Senator CLARK. Mr. Chairman, I have several more questions. I would be happy for the Secretary to catch his plane, but I would hope we could have him back at another time for questioning. I think this treaty is of enough significance and importance that we all ought to have a complete opportunity to ask all of the questions we wish. The CHAIRMAN. When will you be back in town? Secretary ADAMS. Well, I will be back tomorrow.

The CHAIRMAN. Let me ask the committee for a vote and let me ask you, would you be available to come back later?

Secretary ADAMS. Yes, Mr. Chairman, I will certainly come back before the committee.

The CHAIRMAN. It may be that some of it can be handled by propounding questions to you in writing and getting your response for the record.

Secretary ADAMS. Whichever way you prefer. I am at the committee's pleasure. I will return on Monday if you wish.

Senator STONE. Mr. Chairman, I would prefer that the witness come back live. I have not had a chance to ask him some questions I have been preparing. I think it would be better to do this live than in writing.

The CHAIRMAN. We will work that out. We are going to be working on this treaty for a little more time.

Secretary ADAMS. I would be happy to come back next week, Mr. Chairman, and we can work out whenever is convenient, so that we can arrange the time.

The CHAIRMAN. We will do that. Do I understand that there is a rollcall over in the Senate now? It is a 15-minute rollcall. Why don't we take a 5-minute recess and go answer the rollcall?

[Whereupon, a brief recess was taken.]

WITNESSES

The CHAIRMAN. Let the committee come to order, please. We had better get moving, because we will be jumping back and forth with rollcall votes. Our next witness is the Honorable Richard N. Cooper, Under Secretary for Economic Affairs of the Department of State. We will also hear from the Honorable Anthony Solomon, Under Secretary for Monetary Affairs, Department of Treasury. We will ask these two witnesses to serve as a panel if they do not object.

Senator Church, would you like to open the questions?

Senator CHURCH. Yes, thank you, Mr. Chairman, but first of all I would like to ask Mr. Cooper if he wishes to present his statement.

STATEMENT OF HON. RICHARD N. COOPER, UNDER SECRETARY OF STATE FOR ECONOMIC AFFAIRS; ACCOMPANIED BY RICHARD CAMAUR, ECONOMIC AFFAIRS ADVISOR, PANAMA CANAL NEGOTIATION TEAM, DEPARTMENT OF STATE

Mr. COOPER. Thank you, Mr. Chairman and members of the committee. First I would like to introduce on my left Mr. Richard Camaur. who did the economic work for the negotiators. He is assisting Under Secretary Solomon and me today.

I appreciate the opportunity to discuss with the committee the plans for improved economic cooperation between the United States and Panama which will complement the process of implementing the new canal arrangements. The programs that Under Secretary Solomon and I will discuss today are entirely separate and independent from the new treaty, although the idea of having this associated package arose during the last few weeks of the treaty negotiations.

Secretary Vance and Ambassadors Bunker and Linowitz have already described for the committee the provisions within the treaty which will provide for Panamanian participation in canal revenues. The arrangements we discuss today are not directly related to the canal but, rather, are an expression of our friendship and cooperation with the people of the Republic of Panama and reflect our interest in the economic well-being of that country.

PANAMANIAN SUGGESTIONS CONCERNING ECONOMIC BENEFITS ASSOCIATED WITH TREATY

As this committee is aware, the discussion of economic arrangements associated with the treaty were among the most difficult issues encountered in the negotiations. Panama's negotiators proposed that the United States pay Panama a large initial lump sum payment and a very sizable annuity, either of which far exceeded the most optimistic. estimates of gross canal revenues. The Panamanian negotiators sought to justify these proposals by assigning high economic value to the economic and security benefits derived by the United States from the canal without comparable benefits to Panama.

They further suggested that as a counterpart to U.S. investment in the Panama Canal, Panama had provided its unique geographic location, much of its prime land and water resources, as well as the labor of its people to the canal effort. Panama also cited the low remuneration received by Panama under the present treaties and the value to our security interests of the military bases and of the new neutrality arrangements.

In a more compelling argument, Panama's negotiators maintained. that Panama's national priority lies in rapid social and economic development of its people, with wide distribution of the benefits among its people. Both the economic provisions within the treaty and the economic arrangements outside it are based on our shared recognition of the special relationship created by the interest in the canal.

Panama's development would serve the interests of the United States by fostering the stability which is the underpinning for an open, safe, efficient and accessible canal before and after the expiration of the treaty which you are now considering. Giving the Panamanians a stake in the operation of the canal makes political and economic sense. It will insure Panamanian cooperation in the efficient running of the canal operation while also building broad political support for the enterprise in Panama.

BROADER PROGRAM FOR IMPROVED ECONOMIC COOPERATION WITH PANAMA

The broader program for improved economic cooperation with Panama rests on a similar assumption, that improving the welfare of

an increasing number of Panamanians will result in a stable political climate in which the sound administration of the canal can continue.

As was covered in earlier testimony, for the purposes of the annuity payments in the treaty, the economic provisions in the treaty reflect the U.S. position that the canal operating revenues would be the source of financing. The purpose of this formula is to give Panama an equitable share of canal benefits and assure a vital Panamanian interest in the official operation of the canal.

Senator CHURCH. Mr. Chairman, may I interrupt at this point to ask one question of the Secretary?

The CHAIRMAN. Yes.

PROJECTED INCREASES IN PANAMANIAN SHARE OF TOLLS

Senator CHURCH. Have you projected how much the Panamanian share of tolls will be increased between now and the end of the century by virtue of the indexing provisions of the treaty?

Mr. COOPER. Yes and no. We have made projections in today's prices, as it were, and based on the projections of traffic which you saw in Secretary Adams' testimony. Taking those two together, you get revenues accruing to Panama under this particular provision of the treaty. Then to translate that into current dollars, that is, the dollars of 1985, 1990, and so forth, one would have to multiply by an estimate of the index which the agreement stipulates will be used to raise the royalty payments. Depending upon your assumptions about the movement of that index, you get different numbers.

If we assume that the wholesale prices of manufactured goods rise by 4 percent a year, then the total in dollar terms would roughly double during this treaty period, so it would be 60 cents a ton by the end of that. Of course, if that happens everything else will be much higher, too. Both the gross operating revenues of the canal and the costs of the canal, ex royalty, will be correspondingly higher.

Senator CHURCH. So your assumption is with anticipated inflation, 4 percent is a very modest projection of the possible inflation, your projection is that the tolls should be sufficient to accommodate those increased payments even by the end of the century?

Mr. COOPER. Yes; the assumption that underlies that particular provision is that it is an allowance for, if you like, general world inflation. General world inflation will affect the operating costs of the canal and in fact by an amount greater in all likelihood than the wholesale price index for manufacturing since many of the operating costs are labor costs and wages tend to rise more rapidly than the cost of manufactured goods.

So, all of the numbers would be grossed up by the amount of inflation, but the royalty would be rather less than average because of the choice of index, which I think is an appropriate one. It would be lower than the rate of world inflation.

I don't want to be interpreted here as suggesting that 4 percent is the right number. I just use that figure illustratively.

Senator CHURCH. Thank you very much for your answer.

The CHAIRMAN. Senator Church, there is a rollcall on. Have you voted on this rollcall, Senator Percy?

Senator PERCY. Yes, Mr. Chairman, I have. I came over to relieve

you.

The CHAIRMAN. Very well, then, take charge. If you will excuse us, we will go to answer one of the many rollcalls of the day.

Senator PERCY [presiding]. Dr. Cooper, were you in the middle of your statement? If so, please go right ahead and finish it. Could you tell me first what the question was that you were addressing yourself to?

ECONOMIC ARRANGEMENTS OUTSIDE TREATY

Mr. COOPER. I was going through my statement and I am coming to the economic arrangements outside the treaty. These reflect the perception that Panama and the United States have mutual interests specifically in fostering economic development and the well-being of the Panamanian people. Since we believe that Panamanian development during the new treaty period would serve as a means of promoting an environment helpful in the operation of the canal during and after the new treaty period, the U.S. negotiators arranged for the Panamanian negotiators to meet with representatives of the Departments of State and Treasury, with AID, and with the Export-Import Bank to discuss Panama's development needs.

Out of these discussions emerged a program which will be undertaken outside the treaty, which will introduce no special assistance devices, and which is subject to all applicable procedures under existing programs. Its contents were outlined to the Panamanian Government in the form of a diplomatic note signed by Secretary Vance on September 7, the date of the signing of the two treaties concerning the canal. I understand that a copy of this note has already been provided to the committee.

The note outlines a program to be undertaken on a best efforts basis which seeks to enhance Panamanian development with the participation of the private sector in the United States as well as Panama, and it is composed of the following elements. Up to $200 million in ExportImport Bank loans, loan guarantees, or insurance over a 5-year period subject to approval by the bank. Up to $75 million in AID housing guarantees over a 5-year period, and a guarantee by the Overseas Private Investment Corporation of $20 million in U.S. private capital to the Panamanian National Finance Corporation, COFINA, as it is called, for use in productive projects in the Panamanian private sector. Secretary Vance's note of September 7 also proposes issuance of repayment guarantees under our foreign military sales program not to exceed $50 million over a 10-year period. This aspect of the program is to assist Panama in assuming its increased responsibility for canal defense during the new treaty period. It, too, is designed to further the spirit of cooperation between the two countries.

Like the other parts of the program outside the treaty, the military sales program is not a grant to be financed by the American taxpayer. The only appropriations required would be to cover 10 percent of the annual program in the form of deposits in a special reserve account, as is typically done with military sales.

RATIONALE FOR AID HOUSING GUARANTEE PROGRAM

Under Secretary Solomon will discuss the overseas private investment guarantee and the Ex-Im program. I would like to expand a bit on the rationale for the AID housing guarantee program proposed in the Secretary's note.

The purpose of the AID housing program is to provide housing to lower, to medium income groups in less developed countries. The program provides a full faith and credit U.S. Government guarantee to private U.S. lenders who make loans for housing projects in less developed countries. The program demonstrates the valuable contribution of private capital and foreign investment for the social and economic development of such countries.

The 5-year program proposed for Panama in the economic cooperation proposal would fit within existing statutory authorization. The guarantee program was proposed in the early 1960's and is designed to be self-sufficient, and has not required congressional appropriations. Total current housing guarantee authority is just over $1 billion. The proposed Panama program would conform to the statutory limits of $25 million per year to any one country and an average annual face value of $15 million.

In other words, we are using existing programs which are proven tools for furthering U.S. interests in many overseas areas to strengthen Panamanian development and the cooperative relationship between the two countries. Panama has already had several successful AID housing guarantee projects. To date, AID has guaranteed a face amount of approximately $26 million in loans. Another $15 million project is now under consideration. This represents an 11-year course of activity involving eight different projects.

Moreover, the proposed housing guarantee program addresses an area of social and economic development in which Panama has placed a high priority within its development plan. This priority is felt because of the astonishing urban growth in Panama. Much of the poor population in Panama City and Colón dwell in decrepit, unsafe. barrack type buildings which were actually used by the work force of the French Canal Company almost a century ago.

The housing guarantees are an example of the kind of program that is in the mutual interest of both countries. The economic cooperation program as a whole is designed to assist Panama's social and economic development, and improve prospects for stability with the participation of the private sector. Moreover, the economic cooperation program does not represent a grant to be financed by American taxpayers.

NEW PANAMA CANAL COMMISSION

Before closing my formal testimony, I would like to add brief comments on two other areas of interest to the committee, the new Panama Canal Commission and the provisions on the sea-level canal.

Under Secretary Solomon and I were both recently appointed directors of the Panama Canal Company. In this capacity, we have an interest in the structure of the new Panama Canal Commission which will replace the company as the canal operator.