Foreign Relations of the United States, 1955–1957, American Republics: Multilateral; Mexico; Caribbean, Volume VI

108. Memorandum From the Assistant Secretary of State for Inter-American Affairs (Rubottom) to the Deputy Under Secretary of State for Economic Affairs (Dillon)¹

Washington, December 20, 1957.

SUBJECT

• Policy of Development Loan Fund Towards Latin America

Problem:

Senator Smathers and other Congressional representatives have manifested increasing interest in the extent to which the Development Loan Fund is currently contemplating extension of loans for Latin American projects. At the same time, there are indications that within the Executive Branch, officers concerned with DLF operations may consider only Bolivia, Honduras, Paraguay and Haiti in Latin America eligible for access to the Fund and discourage other countries from submitting proposals to it. As a corollary to this attitude there appears to be a disposition arbitrarily to define a “sound economic project” in these countries only as one which can obtain financing from conventional institutions.

Recommendations:

(1) To assure adequate recourse by Latin America generally to capital of the DLF, 10 percent of the latter’s funds administratively should be earmarked for projects there.

(2) Of such informally earmarked funds, approximately 20 percent should be reserved for projects in the fields of education, health, sanitation and resettlement as contemplated in the Smathers Amendment (Section 400 (b) of the Mutual Security Act).

(3) It should be generally recognized that the rapidly deteriorating export earnings potential of many Latin American countries may limit or reduce their abilities to obtain credit from existing institutions in amounts sufficient to finance demonstrably soundly conceived projects. In consequence, combinations of DLF and traditional loans may be requisite.

Discussion:

1. The legislative history of the DLF clearly establishes that all friendly underdeveloped countries are to be considered eligible for loans from the Fund, including specifically countries of Latin America. This history also shows that the sole criteria for exclusion of individual project applications relate to questions of their soundness, contribution to economic growth and ability to obtain financing on reasonable terms elsewhere. The Senate Foreign Relations Committee report stated “The Committee wishes to stress its understanding that every consideration will be given to Latin America in the use of the Fund.” It emphasized that “The resources of the Fund, where appropriate, will be made available to Latin America notwithstanding the special provision of $25 million for assistance to that region” provided for in the Smathers Amendment (but not appropriated).

Similarly, the House Foreign Affairs Committee report: “The countries of Latin America will have equal access with other nations of the world to the Development Loan Fund in accordance with criteria established for the Fund”.

In the discussions in the Senate Foreign Relations Committee, Senator Capehart placed considerable emphasis on the eligibility of Latin America for access to the Fund and asked “And they will be loaned a portion of it?” To which I responded “I think that is a fair assumption on your part; yes, sir, there is no reservation on my part on that”. Before the House Foreign Affairs Committee I testified “We will tell the peoples of Latin America that we shall do our best through the Eximbank to satisfy their needs for sound development where capital is not available from private sources. …² There will also be access to the new Development Loan Fund, if Congress approves this proposal”.

You, in your testimony before the Senate Appropriations Committee, stressed that there would be no individual country levels of aid: “If we wish to make the most businesslike use of our aid, it is essential that we allocate it on the basis of individual projects that we find worthwhile, and not on the basis of country totals.” Similarly, Mr. Hollister before the House Appropriations Committee: “A Development Loan Fund would not make advance overall annual allocations by country. … Its financing would, instead, be geared to specific projects and programs.” ARA has, however, noted references in Department messages indicating planned expenditures of $50 to $75 million of current DLF funds for India.

Recommendation (1) above is designed to preclude the possibility that the Fund’s resources might be allocated on a “first come, first served” basis. Mr. Hollister in his testimony before the Senate Appropriations Committee stressed the unfairness of such an approach and the desire of the Administration to avert it. This risk, however, prevails in consequence of the despatch of two separate messages concerning the Fund’s operations to our Missions in the field. The first of these, circular telegram 368 of October 17,³ called for action by Missions in Asia, the Far East, the independent countries of Africa, and Paraguay, Bolivia and Honduras to encourage the submission of proposals. The second message, circular 3946 of October 25,⁴ was addressed to all other Latin American Missions, instructing them merely to provide information concerning the DLF to local governments and other potential applicants when requested to do so. In concurring in the despatch of these two instructions, it was not the intention of ARA to imply that countries in the second category were either to be debarred from access to the Fund or discouraged from applying to it. Indeed, CA–3946 indicated that the earlier message was limited to the three Latin American posts merely because these “were considered to have relatively greatest need at this time for purposes of Development Loan Fund and most readily qualified under its loan criteria.” Moreover, it was ARA’s view that it was inadvisable in the formative stages of the DLF to clog its administrative machinery with a cumbersome number of applications, and simultaneously unseemly for our Missions to raise false hopes through extensive publicity and solicitation of proposals in the face of currently limited Fund appropriations. The unwarranted conclusion drawn in some quarters from the existence of two separate messages with respect to the Fund to the effect that only three countries in Latin America (with the ultimate addition of Haiti when the political situation there stabilizes) definitively are eligible for access to the Fund should be corrected.

2. The Smathers Amendment (Section 400 (b) of the Mutual Security Act) was designed to finance primarily on a loan basis projects of a social infrastructure type. The $25 million authorized for this purpose was not appropriated by the Congress, in part because the sponsor of the Amendment and others were led to believe that its objectives would be attained through MSA Special Assistance funds and the DLF. The Executive Branch, in fact, opposed the appropriation of funds under the Smathers Amendment on these grounds. Thus, Mr. Snow before the House Appropriations Committee: “We do not consider this a necessary provision to make because the type of loan contemplated by Senator Smathers is also contemplated under the new Development Loan Fund … and that the sort of loan contemplated would come under that Fund”. Similarly, you, before the Senate Appropriations Committee, said: “We did not originally request these funds ($25 million of Smathers Amendment) because we had intended to take care of the Latin American demands through two sources, either the Development Loan Fund to some extent, or through special funds of the President.”

Your testimony before the Senate Foreign Relations Committee and the Fund booklet indicates that projects in the fields of education, health and sanitation which contribute to economic growth are especially considered to qualify for Fund financing, in view of the fact “It is not the policy of established public lending institutions to finance such projects.”

Recommendation (2) is designed to assure that administrative consideration will be given to projects of this type. Among them are land development projects for settlement of European emigrants in Brazil and Argentina which have been specifically endorsed by Congressmen Walter, Chelf and Celler, as well as endorsed in principle by Senator Smathers, Congressman Judd, and others.

3. The significant declines in prices of commodities such as tin, lead, zinc and copper which have occurred since late 1956 have adversely affected the balance of payments positions of several important Latin American countries and reduced their credit worthiness. The threatened imposition of United States tariff and quota restrictions on imports of lead and zinc would further impede their economic growth. Moreover, prospects for maintenance of current price levels for coffee, a commodity of major significance to Brazilian, Mexican, Colombian and Central American economies, are dim. The likelihood, therefore, is that many of these countries soon will approach the limits of credits available from existing institutions, particularly when account is taken of their existing repayment obligations.

In consequence, many soundly conceived projects in Latin America are likely to obtain from established lending institutions only part of the financing requested. Specific illustrations of this situation already prevail in Chile, Ecuador and Honduras. Were the DLF to supply part of the foreign exchange or local currencies needed for these projects, existing institutions such as the IBRD, likely would be prepared to supply the remainder.

This is precisely the type of situation visualized by the Executive Branch at the time the DLF was proposed. Thus, Mr. Hollister in testimony before the House Appropriations Committee: “For example, one of the existing public lending institutions might meet the foreign exchange costs of a project while the Fund financed the purchase of commodities to generate part of the necessary local currency”. Similarly, you before the Senate Appropriations Committee: “The Fund might join one of the existing public lending agencies in the financing of mutually interdependent projects”.

4. The political importance at this time of demonstrating a sympathetic awareness of Latin American needs and aspirations in the administration of the DLF is highlighted by recent events. At the Buenos Aires Conference the United States reiterated its opposition to the establishment of an inter-American bank, primarily on the grounds that the resources and procedures of existing international lending institutions were adequate. Subsequently, the United States endorsed in principle the channeling of funds for capital development through the UN, whose officials are now proposing that these move initially into an Arab Union Bank. The impression on the part of the Latin Americans, however unwarranted it may be, that the United States has neglected them in relation to other areas persists. Dr. Milton Eisenhower has recently observed that it has in fact been accentuated. Simultaneously, the Soviet Bloc has intensified its trade, credit and “assistance” offers, provoking increasingly responsive reactions, particularly from Uruguay and Brazil. These circumstances, coupled with the increasing interest on the part of Congressional leaders in DLF operations as these relate to Latin America, underscore the timeliness of the recommendations set forth above.

1. Source: Department of State, Rubottom Files: Lot 59 D 573, Economic. Limited Official Use. Drafted by Harry Conover of REA.
2. All ellipses in this document are in the source text.
3. Not printed. (Department of State, Central Files, 700.5–MSP/10–1757)
4. Not printed. (Ibid., 720.5–MSP/10–2557)