $184.5 million from the Eximbank and $25.3 million from the IBRD, and none thus far from DLF. Additional loans authorized since September 30, 1958 amounted to $86 million from the IBRD and $2.6 million from the DLF; net additional disbursements by IBRD were $826,000.
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Taken together, these developments (described in greater detail in Annex A) represent a considerable adjustment of the U.S. position towards economic development and other key issues. Latin Americans are now watching closely to see if the United States carries out what they consider to be the implicit promise of greater support to the development of the area.

4. Major Problems Confronting the United States

Meanwhile, the underlying economic and political maladjustments which were outlined in the last OCB Report of May 21, 1958 as affecting the attainment of U.S. goals remain much the same. These problems and maladjustments (further described in Annex B) may be summarized as:

a.
Economic. Despite some recent price rises, world prices and demand for the narrow range of basic commodities exported from Latin America remained below the level of recent years. This situation complicates their efforts to finance from their own resources what Latin America regards as a reasonable rate of economic development and rise in living standards. With demand for imports remaining on a high level, partly because of inability to control inflation, new strains were placed on the precarious balance of payments position of several countries. Monetary stabilization efforts in several countries were placed under added strain. Several of these governments continued to show a disturbing lack of effective actions in dealing with domestic financial instability and external payments problems and, in the area generally, there continued to be a lack of realistic economic planning and programming. Latin American governments among other things continued to show difficulties with preparing sound projects to present to various United States and international lending institutions. There also appeared to be some confusion among them as to the various criteria and policies of these banks. The interest of certain Latin American countries in maintaining large military establishments continued to have an adverse impact on their economies.
b.
U.S. Government Economic Activities. Despite the more constructive attitude adopted by the United States towards the area’s economic problems (see above) and U.S. loans to governments in financial difficulties, several steps taken during the period had an adverse effect on our relations with Latin America. The failure to renew the suspension of the U.S. copper import tax in July and the adoption of lead-zinc quotas in September, added to previous restrictions on the import of competitive commodities, represented to much of Latin American opinion a continued inability of the United States to follow liberal trade practices of benefit to them.
c.
Political instability, a continuing problem in much of the area, was illustrated by the expansion of the civil war in Cuba as well as by attempted coups in Bolivia, Haiti, and Venezuela, and remained a serious hindrance to economic development.
d.
Major misunderstandings by Latin Americans of the United States and of U.S. policy—such as the charge that the United States supports dictatorships—as well as lack of understanding in the United States of Latin American problems, continued to impede the development of fully harmonious relationships.
e.
Ultra-nationalist sentiment continued to present an obstacle to effective U.S.-Latin American partnership as well as to admission of foreign capital for economic development. In this respect, however, the decision of the Argentine Government to modify its petroleum policy by admitting U.S. firms represented a beneficial development.
f.
Soviet Bloc and Communist Party activity, aimed at fanning anti-American sentiment and stimulating more “neutralist” policies in Latin America, continued to make headway in the area despite some setbacks such as anti-Communist electoral victories in Brazil and Chile. The Communists continued to increase their influence over organized labor in most countries. Problems in disposing of commodities and related foreign exchange shortages continued to give impetus to desires to expand trade with the Soviet Bloc, while Bolivian difficulties in marketing tin were accentuated by Soviet tin dumping. The Communist Bloc continued to step up its political and propaganda emphasis on its economic and cultural offensive in Latin America and a number of new offers were made which may result in a future increase of Bloc trade with the area.
g.
Overseas Internal Security Programs. Only moderate progress was made in carrying out these programs, and Latin American governments generally continued to place a low priority on limiting Communist subversion and penetration.

[Here follows a list of attachments.]

Annex A

MAJOR DEVELOPMENTS

5. Increased High-Level U.S. Attention to the Area. Increased high-level U.S. attention to the problems of Latin America has contributed toward reducing the feeling in Latin America that the United States neglects its closest neighbors while lavishing its attention and resources on Europe, the Middle East and Asia.

a.
The Vice President’s visit to Latin America was followed by an exchange of correspondence in June between President Kubitschek of Brazil and President Eisenhower in which the former proposed an [Page 40] “Operation Pan America” to strengthen ties among the American republics and to devote greater attention to the problem of underdevelopment in Latin America. The President’s reply was carried to Brazil by the Assistant Secretary of State for Inter-American Affairs.3 In August, the Secretary of State—making a favorable impression on Latin American opinion by devoting time to Latin American problems despite the pressures of the Lebanese crisis—visited Brazil to discuss “Operation Pan America” and US-Brazilian relations with President Kubitschek. In September, at the Secretary’s invitation, the Foreign Ministers of the American Republics held a successful informal meeting at which they took a number of steps in the economic field and agreed to recommend that their government instruct representatives on the Council of the OAS to consider the desirability of holding more frequently informal meetings for Foreign Ministers and other high ranking government representatives.
b.
Meanwhile, in late July, Dr. Milton Eisenhower, accompanied by ranking officials of the Departments of State and Treasury and of the Export-Import Bank and the Development Loan Fund, completed a tour of Central America.4 Dr. Eisenhower met with some 1,200 Government, business, labor, agricultural, and intellectual leaders and explored thoroughly with them the current problems confronting their countries and the relationship of the United States to them.
c.
Progress has also been recorded during these months in briefing the governments of the other American republics through meetings between the Secretary of State and Latin American ambassadors and Foreign Ministers and through our Embassies in Latin America on the United States position and intentions with respect to major issues arising in the conflict between the free world and international communism, e.g., the Lebanon and Taiwan crises. While these measures necessarily fall short of the aspiration of some Latin Americans for full consultation and participation in the formulation of the United States decisions on major world problems, they are making an important contribution toward reducing apprehensions of Latin Americans that decisions affecting the security of the Western Hemisphere are made without taking their interests and views into account.
d.
Special efforts were also made to inform and consult with Latin American governments on U.S. decisions and policies of special interest to them. Prior to the public announcement on September 22 of the [Page 41] imposition of quotas on the import of lead and zinc into the United States, the Latin American governments most immediately affected—Peru, Mexico, Bolivia and Guatemala—were privately informed at a high level, and although this did not prevent an adverse reaction it removed any bases for complaint that they were forewarned. Advance consultations were also held with Venezuela regarding the impact on that country of restrictions on oil imports.
e.
The program of bringing Latin American Chiefs of State and other leaders to this country is also going forward. Visits to Washington have been scheduled for President Frondizi of Argentina in January and President Lemus of El Salvador in March. Frequent visits to the United States by Latin American Foreign Ministers and other Cabinet officers in connection with United Nations meetings and other activities have also afforded opportunities for personal contacts with senior U.S. officials.
f.
U.S. Senate Study. Reflecting high level Congressional interest in the area, the Senate Committee on Foreign Relations has been authorized to make a full and complete study of United States relations with the American Republics. A sub-committee under Senator Morse will make the study. In the conduct of the study the subcommittee may use the experience, knowledge and advice of private organizations, schools, institutions, and individuals, in its discretion. It is also authorized to call on the departments and agencies for information and services required for the completion of the study. $150,000 has been made available for this purpose.

6. Economic. In the economic field United States Government operations in the period since our last report have resulted in a number of measures adding up to a more positive approach toward Latin American aspirations for a greater United States contribution to their economic development. These measures included:

a.

Inter-American Regional Development Institution — The United States re-examined its position with respect to U.S. participation in the establishment of a special regional lending institution to help finance Latin American economic development which had long been an objective of the Latin American countries. Under the immediate impact of a decision to support a regional Arab development institution as part of the solution of this summer’s Middle East crisis, the Under Secretary of State for Economic Affairs announced on August 12 to the Inter-American Economic and Social Council (IA–ECOSOC) that the United States is now prepared to consider the establishment of an inter-American regional development institution which would receive [Page 42] support from all its member countries.5 Following up on this announcement, the United States took the lead at the September Foreign Ministers Meeting in obtaining agreement that a specialized committee of government representatives should be convened by IA–ECOSOC in accordance with resolution XVIII of the 1957 Buenos Aires economic conference, and meet in continuous session until it completes draft articles for the institution.6

This development, which was widely interpreted as a reversal of United States policy and a “victory” for Latin America, was generally well received in the other American Republics although the ultimate reaction will depend much on the lending policies of the bank, the role of the Latin Americans in determining them, and the extent of United States as well as Latin American contributions to its resources.

b.

Common Market—Following a UN Economic Commission on Latin America (ECLA)-sponsored meeting in Santiago, Chile, in February,7 which proposed the organization of a regional Latin American market, the past months have brought renewed indications of interest in a general common market as well as in establishing smaller, regional common markets in Latin America.

The Central American republics signed subject to ratification by national parliaments a multilateral free trade agreement at the close of the 5th Session of the Central American Economic Cooperation Committee, June 4–10, at Tegucigalpa.8 Colombia, Ecuador and Venezuela have established commissions to propose plans for the promotion of mutually beneficial trade among the three countries including possibly forming a regional common market.

In response to these signs of increased interest in Latin American regional markets, the United States played a more sympathetic role in encouraging their development and subscribed to the final communiqué of the September Foreign Ministers Meeting which provides for the submission of a report by the Inter-American Economic and Social Council (IA–ECOSOC) on regional common markets not later than the Eleventh Inter-American Conference scheduled to be held in Quito late in 1959. The United States also made known that it was prepared to assist financially in the establishment of sound industries, through [Page 43] appropriate agencies, under suitable conditions, with a view to promoting enjoyment of the benefits of regional markets through public and private investment.

c.

Commodity Agreements—After prolonged negotiations under the auspices of the Coffee Study Group failed to bring an agreement on joint marketing controls binding both Latin American and African coffee producing countries, the Latin American producers signed a new inter-American producers agreement on September 27, 1958 to replace the Mexico City agreement which expired on September 30, 1958. The new agreement is based on retention of a fixed percentage of production, as was the Mexico City arrangement, with quantities varying from 5% for small exporters to 40% in the case of Brazil. The agreement was signed on September 27 by representatives of all 15 producing countries of this hemisphere, whereas last year’s agreement had only seven signatories. These countries provide about 80% of the world exportable supply of coffee.

African producers, with the exception of the British colonies and Ethiopia, were prepared to join an agreement establishing specific export quotas for each signatory, but were unwilling to agree to a retention formula. Brazil refused to accept a fixed export quota, and the other Latin American producers were obliged, because of Brazil’s preponderance in the market, to follow her lead.

The Coffee Study Group is continuing its consideration of the long-range problem of developing a better balance between supply and demand.

d.

Loans Extended to Latin America—As of September 30, 1958, the Development Loan Fund had approved in all six loans totaling $11.6 million for projects in Brazil, Honduras and Paraguay, and has under consideration loan applications totaling $65.7 million. There has not been time as yet for disbursements.

The Export-Import Bank, 37% of whose outstanding loans are in the Latin American area, approved loans amounting to $261 million in the six months ending September 30, 1958. Loan disbursements less repayments on principal for the six months ending September 30 were $184.5 million. Undisbursed commitments amounted to $644.5 million on September 30, 1958.

In the same period the International Bank for Reconstruction and Development approved loans amounting to $61.1 million. The net disbursements made by IBRD for the period were $25.3 million. Undisbursed commitments amounted to $177.8 million on Sept. 30, 1958.

The International Monetary Fund authorized drawings of $85 million to Latin America during the six months ending September 30, 1958. Drawings less repayments amounted to $39 million.

e.
Increase in Lending Authority Public Law 85–424, which increased the lending authority of the Export-Import Bank by $2 billion [Page 44] to $7 billion, was approved May 22, 1958.9 As of September 30, 1958 the uncommitted lending authority of the Bank amounted to $2.2 billion.
f.

Increase in Resources of International Monetary Fund and International Bank for Reconstruction and Development—At the request of the President, the Secretary of the Treasury10 in his capacity as United States Governor of the International Bank and International Monetary Fund proposed at the October annual meetings of the Fund and Bank at New Delhi prompt consideration by the Executive Director of the advisability of a general increase in Fund quotas, and an increase in the authorized capital of the Bank. The U.S. resolutions calling for such consideration by the Executive Directors were adopted unanimously.11 Member governments of the IBRD were invited to exchange views informally with the United States on the subject of the proposed International Development Association. It was indicated that further action by the United States would depend on the tenor of the views expressed by interested governments and on the results of additional study within the U.S. Government.12

Note: Additional loans authorized since September 30, 1958 amounted to $2.6 million from the DLF; $86 million from the IBRD; and $1.3 million from the IMF.

g.
Amendment to Tax Regulations—The Treasury has initiated an amendment of tax regulations so that the allocation of profits between domestic and foreign sources may proceed on a basis other than the formula now in the regulations if this would “more clearly reflect proper source of income”. First urged by Costa Rica and the United Fruit Company, the change in regulations would apply where there is no independent price for a commodity produced in one country and sold in another. Under the new regulations, a taxpayer may present its case for allocating a larger share of profits to its foreign operations than heretofore. If the United Fruit case is persuasive, financial benefits would accrue to it and to countries abroad in which it operates. This could be interpreted as a demonstration of the United States’ desire to promote the wellbeing of the countries affected.
h.
Master Program Book—A programming process has been developed by ICA, with the approval of the Department of State, for the FY 1960 submission for the Mutual Security Program which represents [Page 45] a basic innovation for Latin American USOMs. A Master Program Book for each country has been developed which, in the context of over-all U.S. policies and objectives identifies problems and conditions in the field of economic development which face these objectives, and then activities which address the problem and conditions. The Master Program Book is conceived as a country team effort periodically to examine in each country the requirements for, and availability of, resources from all sources (local, foreign and U.S. resources, both public and private, and among U.S. resources, non-MSP as well as MSP) to deal with those problems in a country which must be solved if U.S. objectives in relation to that country are to be achieved. It is not intended to modify the project approach for assistance to Latin America.
i.

Shift in Argentine Petroleum Policy—A noteworthy development with reference to the sustained United States policy of not making public funds available for development projects for which private capital is available on equitable terms, was the Argentine Government’s action in negotiating with United States oil companies and other private firms with the result that on July 24, modifying Argentina’s opposition to investment of private foreign capital to develop its oil resources, President Frondizi announced agreements with foreign private companies, involving nearly $1 billion of foreign capital in the development of the petroleum industry. Most of these agreements were not definite contracts but require further steps to reach definite implementation. They involve United States interests (about $900 million) and West German and Belgian companies. In addition Soviet Russia has offered and Argentina accepted on October 27 for future delivery petroleum equipment valued at 400 million rubles (officially $100 million), to be repaid by Argentine products.

The Argentine announcement on petroleum development had an appreciable impact on Brazil’s thinking on its nationalistic economic policy. Fears of Argentine predominance in the region were expressed. The Brazilian Government, still unwilling openly to face a modification, again raised with Secretary Dulles the possibility of U.S. Government financing for Brazilian petroleum development. However, a public opinion poll in Brazil showed 31.9% of 16,737 replies in favor of joint exploration by Petrobras and national and foreign interests; 20.4% in favor of Petrobras and Brazilian private interests only; and only 11.3% in favor of Petrobras only. Nonetheless, the elements which have traditionally supported Petrobras have reiterated their intention to support the national oil monopoly.

7. Information, Educational and Cultural Activities—Among information, educational and cultural activities, the major developments were the appropriation by the Congress of an additional $2 million for Educational Exchange Activities and the approval by the Operations [Page 46] Coordinating Board (OCB) of a special Student Program for Latin America. The aim of this program is to improve the attitude of the Latin American students toward the people and policies of the United States, and in a relatively short time to influence them to support friendly relations between their countries and the United States. The university students were made the subjects of this intensive program of pro-United States orientation because the students are taking not only an active and direct role in political affairs but also provide a key element of the increasingly numerous and influential intellectual groups in Latin America. The planned expenditure of the student program was a minimum total of $7,328,837 and a maximum of $11,495,307 in FY 1959. This included the additional appropriation of $2,000,000 mentioned above. In addition, the Department of Defense plans to spend a total of $13,764,200 in FY 1959 for its Latin American training program.

8. Student Program—Salient features of the Student program include:

a.
Seminars for Latin American students on U.S. and Puerto Rican campuses.
b.
Sending U.S. students to Latin American universities.
c.
Increasing the grants for the exchange of U.S. and Latin American professors.
d.
The encouragement of Puerto Rico to increase exchanges of students and professors with the Latin American countries.
e.
Extension of Binational Center activities onto university campuses, including the establishment of new branch centers where these are deemed essential.
f.
Increasing the variety and number of U.S.-authorized textbooks available to Latin American university students in key subjects.
g.
Selected assistance in the improvement of plant and equipment of Latin American universities subject to approval under ICA programming.

Detailed planning for the use of $2 million appropriation and implementation of the special student program has been completed. Some projects are already under way. Additional projects are being considered by a subcommittee of the Latin American Working Group.

9. Military—The United States has continued efforts to develop current and future U.S. military programs in Latin America in consonance with national policy and objectives. The immediate objective continues to be to gain and maintain the acceptance and understanding by the Latin American countries of the role that the U.S. visualizes for them in the defense of the Western Hemisphere.

a.
Review of Military Plans—The Joint Chiefs of Staff reviewed bilateral military plans with Latin American countries taking into account the latest U.S. national policy. Proposed revisions to the plans serve to emphasize the role of the Latin American military establishment [Page 47] in contributing to Western Hemisphere defense, through the defense of the coastal waters, ports, and approaches thereto, bases, strategic areas and installations located within each nation’s own territory, and routes of communications associated therewith, and to remove provisions which commit certain forces to the sole task of assisting in the protection of the Panama Canal.
b.
Military Rights in the Latin American Area—Military discussions with Brazil arising from the Fernando de Noronha Agreement have continued within the Joint Brazil–United States Defense Commission. On July 18, 1958, the United States offered to Brazil military equipment valued at $87.5 million. This proposal, which was proffered in the expectation of providing final settlement of Article 6 of the Noronha Agreement, received general (unofficial) approval by Brazilian Air Force and Navy authorities, but was not fully satisfactory to the Brazilian Army. The Brazilians accepted the offer and the Fernando de Noronha negotiations can now be concluded.

No progress has been made with respect to U.S. proposals to revise the Mexico–United States Defense Plan, to reflect U.S. requirements in the area of Air Defense operations, rights and agreements. Realizing the requirement for greater security measures in the Mexican-United States border area, the reluctance of Mexico to discuss mutual security matters in the joint Mexico–U.S. Defense Commission is a subject of much concern to U.S. military agencies.

10. The Overseas Internal Security Program (OISP)—Little progress was made during the reporting period on the implementation of the courses of action listed in the OISP Annex to the Latin American Operations Plan, dated January 17, 1958, except in Brazil and Bolivia. While an organization has been established in Guatemala to combat communism, it is too early to judge its effectiveness. In Chile no further action was taken pending the fall elections and the installation of a new government. In Brazil the National Intelligence Agency referred to in the OISP Annex has been established though it is not yet effective. Also in Brazil a new program ($124,000) has been proposed for consideration but no further action was taken with respect to the traffic survey for Sao Paulo or the other proposals. In the general field of internal security, surveys were initiated in Ecuador, Panama and Costa Rica but programs have not yet been agreed upon. A decision by the Director of ICA,13 not yet reviewed by other agencies, to restrict the supply of equipment under the OISP program for demonstration and training purposes (subject to exceptions under special conditions) [Page 48] has implications for current programs which contemplate a grant of equipment.14

Annex B

MAJOR OPERATING PROBLEMS AND DIFFICULTIES FACING THE UNITED STATES

11. The six months since our last report have brought further illustrations of the basic economic, political, psychological and other problems which affect the attainment of U.S. operational goals in Latin America. The magnitude of these problems, the principal of which are summarized below, should dispel any expectation that the steps recently initiated by the United States will of themselves provide quick solutions to the deep-seated maladjustments of the area.

12. Political and Economic Aspirations. Since the close of World War II, the Latin Americas, in common with peoples of other underdeveloped areas, have increasingly aspired to higher living standards, industrialization and other symbols of economic development, greater popular participation in government, and greater civil liberties. These popular aspirations for a better life are a natural consequence of urbanization and improvements in communications and education which have made Latin Americans increasingly aware of the standards achieved by the industrialized nations. They have been greatly accelerated by the practice of local political leaders as well as by communist propaganda of presenting these aspirations of the public as achievable goals. The area’s rising aspirations are also to some extent the product of idealism stimulated by two World Wars which accentuated the rights of individuals to freedom and participation in government and the rights of nations to freedom from external political and economic domination. However, in Latin America—as also in other areas— these aspirations have increased a great deal more quickly than the practical possibilities of attaining them as quickly as desired. Even if the Latin American countries should develop the unity and self-discipline necessary to make the most of the resources, and even if these are supplemented by resources from abroad, a gap will continue to exist between their aspirations and accomplishments.

13. In the resulting frustration, Latin Americans have inevitably become more sensitive to the actions of the United States, tending to judge everything that does not in their eyes contribute sufficiently to the achievement of these aspirations as obstructionism. Underlying [Page 49] these frustrations is a concept held by large segments of Latin American opinion that the United States—rather than the Latin American peoples and governments themselves—is primarily responsible for the solution of Latin American economic and political problems. Since the United States Government has no practical way either of deflating ambitions which are not immediately achievable or of fully satisfying them, its pronouncements and policies have sought both to encourage the Latin Americans to accept responsibility for their own economic development while at the same time accentuating U.S. willingness to assist in the process by providing technical and other assistance to Latin America. In practice, it has been extremely difficult to strike a balance between these two components. Experience has shown that Latin Americans frequently react negatively to exhortations from the United States to put their houses in order, especially when made in public, yet external pressure from the United States and international lending agencies has made an important contribution to such development of sound fiscal and economic policies as has been recently made in the area. Similarly, Latin American responses to announcement of U.S. economic policies have fluctuated between exaggerated expectations of large-scale U.S. underwriting of the area’s modernization to hyper-critical condemnation of the United States disregard for Latin American needs. In this atmosphere, we have not found—and it may not be possible to find—an approach which will entirely meet the problem of identifying the United States satisfactorily as a wholly constructive force in the area.

14. Major Economic Problems. A series of adverse economic developments have sharpened Latin American discontent with the state of their economies. Taken together these developments represent a decline in the area’s rate of economic growth at a time when the population is rapidly expanding.

a.
Balance of Payments and Inflation. Latin America’s export difficulties, coupled with rising demands for imports, have produced sizeable unfavorable trade balances, and inflationary pressures have contributed heavily to this situation in much of the area. Between 1950–1957 the area’s exports of goods and services rose by 22.9% while its imports—stimulated by population increases and industrialization as well as by inflationary fiscal policies—of these items rose 56.5%, measured in 1950 prices. The United States, aided considerably by the International Monetary Fund (IMF), has made substantial effort to encourage Latin American governments to confront more courageously their fiscal and balance of payments problems. It has also given considerable material assistance, some 42% of the Eximbank’s disbursements since 1953 having consisted of credits designed to give general support to import requirements of the countries concerned from the United States and thus aiding the difficult balance [Page 50] of payment problems. However, under domestic political pressures (especially reluctance to hold down wages and thus to oppose aspirations for higher living standards), many Latin American governments have shown timidity about taking measures to check inflation and inability or unwillingness to institute sound fiscal and economic policies. The Bolivian and Chilean stabilization programs are running into serious troubles and inflation has been continuing, especially in Argentina and Brazil.
b.
Commodity Problems. Seventy-three per cent of Latin America’s exports consist of petroleum, coffee, sugar, non-ferrous metals, cotton, grains, bananas, and wool, and the area depends principally on these to finance imported items for current consumption and economic development. In general, world market conditions in 1957–58 have not been favorable for these products, although the economic upturn in the United States has recently been reflected in increased prices. In some cases, action taken by the United States in protection of its own producers or processing industries have appeared to Latin Americans to add further injury to a difficult situation. Petroleum, 26% of Latin America’s foreign earnings, is the only major export of Latin America which has enjoyed relatively stable prices, but discontent about U.S. voluntary import restrictions on petroleum is contributing to demands for a much larger Government share in profits of the oil industry. In the case of coffee, 20% of Latin America’s exports, mid-1958 reports indicate increasing coffee surpluses due to anticipated significantly higher production in the next two years with no foreseeable parallel increase in exports or consumption. The Inter-American Producer’s Agreement, which the United States helped to work out (see Para. 6. c, Annex A above) may serve to bolster prices for another year, but no fundamental attack has yet been made on the problem of oversupply. In the case of non-ferrous metals (7%), copper is currently recovering from a 1957–58 depression in prices but market fluctuations have been a persisting source of dissatisfaction. On July 1, the United States again imposed a 1.7 cents per pound tax on copper imports, which had been suspended for some years. In the case of lead and zinc, whose prices have declined, the United States, on September 22, imposed quotas limiting imports to 80% of average. The economic effects will be felt principally by Bolivia, Mexico, and Peru. In the latter, particularly, public and official reaction was markedly anti-U.S. In the case of tin, Soviet dumping in 1957–1958 added to the softening of the market following the suspension of U.S. stockpiling and brought a sharp decline in prices which threatened to undermine Bolivia’s economy and stabilization program. In the case of wool (2%), Uruguay, partially due to its own exchange practices, faced difficulties in marketing wool in the Free World and turned to the Soviet Bloc to dispose of its surplus. The countervailing duties on wool tops imposed by the [Page 51] United States in 1953 continued to be a political issue despite the fact that the United States offered to remove this duty at any time that Uruguay could show that their exchange practices did not have the effect of subsidizing these exports. In the case of cotton (4%) and grains (3%), world market conditions have not improved and there is some tendency to blame United States sales of agricultural surpluses.
c.

Capital Movement. The annual gross flow of foreign capital—official and private—into Latin America has risen markedly in recent years from $1,610 million in 1956 to $2,167 million in 1957, while the net flow rose from $1,040 million to $1,587 million in the same period. A large share has been channeled into the extractive industries, especially Venezuelan oil, which accounted for about one-third of the 1957 total. Excluding Venezuela from both gross and net figures, the United Nations Economic Commission for Latin America (ECLA) estimated a net capital inflow of $826 million for 1957. These figures include private direct investment, medium-term private credit, and short-term credit, as well as official loans and grants. Of course, all of this flow does not directly finance new productive investment. In many countries the climate for private U.S. investment remains unfavorable, although, as indicated elsewhere in this Report, there were some signs of improvement in Argentina.

The Development Loan Fund (DLF) has not made a significant contribution to the area’s requirements for capital assistance. As of October 3, 1958, $11.6 million had been approved for six projects in three countries (see Para. 6. d. above). Forty-seven per cent of all loan applications withdrawn from consideration by DLF were applications from Latin America and only 4% of the loan applications under consideration by the Fund were from that area. The reasons for the small amount being loaned by the DLF to Latin America are complex, involving, inter alia, the fact that relatively few documented applications have been presented from Latin America, the lack of soundness of many of these applications, the availability of funds from other private and public sources, and the relative priorities assigned the other areas for the available funds. But the fact remains that the DLF has not developed into an important instrument to meet Latin American economic problems. In the same period, $149 million in DLF loans were approved for South Asia, $48 million for the Far East, and $22 million for Africa, although account should be taken of the fact that Eximbank has concentrated on Latin America.

d.
Rates of Economic Growth. During the immediate post-war years, under the impetus of strong foreign demand for the area’s products and the expenditure of wartime savings, Latin America achieved a significant rate of economic growth. From 1945 to 1950, the annual increase in per capita gross national product averaged about 2.5%, measured in 1950 prices. In 1956–57, the comparable figure [Page 52] declined to 2.1%. Moreover, many of the countries and large segments of the population were untouched by these advances, which were unevenly distributed. The higher rates of growth in Cuba, Mexico, and Venezuela had an important effect of raising the overall average in both periods. There were also wide fluctuations in rates of progress (1952–3 and 1956 were years of stagnation) due principally to fluctuations in the markets for Latin American exports. Agricultural production for the area as a whole has barely kept pace with population growth. It appears that there has been little or no growth in the real earnings of unskilled urban workers, even in some countries where the gross national product has risen substantially. Such factors, while necessarily giving a superficial impression of an extremely varied and complex situation in 20 countries, lie at the root of Latin America’s feeling that it is not making satisfactory progress.
e.
Problems Connected with Setting up Priorities, Determining Sources of Loans and Preparing Projects. The large number of public international and U.S. lending institutions, with differing criteria and requirements for economic data, has somewhat bewildered the Latin American governments as to which is the proper institution to apply for what project. These governments also find it difficult to collect and present the necessary economic data and to establish an orderly system of priorities for projects which they have tentatively examined but have not taken concrete form. These two difficulties bear a share of responsibility for the failure of Latin American governments generally to make fully effective call on funds available for loans. In order to overcome these difficulties some governments have engaged the services of U.S. private consultants and/or have made attempts at establishing centralized economic planning bodies. However, these solutions have nowhere been fully effective and there is no centralized point in any Latin American capital in which the process of developing projects, particularly the public sector, and establishing priorities can be coordinated with the activities of the U.S. Government and international lending institutions.
f.
Problem of Coordination. Latin American countries continued to have difficulties with the problem of coordinating borrowing of the dollar component and local currency component of project loans. The local currency component is of particular importance in some Latin American countries because imbalance, inflation and other problems restrict their ability to mobilize the local currency necessary to undertake projects in the public sector even when the foreign exchange component may be available from U.S. or international lending institutions. Consequently such countries are not in a position to initiate sound applications for projects which might otherwise make a contribution to economic development.
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15. Political Instability. Political instability continued to be a cause as well as a symptom of lack of fully satisfactory progress toward economic development and the establishment of representative governments. Since the last Report, Cuba has continued to be torn with domestic strife and, at this writing, there appears to be little prospect of orderly transition from the presidency of General Batista to a freely elected and stable government. In Bolivia and Haiti there have been active attempts to overthrow the elected governments. In Venezuela two abortive coups by military elements against the Junta which succeeded the dictatorship of General Marcos Perez Jimenez complicated the process of establishing an elected, representative government in elections scheduled for December, and gave further scope for the Communists who took full advantage of the situation to increase their influence rapidly. In Argentina, Guatemala, and Panama continuous intrigue and rumors of plotting reflected less than satisfactory progress toward constitutionality and stable governments. In Mexico, where the election of Adolfo Lopez Mateos to succeed President Ruiz Cortinez took place without event,15 the late summer was marred by politically-motivated strikes and riots through which dissident elements, including Communists, sought to impose extra-legal pressures on government policies.

In many of these countries, political instability has probably been a significant factor in the recorded slowing down of the flow of domestic and foreign private capital into developmental channels in recent months. This fact again illustrates that stable and orderly governments, responsive to the aspirations of their peoples, are among the most important prerequisites to progress toward meeting Latin American aspiration for more rapid economic progress.

In contrast, the election of Jorge Alessandri, the pro-American, free enterprise candidate as President of Chile,16 and the inauguration of Alberto Lleras Camargo as President of Colombia,17 represent solid advances, although each faced formidable economic and political problems. Earlier in 1958, some progress had also been made in Argentina, Venezuela, and Honduras toward the development of institutional and free governments; and, taken altogether, the trend of the movement in Latin America is away from governments based on de facto alliances between the military and a narrow segment of wealthy [Page 54] agricultural elements toward governments more responsive to the emerging urban middle classes and the increasingly influential and articulate intellectual elements.

16. Problems of Non-Intervention. For the past quarter century, in Latin America forcible changes in governments have characteristically been brought about by swift coups d’état in the capital city or by relatively short-lived revolutions. Consequently, apart from ad hoc measures for the protection of American lives and property, the United States has been able to deal with the situation within the framework of the inter-American system. However, the inter-American system has no adequate provision for dealing with situations in which central governments are not in control of the national territory. This was illustrated in Cuba by the “26 of July” rebel movement of Fidel Castro which last summer gained effective control of the countryside in the eastern part of the island. In June the rebels kidnapped 47 American citizens and have since presented a continued threat to U.S. personnel and property. Although the release of the Americans kidnaped was brought about by various pressures, the case illuminated the difficulties of dealing with this guerrilla-type activity—reminiscent of the days of Pancho Villa—with the techniques and policies which have been primarily developed in the context of dealing with or through governments in effective control of their national territories.

17. Misunderstandings of the United States, its policies and objectives also continued to be a major impediment to the realization of United States goals in Latin America. This serves to underline the need for U.S. Government agencies to contribute to a coordinated and vigorous explanation of what the United States’ aims are in the area and of what it expects the Latin Americans to contribute to the solution of the individual and common problems of the nations of the area.

A review of the misunderstandings of which a few major instances are sketched below, indicated that appearances were involved fully as much as reality. The actions and aims of the United States were sometimes willfully distorted by the opposition to the United States, but in other cases our failure to win understanding and support of the Latin Americans was due to our not being sufficiently mindful of Latin American interests, emotional prejudices and sensitivities to assess fully in advance how our actions would be received. In other words, the U.S. problem was not only to be good but also to look good.

a.

The United States Supports Dictatorships in Latin America. This charge has a disturbing acceptance in Latin America especially among the articulate elements. It is particularly difficult to deal with, because (1) it is illogical in the sense that these same elements strongly hold to the view that the United States should abide by its non-intervention commitments and would strongly resent U.S. interference in internal [Page 55] affairs, and (2) it disregards both the U.S. record of combatting Nazi and Communist dictatorships and of giving material and moral support to popularly based governments in Latin America. Nonetheless, some of those opposed to dictatorships in Latin America feel that the entire pattern of U.S. relationships with authoritarian regimes indicates support for dictatorships. Among specific actions singled out as evidence of support are U.S. aid, particularly military training and assistance, to authoritarian regimes and personal attention given to dictators by the United States. Although Latin American governments of all kinds often themselves take actions which could be equally interpreted as support of dictatorships, Latin American opinion does not attach as much significance to them as to the actions of the United States which in this field, as in others, provoke intense reactions because of this country’s enormous power and influence in comparison to any Latin American country. Maintaining the proper balance of emphasis between observance of the non-intervention policy and taking appropriate occasions to identify the United States with Latin America’s aspirations for greater democracy is likely to remain a problem for United States policy for some time.

Some measures have been taken to clarify for Latin American opinion our support of the current emergence of more democratic regimes. The statement of President Eisenhower, on the occasion of the presentation of the credentials of new Venezuelan Ambassador expressing the United States’ good wishes for the establishment of an elected government in Venezuela was well received in Latin America and contributed toward dispelling this misunderstanding. More positive actions of this kind are desirable as and when appropriate occasions arise.

b.
The United States neglects Latin America while concentrating its attention and resources on Europe, the Middle East and Asia, remains a persistent complaint of Latin Americans only partially softened by the recent attention devoted to Latin America by the highest leaders of the U.S. Government (see Annex A, Para. 6, above). Despite such increased attention, however, the United States is likely to be subject to this criticism so long as the entire U.S. Government aid to Latin America remains a small proportion of the total that the United States extends to foreign countries.
c.
The United States has unlimited resources is also a concept which is tenaciously held in the area, leading Latin Americans to conclude that the United States “failure” to solve their problems of economic and social development is the result of American indifference or malevolence. Although some thoughtful Latin Americans have an intellectual grasp of the burdens imposed on United States resources by defense and foreign aid, many are unable to comprehend why the United States cannot, if it only would, devote an effort to Latin [Page 56] America of the scope of the Marshall Plan in Europe or of our aid programs in Asia in recent years. At the same time, it is not in the interest of the United States to admit to economic limitations in such a way as to give the impression that the United States is less able or willing to assist with their problems than, for example, the Soviet Union.
d.
Prices paid for Latin American commodities are fixed at low levels by the United States Government and/or large American corporations is another widespread misconception among Latin Americans, who also believe that the United States and American companies set artificially high prices on manufactured goods exported to Latin America.

The correction of these misunderstandings and misconceptions must remain a high-priority project for leading officials of the Government in their public pronouncements and actions and private contacts, as well as a continuing objective of the agencies of the Government concerned with the dissemination of information about the United States which will reach Latin American audiences.

Underlying these assumptions, it will be noted, is a concept held by large segments of Latin American opinion that the United States— rather than the Latin American peoples and governments themselves—is primarily responsible for the solution of Latin American economic and political problems. A correction of this concept—probably involving a more forthright assertion of the primary responsibilities of Latin American governments for their own welfare and of the necessarily limited manner in which we can help—has been accepted as a target by all agencies concerned.

18. Labor. Since the last Report on Latin America was prepared economic conditions of workers have continued to deteriorate through inflationary developments as well as unemployment caused by market weakness for basic Latin American export products. This and intensified exploitation thereof by leftist elements have resulted in discontent which has flared in numerous strikes and demonstrations, the most pronounced of which were in Mexico where pro-Communist leaders have been able to win an election in the important railway workers’ union. In Argentina the Peronistas seem destined to control the entire labor movement by virtue of a newly adopted labor law permitting only one registered union in each industry. In Venezuela the non-Communist trade unions have accepted the cooperation of Communists, considering that for the present the threat of dictatorship is greater to democracy and individual freedom than the Communists. The recent repeal of the Law for the Defense of Democracy in Chile gave greater scope for overt Communist actions and unless this trend is checked in the forthcoming Alessandri administration, Communism may exert greater influence over Chilean labor.

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19. Soviet Bloc Activities. Although actual Soviet Bloc trade with Latin America continued to decline (down 24% in value for the first six months of 1958 as contrasted with 1957), the Communist Bloc continued to step up its political and propaganda emphasis on its economic and cultural offensive in Latin America and a number of new offers were made which may result in a future increase of Bloc trade with the area.

In a characteristic maneuver, the Soviets—discovering that they were buying Uruguayan wool on the Netherlands market—transferred their buying operations directly to Montevideo and, while actually purchasing less wool, made substantial political capital by presenting themselves as saviors of Uruguay from the vagaries of the capitalist market while at the same time bringing pressure on Uruguay to import from the Communist Bloc.

In the information and cultural field—through such measures as arranging Latin American tours of the Bolshoi Ballet, Moscow’s “Dynamo” football team, and a large Chinese Communist acrobatic team—the Communist countries have sought to gain added prestige in Latin American opinion and to diminish the significance of Latin America’s traditional cultural ties with and dependence on the United States and Western Europe. Sino-Soviet Bloc radio broadcasting and publications activities have also increased. United States programs to expose and counter the Communist offensive require more coordinated and continuing attention by the agencies concerned.

20. Communist Party Activities. With the assistance of the Communist Bloc’s economic and cultural offensive, local Communist parties in Latin America have assiduously devoted their efforts to the primary aim of disrupting Latin America’s traditional friendly ties with the United States. In general, they—like the Communist parties in Asia, the Middle East, and certain parts of Europe—have tended to suppress revolutionary Communist aims and emphasized collaboration with nationalist, left-wing socialist and, indeed, any elements which might be expected to oppose United States influence. While Communist leaders in Latin America retain the Communist control of the state apparatus as their ultimate aim, they have increasingly in 1958 focused on the development in Latin America of “neutralist” governments on the model of Nasser’s Egypt, Nehru’s India, or Sukarno’s Indonesia as the immediate and more achievable aim of Communist tactics.

In Venezuela, profiting from their association with the overthrow of the Perez Jimenez regime, the Communists have in recent months sought with disturbing success to insinuate themselves as full partners in the successor “democratic” coalition and to influence that coalition into anti-American channels. In the Chilean presidential election, the Communists made common cause with the Socialists and gave their [Page 58] full support, suppressing Communist revolutionary objectives, to Senator Salvador Allende in the unrealized hopes of bringing to power an anti-American “neutralist” government there. In such varied countries as Brazil and Guatemala, Communists have aligned themselves with nationalist elements of the far right as well as of the left in order to limit the capability of local governments to pursue policies of firm support of the United States and to tempt them to adopt a neutral position in world politics.

21. United States Government Operations. From the U.S. viewpoint current Communist tactics pose a number of difficult problems. As a result of their suppression of their objective of forcible overthrow of non-Communist governments and their current emphasis on “parliamentary” tactics, Communists in a number of areas in Latin America were gaining increasing acceptability as “legitimate” political parties and their close alignment with non-Communist nationalist elements has met with a sympathetic response.

One result has been that the United States Overseas Internal Security Program (OISP) has not generally gained the interest and support of the Latin American governments which, with the exception of Bolivia, did not feel sufficiently threatened by Communism to overcome local political problems inherent in establishing new security organs. There were, for example, indications that some of the legally constituted law enforcement and military bodies, as well as the non-Communist opposition, resented and feared the introduction of new security agencies designed to combat Communist subversion, fearing they would be used (as they have in some cases) as political weapons under the control of the existing governments primarily directed at the political opposition as such, and function to the detriment of existing security organs. In Brazil, lack of high-level government interest in combatting Communist infiltration has retarded the development of the program. In Chile, President Ibanez’ recent decision to accede to the repeal of the Law for the Defense of Democracy, thereby re-legalizing the Communists’ activities, underscored the limitations on United States efforts to assist in the control of Communist subversive activities. In Peru, the hesitancy of the Government with respect to pushing effective legislation to control Communist activities and the inactivity of three successive Ministers of the Interior with respect to implementing recommendations of a U.S. survey of the internal security situation reflected the low priority given to anti-Communist measures.

It has thus become increasingly apparent that, if the United States hopes for success in aiding Latin American governments to combat internal Communist subversion, there must be greater public and governmental awareness of the nature and immediate objectives of current Communist tactics. To assist in their process, there has recently [Page 59] been instituted among the government agencies immediately concerned a special Task Force charged with the exposure, [less than 1 line of source text not declassified] of Communist activities as they relate to Latin America. To the extent that it is successful in bringing about a greater awareness of Communist operations in Latin America and of their conformity to Soviet objectives, it should prove easier to encourage Latin American governments to take a firmer stand against Communist activities in their countries.

22. Military Problems

a.
Inter-American Military Relations. Despite U.S. efforts to influence Latin American countries to limit the size and types of their military forces, there is a continuing problem of resistance on the part of Latin American countries to suggestions that they design and employ their military forces in consonance with the roles and missions of maintaining their own internal security, and furnishing a contribution to Western Hemisphere defense through defense of coastal waters, ports, and approaches thereto, bases, strategic areas, and installations located within each nation’s own territory, and routes of communication associated therewith. Relations with Cuba have been rendered particularly difficult by the U.S. Government’s decision to suspend U.S. arms shipments to Cuba, some of which have already been paid for. Additionally, this action has prompted the Government of Cuba to purchase arms from other Free World countries, notably the United Kingdom. In the Dominican Republic, following the failure of General Rafael Trujillo, Jr. to complete successfully the course at the U.S. Staff and Command School at Ft. Leavenworth, the scope and effectiveness of the U.S. Military Program was subjected to increased criticism in the Dominican Republic. The future of this program is unresolved, and US/Dominican Republic relations are strained.
b.
Latin American Interest in Excessive Military Equipment. It continues to be the general policy of the United States to discourage Latin American countries from acquiring military equipment through either grant or sale programs, which is not suited to the objectives envisaged in U.S. national policy and current strategic concepts. Despite the constant U.S. efforts in this vein, it can be expected that the desires of Latin American countries for such equipment will continue, as will their procurement from non-U.S. sources, principally Western Europe.
c.
Presidential Determination. Under an amendment to the Mutual Security Act (Section 105(b)(4)) proposed by Senator Morse, it has become necessary for the President annually to make a determination that the mission of Latin American forces assisted by the United States is important to the defense of the hemisphere and that U.S. military assistance is required to enable them to fulfill this mission. Documentation for the Presidential determination is now under preparation.
d.
Military Programming. Starting with fiscal years 1959 and 1960, increased emphasis is being placed in programming for military assistance to Latin America on developing anti-submarine warfare capabilities. In this connection a ship loan bill passed by the 85th Congress would allow the transfer of up to 19 ships to Latin American countries to assist them in this aspect of hemisphere defense.
  1. Source: Department of State, S/S–NSC Files: Lot 62 D 1, NSC 5613 Series. Secret.

    On August 29, the OCB Board Assistants agreed that since a review of NSC policy toward Latin America had been approved, an abbreviated special report pursuant to NSC 5613/1 in place of the regular report, scheduled for OCB consideration in November, would meet current needs and not require consultation with field missions in its preparation. (Memorandum by OCB Acting Executive Officer Roy M. Melbourne to the OCB, November 13; ibid., S/S–OCB Files: Lot 61 D 385, Latin America—Documents, 1958) The OCB concurred in the special report at its meeting on November 26, and it was transmitted to the NSC under cover of a memorandum from Melbourne to Lay, December 2.

    This special report contains four annexes, two of which are printed below. The Financial Annex and Annex C, “Sino-Soviet Bloc Activities in Latin America” are not printed.

  2. The informal meeting was held September 23–24; documentation is in Department of State, Central File 363; OAS Files: Lot 60 D 665; Rubottom Files: Lot 60 D 553; and Conference Files: Lot 64 D 559, CF 1117–CF 1121.
  3. The exchange of letters between President Kubitschek and President Eisenhower, dated May 28 and June 5, is printed in Department of State Bulletin, June 30, 1958, pp. 1090–1091.
  4. Dr. Eisenhower’s factfinding tour of Central America, as the personal representative of the President, took place between July 12 and August 1, 1958. A brief report on the trip, released by the White House on August 1, is printed ibid., August 25, 1958, pp. 309–310. See also Documents 58 ff.
  5. This statement by Under Secretary Dillon was issued by the Department of State as press release 463; it is printed in Department of State Bulletin, September 1, 1958, pp. 347–348.
  6. For text of the communiqué on this subject, approved at the informal meeting of Foreign Ministers in Washington on September 24, see ibid., October 13, 1958, pp. 575–576.
  7. Apparent reference to the ECLA’s working group meeting in Santiago, February 3–11; details concerning the meeting were transmitted to the Department of State in despatch 802 from Santiago, February 14. (Department of State, Central Files, 340.210/ 2–1458)
  8. Documentation on this subject is ibid., Central File 813.00.
  9. For text of the act, see 72 Stat. 133.
  10. Robert B. Anderson.
  11. Documents pertaining to the annual meetings of the IMF and IBRD at New Delhi, October 6–10, 1958, are in Department of State, Central Files 398.13 and 891.00.
  12. For text of a report on the proposed International Development Association submitted on behalf of the NAC by Secretary of the Treasury Anderson to the Senate Foreign Relations Committee on August 14, see Senate Document 45, $86th Cong., 1st Sess.
  13. James H. Smith, Jr.
  14. An OCB memorandum to James Lay, dated December 22, contains a brief updating supplement to the “Major Developments” section of this report. (Department of State, S/S–OCB Files: Lot 61 D 385, Latin America—Documents 1958)
  15. Adolfo Lopez Mateos was elected on July 6 and inaugurated on December 1 for a 6-year term.
  16. Jorge Alessandri Rodriguez, after winning a plurality in the presidential elections, was formally elected by the Chilean Congress on October 24 and inaugurated on November 3 for a 6-year term.
  17. Alberto Lleras Camargo was elected on May 24 and inaugurated on August 27.