Foreign Relations of the United States, 1952–1954, East Asia and the Pacific, Volume XII, Part 1

FE files, lot 55 D 480

Memorandum by the Economic Coordinator of the Bureau of Far Eastern Affairs (Baldwin) to the Director of the Policy Planning Staff (Bowie)¹

secret

[Washington,] August 30, 1954.

Subject:

• Report of Asian Economic Working Group

1. Herewith submitted is the report of the Asian Economic Working Group, on which have been represented E, FE, NEA, EUR, S/P, R and FOA. This report consists of:

(a) The report itself, which summarizes the conclusions reached by the Working Group;

(b) Annex One:² a study made for the Working Group by the Office of Intelligence Research concerning the inter-relation between political and economic prospects in South and Southeast Asia, the nature of the area’s economic problem, and the probable political and economic impact upon the area of external aid programs of varying size. This study’s estimates of the impact of varying degrees of external aid rest upon calculations and assumptions which the other members of the Working Group have not yet examined and which must, therefore, be considered as representing only the views of the OIR at this point.

(c) Annex Two (with three Attachments³): A fuller discussion than is contained in the summary report of the magnitude of alternative programs and alternative operating mechanism which would be appropriate to the recommended Asian economic program;

(d) Annex Three: A summary of the views expressed by certain U.S. Foreign Service Missions in Asia in response to inquiries made of them on behalf of the Working Group.

2. I wish to emphasize an assumption which was accepted without question by the members of the Working Group and which is implicit in the report but perhaps should be stated more positively, viz: that the expanded economic program contemplated by the Group should be regarded only as one part, albeit an important part, of a balanced defense against Communism in Asia.

3. The report calls attention to the importance of adequately preparing American public opinion before the program suggested by the Working Group, or any similar program, is announced. Because of the importance of this aspect of the matter it should, I believe, receive particularly careful consideration.

4. This report is preliminary and subject to further elaboration. It could, however, serve at an appropriate time as a basis for interdepartmental consideration, preferably by the NSC Planning Board.

[Attachment]

confidential

[Here follows a table of contents.]

Report of the Asian Economic Working Group Concerning the Inauguration of Large-Scale, Long-Range Program of Economic Assistance

1. Objectives: (a) U.S. policy should support efforts to ensure survival of non-Communist governments in Asia, even if those governments pursue so-called “neutralist” policies, in the face of a Communist strategy emphasizing subversion, agitation, and other political warfare tactics.

(b) Our policy in Asia should, therefore, give support to the positive goals espoused by Asians. One of these goals is an acceleration in present dishearteningly slow rates of economic development. Poverty, economic instability, and other grievances which arise out of economic stagnation exist today in every non-Communist Asian country, and will be exploited to the maximum by the Communists.

(c) The U.S. should take additional measures, in concert with other nations, to stimulate the processes of economic growth so that, with the consequent prospect of an improvement in living standards, the means available to aid the Communist effort will be reduced, and the prestige and attractiveness of non-Communist political and economic institutions enhanced.

(d) A related purpose of these measures should be to assist in placing Japan on a sounder economic basis by improving its trading opportunities.

2. Magnitude: Slow rates of economic progress in this area have been due in large part, to inadequate levels of investment, which result from both under-employment and a shortage of needed resources. The resolution of these problems could be materially assisted by a new long-range program of assistance to the area, if it were large enough to have a dramatic and galvanizing impact upon the people and the governments of the area, creating the prospect that their own efforts and resources could be used more effectively, and thus providing an effective challenge to them to redouble their own efforts to this end.

An expanded investment program necessarily starts slowly and gathers momentum. In the first year or two the “tooling up” process must take place and consequently the requirement for funds would be relatively small. Moreover, the “absorptive capacity” is limited by the difficulty of introducing Western methods of organization, construction, etc. It is a hazardous and inexact exercise (especially in South and Southeast Asia) to estimate the amount of incremental investment required to bring about in time a satisfactory and continuing rate of growth and it is particularly difficult to estimate the portion of the new investment which must be provided from external sources.

Unless the proportion of the incremental investment which is provided from domestic effort and resources is substantial, no amount of external aid in a given period will create the conditions necessary to assure a continuation of high levels of growth without further external aid. The objective of the proposed program is to achieve a reasonably high rate of economic growth which will be self-sustaining and continuing, rather than a selected level of total investment, however high.

It is evident that present external aid programs have not stimulated an adequate acceleration of domestic investment. U.S. aid for economic development programs in the area has been running at about $200 million annually, and Commonwealth programs have somewhat increased this total. It is the considered opinion of the working group that a very substantially greater volume of aid is required to achieve the objectives of a new program. It is believed that a sum of about $2 billion would provide the dramatic impact upon and the challange to the countries of the area that would be needed initially and would be a reasonable estimate of the additional amount which could be used effectively in the first few years of an accelerated program.

Subsequent provision of external aid could obviously be estimated with greater accuracy after experience with and observation of actual developments in the area. It has been estimated that $10 billion over a ten-year period would approximate the upper limits; such a sum would fully test the area’s ability to use external resources effectively.

3. Initiation of New Program: The first steps in initiating this program would be (1) preparation of U.S. public opinion followed by adequate Congressional consultations; and (2) U.S. consultations with some of the principal interested countries. Subsequently, one of the major Asian countries might convene a special meeting, perhaps under the auspices of the “Colombo Plan” Consultative Committee, to discuss the measures required to launch the new program.

4. Administration of New Assistance Program: The new program could be administered multilaterally or bilaterally.

The multilateral approach would stress the establishment of an Asian organization with a multilaterally endowed development fund. This would provide a means for obtaining contributions of external resources by other nations; promote greater cohesion among countries of the region; stimulate greater responsibility on the part of recipient countries; and foster an improvement in Japan’s relations with other Asian countries. It would be a sufficiently sharp contrast with the present method of administering U.S. assistance as to produce a dramatic and favorable impact on the minds of Asians.

Such a multilateral program should be carried out by an organization consisting of: (i) a Council of Ministers, which would follow the OEEC pattern except that its committee structure would be drawn up in accordance with the problems of the area, and (ii) a subsidiary Asian Development Corporation. The Corporation would finance, on a flexible basis, the costs of sound and needed public and private development projects that cannot qualify for financing from other sources. Its management would have to enjoy a sufficient measure of competence and autonomy to ensure the adoption of policies that the U.S. would consider economically and politically sound.

An alternative to the multilateral approach would be larger U.S. bilateral programs, possibly conducted with the advice of some such multilateral group as the Colombo Plan Consultative Committee. The principal advantages of this alternative might be a greater degree of U.S. control and hence public favor in this country. This method would not be a sharp departure from present arrangements for extending U.S. aid to South and Southeast Asia and would lack the dramatic aspects and diplomatic and psychological advantages of the multilateral method of administration.

5. Membership in New Organization: Membership of the proposed organization should include all nations members and observers of the Colombo Plan Consultative Committee, thus embracing countries which are most important politically and most in need of economic aid:—India, Pakistan, and Indonesia. This would not be feasible if political or military conditions were attached to the aid.

Membership would also include those donor countries members of the Colombo Plan and would provide for inclusion of Japan and other would-be donors acceptable to the membership.

Annex Two

Asian Economic Program: Its Proposed Character and Method of Operation⁴

1. Objectives. The principal U.S. objectives in supporting the development of an expanded Asian economic program would be to:

(a) strengthen the economies of, and hold out the prospect of more rapid economic growth to, the free countries of Asia and thus facilitate their governments’ efforts to achieve greater political and economic stability;

(b) encourage greater regional cohesion and cooperation, thereby increasing the ability of these countries to resist both overt Communist aggression and Communist attempts to subvert and gain control by non-military means;

(c) engender an Asian desire for continuing association with the West in general, and the U.S. in particular, as promising that measure of economic progress which the Communists contend can only be achieved through their methods.

The U.S. could better accomplish these objectives if the U.S. contribution to the area were increased and made available in a manner to permit programming over a period of more than one year.

2. U.S. Contribution. Two questions are involved in any discussion of the U.S. contribution: (a) what will be its total amount and duration, (b) what will be its initial size and timing?

No definite appraisal of the total additional public funds which the U.S. would have to allocate for the support of Asian economic development in order to achieve its policical objectives can be made at this time.

The OIR study of “Asian Economic Development”⁵ suggests that the investment of external resources in South and Southeast Asia of something like $10 billion over a ten year period would, if it were associated with greatly increased internal efforts by the recipient countries, enable the area’s per capita income to reach a rate of increase of about 25% per annum. Furthermore once attained, this rate of growth could be maintained thereafter without external aid if proper measures were taken to sustain the momentum of investment programs from local resources. The study also points out that to attain a 1% per annum rate of increase in per capita incomes would require the investment of more than $500 million of external resources annually. While these estimates are clearly subject to a wide margin of error due to the inadequacy of available data and lack of experience in testing the assumptions on which they are based, they are illustrative of the order of magnitude of aid required to accomplish specific objectives. $10 billion over a ten year period would probably test the area’s absorptive capacity, and indeed the rate of expenditures would probably have to be uneven, since the area could probably not initially use $1 billion of external resources annually effectively. On the other hand, it is hard to see how a program which resulted in per capita economic growth of much less than 1% per annum could have significant economic repercussions and even this rate is probably too low to generate the increased internal effect necessary to permit its being maintained, after say a ten year period, without external aid.

Because of the uncertainties regarding speed of implementation and other unknown factors involved, the working group cannot recommend that either of the programs outlined above be adopted for implementation over any definite period. The program’s initial expenditure would have to be determined largely by the area’s absorptive capacity. The initial U.S. contribution to the program might be only enough to cover that first year’s expenditure, or it could be a larger lump sum, designed to provide for operations over an unspecified longer period. If this sum were set at about $2 billion, it would cover the initial years, depending upon the scale on which it was found desirable to proceed after the first year. If Congressional approval could be secured, the lump sum method of financing would be preferable from the standpoint of initial impact on the area and of the program’s subsequent operation. A question arises as to whether a Congressional authorization of the larger sum could be secured, with appropriations to be provided as necessary by the Congress in the light of its review of the program’s operation. If not, a legislative record indicating that such an amount would probably eventually be required would be highly desirable for political and planning purposes.

Funds for this program could not now be secured from the Congress in time to be expended before FY 1956. If informal Congressional approval for the concept is secured, however, it might be possible to initiate preparatory operations in the Southeast Asian area in FY 1955, from funds authorized under Sec 121 of the Mutual Security Act of 1954 (Indochina Funds), and a limited amount of other funds appropriated for economic development in Asia.

At its initiation the economic assistance to be provided the area through a new regional grouping would be largely supplementary to, rather than a substitute for, bilateral programs now operative under the U.S. bilateral and Colombo Plan programs.^* This would continue to be true of U.S. programs actuated by military objectives. U.S. grant assistance for economic development should cease when the proposed program is well underway. Continuation and even expansion of bilateral agricultural surplus programs would be desirable, mainly to offset inflationary pressures and meet the added demands arising from increased purchasing power in aid recipient countries.

3. Tactics in Initiation. The following steps might be taken:

(1) After appropriate Congressional consultation, U.S. leadership might consist of a public suggestion by the President, or the Secretary of State, that the United States was now prepared to join free Asian countries in devoting substantial resources to the support of Asian economic development programs.

(2) Appropriate bilateral consultation between the U.S. and certain major interested countries including the UK should be undertaken and determined in accordance with the circumstances prevailing at the time.

(3) Initiative for the organizational meeting of prospective member countries should come from a leading Asian country, or countries, rather than from the United States.

It will be necessary that membership in the program include those nations of South and Southeast Asia which are most important politically and which are most in need of economic aid—India, Pakistan, and Indonesia; this could not be done if military or political commitments were sought from recipient countries. It will be extremely desirable that this membership include, as soon as possible, all other free Asian countries as well. Membership should also include donor countries; the U.S., Japan, the UK and any other countries acceptable to the membership of the program may be particularly important in determining the attitude of the neutralist countries of the area. No strong opposition to Japanese membership is envisaged, since if the multilateral approach suggested in paragraph 4 is followed Japan’s role would be principally that of a donor rather than recipient of financial support (see paragraph 5 below). Economically the inclusion or exclusion of Taiwan and South Korea would not be of primary importance since most U.S. aid to those countries will have to continue on a bilateral basis in any event.

The use of the Colombo Plan framework to the extent practicable would have several advantages. These include the fact that the countries grouped within the Plan include all the countries of South and Southeast Asia but not Communist China, the support it has by virtue of its “atmosphere” free from the odium of political pressure and imperialism, and its emphasis on longer range economic development.^† The characteristics of the Colombo Plan organization, as set forth in Attachment A, suggest that it would not, without extensive alterations, provide a suitable framework for the purposes the U.S. would have in mind if the new international organization were to have real authority in the use of U.S. and other resources. A bilateral U.S. loan program could be carried on under the general aegis of the Colombo framework without any substantial organizational changes. In any case, the use of the Colombo Plan grouping, at least as a springboard for launching the larger association envisaged in this program, has merit. Eventually it would be highly desirable that the Consultative Committee of the Plan merge into the Council proposed below.

4. Main Elements of the Organization.

Two basic approaches to the financial aspects of the problem have been considered. These are:

(1) to provide substantial support to a multilateral financial institution, essentially an investment bank with complementary technical assistance functions, and

(2) to undertake a bilateral loan program, a variant of which would be to have the initial U.S. loans repaid to a multilateral institution.

If the first alternative were followed, a Council of Ministers, following in general the OEEC pattern (except that its committee and subcommittee structure would conform to the problems of the area) might be set up with overall responsibilities for the operation of the program and related matters. Possible elements in the charter of such an organization are set forth in Attachment B.

The Council would consider such matters of mutual interest as the inter-relationship between their economic development plans, regional trade problems, and the exchange of technical aid and information. The Council would not undertake detailed review of annual bilateral aid programs (U.S. or Colombo Plan), but would review longer range economic development programs, the progress being made in these programs, and the general fiscal and economic situation of the member countries which would, of course, have a vital bearing on the activities of the financial institution.

The latter would be essentially an investing and lending institution, although it would be prepared to finance on a grant basis the demonstration and testing activities, and the engineering and other analytical studies incident to the development and presentation of projects for financing by the institution or other sources. In practice the institution, unlike IBRD or the Eximbank, would be prepared to finance on a flexible basis either the foreign exchange or both the foreign exchange and the local currency costs of private and governmental projects. Its loan resources would be obtained by the sale of its debentures or preferred shares to the governments of the U.S., and we would hope, the UK, Australia, Canada, Japan, and the “recipient” countries. Widest possible distribution of the debt obligations of the institution would eventually be sought.

The financial institution would act under the very general direction of the Council. Its own internal organization would not be unlike that of the IBRD. The right of the management to be largely autonomous in its operations would have to be agreed to in advance by the participating countries. Only a strong, effective management operating in accordance with sound economic and political policies could ensure the institution’s success. The example of the IBRD suggests that it should not be impossible to secure such management.

Considerable flexibility would be desirable in respect to the terms of contributions received and financial advances made by the financial institution. The general principle might be that the United States would not expect to be repaid the principal amount of its contribution at any fixed time, unless its financial situation were such as to enable it to dispense with a part of the U.S. contribution, but that the terms of its advances should be such as to secure the maximum prospect of maintaining the integrity of its resources consistent with the attainment of its objective—to finance all sound and needed development projects in the area for which other types of financing cannot be secured. The Charter should be sufficiently flexible to permit investments in public or private equities and other securities as well as loans to governments or private borrowers. The necessary “softness” should, whenever possible, be injected into loan agreements by the length of time allowed for repayment and liberal moratoria before foreign exchange payments are due, rather than by providing that complete repayment may be made in the currency of the borrower (except, of course, when the entire loan was made in such currency). The latter would tend to convert the loan to a grant, for practical purposes, and might not be acceptable to the more responsible member countries. However, emphasis should be on “useable” (for relending), rather than fully “convertible”, currencies in specifying repayment requirements, and the extent to which such repayment is required in specified currencies would, in any case, depend on the servicing capacity of the borrower.

The Charter should make explicit the institution’s role as distinct from that of the IMF, the IBRD, or other loan agencies. Its relation to the programs of these and other established or proposed agencies is set forth in Attachment C. It should not, for example, make short term balance of payments loans or finance projects which are sufficiently bankable to assure repayment in convertible currencies within 15 to 20 years. However, it should not be debarred from making loans in support of other types of projects—in countries which are “fully loaned up” from the standpoint of other lending institutions or are not sufficiently viable to permit the entry of such institutions.

The multilateral approach in alternative (1) appears to the Working Group to offer the best method of implementing the new program to realize U.S. objectives in the area.

It would readily provide a means for obtaining contributions of external resources by other nations. It would foster greater cohesion among countries of the region and would foster, by virtue of participation, greater responsibility on the part of Asian countries. It would gain a more enthusiastic reception, and, by providing for Japanese participation foster an improvement in Japan’s relations with other Asian countries. It would be sufficiently new to be a sharp contrast with the present method of administering U.S. assistance as to produce a dramatic impact on the minds of Asians. The Working Group believes that this political aspect of the multilateral approach is one of its greatest attributes.

The advantages which might be claimed for alternative (2) is that it would be preferred by Congress (since it would not involve multilateral control of U.S. funds), and that it would fit the pattern of bilateral aid being furnished under the Colombo Plan. The Consultative Committee of that organization might be adequate to provide a forum for discussion of any regional questions arising with such a program, and the establishment of a new Council would be unnecessary. The Working Group does not believe that these considerations outweigh the decided political advantages of alternative (1) or the means that approach affords if mobilizing larger resources for economic development. The consultations held with Congress during the last session on the establishment of an Asian economic grouping on a broad basis elicited a positive response and evidenced a receptive attitude towards consideration of further plans to that end.

The variant of alternative (2) that would involve the repayment to a multilateral institution of loans originally extended bilaterally, would give rise to great practical complexities. Furthermore, a financial institution, the only initial assets of which would consist of debt claims which it had no voice in establishing, would not have much prestige or support among responsible persons in the area. Previous attempts by the United States to undertake bilateral loan programs with part repayment in local currencies (such as the basis materials fund) do not indicate that substantial speed could be achieved in making the initial loans. While the Working Group recognizes that resort to the bilateral approach may be necessary if alternative (1) should be impossible of achievement, it believes that real efforts should be made with Asian countries to adopt the multilateral approach. It does not consider that the proposed variant of alternative (2) offers a satisfactory compromise.

5. Role of Japan. Japan’s primary role would be that of a contributor, and its foreign exchange deficiencies would have to be derived from other sources. Apart from the currencies of non-Asian countries, the Japanese yen is the only currency of members that would be used extensively for external financing of development projects. Currencies subscribed by other Asian [countries] (except possibly sterling area subscriptions from sterling balances) would be used principally to finance the local currency costs of projects within those countries.

Japan would benefit from its role as a contributor in several ways. That role would help to dissipate anti-Japanese feeling in South and Southeast Asia, and would introduce greater quantities of Japanese goods into an area with which Japan must expand its trade relations if it is to become economically viable. By expanding the scope of the program, that role would also add to the program’s effect in increasing South and Southeast Asia’s ability to buy Japanese goods and to export the primary commodities that Japan needs.

Japan’s contribution might take several forms, which it would be premature to try to specify at this time. The possibilities of linking this contribution to a GARIOA settlement or to any future U.S. agricultural surplus or other aid to Japan raise a variety of questions which fall outside the scope of this paper. In general, however, it seems true that (i) Japan could and should contribute substantially to this program regardless of any U.S. aid, (ii) its ability to contribute would probably be enhanced by aid so that an increased contribution could be required in return for aid.

The merging of this program and of any bilateral aid which we may give Japan would clearly not, however, be desirable on political grounds. The immediate problems of how to meet Japan’s balance of payments deficit as U.S. special expenditures in Japan decline and of whether, or how, to provide resources to modernize and renovate Japanese industry are such a character as to fall largely outside the scope of this paper. On the other hand, this program could, if executed on a large enough scale, make a significant contribution to the solution of the first of these problems. For Japan should immediately be able to earn some part of the non-Asian currencies that would be assigned to the countries of South and Southeast Asia under this program. The extent of its earnings would be affected, however, by the resolution of the second problem, in view of Japan’s current competitive difficulties as a highcost producer.

Annex Three

Summary of Mission Views on an Asian Aid Program

Replies have been received from all missions in the area except New Delhi. They agree on the fundamental need for economic progress, on the need for outside aid to attain it, and on the desirability of US assistance.

Qualifications: Bangkok, Manila, Taipei, Seoul, Saigon and Tokyo stress the need for internal reform as a condition for effective outside aid. Rangoon feels that Burmese requirements might be met by IBRD loan facilities; all others envisage much more demanding programs. Manila sees little gain in assisting countries soft toward communism. Karachi considers our resources inadequate, would therefore limit aid to those who show initiative and are willing to play with the West. Seoul advises against dramatic moves that we might not be able to sustain and that might cause disillusionment for lack of quick concrete benefits.

Bangkok, Colombo, Manila, Taipei, Saigon and Seoul prefer bilateral US aid, the latter two emphatically so. Djakarta would make grants bilateral, loans multilateral. All others advise a regional, multilateral approach with Asian participation or leadership.

No mission wants military strings although Bangkok, Manila and Saigon would not object to them. Taipei feels military conditions do not serve US interests if a country is not already safely anti-communist. No mission recommends a tie-in of economic aid with SEATO beyond a general broad reference to economic cooperation.

Rangoon, Tokyo and Singapore recommend loan rather than grant aid.

Tokyo envisages a close tie-in of the new program with Japanese reparations deliveries in Southeast Asia.

The substance of suggested aid:

(1) Missions in exporting countries emphasize the crucial role of export markets and prices in economic stability (Rangoon and Bangkok: rice; Singapore and Djakarta: rubber and tin; Ceylon: rubber and cocoa; Taipei: sugar; Tokyo: manufactured goods).

(2) Most missions give high priority to transportation, power, communications, irrigation, and credit facilities.

1. Also addressed to Byroade (NEA), Merchant (EUR), Robertson (FE), and Waugh (E).
2. Not printed.
3. Three attachments to Annex Two not printed.
4. Drafted by McDiarmid on Aug. 27. The three attachments to this annex are not printed.
5. Reference is to Annex One, not printed.
6. The relationship of this program to existing US programs affecting this area is treated in more detail in Attachment “C” to this paper. [Footnote in the source text.]

7. The United States is currently discussing informally the question of Japanese (as well as Afghanistan) association with the Colombo Plan with representatives of Canada, Australia, New Zealand and the United Kingdom. [Footnote in the source text.]

   [Regarding the interest of the United States in Japanese membership in this grouping, see volume xiv.]