Foreign Relations of the United States, 1961–1963, Volume XII, American Republics

399. Memorandum of Conversation¹

Panama City, January 19, 1962.

SUBJECT

• Call of Under Secretary Ball on President Chiari at Casa Presidencial, Panama²

PARTICIPANTS

• President Chiari
• Under Secretary Ball
• ACCOMPANYING PRESIDENT CHIARI
• Foreign Minister Galileo Solis
• Finance Minister Gilberto Arias
• David Samudio, Director General of Planning
• Jorge Riba, Technical Director, Planning Bureau
• Fabian Velarde, Presidential Press Secretary
• ACCOMPANYING UNDER SECRETARY BALL
• Ambassador Joseph S. Farland
• Katherine Bracken, Director, Office of Central American and Panamanian Affairs
• George Springsteen, Special Assistant to the Under Secretary

The Under Secretary conveyed the greetings of President Kennedy to President Chiari and indicated that Mr. Kennedy looked forward to seeing Mr. Chiari in Washington in the future.

The Under Secretary said that he had expressed to the Foreign Minister at the airport Secretary Rusk’s appreciation of the vigorous action which the Panamanian Government had taken in connection with the Cuban problem and wished to repeat this to the President as well. President Chiari thanked Mr. Ball for his comments.

Mr. Ball then informed President Chiari that, as mentioned in President Kennedy’s recent letter to him,³ a special study group had been set up to assess United States needs with regard to the Canal, and that Ambassador Muccio had been designated to head the group. The importance given the group and the seriousness with which the United States was pursuing the study, the Under Secretary said, was demonstrated by President Kennedy’s selection of Ambassador Muccio to direct the activities of the group. Mr. Ball said that the report would provide a basis for a letter to President Chiari and it was hoped that this would come forward in a few months.

President Chiari indicated his pleasure at this information and noted that studies of the Canal had been under way for many years and inquired how this review might differ from already existing reports. The Under Secretary pointed out that there were in effect new conditions and that the present review was a more comprehensive analysis, particularly of the economic and strategic needs, and would take into account the technological advances that have made possible new methods of canal excavation.

President Chiari asked whether the United States was still considering a sea-level canal and the routes already explored. The Under Secretary replied that this is one facet of the total study. President Chiari remarked that he was happy to hear this since he and his Government had gathered from the extensive improvements under way to widen the cuts that a new canal was no longer considered.

The Finance Minister inquired whether the United States was contemplating a revision of the present canal treaties apart from a treaty regarding a new canal. The Under Secretary responded that this was a part of the total study of a total problem.

President Chiari referred to delay in getting projects implemented under the $9.9 million grant made in October 1961. Mr. Ball referred to the extensive reorganization of the aid programs which had taken place in Washington, but which was just about completed, and added that we could now press on to hasten implementation of the projects. He noted that funds were now allotted and the program could move forward.

President Chiari brought up the question of authorization for Panamanian firms to participate in the school construction projects, particularly since there were well qualified Panamanian firms who could operate in the rural areas to better advantage than foreign firms. The President stressed that Panama is now in the dry season and that unless construction can move forward now, a year of delay would result. The Under Secretary replied that preliminary consideration of the waiver proposal had already begun and that he did not anticipate problems in this connection.

President Chiari expressed his gratification and introduced Mr. Samudio, and Mr. Riba, who had just joined the group. Mr. Samudio described briefly a memorandum he had prepared on the steps, including self-help, taken so far by Panama and the country’s expectations under the Alliance for Progress, which President Chiari passed on to Mr. Ball. The Under Secretary indicated he would read the memorandum with great interest.

The Under Secretary then mentioned to President Chiari that one point in the Panamanian scene which had caused some concern had been the inflationary budget just passed by the Assembly and he inquired whether this represented a departure from previous policies. The Finance Minister, at the President’s direction, defended that budget as a one-year operation. He explained that while the budget was larger than anticipated, many of the increases in personnel expenditures had been caused by Panama’s projects under the Alliance for Progress, mentioning the $600,000 required to set up an electrical authority and a similar sum to support the centralized water authority, both of which were necessary to qualify for hydroelectric and waterworks loans. The financing of the payments to Social Security by bonds in the amount of $2.8 million was, in his opinion, necessary only this year since by 1963 additional revenues possible under the new tax measures would have provided the additional sources needed. The Finance Minister referred to the Chiari Administration’s good record in cutting down defaulted payments on current accounts, including the water bill to the Panama Canal Company, and expressed confidence that the improved tax law and better collection methods would begin to ease the situation during the year. He stressed the increase in tax rates, which he personally felt was an important step forward. In response to a question, the Finance Minister indicated that active steps were underway to improve tax collections, noting the addition of 16 internal revenue persons to his staff. He also noted that all Treasury personnel were under Civil Service. The President and the Finance Minister both noted that steps were underway to bring more persons from all branches of government under Civil Service in order to improve Government efficiency. This would be a slow process as standards had to be established and applied. All these added to the budgetary problem.

The Finance Minister explained that one of the problems in increasing revenues was the difficulty in controlling the contraband from the Canal Zone. He suggested that the commissaries in the Canal Zone increase the price of cigarettes, balancing this increase by reductions in other items, so that the Panamanian Government could increase its taxes on cigarettes. He said that as much as $2 million in additional revenue could be realized if this were done. He said that the Republic is faced with a rising volume of contraband each time it endeavors to increase the tax 2 or 3 cents. He noted that the contraband in whiskey had now been brought more or less under control by centralizing sales in certain locations in the Zone. The Under Secretary suggested that Ambassador Farland pursue the matter further with the Panamanian authorities to see what recommendations might be made. The Ambassador indicated that he hoped to have something definitive within ten days.

The Under Secretary inquired of the President whether he had other problems to raise. The President replied that at first he had intended to bring up many problems in connection with the Canal but he had changed his mind after hearing the Under Secretary’s comments. Mr. Ball agreed that any attempt to discuss such matters at this time would be premature and would not serve either country’s interest.

As the meeting terminated, the Under Secretary informed the President that he would be visiting the self-help housing project at San Miguelito on Saturday. The President expressed his appreciation and wished Mr. Ball well for the rest of his stay on the Isthmus.

1. Source: Department of State, Central Files, 611.1913/1-1962. Confidential. Drafted by Bracken and approved in U on January 23.
2. Ball was in Panama to attend a meeting of the Panama Canal Company Board of Directors, on which he represented the Department of State.
3. Kennedy’s letter, November 2, replied to Chiari’s letter of September 8. For text, see Department of State Bulletin, December 4, 1961, pp. 932-933.