Subject: Agenda for Council Meeting of Tuesday, April
17th
1. The memoranda prepared by the President of the International Bank and the
Chairman of the Board of Directors of the Export-Import Bank (NAC Document No. 1107) have raised a number of
questions concerning the coordination of the activities of the two banking
institutions in this period.1 There has been prepared, as a basis for
Council discussion, NAC Document No.
11222 which deals not only with the
problems raised in these memoranda but also with the question of
coordination of lending programs for development with grant assistance
programs being undertaken by this Government. This question inevitably must
have an important bearing on the operations of the two banks in this
period.
The problem of evolving a coordinated program is particularly important in
areas of special political significance. (Attached is a letter from the
Deputy Administrator of ECA to the Bureau of
the Budget bearing on this problem.)
In these areas a major question is whether primary responsibility for
evolving such programs in cooperation with local governments must not be
assumed by the U.S. Government rather than by an international
institution.
2. With reference to the Foreign Assistance programs for Fiscal Year 1952 the
Council adopted the following principle in December 1950 (NAC Action No. 442):
It was felt desirable to review the implications of this action in terms of
the legislation which is currently in preparation for presentation to the
Congress. More specifically, the question is raised whether the legislative
presentation should reserve to the Export-Import Bank all loan operations
undertaken by this Government and should deny lending authority to other
agencies extending foreign assistance.
The following cases are particularly pertinent to this general policy
problem:
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[Attachment]
The Deputy Administrator of the Economic Cooperation
Administration (Bissell) to Mr. George W. Lawson, Jr., of the Bureau of the
Budget3
secret
Washington, March 30,
1951.
Dear Mr. Lawson: It has come to my attention
that certain of my remarks in the hearing on the Southeast Asia program
over which you presided on March 29 have been interpreted as an argument
for a policy as to the appropriate use of loans which may be
inconsistent with the views set forth by representatives of the State
Department, and, indeed, of this agency. I am writing you to forestall
any possible misinterpretation.
To restate them briefly, my views about the fiscal year 1952 program are
as follows:
(1) In general, I believe that the costs of heavy economic development in
countries which have no balance of payments problem should be financed
on a loan rather than on a grant basis, provided the conditions set
forth in paragraph (5) below as to the administration of loan funds can
be met. In making this general statement of policy, certain general
exceptions or qualifications should be recognized. I believe it entirely
appropriate to use grant funds to finance the planning that must precede
major projects. There may well be occasions where the early stages of
capital development projects should be financed with grant funds to
enable them to be begun promptly. Moreover, it will often be appropriate
to finance the repair of war damage on a grant basis even where such
activities are carried out as a preliminary phase of a development
project.
(2) I would propose that this general principle be applied to the
Southeast Asia countries, other than the Philippines, in the following
fashion and for the following reasons. All aid to Formosa should be
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on a grant basis because the
economic problem in this case is a true balance of payments problem.
There is no scope for loans in the Indo-China program, both because the
country is running a massive balance of payments deficit and because the
advanced state of internal political disorganization puts a premium of
[on?] flexibility of speed and on the
avoidance of requests for quid pro quos.
The same considerations apply, though with somewhat lesser force, in the
case of Burma. In the case of both Thailand and Indonesia I believe that
aid which is provided for the strengthening of institutions and for the
ultimate purpose of improving the distribution of wealth and income
should be on a grant basis but that, in accordance with the general
principles set forth in paragraph (1) above, all true capital
development should be financed on a loan basis, unless overriding
political considerations call for a modification of this position.
(3) In speaking of aid for the strengthening of specific institutions
(such as a health service or an agricultural service) it is important
that we do not fall into the error of making the basic distinction
between the furnishing of personal services (technical assistance) and
the furnishing of things (supplies and equipment). The success of JCRR’s
program can be attributed in considerable part to the fact that the
institutions being built (including the JCRR structure itself) were able
to furnish ECA-financed fertilizer and
thus gain rapidly in the esteem of and cooperation from the people and
government of Formosa. Similarly, the establishment of a broad
agricultural service, even in a country with no balance of payments
problem such as Thailand, needs to be set in motion by the catalytic use
of grants in the first year or two for some supplies and equipment such
as pumps to get an irrigation program under way. What is required is
more than simply a single demonstration here and there, but enough
technical help and enough equipment to get a broad program really under
way. By the same token, it is most important that the use of grant funds
in this manner be strictly limited as to time, the main objective of
such use being to put the governmental service institution involved on a
self-perpetuating basis as soon as possible.
(4) In the case of the Philippines I believe that an exception should be
made to the above general principle in the first year of the program.
Specifically, I recommend that the program of approximately $50,000,000
be on a grant basis. This recommendation is based on my conviction that
it is absolutely essential to get a wide-scale program covering many
fields of activity underway with the least possible delay and in a fully
coordinated plan. I believe there is a further political consideration
which is unique to this country. The proposed program will be undertaken
pursuant to the Foster—Quirino agreement negotiated last December, under
the terms of which the Philippine Government has already carried through
a drastic, painful, and altogether remarkable program of tax and reform
legislation. Moreover, there is further legislation of a reform
character that we will require during the calendar year. Although, I
believe, for these reasons an exception should be made in the Philippine
case, I doubt if the provision of $50,000,000 grant aid would, in fact,
turn out to violate the general principle stated above in any great
degree because it seems probable that most of this sum would be expended
for purposes other than economic development or else for the planning
and repair phases of development projects. It is our hope, of course,
that the total program
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for
the fiscal year 1952 will turn out to be considerably larger and will
include loan funds which it has not yet been possible to program.
(5) The general views set forth in paragraph (1) above, which I also
expressed at the hearing referred to above, are valid only on the basis
of certain assumptions as to the way in which loan funds are
administered.
-
First, loans must be programmed or, to
put it another way, loan funds must be used, not independently
to finance projects, but to cover the costs of certain elements
in overall economic programs. The programs must come first and
be developed as such by representatives of the receiving
government and the U.S. Government working in cooperation. Only
thereafter should a decision be made to finance certain parts of
the program on a loan basis.
-
Second, it must be possible to negotiate
loans promptly so that long and unnecessary delays will not
intervene between agreement between the two governments on a
program and the negotiation of one or more specific loan
agreements.
-
Third, the receiving country’s actual
expenditure of loan funds must be supervised in exactly the same
way as its expenditure of grant-in-aid funds. This is especially
important in Southeast Asia where, almost universally, the
governments are new and inexperienced.
-
Fourth, it must be possible to finance
with loan funds not only dollar or other foreign exchange costs
but also local costs, otherwise the loans will not perform the
functions of making up for the shortage of capital funds for
public or private investment in the country.
-
Fifth, the value of loans will be greatly
reduced unless their proceeds can be spent wherever necessary in
the world and not merely in the United States.
-
Sixth, and finally, if the need for
grants-in-aid is to be held at a minimum, some provision must be
made for loans in situations in which the public lending
institutions may not wish to extend credits but in which the
economic prospects of the receiving country and the purposes for
which aid is being given make the use of loan funds preferable
to that of grants. For instance, the internal and external
political dangers in a particular country may be so great as to
make it a poor risk for a loan yet its economic prospects,
provided the political dangers do not materialize, may be
sufficiently favorable to justify the use of loans rather than
grants for purposes judged to be necessary in the United States
interests. I do not have a firm recommendation to make as to the
way in which this problem should be solved. It would be unwise,
I believe, to give any other agency the power to compel the
lending institutions to make loans in amounts or to countries or
for purposes unacceptable to those institutions. There are
objections, also, to seeking an appropriation of funds to the
ECA to finance loans.
Possibly the best solution would be one whereby the ECA, in the case of the countries
in which it operates, could guarantee loans of this character
which would then actually be made by the lending institutions.
Whatever the appropriate solution, I am convinced that some
solution to this problem must be found if the programs are to be
undertaken in Southeast Asia or to have a real chance of success
at a minimum cost to the taxpayer.
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I cannot emphasize too strongly my conviction of the importance of
integrating the loan and grant operations in the manner indicated in
paragraph (5) preceding. I believe programs submitted to the Congress
should indicate total funds proposed to be made available to each
country, including items to be financed with loan funds as well as those
for which grant-in-aid appropriations are requested. Likewise, in
negotiations with other governments and in the supervision of
expenditures each country’s program should be treated as a whole. It is
only in this way that our government can make full and effective use of
all the available resources as means to attain a single set of ends in
each country.
I hope this will serve to clarify the view I expressed before you
yesterday.
Sincerely yours,
