832.50 J.T.C./3–1749

The United States Co-Chairman of the Joint Brazil–United States Technical Commission ( Abbink ) to the Secretary of State

confidential

My Dear Mr. Scretary: Instructions issued to me, as Chairman of the United States Section of the Joint Brazil–United States Technical Commission, dated August 24, 1947 [1948],1 provided that I make a special report to the Secretary of State, commenting on the work of the Joint Commission.

The report of the Joint Brazil–United States Technical Commission, which was unanimously approved by Brazilian and United States members on February 7,2 emphasizes four main themes: (1) the need for “balance” in the Brazilian economy and in economic development programs, (2) “self-help”, (3) financial stabilization, and (4) the significance of the external balance of payments. There was a gratifying degree of understanding and mutual agreement between the two sides of the Commission on the economic aspects of these four ideas. Because the Commission’s report was to be directed to both governments and because publication of the report was seen to be both inevitable and desirable, political considerations were largely ignored in its drafting.

In the following comments on the Commission’s work, I shall emphasize some of the political aspects of the conclusions we reached.

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“Balanced” Development

The idea of balanced development has three aspects. In the first place, Brazil cannot afford to neglect agricultural development, even though industrial development has been emphasized in public discussion of Brazil’s future.

The Brazilian members of the Commission, holding positions in a government which is strongly influenced by the views of the agricultural interests, but which is aware of the necessity of doing something for the smaller farmers and urban workers as well as for large-scale agriculture, were insistent on the importance of stimulating food production as a means of reducing inflationary pressures and avoiding future balance of payments difficulties. In fact, the letter of transmittal to the Minister of Finance,3 based on a draft by Dr. Bulhões,4 seemed to the United States members to overstress the short-run anti-Inflationary effects of increased food production.

The basic political objective of the Brazilian Government in dealing with agriculture should be, of course, to prevent the emergence of acute unrest among the large underprivileged rural population. This is an issue which may seem unimportant for the near future, but it represents a latent threat to Brazil’s internal stability and to stability of Brazil’s international relationships over the two or three decades ahead. The immediate danger is that the Brazilian government will not face the problem fully and that it will content itself with half solutions or even with promises of solutions. The proposal to set up a rural bank, for example, seems to promise more than it is really likely to accomplish in the near future. I may note also that any discussion of rural ownership problems was tabooed by the Brazilian members.

The United States members of the Commission are impressed with the importance to the United States, in its future dealings with Brazil, of keeping in mind the need for far-reaching improvements in the economic and social status of the ordinary small landholder, tenant or agricultural worker.

Secondly, it is obvious that bottlenecks to industrial progress cannot be allowed to develop in the fields of transportation, power, and fuel. However, maintenance of a proper balance will be difficult.

The regulation of public utilities became heavily tinged with an anti-foreign bias under the Vargas5 regime. Moreover, any government faces public resistance when it tries to keep utility rates in step [Page 554] with rising costs, as our own experience with New York City subways and the Long Island Railroad may remind us.

The obstacles to rapid development of Brazil’s petroleum resources6 are very largely political and therefore emotional, arising from nationalistic sentiments. The Commission found it impossible to discuss the fuel problem during the first two months of its work because of the atmosphere which had been created by a vociferous public campaign on this issue. This campaign, in which Nationalists were abetted by or abetted the Communists, had started when the President sent Congress a bill for petroleum legislation, before our arrival, but later it was turned against the “Viceroy” and “his little abbinks.” To quiet this agitation, President Dutra took preliminary steps to implement the government refinery program which had been proposed earlier. General discussions of petroleum in the Commission did not get far until January. Finally, however, a Brazilian subcommittee, headed by the President of the National Petroleum Council,7 brought in a report which we found very encouraging. While not as clear and forceful as might have been wished, this memorandum by a responsible official (and General in the Brazilian Army) arrived at the definite conclusion that rapid petroleum development requires the cooperation of private foreign capital.

Whether President Dutra will push for the legislation which is needed to bring in petroleum capital, or whether the Brazilian government will concentrate on the half-solution of erecting and operating refineries in Brazil, remains to be seen. The approach of the next national election date, May, 1950, discourages too great optimism on this matter, but I believe there are chances of bringing about a satisfactory settlement of the problem if some “face saving” measures can be put forward. If the solution of the petroleum question in Brazil is of real importance to the United States, I would urge that it be attempted during President Dutra’s term, as a new president might not be in as favorable a position.

Thirdly, balanced development obviously requires that programs in one field take account of programs in other fields and that proper provision be made for complementary facilities—for example: local feeder roads for crop-carrying railroads; railroads to bring raw materials to a steel plant. Brazil, like other countries, has the difficult problem of obtaining proper economic planning without over-extending the government’s responsibilities or overcentralizing governmental administration and policy-making. Brazil has many able and conscientious [Page 555] public officials, but the number of qualified technicians needs to be increased in many fields.

Self-help

The United States Delegation considered that one of the principal reasons for its presence in Brazil was to make it clear to Brazilian officials with whom it came in contact that Brazil could not expect huge amounts of assistance from the United States, and that the way to get assistance is to do what can be done with the country’s own resources. There was no need to argue this proposition. The Brazilian members of the Commission accepted it fully from the start.

Nevertheless, “self-help” will remain a central issue both for Brazil and the United States. On the Brazilian side, inevitably there will be attempts to gain political credit and avoid or postpone internal problems by swinging deals for foreign assistance. It will be hard to impose the proper taxes on all those who are able to pay. It will be impossible to crack down on the real estate boom sufficiently to kill it once for all. It will be difficult to adopt and carry out really bold policies for agriculture.

On the United States side, it will always be difficult to judge, at any given moment and in connection with any given project, whether the Brazilians are really doing all they can be expected to do.

Financial Stabilization

The third leading idea of the report grew very definitely out of our studies and discussions while in Brazil. We were forcibly struck by the distorting effects of the wartime and postwar inflation, both with regard to the diversion of resources into apartment houses and office buildings, and with regard to its adverse effects on the financial stability of public utility enterprises. We observed a vicious circle in which short-cut methods of government finance had contributed to inflation, while inflation had helped to destroy the market for government securities. We were convinced also that the habit of inflation in Brazil is intimately tied up with a failure to work out consistent and effective economic policies generally. We were encouraged, however, by the fact that the budget had been balanced in 1947 and most of 1948, and by indications that President Dutra’s administration is determined to maintain financial equilibrium in 1949.

One cannot be over-optimistic that Brazil will altogether avoid inflation in the next few years. There is no group whose economic interests have been set back decisively by inflation in the past. There are too many influential groups which have a definite interest in continually rising prices—among them investors in real estate, the market for which was somewhat unsettled in 1948, although market values remained at a high level. Unfortunately, depreciation of the [Page 556] cruzeiro is always available as a “remedy” for a decline in prices, whether or not it is really needed to maintain the flow of agricultural and manufactured products into exports.

The Balance of Payments

One aspect of the issue of self-help is the question of how Brazil is to pay its own way in international exchanges of goods and services. The report stresses the significance of the balance of payments, both as a guide in formulating development policies, and as a criterion for the timing of development programs.

The need for import controls is obvious, particularly during the next year or two until Brazil has cleaned its slate of short-term trade debts. The present Brazilian government is reluctant to envisage import controls as a more or less permanent thing, preferring to be optimistic both about export possibilities and an inflow of foreign capital. The industrial interests, on the other hand, are quite happy with import controls. An early draft of the report contained the observation that the Export-Import Department of the Bank of Brazil sometimes uses import controls for protective purposes. Such direct criticism was considered inadvisable, and these remarks were deleted.

In general, one finds in Brazil a perhaps natural reluctance to face the balance of payments problem. Brazilian industry, by and large, is not interested in acquiring export business the hard way by improving quality and reducing unit profits. The government (at least outside of the Exchange Department of the Bank of Brazil) is reluctant to curtail imports any more than seems absolutely necessary. Meanwhile, it hesitates to take the political risks that would be involved in bringing in foreign private capital to develop petroleum—the only sound way of rapidly freeing Brazil from a substantial part of its present essential import requirements.

Recommendations Made by the Joint Commission

The report contains many recommendations and suggestions, explicit and implicit, both to the Brazilian government and to the United States government. Some of these suggestions touch on actions which can be taken by the United States. Some are matters on which the United States ought to insist in its future dealings with Brazil.

The Flow of Private Capital

The report stresses the necessity and desirability of stimulating a flow of private capital into Brazil (although a careful reading of the report will also show the need for loans from the World Bank and the Export-Import Bank).

We found general agreement among the American business community in Brazil, as in New York, that foreign exchange uncertainty [Page 557] is an important factor restraining direct investments by persons not already familiar with Brazil. We had no difficulty in persuading our Brazilian colleagues that we should stress two things which the Brazilian government ought to do in this connection: (1) to end, as soon as possible, delays in remittances both for imports and for other purposes such as transmission of profits, and (2) to codify and clarify the exchange regulations. We had to agree, however, that the short-run dollar balance of payments position in Brazil will not allow a rapid elimination of the back-log of short-term debts unless short-term credits can be obtained by Brazil, either from private sources, from the International Monetary Fund, or from other sources. It may be within the power of the United States government to assist Brazil in this respect.

Two suggestions bearing on the stimulation of a flow of private capital are directed particularly to the United States government: (1) guaranties for transfers of profits and capital, and (2) tax concessions to American investors abroad. Both suggestions will require joint implementation, of course. The United States should not guarantee payment of dollars to investors withdrawing cruzeiro funds from Brazil before obtaining reasonable assurances of dollar reimbursement from the Bank of Brazil. Moreover, guaranties to private capital should also be obtained from the Brazilian government, through a treaty on investments. Any possible tax concessions to Americans investing in Brazil—a measure whose value is over-stressed in Brazil—should be coupled with the negotiation of a treaty to eliminate all double taxation.

These two suggestions, more than any others made in the report, call for basic policy decisions by the United States government. The issues involved are, of course, much broader than simply between the United States and Brazil. The American members of the Joint Commission, having had the opportunity to look at the problem of private capital movements through the eyes of their Brazilian colleagues, are fully persuaded that our present policy of reiterating our faith in the willingness of private capital to move into countries like Brazil, while taking no active steps to foster a larger movement, is not adding to United States prestige abroad. Either such steps as we have suggested should be taken, or the emphasis in United States foreign economic policy should shift to governmental loans. The first alternative is in the interests both of the United States and of the underdeveloped countries.

Finally, in relation to the flow of private capital, the report contains suggestions that the Brazilian government should take the legislative and administrative actions necessary to bring foreign mining and petroleum development capital into the country. The interest of the [Page 558] United States government in these developments may be such that it is warranted in making a determination of the practical steps it can take at this time to hasten these actions.

Technical Collaboration

President Truman’s Point Four Program,8 announced at a time when the Commission’s work was nearing completion, calls for the provision of technical assistance to underdeveloped countries. Many useful opportunities for such aid are noted in the Joint Commission’s report, though the Commission made no attempt to analyze this problem systematically or to propose Priorities.

As in many other countries, the greatest needs for assistance in Brazil—at least of types which the United States government might undertake to provide—are undoubtedly in the fields of agricultural productivity, farm credit organization, and improvement of health conditions. Brazilians are good at drawing up blueprints for programs. They have often succeeded magnificently in providing physical facilities for such programs as agricultural research and industrial training. The more difficult tasks are to organize field operations and develop adequate personnel, well trained and devoted to their jobs, and it is in these directions that any help which the United States might provide would be most useful.

The report also contains various suggestions for study and review of administrative organization and operations, both in general government and specifically in the administration of social insurance. Assistance for such studies might appropriately be provided by the United Nations.

Terms of Technical Assistance

The report has nothing to say on the terms and conditions under which technical assistance might be provided. The United States members of the Commission consider it most advisable—indeed essential—that assistance should be given only on the basis of matching funds (not necessarily equal matching) or on a repayment basis (in cases where projects can be made to have self-liquidating features). Only in these ways will the Brazilian government and people feel that the assistance they are obtaining is really worthwhile. Without this feeling on their part, the political disadvantages to the United States may easily outweigh all other advantages calculated to accrue from our assistance programs. Moreover, there must be a Brazilian financial stake in order to assure Brazilian review of the relative needs in different fields, and in order to assure continuity in programs and projects.

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Financial Stabilization and Self-Help

The Commission’s suggestions to the Brazilian government with regard to financial stabilization and self-help are systematically outlined in the summary of the report which was released by the Department of State on March 9 [10],9 I shall add here only certain observations as to the attitudes which the United States government might take toward these suggestions.

We cannot expect rapid progress in the development of capital markets in Brazil, but emphasis on this goal is desirable as a means of persuading the Brazilians to adopt a sound and broad approach to problems of economic development.

While delays may also be expected in the implementation of the Commission’s tax recommendations, Brazilian representatives should be reminded from time to time that equitable and efficient taxation is an essential element in a program of economic development designed to benefit the whole people, and an easy test of the degree of “self-help” that is being achieved.

Improvement in the regulation of public utility rates involves new legislation in conformity with the 1946 Constitution of Brazil, as well as administrative reorganization and a necessarily gradual improvement in the technical personnel of the regulatory agencies.

The creation of an efficient Central Bank and other useful government-controlled financing institutions will take time. In fact, the report takes the position that careful preparation is more important than immediate establishment of any such institutions, with the possible exception of the Central Bank. We had to modify this general position slightly in the case of the proposed “Rural Bank”, since there is strong pressure on the Brazilian government to go ahead with the formation of such an institution immediately after the creation of a Central Bank, if the Brazilian Congress can be persuaded to take the latter step. In the case of the Rural Bank, the United States attitude should be to urge adequate capitalization (so as to avoid inflationary financing) and early attention to the needs of small farmers for supervised credit.

Priorities

The report does not go as far as might be wished in arriving at firm recommendations as to Priorities, either of different types of investment or of different types of programs which might involve external technical assistance. In truth, the magnitude of Brazil’s requirements is so great, in relation to available resources, that clear-cut Priority recommendations are impossible. Some guidance is provided, however, [Page 560] by the principle of balanced development as applied to agriculture, public utilities, fuel production, and complementary facilities in general. Educational and health needs are also of strategic importance.

Brazilian Reactions to the Joint Commission’s Work

During the early part of our stay in Rio de Janeiro, Brazilian attitudes towards the Commission seemed to be compounded of three feelings. There was an element of suspicion of the purpose of the United States in sending this mission to Brazil—a feeling on which the extreme Nationalists and Communists played, with their petroleum campaign. There was also evident a desire among some groups, inside or outside the government, to exploit our presence in Brazil by pressing Brazil’s claims for large scale financial assistance from the United States. Some people seemed to have the misconception that the United States would soon be forced by the world situation to adopt a “Marshall Plan” for South America. Finally, there was a good deal of pure ignorance and puzzlement about the nature and purposes of the Joint Commission.

If, at first, these attitudes influenced any of the Brazilian members of the Central Commission or Subcommissions with whom we came in regular contact, they were soon dispelled.

Information about the Commission’s work gradually trickled out to the newspapers. Toward the end of our stay in Brazil there were many evidences of a widespread appreciation of the real effort which the Commission had been making to get a full understanding of Brazilian problems and to recognize useful ideas, whatever the source. Expectations of a “Marshall Plan” are no longer entertained in Brazil, but Brazilians are conscious that their opportunities to obtain loans from the United States have not been completely shut off. They are curious to know what criteria will be established for our lending policies. At the same time, the widespread interest in the SALTE Plan10 gives some evidence of a belief that Brazil should be doing more for itself.

The Brazilian government has undoubtedly been taking the report seriously. The fact that, up to the time we left, President Dutra had not yet sent an expected message on the SALTE Plan to the Brazilian Congress suggests that he wished to keep his message in harmony with the report. It is also known that the Finance Minister has been giving the Portuguese text of the report an extremely careful reading, preparatory to approving its publication.

Implementation

Implementation of the Joint Commission’s report presents many difficult problems. Now that President Truman has enunciated the [Page 561] “Point Four” policy, the development of a joint program for Brazil falls within the framework of the broader program.

Three aspects of the Point Four policy seem to be well established. First, it envisages a long-range program. Secondly, it relies heavily on the flow of private capital to underdeveloped countries. Thirdly, programs of technical collaboration are to be greatly expanded and extended. It seems to the United States members of the Joint Commission that the Point Four policy, to operate successfully, will have to embrace two other essential elements.

In the first place, it seems to us that financial assistance from the Export-Import Bank ought to be viewed as an integral part of the program, to help provide the tools which technicians will need in assistance projects in fields where private funds may not be immediately forthcoming. It would be unrealistic to suppose that the aims of the program can be achieved without the United States government itself making loans for specific key projects for which private capital is unavailable. The power to loan is also a vital bargaining weapon for the United States in dealing with underdeveloped countries. Negotiations regarding self-help and technical collaboration or the treatment of private foreign capital should not be divorced from negotiations regarding loans. Moreover, to strengthen our bargaining position, the lending policies of the Export-Import Bank ought to be thoroughly intelligible to the underdeveloped countries. The use of Export-Import Bank loans for political purposes, unrelated to consistent development programs for which a local government is being urged to give its full support, ought to be minimized.

Another vital element of a workable Point Four policy will be a new technique—strategically sound and tactically useful—of consultation between the United States and each country that is to be aided, aimed at reaching agreement on specific programs. The tactics will have to be flexible, adapted to the peculiarities of each country. Because of the newness and long-range character of the Point Four policy, the technique of consultation will probably have to be developed gradually on a country-by-country basis. Those who are given the responsibility of formulating proposals to be made to any given country ought to have as intimate as possible an understanding of the economic problems of that country, both long-run and immediate, as well as a general grasp of its political situation.

Steps in Developing a Brazilian Program

Initial negotiations to develop a program of collaboration along lines consistent with the report of the Joint Commission might cover the following points. First, what can the United States do to assist Brazil to solve its short-run balance of payments problem? The United States negotiators should be forearmed with a good understanding [Page 562] of the International Monetary Fund’s policy towards Brazil, and they should have at hand a careful survey of the possible availability of short-term credits from other sources. Second, what steps ought now to be taken toward the negotiation of treaties of commerce and investment, and for the elimination of double taxation? In discussing these matters, the United States negotiators should have a clear idea of what legislation may be forthcoming on exchange guaranties and tax concessions to American investors abroad. Third, a start should be made in formulating plans for technical collaboration. Fourth, further information should be requested from the Brazilians on their policies and plans for financial stabilization, on the status of measures to implement the SALTE Plan, and on plans for the internal financing of various government projects within or outside the scope of the SALTE Plan. Fifth, the Brazilians may be expected to open the question of financial assistance from the Export-Import Bank, and the United States negotiators should then be prepared to emphasize the importance of careful planning of any specific projects within a consistent framework of economic development policies, the importance of adequate financing of internal expenditures both for individual projects and for the development program in general, and the desirability of working out such projects for technical collaboration as might contribute to the success of individual projects or of the broader Brazilian program.

Later steps in working out a rational program of United States assistance for Brazilian economic development can hardly be predicted at this moment. We cannot expect that all of our suggestions will rapidly be put into effect in Brazil. There will be a continual need to prod the Brazilians into action, and also a need to review constantly the progress made.

The Brazilians, for their part, may well feel that their problem is to prod the United States into action, particularly in the direction of making loans. The Brazilian members of the Joint Commission have already advanced the suggestion, included in the letter of transmittal to the Finance Minister, of setting up “a mechanism to foster the achievement of the measures proposed in the report”. Possibly this proposal will be renewed in more definite form.

Some advantages can be seen in having a continuing joint organization (with a composition similar to that of the Joint Technical Commission) to assume responsibility for the Commission’s report. There are, however, many obvious difficulties in the idea. It would be undesirable for American participation in such an organization to be only on a technical level. It would be equally unfortunate if the American members were put in the position of being able to exercise far-reaching [Page 563] influence on actions of the Brazilian government. Difficulties would arise if a permanent joint body were exepected to give close consideration to specific projects which might become the subject of loans from the United States. It would not be easy to coordinate the operations of a continuing joint body with the operations of the Department of State and our Embassy.

If it is found desirable to set up some kind of joint committee, perhaps a better solution would be to limit its life to the duration of particular studies or negotiations, whether in Washington or in Brazil. Such a committee (or committees) might include departmental representatives on both sides and possibly also public members. Continuity in the development policy might be the responsibility of special secretariats in the two countries. These secretariats could be charged with the detailed negotiations necessary to carry out agreements reached in the joint committee sessions. On the United States side, the secretariat might be located in the Department of State or in some new agency.

To what extent might the difficulties suggested above be avoided by transferring leadership to United Nations agencies? In some parts of the program United States aid may possibly best be given through the United Nations. In the early stages of the program, however, it will be difficult to develop sound procedures without direct United States participation in planning and in negotiations with the country concerned. It must be remembered that the United Nations agencies lack the bargaining power of control over loanable funds, since they have no direct influence on lending policies of the World Bank or of the International Monetary Fund.

The co-ordination of United States programs with actions of the international financial agencies is a problem which will require some attention.

Joint Commissions for other Countries?

In developing country programs to carry out the Point Four policy the United States government would probably find it helpful to have reports by joint study commissions available as a basis for subsequent discussions. It must be recognized, however, that the preparation of a useful report takes time. Moreover, the United States government will not find it easy to staff any considerable number of study commissions simultaneously.

If the report of the joint study commission (or the report of the United States representatives on the commission) is to be really useful, it must not be narrowly conceived. In particular, it must not be limited to the consideration of a country’s needs in various specific fields. It [Page 564] must attempt to establish general perspectives and to evaluate the basic economic problems of the country under study. It must give some indication of the manner in which the economy of that country actually functions.

The experience of the Joint Brazil–United States Technical Commission points to certain problems of preparation and planning which must be solved in order that any such commissions may operate more effectively in the future.

The difficulty of carrying out a sufficiently comprehensive study in Brazil was not clearly foreseen. The initial organization of the Commission’s work, at the suggestion of the Brazilians, into a large number of subcommissions was perhaps not the best way to achieve rapid progress. It did, however, enable the Commission to get the benefit of a considerable amount of discussion of important problems by representative Brazilians, inside and outside the government.

The work of a joint commission might be facilitated if exploratory discussions could be conducted in advance, particularly by the economists on both sides. In these discussions, the current situation of the country could be quickly reviewed and problems spotted, consideration given to the availability of economic and financial information of various types, and the organization of the joint commission could be planned.

The language difficulty was particularly acute in Brazil, perhaps more so than it would be in Spanish speaking countries.

Proper local publicity for the aims and activities of a joint commission is a difficult thing to achieve, particularly since the results of studies cannot be foreseen while they are still going on. It would be desirable to make special efforts to keep the United States delegates adequately posted on current events in the local country. These functions of publicity and information might be performed for the Mission through the Embassy, or staff members might be added to the Mission specially for these tasks.

Finally, it will always be of the highest importance to select as American representatives men who will form an effective team, bringing to the work of the Commission outstanding abilities in international affairs, in business matters, in economics, and in various technical fields.

Respectfully submitted,

John Abbink
  1. See the letter from Secretary of State Acheson to Mr. Abbink, dated: August 24, 1948, printed in Foreign Relations, 1948, vol. ix, p. 364.
  2. A summary of the report was released on March 10, 1949, as Department of State press release No. 132, which is printed in Documents and State Papers, March–April, 1949, p. 695. The report was issued on March 24, 1949, as Department of State Publication 3487.
  3. Pedro Luis Corrêa e Castro.
  4. Octavio Gouvêa de Buihões, Brazilian Co-Chairman of the Joint United States–Brazil Technical Commission.
  5. Getulio Vargas, President of Brazil, 1930–1945.
  6. Documentation on United States interest in Brazilian petroleum legislation is contained in Foreign Relations, 1948, volume ix .
  7. Gen. João Carlos Barreto.
  8. Documentation on this subject is contained in volume i.
  9. See footnote 2, p. 552.
  10. A comprehensive plan of the Brazilian Government for development in the fields of health, food supply, transportation, and electric energy.