Foreign Relations of the United States, 1951, National Security Affairs; Foreign Economic Policy, Volume I

NAC Files, Lot 60 D 137

Memorandum by the NAC Staff Committee to the National Advisory Council

secret

[Washington,] April 12, 1951.

NAC Doc. No. 1122

Subject: Lending Operations of the Export-Import Bank and the International Bank

Problem

The memorandum prepared by the President of the International Bank and the Chairman of the Board of Directors of the Export-Import Bank have raised a number of questions relative to the coordination of the lending activities of the International Bank and the Export-Import Bank. This paper is directed primarily toward the relationship of the two Banks but also deals with the question of coordination of grant and loan assistance in this period.¹

Long Range Development Financing

(1) From the time of the founding of the International Bank, it has been the established policy of the NAC that there should be a presumption that members of the International Bank should look first to that institution in developing and financing long-range development programs. This policy rests upon the following broad historical basis. In establishing the International Bank it was anticipated that for the longer term that institution could more appropriately on a global basis assume the initiative with foreign governments in assisting in framing their development programs than a purely United States institution. This view was also based on the expectation that the International Bank would be able to tap the private capital markets not only of the United States but also of other countries. There would appear to be no reason to change the general presumption for the longer term, but it is important that there be a clear understanding as to what this presumption should imply as to the relations of the two institutions, especially in relation to the problems immediately ahead.

(2) It would clearly not be desirable either for the immediate period ahead or for the longer term for this Government to attempt to delineate fixed geographical areas of operations for the two Banks with reference to development lending; and clearly this Government should not approve a policy of banking monopoly of one or the other institution with respect to any specific area either for the short or long run. There may well be cases in which it will be in the interests of this country that both the International Bank and the Export-Import Bank simultaneously finance development projects in a given country within an agreed frame of reference of development for that country. In such cases, as generally in the planning of the two Banks with respect to development, there should be close and continuous liaison between the staffs and management of the two institutions. Where questions may arise in connection with appraising the financial aspects of programs proposed by either or both of the Banks operating in a given area, the United States views will continue to be coordinated through the NAC and the United States position expressed in the International Bank through the Executive Director.

(3) One financial policy question which may arise in connection with the operations of the two Banks in any given area is of sufficient importance to be specially noted. This is the question of assessment of debt-repaying capacity.

At the outset it must be recognized that there is no mechanical formula for appraising the debt-bearing capacity of a given country. In making such an appraisal, statistical analysis of the current and prospective balance of payments is, of course, important; but any projection of foreign earnings and receipts over an extended period of years must necessarily be subject to a wide margin of error. Furthermore, appraisal of intangibles such as stability of political and financial institutions, experience of financial management, and ability and willingness to marshal resources to repay foreign debt are probably more important in the last analysis than formal statistical analysis. It would thus be a mistake to assume that an appraisal of a country’s capacity to repay at any given time could be quantified in any sense other than an illustrative range of figures.

In addition borrowing capacity is in part a function of the uses to which borrowed funds are put and such effects can be judged only in the light of specific projects or programs.

These considerations point to the necessity for keeping a country’s borrowing capacity under continuing review in the Banks and in the NAC, rather than establishing a fixed borrowing limit which is presumed to have validity for an extended future period.

Where differing judgments by the Banks as to borrowing capacity would result in limiting the lending activity of either of the two banking institutions in a given area, it would appear essential that no action should be taken by either Bank without review, to the U.S. Executive Director of the International Bank and to the Export-Import Bank.

Strategic Materials

In the area of strategic material development it would appear clear that the Export-Import Bank, rather than the International Bank, should act in making loans where the development is being undertaken essentially for United States procurement. Even in this field, however, it is possible that, in certain cases, countries may be unwilling to enter into bilateral arrangements with the United States with respect to the expansion of output and exportation of strategic materials, and would consider International Bank financing more acceptable. The cases in point are of course those countries which may be asserting a policy of neutrality and for this reason might be reluctant to enter into bilateral arrangements on strategic materials, but might be willing to expand output of strategic materials, for export to the free world generally. In general these cases are likely to be rare, but it is possible that India, for example, might prove to be a case in point.

Coordination of Development Lending and Grant Assistance

One of the major factors which must inevitably have a marked bearing on the area of activities of the two banking institutions in this period is the coordination of loan assistance with grant assistance programs being undertaken by this Government in undeveloped areas of special political importance. The memorandum of the President of the International Bank notes the special responsibilities of the Export-Import Bank with reference to United States activities in areas of particular political significance.

In general, in such areas it will be essential that the loans and grants be extended within the framework of a coordinated program.

In general, in the development of such programs involving coordination of loan and grant assistance, it would appear to be in the United States interest that the broad planning be undertaken within this Government in cooperation with the local governments, rather than by an international lending institution, especially in the following circumstances:

a. Instances in which the United States may wish to link development assistance with other specific objectives of a political, economic, or military character in a given country.

b. Instances in which for political reasons the United States might wish the loan to stand as a symbol of direct United States interest in the area in addition to serving its normal economic function.

The fact that primary responsibility must be assumed within this Government for evolving programs in such areas in cooperation with foreign governments should not preclude the International Bank from operations in these areas. In fact, such cooperation will be of great value in achieving both short-run and long-run objectives in the field of economic development.

1. For the Brazilian background to this question, see vol. ii, p. 1188.