Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

832.00 TA/5–2053

The United States Commissioner on the Joint Brazil–United States Economic Development Commission (Bohan) to the Department of State

confidential
No. 1735

Rio de Janeiro, May 20, 1953.

Subject:

• Termination of Joint Commission

The receipt of the Department’s telegram 1197 of May 8, 1953¹ brought an end to a period of uncertainty dating back to the first days of October 1952. In one sense, the receipt of specific policy directives was a welcome development, in another, a deep disappointment.

All members of the American Section of the Joint Commission will scrupulously observe the policy directives laid down and do whatever is in their power to present the new policy in the best possible light to the Brazilian Government and public. A good case can be made for the Joint Commission. Rarely has a cooperative international effort achieved such concrete results in so short a period. The Commission, in just under two years, has laid out a program amounting to an equivalency of over U.S. $1 billion, assured a noninflationary financing of the entire cruzeiro costs of the program and obtained, or is in the final stages of obtaining, almost 50% of the foreign currency requirements. In addition, an institution (National Bank for Economic Development) has been set up for the express purpose of implementing the Joint Commission program.

This would seem to be record enough. It certainly deserves a rating of very good, just a fraction under excellent. Why, then, are we disappointed? Simply because that fractional difference is the difference between failure and success, certainly in the political sense and perhaps also in the economic sense.

Looking back over the last two years it is easy to see the mistakes that have been made. One of the worst was the very limited area in the United States Government to which responsibility for and knowledge of the Joint Commission was restricted. By January 1953 there was no one in the Department with a personal knowledge of the events leading up to the establishment of the Joint Commission or of its first year of operations. This explains, in part at least, why the true nature of the Joint Commission began to be lost sight of, for the Commission was the heart of a political not an economic program. It was designed to play the major role in an effort to recapture the spirit of mutual confidence which from the days of Elihu Root and the Baron of Rio Branco down to the death of Franklin D. Roosevelt had characterized Brazilian-American relations.

Before the connotations of the word “political” affect the reputation of the Joint Commission, let me hasten to add that the Commission is quite prepared to show that its program is economically sound and within Brazil’s ability to assume foreign debt as well as to repay it without either undue strain on its resources or its friendship with the United States. The point I wish to make is that the objective was political—only the implementation was economic. Improving the balance of payments or bettering the managerial practices on Brazilian railroads, for example, were problems, not objectives.

Once it is granted that the program was political, then the selection of the International Bank as the sole source of financing (with specified exceptions) can be seen to have been a major error since it delegated authority over implementation of a bilateral political program to an international banking institution which quite rightly prides itself on its independence and resistance to the individual political interests of its members. By June of 1952 those concerned with the program were becoming fully aware of the gravity of the mistake that had been made and this awareness was not based entirely on the political considerations I have described, but also stemmed from the growing ill will shown towards the Bank in Brazil.

This ill will, bitterness is perhaps a better term, is a fact that must be taken into account not merely in the relations of Brazil and the IBRD but also in the relations of Brazil and the United States. As no presently useful purpose would be served by attempting to allocate responsibility for this unfortunate situation, I will only observe that, on the one hand, the importance of the “jeito” in getting along in Brazil was not recognized; and on the other hand, if Brazil had deliberately started out to sabotage its own credit record abroad and to dissipate the really extraordinary fund of good will it had built up in United States business and Government circles, it could not have succeeded in doing half as good a job as its economic bungling has accomplished in the last two years.

In fact, Brazil committed so many sins in the economic field that a great many of its former friends turned against it. This easy way of escaping responsibility was denied the American Section of the Joint Commission which had to keep its sights trained on the political objective of its program and do what it could to repair the damage done in the economic sector, as witness the role it played in finding a solution for the remittance problem and influencing the Minister of Finance to work out a plan for the liquidation of the commercial backlog.

Comparatively successful in its efforts to patch up the damage done to its program by extraneous developments in Brazil, the American Section failed conspicuously in its efforts in Washington to bring its program back into political focus and to obtain acceptance of the fact that serious as were the short-term effects of the mistakes which had been made by the Brazilian Government, nothing more than superficial damage had been done to the Brazilian economy.

Between my return from Washington on April 5, 1953 and departure for Quitandinha on April 8, the situation was reviewed with Ladd² and Glaessner.³ Out of those conversations came a determination to make a last attempt to find a solution for the impasse in which we then found ourselves, it having been agreed that the following considerations would have to be kept in mind if we were to find a wise solution.

1. Consideration of the problem within the narrow confines of what the IBRD would and would not do would be expanded to the broader area of U.S. political and economic interests in Brazil. Even so, the commitment prejudices of IBRD would be given full weight.

2. Particular stress would be laid on the economic soundness of any solution since our insistence that the program’s long-term objectives took precedence over Brazil’s short-term mistakes had led to a certain confusion in Washington. While the Joint Commission had nothing to apologize for as concerns its economic approach (legislation for noninflationary financing, creation of the Development Bank, and reorganization of railway management all trace their origin to, the Joint Commission), nevertheless, it should be prepared to have its proposals judged in the light of commercial rather than sound economic development banking practices.

3. The debatable question as to whether or not the U.S. has a moral commitment to finance the program would be excluded, but the fact that the Brazilian public believes such a commitment exists would be given full weight. Two factors influenced our decision in this instance. The first, that an acceptable way to meet that belief could be found without the need for any banking commitments; the second, that failure to meet it laid the U.S. open not only to the widespread belief that it had failed to live up to its obligations, but would make it the whipping boy for any failures in program implementation. The cynical observation that this is the traditional role of the U.S. is not entirely pertinent since failure to include a foreign currency financial plan in the Joint Commission program leaves that program with only three of the four legs which correspond to it (cruzeiro financing, projects, implementing institution).

4. Any considerable delays in the orderly and systematic implementation of the program increases the danger of diversion of Lafer Plan funds, affects the currency of projects (the railway projects, for example, are based on railway needs today, not last year or next year), and promotes the general unwinding of the entire correlated program. Such consequences, if no financial plan is advanced, can and undoubtedly will be blamed on the United States, but as these delays may well result from failure on the part of the Brazilian Government to carry out such measures as prompt managerial reform of railways, the U.S. should, in such a case, be in a position to escape joint responsibility for the results of such delays.

Even though a great deal of work had been done, particularly in the field of the balance of payments, we were not quite ready when events forced us to send our telegram 1538 of May 5[6], 1953.⁴ Incidentally, the Department was in error in concluding that our plan necessarily called for prior bank commitments (point 7, Department’s 1197). It would only have called for a policy decision on the part of the U.S. Government. In broad outlines the last project of the Joint Commission would have made specific recommendations to the Brazilian and U.S. Governments which, upon acceptance, would have constituted an inter-governmental commitment. Details: Brazil to a) Ask urgency for railroad legislation; b) Create Executive Board for Railway Rehabilitation composed of from five to seven outstanding Brazilians to act prior to passage of reform legislation; c) Contract Foreign Railway Mission; d) Appoint Executive Board composed of outstanding executives to specific railways to start improving operations at once; e) Institute port administrative reforms; f) Merge the Lloyd Brasileiro and Costeira coastwise shipping services. The U.S. would only have been committed to lend its good offices to secure the necessary foreign currency financing as the measures recommended to Brazil were taken and in planned relation to total Brazilian foreign debt outstandings. A debt ceiling would, of course, have been recommended. The situation would then have worked out about as follows:

Estimated Debt Service in All Currencies on Brazil’s External Debt, Assuming Full Financing of Joint Commission Program by the End of 1955

(in millions of dollars)

Year	Service on debt other than backlog loan*	Service on $300 million backlog loan	Service on rest of JC project loans†	Total estimated debt service
1954	77.5	107.7	4.4	189.6
1955	78.6	104.2	9.4	190.2
1956	77.9	67.6	13.3	158.8
1957	62.3		19.4	81.7
1958	56.9		20.1	77.0
1959	51.2		21.3	72.5
1960	44.6		21.3	65.9
1961	39.0		21.3	60.3
1962	36.2		21.3	57.5

According to our preliminary calculations, total Brazilian external indebtedness, which stood at 597.5 million dollars at the end of 1951, before the granting of any Joint Commission loans, will reach 942.8 million at the end of 1953 (including Exim backlog loan and $50 million IBRD loans now under negotiation). This exceeds by 45.3 millions the debt ceiling indirectly approved by the IBRD in 1951 (597.5 plus 300). If the rest of the Joint Commission program were entirely financed during 1954 and 1955, total outstandings at end of 1955 would be 862.2 millions and at end of 1957, 627.8 millions, or only 30.3 million more than at start of Joint Commission. This is, of course, based on the assumptions that the backlog and other obligations are met as scheduled and has the drawbacks inherent in any over-simplification of a problem. Nevertheless, it does show that a financial program could be laid out that stays within the limits fixed in 1951, adds virtually nothing to the service burden on the balance of payments during the next three years when heavy repayments of short-term debt are called for and implies a very small net increase in service payment and debt total over the long run.

This report is, of course, too late to be of any value to the Department in making its final decisions. However, the American Section did not want the record to give the impression that we had at any time failed to give balanced consideration to both the political and economic aspects of our Mission as we saw them and judged them.

Forgive me if I end on a personal note. I had come to think of the Joint Commission program as proof that statesmanship was still a factor in our relationships with Latin America and if at times I have become impatient with those who have seen that program only as another Point 4 project, this may help explain my attitude. An attitude also influenced by the ghost of another experiment, the Bolivian development plan of 1942.⁵ I sometimes wonder if the United States had not listened to all the sound advice it received to justify postponement of the implementation of that program if things would have come to their present pass. At least, the Bolivians would have had the exciting attraction of a growing and diversified internal economy to distract them from the hopeless contemplation of their economic miseries. The two cases, of course, are not entirely parallel, although time may show that the lessons were.

Merwin L. Bohan

1. Supra.
2. William C. Ladd, Deputy Commissioner, U.S. Section, Joint Brazil–United States Economic Development Commission.
3. Philip J. W. Glaessner, Chairman and Chief Economist, Economic Subcommission, U.S. Section, Joint Brazil–United States Economic Development Commission.
4. Ante, p. 612.
5. Including portfolio debt, suppliers’ creditors and Eximbank and International Bank loans outstanding, including J. C. loans granted up to now as well as a further $50 million in J. C. loans presently under negotiation. [Footnote in the source text.]
6. Assuming all J.C. project loans granted by 1955. [Footnote in the source text.]
5. For documentation on this subject, see Foreign Relations, 1942, vol. v, pp. 592 ff.