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 highthe $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 restructions 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 LDC's 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 nonproductive 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 deficit 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 part-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 depend.

TESTIMONY ON PANAMA CANAL TREATIES

Mr. SPARKMAN. Mr. President, the Committee on Foreign Relations continued its hearings today on the Panama Canal treaties. The witnesses today were Dr. Harold Brown, Secretary of Defense, Gen. George S. Brown, Chairman of the Joint Chiefs of Staff, Adm. Robert L. J. Long speaking for Adm. James L. Holloway III, the Chief of Naval Operations, and Lt. Gen. D. P. McAuliffe, Commander in Chief, U.S. Southern Command.

I ask unanimous consent that the prepared statements of these witnesses be printed in the Record.

There being no objection, the statements were ordered to be printed in the Record, as follows:

STATEMENT OF THE HONORABLE HAROLD BROWN

Mr. Chairman and Members of the Committee: Just over sixty-three years ago the first United States vessel crossed through the Panama Canal from one to the other of the two great oceans which border our country.

Let us strip the matter to its essentials. Your deliberations in this committee room today are vital. As much as any other factor, they will determine whether we can be confident that our ships of war and vessels of commerce will continue to use that important but fragile waterway during and beyond the last quarter of the twentieth century as they did in the first.

We have always been a practical people-proud of our history, but not sentimental; remembering where we have been, but oriented toward the future. You all are practical men or you would not hold the offices you do. In my judgment, the issues before you are practical ones, and it is in practical terms that I shall address them. On September 7, 1977 the President signed two treaties affecting the operation and control of the Panama Canal. I am pleased to appear before you this morning with General George Brown, Chairman of the Joint Chiefs of Staff, to state that the Department of Defense wholeheartedly and fully supports these treaties, and to explain why I believe they deserve our-and your-full support.

Quite properly, the focus of your deliberations must be on whether these treaties promote the national interest-and specifically the national security interest-of the United States. To help in answering that question, there are three points that I consider critical:

Use of the Canal is more important than ownership.

Efficient operation of the Canal in the years ahead is more important than nostalgia for a simpler past.

Ability to defend and control access to the Canal is essential. But the issue is how that ability can best be assured-by a cooperative effort with a friendly Panama, or by a garrison amid hostile surroundings.

I have examined these issues personally and in detail. So have the Joint Chiefs of Staff. The Department of Defense has been fully involved in all stages of the drafting and negotiation of these treaties. Mr. Chairman, I believe, personally, and in the light of my responsibilities as Secretary of Defense, that these treaties fully serve, and greatly promote, our national security interests. The Joint Chiefs of Staff, as General Brown will tell you, share that assessment. These treaties deal with today's realities. They provide the security which we need for the future.

I see three elements which together make up our national security concerns relating to the Canal. These are:

First, unimpeded use;

Second, effective operation; and

Finally, physical security of the Canal.

These are our paramount objectives.

The first requirement includes free and unimpeded use of the Canal both by our Navy and by our merchant ships. Free use of the Canal is essential to assure optimum ability to shift our forces and materiel rapidly between the Atlantic and Pacific Oceans. That capability enhances our defense posture in both the European and Pacific regions.

The neutrality treaty-more formally, the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal-provides that the Canal shall be open permanently to all vessels of all nations. Moreover, it contains an important additional provision. The United States is given a preferred position with respect to use of the Canal, a position which no other country except Panama will enjoy: United States vessels of war, and the United States auxiliary fleet (important examples of which are oilers and supply ships) are guaranteed rapid transit through the Canal. This is so irrespective of the cargo they carry. These provisions assure us that the United States will remain able to use the Canal in timely fashion whenever military necessity dictates, just as we can today.

Our second national security requirement is that the Canal operate effectively. The Panama Canal treaty provides that during its term the United States will operate the Canal, with increasing participation of Panamanian managers and workers operating under the treaty terms according to U.S. laws and regulations. Thus, the United States can continue the present efficient operation of the Canal for many years to come, and the Panamanians will be in a position to operate it successfully when the treaty expires.

Our third national security requirement is that we must be able to defend the Canal from hostile acts. Our armed forces now control, and they will continue to control with overwhelming forces, the sea approaches to the Canal, on both the Pacific and Caribbean ends. This is not affected by the treaty.

The treaty goes even further, however. It states unequivocally that during the life of the treaty, the United States armed forces shall enjoy the right and the primary responsibility to defend the Canal itself. It further provides that during that period the United States may station, train, and support units of our armed forces in Panama, and that the United States will decide unilaterally whether and how to modify the force levels we maintain there. All key military bases and training areas which we now operate in the Canal Zone will remain under U.S. control.

When the Panama Canal treaty expires, as the year 2000 dawns, the neutrality treaty provides that U.S. and Panama are to maintain jointly the permanent neutrality of the Canal, and that no troops other than Panamanian may be stationed in Panama. The United States is also made a guarantor of the neutrality of the Canal. In that capacity, we have the right to take appropriate measures to enforce this guarantee. In my judgment, these provisions ensure that the United States' ability and unilateral right to defend the Canal against any external threat remain unimpaired.

There is another aspect of the third national security requirement-ability to defend the Canal from hostile acts-which cannot be ignored. Such hostile acts might not be external. If Panama and other Latin American countries, or major elements of the Panamanian population, became hostile to the United States, then protecting the Canal against internal threats, terrorism and guerrilla actions would become much more difficult. Such occurrences are far less likely under the new treaty than they would be if the long unsettled status quo were to continue. The treaty is a guage of our good faith, toward Panama and all of Latin America. It also provides Panama with a tangible stake in the continued effective operation of the Canal. Further, the treaty contemplates a combined defense agreement between the United States and Panama as a result of which Panama's armed forces will be able to protect the Canal against threats from within Panama more effectively than they can at present. Nothing in life, and still less in international life, is certain. But all these elements should add to the real security of the Canal, and make its availability for United States use much more sure than any alternative course of action. As I see it, and I do not think anyone with national security responsibilities disagrees, the Panama Canal will, for the foreseeable future, be an important defense artery for the United States. The treaties which you are examining provide real security, not paper claims. They offer the firmest and most practical guaran

tees obtainable that the Canal will remain operational, secure, and available to the United States.

The Canal was built for shipping, not slogans. We seek to guarantee transit of vessels, not theoretical claims of title. These goals we have sought, as I said at the beginning, are practical. The issues before you are practical ones. Our negotiations have obtained instruments which-more certainly than thousands of forces and their armaments on the spot-will assure those practical objectives for generations to come. I am convinced that approval of these treaties will best provide for our national security.

I would be happy now to answer any questions you may have.

STATEMENT BY GENERAL GEORGE S. BROWN, USAF

Mr. Chairman and Members of the Committee: I am here to discuss the security aspects of the proposed Panama Canal treaty.

The Joint Chiefs of Staff recognize the Panama Canal as a major defense asset, the use of which enhances United States capability for timely reinforcement of United States Forces. The strategic military value of the canal is reflected in our ability to accelerate the shift of military forces and logistic support by sea between the Atlantic and Pacific Oceans. The strategic value of the canal is not expected to change substantially throughout the life of the new Panama Canal Treaty and beyond, so long as the canal provides the sole means of transiting ships across the American continent.

United States military interests in the Panama Canal are in its use, not its ownership. Therefore, any new treaty must assure that access to and security of the Panama Canal are protected in times of war and peace. This assurance is provided by a permanent regime of neutrality to be maintained by the U.S. and Panama which specifies that the canal will remain open to all world shipping at reasonable tolls, without discrimination, in accordance with specific rules of neutrality, and that it will always be operated efficiently under rules that are just, equitable and reasonable and necessary for safe navigation and efficient, sanitary operation.

Defense of the Panama Canal has two components: internal security and external defense. Both are presently the responsibility of the United States Government. Internal security entails surveillance and control. It is primarily concerned with countering sabotage and terrorist activities. Currently the Canal Zone's police and security forces are responsible for internal security. When required, reinforcement is provided by the United States military units assigned to U.S. Southern Command. Under the new Panama Canal Treaty there will no longer be a Canal Zone and police functions will become the responsibility of the Government of Panama. However, the Canal Commission will continue to provide security for Canal installations. The military units of U.S. Southern Command will be available to augment the Panamanian forces and Commission guards.

External defense is concerned with defense against armed attack by hostile forces using guerrilla or conventional tactics. Our current plans will be described by General McAuliffe. Under the new Panama Canal Treaty, the United States will have primary responsibility for the defense of the canal during the balance of this century. Under the new Panama Canal Treaty, the Panamanian Guardia Nacional and appropriate U.S. Forces Commander will develop plans in concert to provide for mutual defense. The Joint Chiefs of Staff will continue to plan for rapid reinforcement of U.S. Southern Command in the event of emergency need.

Our capability to defend the Panama Canal will be enhanced through cooperation with the Government of Panama. The new treaty provides a basis for such cooperation between the United States and Panama. The alliance relationship should develop and strengthen during the life of the Panama Canal Treaty and be further enhanced by the Neutrality Treaty. The regime of neutrality provided in the Neutrality Treaty calls for a canal open to all ships of all nations in times of peace or war. It specifically provides that U.S. and Panamanian naval ships shall transit expeditiously without impediments or preconditions. Since both the United States and Panama agree to this regime, out right to take the measures that we may deem to be necessary to maintain the canal's neutrality is assured.

For these reasons, the Joint Chiefs of Staff support the treaty as being protective of the military interests of the United States and as providing an effective basis for defense of the canal.

STATEMENT OF Adm. Robert L. J. LONG, U.S. Navy, (Speaking For AdmIRAL JAMES L. HOLLOWAY III, U.S. NAVY CHIEF OF NAVAL OPERATIONS)

I have gone on record with the other members of the Joint Chiefs of Staff, in supporting the Panama Canal Treaties.

The Joint Chiefs of Staff are unanimous in their position supporting the Panama Canal Treaty and the Treaty Concerning the Permanent Neutrality and Operation of the Panama Canal, although each of us may have reached this conclusion on the basis of our individual line of reasoning. I would like to provide the Committee, in this statement, with my own rationale.

The Panama Canal is and will remain of major importance to the United States. Its use is a key factor in the Navy's ability to accomplish its responsibilities in connection with essential war plans and other contingencies involving our national security. While I cannot state that loss of the Canal would result in the failure of these plans or in the inability of the Navy to carry out these responsibilities, it would certainly make these tasks enormously more difficult. We would be much better off with the use of the Canal than without it.

The importance of the Canal to the Navy for defense purposes lies in its assured use, not in its ownership. There are two threats to the continued use of the Canal by our naval forces and essential shipping: the external threat and the internal threat. The external threat is represented by a general war situation. In a conventional conflict, our capabilities to defend the approaches of the Canal are adequate to provide me with reasonable confidence that defense of the Canal against an external threat is practicable. In the case of a nucler conflict defense of the Canal would be virtually impossible as would be defense of almost any other major installation of importance to the United States. However, in a strategic nuclear war, the importance of the Canal in relative priorities diminishes to an inconsequential position. The second threat to our continued use of the Canal is the internal threat from subversive, clandestine, or local guerrilla activities. The defense against such a threat in the formidable jungle terrain of the Canal area would be extremely difficult, particularly in view of the vulnerability of the lock system to disruption as the result of relatively minor damage to critical mechanical components. Defense against a persistent and continuing internal threat would be particularly difficult. Therefore defending against this internal threat is significantly enhanced if the cooperation of the local interests, the Panamanians and Central Americans, can be maximized. On the other hand, our ability to defend and protect the Canal so as to ensure its continued operation, would become extremely difficult in the face of an adversary relationship with our Latin neighbors, or an active hostility on the part of the local population. Our adherence to these treaties, which make the Panamanians our direct partners in the defense of the Canal, will substantially contribute to a friendly and cooperative attitude among all Latin Americans toward the United States on the Panama Canal issue.

The specific provisions in the Panama Canal Treaty providing for the defense of the Canal by the United States until the year 2000, and in the Treaty of Neutrality which will guarantee our use of the Canal after the turn of the century, are considered by the unified commander, Commander-in-Chief Southern Command, to be adequate. That view is shared by the Joint Chiefs of Staff, based upon the analysis of the Services and the unified commander. It is my judgment that the favorable effect which I believe the Treaties will have on the attitudes of the Panamanians and Central Americans toward our continued use of the Canal, for national and hemispheric security purposes, will substantially assist the United States to defend the Canal against the internal threat. On this basis, it is my view that the continued use of the Panama Canal for military purposes in our national defense plans is best assured through the provisions of the new Treaties.

STATEMENT BY LIEUTENANT GENERAL D. P. MCAULIFFE

Mr. Chairman and Members of the Committee, thank you for inviting me to appear before you, as the Commander in Chief of the United States Southern Command. My priority mission is the defense of the Panama Canal.

I will discuss with you my present capability to perform that mission with the forces and facilities presently available and also an assessment of my capability to perform that mission under the treaties signed on 7 September.

The forces presently available to me to carry out the mission of canal defense are well trained and capable of implementing a wide range of defense tasks to protect the canal and also to protect U.S. lives and property. They are not capable, without reinforcement from the United States, of protecting the canal from a major external