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

S/S–NSC files, lot 63 D 351, NSC 5407 series

Report Prepared for the National Security Council¹

[Extract]

²

top secret
NSC 5407

[Washington,] February 17, 1954.

Latin America

a. u.s. objectives and courses of action

The Milton Eisenhower visit was a major political and economic event of the year in Latin America. It has contributed to a new spirit of optimism and franker understanding of mutual problems.

U.S. economic objectives and courses of action with respect to Latin America as stated in NSC 144/1,³ have been confirmed and further articulated in Dr. Eisenhower’s recommendations.

In several areas the Eisenhower recommendations go beyond previously documented policy. The principal recommendations involving either change in policy or substantial shift in emphasis are the following:

1. A long-range basic materials policy permitting purchases for enlarged stockpiles when prices are declining. (Present stockpiling policy does not envisage stockpiling procurement beyond the calculated goals for the subsidiary purpose of international commodity market stabilization.)

2. Maintenance of a national lending institution to make sound development loans which are in our national interest, but which might not be made by an international agency. (This would require changing the present policy under which the Export–Import Bank operates or establishment of a new U.S. lending agency.)

3. Expansion of the technical cooperation problem in Latin America. (Present NSC policy calls for “Continuing the program of technical assistance to the area, but designing individual projects within the capability of the particular country concerned”.)

4. Assigning the consultative part of the technical cooperation task, whenever possible to American universities. (Now done in only a few cases.)

5. Withdrawal of U.S. personnel when a particular project is well established. Dr. Eisenhower states that this is the present policy but that it is not always followed.

The President has expressed his general approval of the Milton Eisenhower report and has asked FOA to implement those recommendations which are within present policy and to give thorough consideration to those recommendations which would require new policy decisions. Development of specific steps to implement the Milton Eisenhower recommendations was the main work of the Lima Conference of USOM Directors of January 13–19.⁴

b. economic trends

Latin America’s remarkable postwar economic growth is evident in the average annual increase of 5.6% in the area’s gross national product at constant prices from 1946 through 1951. The period of rapid progress ended abruptly, however, with overall GNP actually declining in real terms during 1952 and barely recovering to the 1951 level in 1953.

In the absence of production expansion, the persistent annual population increase of 2.5% led to reductions in the average Latin American standard of living as measured by per capita income in both 1952 and 1953. The declines generally took the form of reduced availability of food. FOA estimates average Latin American per capita GNP of $318 in 1953.

The recent slackening of economic progress relates in part to imbalances generated by the development efforts of the Latin American countries themselves and in part to changes in external factors such as international commodity markets.

1. Problems of Balanced Expansion

The numerous recent evidences of imbalance in Latin American development include payments crises, inflation, food and power shortages, and reduced petroleum production.

Although Latin America’s aggregate holdings of gold and dollars increased by an estimated $252 million during 1953, critical payments situations developed in several countries, notably Brazil and Bolivia. Moreover, the overall rise in reserves would not have occurred without the Export–Import Bank’s loan of $300 million to Brazil necessitated by a pressing backlog of commercial debts. In Peru, unfavorable year-end trends brought the sol-dollar exchange rate from 17.85 in October to 21.89 on January 26th. The President of Peru has requested a short term stabilization loan from the U.S. Treasury, particularly with a view to improving psychological attitudes on the exchange market.

Inflation is a problem of serious proportions in Bolivia and Paraguay. The cost of living has risen by 135% in La Paz and 72% in Asuncion during the past year. Inflationary pressures are continuing to a lesser, but still critical, extent in Brazil and Chile.

Food supply has become a major problem owing to population growth and under-emphasis on agricultural development. Food output per capita in 1952–53 was only 96% of the prewar quantity. Chronic food deficits exist in some countries, e.g. Haiti, and famine conditions have occasionally developed in various regions, e.g., the food shortage in early 1952 causing the migration of some 300,000 persons from northeastern Brazil.

Electric power rationing is a common necessity in Latin American cities. In view of the great need for rapid expansion in this sector, the rise of 8.7% in production during 1953 appears small in comparison with the increase of 11.5% achieved in the U.S.

Latin American production of crude oil declined about 2% in 1953 as compared with average annual increases of 11% from 1949 through 1952. Reduced levels of output were recorded not only by the major producer, Venezuela, but also in Bolivia, Mexico, and Peru. Latin American heavy crudes were facing soft markets with Middle East production substantially increased and U.S. imports reduced. The reversal of the production trend represents a foreign exchange loss and also aggravates fuel and energy shortages.

2. Trade and Commodity Problems

Although strengthened and diversified by post war programs for domestic development, most Latin American economies are still dominated by international commodity markets. Exports of primary goods are the principal source of income to finance imports for current consumption and equipment required in implementation of development projects.

Substantial improvement in terms of trade was a major dynamic factor in Latin America’s wartime and postwar economic growth. In October 1953 the area’s terms of trade were still 64% more favorable than in 1938, following a decline of about 10% from the average in the peak year 1951. Post Korean price developments have had little impact on the aggregate Latin American terms of trade, but the effects in individual countries have ranged from crisis in tin-exporting Bolivia to general prosperity in the coffee-exporting countries.

The Latin American countries are aware of U.S. policy directed toward liberalization of trade and are disturbed by recent actual or proposed increases in U.S. import restrictions on lead, zinc, fuel oil, wool and oats. A number of individual trade and commodity problems continue to irritate economic relations between the U.S. and some of the Latin American countries. Uruguay, for example, has objected strongly to the U.S. decision that the preferential treatment by Uruguay of wool top exports was tantamount to a subsidy and that a compensatory duty on such imports was mandatory. Chile complained formally to the State Department regarding the alleged loss of her nitrate market in Greece due to unfair competition from U.S. exports of ammonium sulphate produced in plants which were purchased by present owners from the U.S. Government at 20% of cost. The Chilean Government has also felt that we should buy for stockpile in return for their promise to solve the internal copper problem and not to sell to Russia.

c. the fundamental problem—economic development

The promotion of rapid and balanced economic development on the basis of sound policy and planning is the principal objective of FOA in Latin America.

Latin America’s potential for development has been demonstrated by postwar progress. The need for even more rapid development is evident in all of the available indicators of living standards. The insistent demands of the population for immediate economic improvement have an important bearing on internal politics and are of great importance in U.S. relations with the Latin American countries.

Development progress depends on three principal factors, all of which may be affected by internal political considerations in the Latin American countries: (1) realistic country development plans, (2) availability of investment capital, and (3) technical progress.

1. Country Development Plans

A majority of the Latin American countries now have economic development plans and agencies charged with coordinating their implementation.

Experience of Latin American governments in the development field has led to a new awareness of the need for balanced growth of industry, food supply, fuel and energy sources, and transport facilities. One major error in past planning has been corrected by new emphasis on food production in some countries, e.g. Mexico, Argentina, and Chile. Regional planning efforts by the Central American republics, by Brazil, Peru, Chile, and Argentina may or may not be another constructive step, depending on the nature of the results.

FOA has sought to improve country planning, particularly through provision of the technical knowledge on which country government decisions could be based and by advising governments on means of organizing effectively for development planning. U.S. responsibility for actual planning decisions has usually been avoided, however, except in response to specific invitation as in the case of the Joint Development Commission in Brazil. International organizations have a unique opportunity in this field because their advice is likely to be more acceptable than that of any one government.

2. The Need for Capital

Realization of Latin America’s potential for economic development will require a huge investment of private and public capital from both domestic and foreign sources over an extended period. Since World War II total domestic and foreign investment in Latin America has averaged about $7 billion annually, with domestic investment accounting for over 90% of the total.

a. Domestic Investment

Over 90% of total investment in Latin America since World War II has been provided by domestic capital. From 1946 through 1952 the Latin American countries invested an average of some 16% of their GNP annually. Private investment accounts for the major portion of domestic capital formation, although in recent years government investment has increased in quantitative and qualitative importance. A substantial share of domestic investment has taken the form of relatively unproductive types of construction, speculative commercial ventures, and investments in consumer goods industries not directly serving development purposes.

b. Foreign Investment

The low ratio of foreign to total investment in Latin America obscures the importance of foreign capital, which brings with it technical skills and has usually entered fields of particular importance to economic development. Foreign capital has also encouraged the flow of domestic captial into jointly financed development projects.

(1) Public Loans

Until 1948 the U.S. Export–Import Bank was the principal source of foreign public loans to Latin American countries for economic development. Since then the IBRD has assumed gradually increasing importance in this field and is currently making development loans in Latin America on a substantially larger scale than the Export–Import Bank. Present U.S. policy requires the Export–Import Bank to refer applicants for development loans to IBRD. Dr. Eisenhower’s recommendations, however, point out the need for a U.S. lending agency to make development loans in the U.S. national interest which might not be made by IBRD.

(a) International Bank

IBRD loans to Latin American countries through December 31, 1953, totaled $446.8 million, of which $76.6 million was granted during 1953. Nearly 70% of the total investment is in electric power development with the balance spread out over railroads, highways, industry, agriculture, and ports.

(b) Export–Import Bank

Net active credit authorizations of the Export–Import Bank to Latin America as of December 31, 1953 amounted to $1,348 million, of which less than 10% was for electric power. Latin American industry has received loans totaling $244.2 million, with major emphasis on steel in Brazil, Chile, and Mexico. With the exception of a $300 million loan for Brazil, the Export–Import Bank’s new authorizations in Latin America were extremely limited during 1953—$17.3 million—as compared with the annual average of $126.7 million from 1946 through 1952.

(2) U.S. Grant Aid for Basic Public Works

During World War II, with a view to effecting essential highway construction in the U.S. national interest, the U.S. undertook to contribute grant funds toward the financing of the Rama Road in Nicaragua and the Inter-American Highway. Total U.S. investment to date is $5 million in the Rama Road and $47 million in the Inter-American Highway. Estimated further cost to the U.S. before completion is $3 million for the former and $56 million for the latter.

(3) Private Investment

Latin America shared in the accelerated growth of U.S. private direct investment abroad during 1950–52, but to lesser extent than other areas (i.e. up 25% as compared with 48% elsewhere). The total book value is now about $6 billion with Venezuela and Brazil each accounting for over $1 billion. The Brazilian total rose from $588 million at end of 1949 to $1,013 million at end of 1952. Petroleum is still the principal sector (over one-fourth of the Latin American total), but investments in manufacturing and in mining have been gaining rapidly in recent years.

During 1952 U.S. private direct investment in Latin America amounted to $582 million, of which $278 million represented net inflow of new capital and $304 million undistributed subsidiary earnings. In 1953 estimated net inflow of new capital dropped to $113 million, with undistributed earnings staying at $304 million. Recent changes in the private investment climate appear to be generally unfavorable. An intense spirit of economic nationalism continues to operate against the desire and the need for development.

Although the main responsibility for improving the private investment climate must rest with the country governments, there are a number of important U.S. measures in effect or being developed to increase the incentive of U.S. investors. Since the fundamental incentive for private investment is the anticipation of favorable markets, the major potential U.S. contribution in this field lies in fuller implementation of the established policy of encouraging Latin American exports to the U.S. The MSP investment guarantee program, thus far in Latin America limited to a contract with Haiti,⁵ will be given a further trial with coverage extended to risks of war, revolution, and insurrection (as recommended by the Randall Commission),⁶ in addition to the present coverage for risks of expropriation and inconvertibility. Another possibility for U.S. action is through tax incentive measures as recommended by Dr. Eisenhower and the Randall Commission. Finally, opportunities frequently arise for private investment directly related to U.S. technical assistance programs, e.g. the du Pont plant for insecticides in Peru, Bethlehem’s investment in the manganese mines of Amapa in Brazil.

3. The Technical Base

U.S. assistance programs in Latin America have been directed primarily toward meeting the need for adequately trained technicians and to improve techniques in production and other fields. During the past twelve years some 20,000 Latin Americans have been trained on the job and more than 3,000 trainees have been brought to the U.S. for study. The impact of the programs has been magnified many times by trainees passing on new techniques within their own countries and by inter-country technical exchanges which have been effected under U.S. programs and also at the initiative of the countries themselves. These programs have sought to increase productivity through projects relating to food supply, health, housing, and education; and to increase over-all production through projects in agriculture, industry, natural resources, power, and transportation. Congress appropriated $22.3 million for technical cooperation programs in the Latin American countries during FY 1954 and the countries themselves are making available the equivalent of $44.6 million.

Principal developments from June–December, 1953, were:

a. Dr. Eisenhower’s recommendation that the technical assistance program be expanded. The USOM’s are reevaluating their programs and budget requests submitted for FY 1955 and are making appropriate program modifications to carry out the Eisenhower recommendations.

b. A broadened FOA approach to the development problem, with greater attention to the impact of foreign exchange problems, trade and commodity fluctuations, and other current economic realities.

c. Continuation of the Servicio as the principal operational device of the technical cooperation program in accordance with the recommendation of Dr. Eisenhower. The Servicios provide a mechanism for true partnership and an effective device for smooth transfer of activities from U.S. to country government direction.

d. New attention to means for assuring that activities initiated by Servicios are transferred to agencies of the host country as soon as the latter are able to assume the responsibility. Dr. Eisenhower observed that this established policy has not always been followed in practice.

e. Expanding the consultative role of American universities in the technical assistance program in the course of normal operations and in specific response to Dr. Eisenhower’s recommendation.

f. Continued vigorous support of the operations of international agencies by FOA and other U.S. agencies in Latin America in accordance with existing policy and the recommendations of Dr. Eisenhower. A major goal is to assure that programs are complementary, e.g. recent IBRD loans in Brazil have been given to projects of top priority in the plan of the Joint Development Commission.

As in earlier years, the U.S. has pledged $1 million in support of 1954 OAS regional projects, provided that the U.S. contribution does not exceed 70% of the total. The U.S. also covers 60% of the financing of UNTA programs throughout the world. Total UNTA expenditures in Latin America during calendar 1953 are estimated at $4.7 million.

d. special problems

1. Bolivia

The midsummer Bolivian payments crisis developed essentially because of uncertainties regarding tin marketing and the decline of about 25 percent in tin prices during the second quarter of 1953. Recognizing the crisis proportions of the Bolivian economic situation, the U.S. announced on July 6 that the RFC would purchase 10,000 tons of Bolivian tin and that the technical assistance program would be more than doubled. The RFC purchase was contracted for on September 23rd and all but 600 tons have now been delivered. The RFC contract, however, was not in itself intended to be a solution of the Bolivian crisis. The U.S. in October decided to provide economic aid to Bolivia with the immediate objective of covering the country’s current food deficit and the longer run objective of aiding the Bolivians to become self-supporting through diversification of their economy. U.S. aid programs in Bolivia for FY 1954 amount to a total of $12.5 million and include the following: (a) $1.5 million of regular TA; (b) $2 million of expanded TA for emergency food development; (c) $5 million of CCC surplus wheat and flour under PL 216 (“Famine Relief”); and (d) $4 million of FOA program funds.

U.S. political observers in the field and in the State Department are convinced that the present FOA emergency programs have been successful in terms of averting immediate economic crisis, improving relations with the U.S., and reducing Communist influence in government and labor. The longer run outlook, however, is doubtful. In view of Bolivia’s poor competitive position and the general deterioration of world tin markets, Bolivia faces further reductions in her capacity to finance imports of development goods.

2. Guatemala

In Guatemala, Communism has made its most serious penetration in Latin America. The Government of Guatemala, though not itself Communist, has welcomed Communist support and has assisted Communists to gain key positions in the pro-Government parties, organized labor, the Congress, and the Government bureaucracy. The Communists have been operating chiefly through the land reform program, seeking to obtain control over the large estates by exploiting differences between the landholders and the poor Ladinos and Indians.

From July 1, 1950 through September 30, 1953, Guatemala was allotted $743,000 of U.S. Technical Cooperation Program funds, almost entirely for agriculture and health. Program emphasis is continuing on these two activities in FY 1954. These minimum operations are being maintained in order to preserve contact with non-Communists in and out of government and to avoid loss of our previous investment in projects which may be useful after the Communist influence in the country is eliminated.

3. Argentina

Argentina, continuing her campaign for closer economic ties with her neighbors, has negotiated “economic union” agreements with Chile, Paraguay, and Ecuador, and has offered agricultural technical aid to Paraguay. An agreement for economic union with Colombia is also expected shortly. The agreements thus far are nothing more than declarations of intent, with detailed protocols still to be negotiated. The U.S. attitude has been one of watchful friendliness; welcoming action to improve Latin American economies, but recognizing the danger of economic penetration as well as duplication of activities now in progress.

1. The report, titled “Status of United States Programs for National Security as of December 31, 1953,” consists of a series of nine parts and two annexes, separately dated and prepared by the following agencies: Department of State (Part 1—Our Relations with the Free World), Department of Defense (Part 2—The Military Program), Foreign Operations Administration (Part 3—The Mutual Security Program), Atomic Energy Commission (Part 4—The Atomic Energy Program), Office of Defense Mobilization (Part 5—The Mobilization Program), Federal Civil Defense Administration (Part 6—The Civil Defense Program), United States Information Agency (Part 7—The USIA Program), Central Intelligence Agency with concurrence by the Intelligence Advisory Committee (Part 8—The Foreign Intelligence Program and Related Activities), Inderdepartmental Intelligence Conference and Interdepartmental Committee on Internal Security (Part 9—The Internal Security Program), Central Intelligence Agency (Annex A—Some Comparable Data on the Soviet Bloc), and Operations Coordinating Board (Annex B—Activities of the Operations Coordinating Board). The overall report is undated; Parts 4 and 6, and Annex A were distributed to the members of the NSC on Feb. 17, 1954, and the remaining parts were transmitted upon their receipt by the Executive Secretary of the NSC.
2. This extract is from Part 3, dated Mar. 11, 1954.
3. NSC 144/1, titled “United States Objectives and Courses of Action With Respect to Latin America,” dated Mar. 18, 1953, and approved by President Eisenhower on the same date, is printed on p. 6.
4. Pertinent documentation is in A/MS files, lot 54 D 291, “Relationship with FOA”.

5. For text of the exchange of notes constituting an agreement between the United States and Haiti relating to guaranties authorized by section 111 (b)(3) of the Economic Cooperation Act of 1948, as amended, signed at Washington, Mar. 13 and Apr. 2, 1953, and entered into force on the latter date, see Department of State Treaties and Other International Acts Series (TIAS) No. 2818, or United States Treaties and Other International Agreements (UST), vol. 4 (pt. 2), p. 1546.

   The Economic Cooperation Act of 1948 is Title I of the Foreign Assistance Act of 1948 (Public Law 472), approved Apr. 3, 1948; for text, see 62 Stat. 137.

6. Reference is to the President’s Commission on Foreign Economic Policy, commonly referred to as the Randall Commission after its chairman, Clarance B. Randall. The recommendations of the commission are contained in its Report to the President and the Congress (Washington, 1954). For documentation concerning the commission and its activities, see volume i .