320/10–651: Circular airgram
The Acting Secretary of State to Certain Diplomatic Missions 1
Reference is made to the Department’s circular airgrams of June 27, September 5, and September 27 regarding the forthcoming session of the General Assembly. There are set forth below essential background material and views of the Department concerning the problem of financing economic development, which will be the most important item on the agenda of the Assembly’s second (Economic and Financial) committee. You are requested in your discretion to outline our views to the appropriate officials of the foreign office and report reactions as soon as possible. For your information, it has been apparent in previous UN meetings (particularly ECOSOC) that some delegates speak and vote according to their personal views and not on the basis of a governmental position. In fact delegates have on occasion supported positions that appear to have been contrary to those of the responsible home government. It is, therefore, important in discussing our views with the foreign office that you express the hope that its delegation will be instructed on this issue—preferably in support of the U.S. position.
Financing economic development has been a perennial agenda item of ECOSOC and more recently of the General Assembly. The position of many underdeveloped countries is that international financing facilities, i.e. private foreign investment, International Bank loans, and Eximbank loans, are inadequate to their needs for external capital; since, they say, many essential development projects are of a non-self-liquidating nature and cannot be financed by loan capital or by private investment. Therefore they seek “grant” aid for such projects as roads, irrigation systems and the like. Pressure for international grant aid has been given impetus by recommendations in two recent publications, the Rockefeller Report “Partners in Progress” and the report by a Group of Experts appointed by the SYG of the UN on “Measures for the Economic Development of Underdeveloped Countries”. Both of these reports recommend the establishment of an International Development Authority to provide substantial grant aid to governments of underdeveloped countries as a supplement to [Page 31]international loan financing. All governments would be invited ta participate in the IDA but in fact the funds that the IDA would make available would have to come largely from the U.S.
The most recent action on the issue of an international agency to provide grant funds for economic development was taken at the 13th session of ECOSOC in a resolution which called for further study of and report on the subject. The U.S. Government agreed to the ECOSOC resolution to continue study of the subject but made clear that it is unprepared at this time to support the establishment of an IDA. The U.S. believes that the resources of existing international financing institutions are adequate to the need, especially when supplemented by the grant aid programs of developed countries. (For fuller exposition of U.S. position on IDA see below.) Notwithstanding known U.S. opposition to the idea, a strong concerted effort to force the issue is likely to be made at the General Assembly. It is, therefore, desirable that you explain the U.S. position to the government to which you are accredited and where politic seek to secure support for that position.
Outlined below are the main elements of the U.S. position on the subj ect of financing economic development.
U.S. Position on Financing Economic Development
Economic development can be accelerated through a wider application of improved technology and an increasing rate of capital formation, particularly in selected areas of the economy. The primary responsibility for economic development, the planning, the organizing, the executing, and the financing rests with the local government concerned. The international community can help but it can at most do only a fraction of the job. The extraordinary progress that some underdeveloped countries have made in recent years is attributable to domestic effort and energy for which there is no international substitute. In those countries where development has lagged, the problem in largest part has been the failure of the governments concerned to plan development programs, to translate these programs into concrete projects, to mobilize domestic resources for their execution, and to utilize effectively the international capital and technical assistance that is available from existing institutions. At the present time, when the financial position of many underdeveloped countries has improved, it is particularly important that domestic efforts to promote development be intensified.
A. The role of underdeveloped areas.
- Realistic planning of their investment programs and the establishment of a system of priorities for the investment of available capital: domestic effort can be supplemented by the technical assistance [Page 32]available through the UN, its regional commissions and specialized agencies, and through bilateral programs.
- Improved mobilization of domestic savings: technical assistance is available in this field.
- Optimum use of foreign exchange resources for economic
development: this must apply not only to such resources obtained
through foreign grants and loans but also and primarily to the
foreign exchange proceeds from exports. In this regard, it is
important to realize that, since 1949, the external financial
position of many underdeveloped areas has improved
- Increase in prices and volume of raw material sales has enlarged export receipts of underdeveloped countries.
- Terms of trade have moved in favor of underdeveloped countries, i.e. the prices of goods they import have, in general, risen less than the prices of goods they export.
- As a result, the reserve position (gold and foreign exchange) of most underdeveloped countries has improved and the volume of their imports, including imports of capital goods from Europe and the U.S., has greatly increased.
- Full utilization of existing international financing facilities, both public and private, in order to secure additional resources which the economy can use effectively.
B. U.S. action to promote economic development of underdeveloped areas.
For its part, the U.S. Government, notwithstanding the need to divert resources to the defense effort, has given and will continue to give strong support to the export of both capital and technology to promote economic development. Specifically:
- U.S. Government has made and will continue to make loan capital available for economic development through the U.S. Eximbank. (In the period July 1945–June 1951 Eximbank authorized loans to underdeveloped countries in excess of $1 billion.) The present Congress has just authorized an increase in Eximbank lending authority of $1 billion.
- U.S. Government has supported and will continue to support economic development activities of IBRD. U.S. Government has made its subscription freely available; has facilitated flotation of Bank bonds in U.S. capital market; has encouraged the Bank to give increased attention to economic development, to enlarge its technical assistance activities, to adopt flexible policies.
- U.S. Government has tried to stimulate private capital outflow by such measures as investment treaties, tax treaties, tax credits, and government guaranties against such risks as inconvertibility and expropriation. (At present time, guaranties against extraordinary risks of private foreign investment are made only by ECA. U.S. Executive asked 81st Congress to authorize guaranties by Eximbank to cover new private investments anywhere in free world but Congress did not act on proposal.) The net outflow of U.S. private long-term [Page 33]capital to the underdeveloped countries in the period 1947–1950 has been approximately $2 billion.
- U.S. Government has supported ECOSOC proposal that IBRD explore desirability and feasibility of establishing an International Finance Corporation to promote the financing of productive private enterprise through loans without government guarantee, through equity investments, or by other appropriate means.
- U.S. Government has supported and will continue support technical assistance program of UN and OAS and will itself provide technical assistance on a bilateral basis where requested.
- U.S. Government recognizes that some underdeveloped countries whose internal resources and external borrowing capacity is limited require extraordinary aid to achieve momentum in the development process. Consequently President has requested and U.S. Congress will probably authorize grant aid funds for economic development, including technical assistance, of between $400-$500 million for this fiscal year. (Note that bulk of proposed grant aid is for Asia and Near East. Aid to Latin America will continue in form technical assistance and loans.)
- While first priority in the allocation of scarce goods must necessarily go to support the military effort, U.S. Government recognizes that economic development is an essential element in the total concept of “defense” of free world. Therefore the U.S. Government is assisting underdeveloped countries in obtaining priorities for equipment for economic development. One of the important functions of certain U.S. Government departments is to present the requirements of foreign countries to U.S. allocating and production authorities so that the needs of foreign countries both for maintaining essential civilian activities and for economic development can be met.
- U.S. mobilization policy is not restrictive but expansionist. We are expanding capacity at home and helping to expand it abroad so that the productive base can be established to support both an adequate defense establishment and the economic development requirements of the free world.
C. U.S. position on non-self-liquidating projects and International Development Authority.
- Non-self-liquidating projects. Many projects basic to economic development, such as irrigation and drainage systems, roads, etc., are not in themselves self-liquidating, i.e., they do not yield revenues directly either in domestic or foreign exchange to repay the costs of the investment although they do make an important indirect contribution to national income, productivity, export potential, etc. Underdeveloped countries claim that projects of this character cannot be financed by loans and require grant aid. In fact, both the International Bank and the Export-Import Bank have indicated their interest in and willingness to finance non-self-liquidating projects which contribute indirectly to increased productivity, and both institutions have in fact extended loans on many occasions to finance projects of this character, e.g., IBRD loans for road and telecommunications development in Ethiopia, power development in India, Export-Import [Page 34]Bank loans for road development in Bolivia, irrigation works in Afghanistan, etc. Moreover, the improved balance of payments position and prospects of most underdeveloped countries has enhanced their ability to finance non-self-liquidating projects with their own resources as well as to assume larger debt obligations in order to accelerate investment in this field.
- International Development Authority.The U.S. Government is not prepared at this time to support the establishment of an international agency for the purpose of distributing grants. No organization can be truly international in character unless a sufficient number of countries are able to make effective and significant contributions to it. At the present time it would be unrealistic to assume that substantial contributions would be forthcoming from members of the United Nations generally to an international development authority such as has been proposed. Developed countries which were formerly substantial exporters of capital are not in a position now to provide additional funds for grant aid over and above their present commitments. In fact, many members of the International Bank have found it difficult to permit the Bank to use the funds they subscribed initially to the Bank’s capital. Similarly, members of the United Nations have found it difficult to make substantial contributions to other international undertakings, such as the relief and reconstruction of Korea and the settlement of Palestine refugees. But, to be genuinely international should obviously be a prerequisite for any such development authority.
This does not mean that grant assistance will not be made available where needed. Many governments, including that of the U.S., have made available grant assistance for economic development over recent years and will doubtless continue to do so. Metropolitan powers have provided grant assistance for the economic development of their dependent territories. Members of the British Commonwealth have recently announced their intention to make grants-in-aid in support of the Colombo Plan, for the more rapid economic development of countries in the area of South and Southeast Asia. The President of the U.S. has requested and the Congress will shortly authorize the provision of grant funds for investment in such basic fields as agriculture, health, education and transport in underdeveloped countries that need extraordinary assistance.
This does mean that such grant aid as is likely to be made available in the foreseeable future can effectively be made available without creating new international agencies and without establishing grant aid as a normal feature of international cooperation.
Department would appreciate early response from you regarding 1) local government’s views on U.S. position, and 2) instructions local government plans to give its delegation to G.A.[Page 35]
It may be helpful in your discussions with officials of the government to have data available which indicate that the country is, in fact, making economic progress and is receiving substantial international aid under established institutions. Department will airgram within next few days data where available and relevant on the specific country to which you are accredited relating to its improved financial and trade position, to the volume of external assistance country has received in postwar period, and other like information.
- Sent to USUN and 38 diplomatic missions for action and to 19 for information only. The former generally comprised posts in Latin American, Near Eastern, African, South Asian, and Far Eastern countries.↩