that lead to lower costs and improved productivity. These could include easing the labor code, reducing subsidies, boosting domestic savings, and directing resource flows more toward the international service sector where Panama has natural advantages, however, most such actions would cut back social benefits granted to the working classes under the "revolution", and might not be politically acceptable under the present government, inflows of foreign capital have not been getting at the core problem of high costs (low productivity). Lack of access to relevant Canal Zone sites is delaying GOP development of infrastructure which is prerequisite to the growth of various commercial services industries by the Panamanian private sector. End summary.

3. Economic conditions in Panama worsened steadily during the 1976 first half. There were decreases from a year ago in key indicators-manufacturing, construction, external trade, unemployment, (increase), and sales to the Canal Zone (see reftel), overall growth is likely to be near zero for 1976.

4. Failure of the economy to respond to a variety of stimulants indicates that the recession is more than a cyclical maladjustment. Credit has remained relatively plentiful, with preferential rates available from the government for both agricultural and industrial projects. There are tax subsidies for new exports, and tax benefits for reinvested profits. No basic changes have been made in the "rules of the game" under which business operates, such as the labor code or tax laws, since before the onset of recession, in fact, the GOP in recent months has actively sought by various direct means to improve the business climate. A large boost in 1975 public sector spending had little effect on either private investment or aggregate demand.

5. Also, Panamanian economic problems do not seem to be caused primarily by worldwide economic trends or world trade. In contrast to Panama's continuing decline, other developing countries (LDC's) have been experiencing a quickening economic tempo so far this year in response to rapid recovery by the industrialized countries, plus some correction of structural maladjustments, LDC exports have been generally increasing as a part of the marked improvement in 1976 first half world trade (plus 10 percent) while the value of Panamanian exports remained at its 1975 level (excluding an abnormal decline in petroleum products exports), changes in Panama's economy also differed from the worldwide pattern both during the 1974-75 world recession and the years immediately preceding it. Despite sharp 1974-75 recession among the industrialized countries (zero growth), LDCs' gross domestic product (GDP) increased 5.5 percent in 1974 and 1.7 percent in 1975. Growth had begun tapering off in 1971 whereas during 1971-73 the rest of the world including Latin America experienced unprecedented boom.

6. Private investment in Panama reached a peak in 1971. Growth in manufacturing began to fall off in 1971 with a decline in the number of attractive import substitution possibilities, little increase has subsequently taken place in the volume of manufactured exports, output of both construction materials and intermediate goods stopped expending in 1973. Expansion of construction activity began slowing in 1972 and has actually been declining since 1974. Imposition of rent controls in 1973 brought private investment in low cost housing to a standstill. On the other hand, growth of the important services sector remained near 8 percent annually through 1974 (plus 3 percent in 1975) due in part to the major expansion of the foreign banking sector since 1971, growth in agricultural output has remained sluggish since 1970 at about 3 percent annually, much slower than during the 1960's.

7. Panama's basic economic weakness in our view and the reason behind current stagnation is its non-competitiveness in the world market-a structural problem involving primarily high cost production (coupled with a lack of resources) in both agriculture and industry. The export potential for Panamanian agriculture is extremely limited at present, the main exports, bananas, is in the hands of foreign plantation operators, and has probably reached its peak in an increasingly competitive world market. In general, land is of poor quality and farm labor costs are high-the $3 per day minimum wage is estimated to be at least double the rate anywhere else in Central America. The government encourages high cost production, including rice, the principal crop, by subsidizing producers through support prices typically set above the world market. Thus, Panama cannot profitably export major crops such as rice and corn and is further precluded from developing any profitable export potential for various lesser crops by the small domestic market base in Panama. Accessible forests have been cut over and there is little potential for meat exports while access to the U.S. market is restricted. Panama's sugar industry is likewise non-competitive due to high costs of both cane production and refining operations.

8. As with agriculture, Panama's manufacturing industry currently has little export or overall growth potential because of high production costs coupled with a dearth of natural resources (copper deposits have not yet been determined to be economically exploitable). Minimum wages and the general wage and benefit structure in Panama are estimated to be the highest in Central America and among the highest in all Latin America. Higher wages and benefits in the Canal Zone exert upward pressure on wages in the republic as employers compete for the generally better qualified workers attracted by Zone wages. The dominance of the service sector in Panama's central urban areas with its higher skill levels also creates upward pressure on the entire wage and benefit structure. Employee benefits under Panama's labor code add to direct employment costs. The code exerts indirect pressures on costs through subsidies such as firing restrictions imposed on employers and, by strengthening the trade union movement, bolsters the trend toward costlier contract settlements. High labor costs encourage the substitution of capital for labor, thus boosting structural unemployment throughout the economy. Also, relative capital costs-mostly foreign sourced-are likely to rise as Panama's already high debt service burden worsens and the economic outlook for other LDCs improves relative to Panama.

9. Establishing the basis for renewed growth and improved economic well being that can be sustained will require actions that lead to a lower cost structure. One widely discussed possibility is an easing of the labor code, although its real impact on costs remains uncertain (it did not bring on recession although it may have stood in the way of needed private sector adjustments). Changes probably would not induce an immediate surge of private investment, however, the business community has made clear its conviction that changes are essential, giving them an additional psychological importance that bears importantly on the general investment climate. Changes might be a convincing sign of GOP concern over the private sector's economic plight.

10. Appropriate belt tightening also could include lowering subsidies as well as the wage/benefit structure to reduce relative production costs, and increasing personal taxes to curb consumption (particularly imports) and expand domestic savings. These effects are usually achieved indirectly by currency devaluation. Since Panama's currency is the U.S. dollar, such actions must be taken directly, in addition, resources may need to be more heavily concentrated in the internationally-based services sector where Panama has more natural advantages, with proportionately less in agriculture and the non-productive social sectors.

11. Comments:

(A) Panama's high wages, subsidies, and consumer imports-together with a moderate tax burden and little public saving-permit a standard of living which no longer appears to be supportable by Panama's inefficient domestic production.

(B) Increased external financial flows per se, regardless of concessionality, permit Panama to defer grappling with the core problem of low productivity until a later date when the problem will probably have worsened, unless such financing bears specifically on some aspect of costs. Indeed, much of the capital inflow of the past three years has aggravated Panama's economic malaise by exacerbating its debt service burden without enhancing overall productivity. Moreover, total inflows greatly exceeded the current account deficity of Panama's balance of payments, resulting in large negative "errors and omissions" (around $100 million annually) most of which probably represented outflows of domestically-owned capital.

(C) The types of actions mentioned above for addressing Panama's high cost structure run headlong into the "revolution"—the social and economic benefits granted to the urban and rural working classes over the past eight years which would need to be reversed in party in short, the "revolution" has collided with growth and one or the other must yield, whether or not actions of sufficient scope to be economically meaningful along the above lines are politically possible for the present government is questionable.

(D) Panama's best economic prospects lie in the development of its potential as a sub for servicing international commerce, various aspects of cargo handling are an essential part of the picture. Thus, the GOP has a valid case in urging early access to relevant canal zone sites needed to develop the infrastructure on which growth of various transport, storage and other commercial services.

EXHIBIT 5

[From the Washington Post]

CARTER CONFIDANT IS RULED SUBJECT TO CONFLICT CURBS

(By Morton Mintz)

SEATTLE, February 14.-Attorney General Griffin B. Bell said today that presidential confidant Charles Kirbo is subject to federal conflict-of-interest laws because under a strict, 14-year-old statute, he is a "special employee" of the

government. Kirbo "is a special employee every time he advises the President," Bell told a news conference here, where he is attending the American Bar Association's winter meeting. No one can give the government advice "as a friend," Bell said; in this context, "there's no such thing as a friend.”

Bell also said it makes no difference under the statute that Kirbo, a partner in King and Spalding, the Atlanta law firm Bell left to become Attorney General, is not paid for advising President Carter.

Bell said he told Kirbo last November that he is in special-employee status, which prevents him from advising Carter or anyone else in government about any matter in which he or the law firm has a financial interest.

So far as is known, no friend of a past President who has provided unpaid advice in the White House has been formally classified as a special employee. The statute making such an employee subject to the conflict-of-interest laws took effect in January, 1963, during the Kennedy administration.

Charles G. (Bebe) Rebozo, for example, was a close confidant of President Nixon, but was not known to have been classified as a special employee.

In Atlanta, Kirbo confirmed to reporters that he is in special-employee status, although he collects neither a possible $100-a-day consultant's fee nor expenses when he comes to Washington.

When he comes to the White House, he said, he tries to help Carter carry out his campaign commitments and proposals, although at times he simply listens to the President.

The primary restraint of his special-employee status, he said, is that "you can't give any advice on any matter you have an interest in."

Bell, responding to reporters' questions, said that to avoid any possible conflict from arising out of his former partnership in King and Spalding he will, within a few days, provide Justice Department officials with a list of all of the law firm's clients. He said reporters will be able to see the list, which includes numerous large corporations.

Bell, who met with reporters after speaking briefly to the ABA's House of Delegates, said that Carter soon will issue an executive order creating commissions to propose candidates, on the basis of merit, for vacancies on U.S. courts of appeals. Bell said the order will allow the commissions to propose their own candidates, rather than be bound to names submitted by senators from affected states.

The number of vacancies shortly will reach six. For each one, a commission will propose five names to the President, who will choose one for final nomination to the Senate. Each affected state will be represented on the commissions, each of which will have 11 members.

Some members will be laymen. Bell said that the draft White House order does not prohibit judges from being members, but that he doesn't know if Carter will agree with a suggestion for inclusion of judges that was made to the ABA Sunday by Chief Justice Warren E. Burger.

All told, there will be 13 commissions-one for each of nine circuits, and two each for the huge fifth and ninth circuits in the South and Far West.

In his talk to the House of Delegates, Bell pleaded for a delay until the August meeting of the ABA's policy-making body on pending resolution to overhaul the federal grand jury system.

By August, Bell said, he will have completed a review of the proposals. One of them would allow counsel to accompany witnesses in the grand jury room. At least tentatively, Bell said, he feels that this proposal would convert grand jury proceedings into secret trials, with the result that prosecutors would try to bypass grand juries and file charges by themselves.

PANAMA CANAL NEGOTIATIONS

Mr. THURMOND. Mr. President, a column appeared Saturday, February 19, 1977, in the Washington Post written by Jack Anderson and Les Whitten entitled "Report Could Upset Panama Talks.” The column refers to a report prepared by Representative John M. Murphy, Democrat, of New York, about torture and murder of opponents in Panama of the current military dictator, Omar Torrijos.

As I have warned in the past, the United States is making a serious mistake by attempting to negotiate a treaty on the Canal with a government which was not freely chosen by the people of Panama.

Further, this particular government has denied its citizens many of the basic political and human rights promoted by President Carter.

By negotiating a treaty with Torrijos the Carter administration is giving more power to the current Panamanian government which Congressman Murphy's report claims has tortured and murdered up to 32 political opponents.

Mr. President, I ask unanimous consent that this article be printed in the Record.

There being no objection, the article was ordered to be printed in the Record, as follows:

REPORT COULD UPSET PANAMA TALKS

(By Jack Anderson and Les Whitten)

The United States must soon decide whether to give up the Panama Canal Zone, a colonial strip that is offensive to all Latin America.

We warned on Nov. 20, citing secret intelligence reports, that the canal issue was a “ticking time bomb" about to explode.

President Carter gave it top priority after he took charge of foreign affairs. He dispatched a crack negotiating team, headed by the veteran diplomat Ellsworth Bunker, to Panama this week. Its secret instructions are to seek a reasonable formula that will permit the United States to relinquish sovereignty over this strip of Panamanian territory.

But there are some flies in the diplomatic ointment. Ominous cracks have appeared, for example, in the Panamanian economy. Dictators habitually try to divert public attention from their domestic failures by stirring up emotional issues. There is concern that Panama's military dictator, Omar Torrijos, might forego a reasonable settlement and use the canal as a political issue.

Carter, for his part, has pledged to restore morality to U.S. foreign policy and to take a stand against nations that abuse human rights. He has just received a confidential report from Rep. John M. Murphy (D-N.Y.) about torture under Torrijos. Murphy pointedly urged the President not to surrender the Panama Canal until the allegations have been cleared up.

The disturbing report, written and translated in Panama under extreme duress, was smuggled out of the country. Some of its allegations have been confirmed by diplomatic sources.

The report charges that Torrijos' political opponents have been shot, drowned, beaten, sexually abused and electrically shocked. It names 32 persons who allegedly have been murdered by the Torrijos government.

For example, a Roman Catholic priest, Hector Gallegos, was arrested by the Panamanian National Guard in June, 1971. He had been organizing agricultural cooperatives in his impoverished parish. Apparently he found himself working against the interests of some local relatives of the Panamanian dictator. Diplomatic sources confirm that Gallegos has not been heard from since.

"The usual pattern," states the report, "is that a person is arrested without a warrant and without accusation, and then the authorities deny any knowledge of

their whereabouts. Sometimes the victim is released after questioning or torture or both, and sometimes nothing more is heard about the victim.'

The state police seldom allow relatives to claim the victims' abused bodies. But the report alleges that four bodies-those of student Marlene Mendizabal, student Dorita Moreno, lawyer Ruben Miro and Eduardo White-were recovered and showed evidence of torture.

There are no individual rights in Panama, where, the report alleges "the unwarranted search of homes by the military police is an everyday happening." The report includes affidavits and details about the torture that is inflicted."

It also charges, as we reported in 1973, that members of Torrijos' family are involved in international narcotics smuggling.

The allegations could upset the delicate negotiations for a new Panama Canal treaty.

Footnote: A Panamanian embassy spokesman said the charges were fabricated by American opponents of a new canal treaty and Panamanian opponents of the Torrijos regime. He invited us to visit Panama to see whether there is torture, an invitation we will be happy to accept if we can be guaranteed access, unannounced, to any prisons we wish to inspect, without government escort. Only proven terrorists, agitators and subversives have been exiled rather than being jailed, said the spokesman.

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