E files, lot 60 D 133, “Investment Guarantees, 1953–1954”
Memorandum by the Deputy Director of Mutual Security (Rand) to the Director of Mutual Security (Stassen)
- Subject:
- Investment Guaranty Program.
1. The Program to Date.
Through the guaranty program, the U.S. Government offers, for a fee, insurance protection to new American investments abroad against the risks of currency inconvertibility and loss through confiscation or expropriation. Protection against currency inconvertibility was authorized by the ECA Act of 1948; protection against confiscation and expropriation was authorized by the ECA Act of 19501 and made available in mid-1951.
All the countries for which aid is authorized by the Mutual Security Act of 1951 are eligible to participate in the program. The assurances required to make the program operative have been obtained from 17 countries with respect to convertibility guaranties and from 15 of these 17 with respect to expropriation guaranties. Among the 17 are 4 of the non-European countries made eligible by the 1951 Act—China, Israel, Haiti and the Philippines. At March 31, 1953, 44 convertibility guaranties totaling $38,044,017 and 3 expropriation guaranties totaling $1,574,231, had been issued covering investments in 6 countries: France, Germany, Italy, The Netherlands, Turkey and the United Kingdom. The contracts issued range in amount from less than $20,000 to more than $14,000,000, and protect investments in industries so diverse as oil refining, sewing machine manufacture, seed cultivation, pharmaceuticals manufacture, and carbon black manufacture.
Thus far, some $700,000 of fees have been collected; no claims have been paid. Fifty-one applications for convertibility guaranties, totaling $41,000,000, and 22 applications for expropriation guaranties, totaling $17,000,000, or a total of 73 applications for $58,000,000, were in process at March 31, 1953.
2. Continuation of the Program.
On the basis of experience to date, there is little indication that presently authorized guaranties will make a major contribution to efforts to encourage U.S. private investment abroad. Nonetheless, [Page 268] it is recommended that the program be continued under vigorous administration in an effort to develop its potentialities because:
- a.
- The full effects of the two types of guaranty presently offered (inconvertibility and expropriation) have not yet been fully felt. It takes about two years for the effect of each successive development of the guaranty authority to be reflected in completed new investments. The program has not yet been extended to the underdeveloped areas where protection against political risks may be most needed. The potentialities of the protection offered by the program are not fully understood by the business and financial communities either here or abroad, largely because of inadequate efforts to promote this understanding.
- b.
- It is possible to increase the effectiveness of the program without undue administrative burden or undue assumption of risk by the Government. Proposals to this end are outlined below.
- c.
- It would be unwise from the standpoint of Congressional and public relations to abandon the program at this time. The disposition of the guaranty program, which will necessarily arise in Congressional hearings on the Mutual Security Program, will probably be the first concrete decision with respect to the Government’s role in encouraging private investment to follow upon the President’s State of the Union message which emphasized the need for an affirmative private investment policy. The guaranty program has been developed largely on the initiative of the House Foreign Affairs Committee which has already expressed its current interest in MSA plans for the program.
3. Proposed Changes.
In order to permit further development of the potentialities of the guaranty program and to prepare the way for more effective promotion of understanding of its nature and possible uses, the following legislative changes are recommended:
- (1)
- Cover risk of loss of investment by damage from war, revolution and civil disorder (war risk is already covered in part by expropriation guaranty).
- (2)
- Broaden the availability of guaranties by (a) making it legally possible to extend the program to the relatively few remaining countries of the free world not presently participating in the Mutual Security Program (provided, of course, that the U.S. and foreign government agree to the initiation of the program), (b) eliminating the requirement that investments be found to further the purposes of the Mutual Security Act (which results in a more restrictive standard in Europe than in the Point IV countries) and (c) providing the necessary legal basis for greater reliance by MSA on foreign government findings that the investment is economically beneficial.
- (3)
- Extend authority to write guaranties from present limit of June 30, 1954 to June 30, 1957, and term of individual guaranties from present expiration date of April 2, 1962 to twenty-five years from date of issue.
Two other possible changes which have been considered are (a) authority to provide special protection for materials development investments and (b) the underwriting (with indemnification commitments) of foreign government guaranties of exchange rate for medium and long term fixed dollar obligations. These possibilities are under further study.
- Title I of the Foreign Economic Assistance Act of 1950.↩