Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

10. Memorandum Prepared by the Policy Planning Staff⁰

May 5, 1958.

SUBJECT

• US Policy Concerning Soviet Development Aid To Free Countries

I. Introduction

1. Soviet Purpose. The basic Soviet purpose in extending development aid is to increase Soviet political influence in the less developed areas. While the immediate objectives which that increase is designed to serve may be limited, it is part and parcel of an over-all Soviet campaign which looks to the ultimate subversion and, if possible, take-over of these areas.

2. US Purpose. The basic long-term US purpose in extending development aid to less developed countries is to enhance the likelihood that these countries will remain strong and free, and that they will be disposed to pursue their national objectives in association with the free world rather than the Bloc. We believe that this likelihood will be enhanced if these countries can achieve in freedom the economic progress which their peoples seek.

3. US Action. These contrasting US and Soviet purposes in extending aid suggest that our reaction to the Soviet aid program must be twofold:

(a) To render our economic programs even more effective in fulfilling their purpose: helping the less developed countries to go forward in freedom;

(b) To take action to limit the effectiveness of Soviet aid as a means of achieving its contrasting goal: extending Communist influence into those countries.

These two types of action are discussed under II and III, below.

II. US Programs

4. Objective. By helping the less developed countries to progress through free methods, we can probably do more to frustrate the purpose of Soviet aid programs than by the direct responses to these programs proposed under III. For if less developed countries can achieve the growth they seek as partners of the free world, the Soviet economic campaign in the less developed areas will find few opportunities to exploit. Our basic reaction to this campaign, therefore, should be to look to our own programs, to see if there are any ways in which they could be rendered even more effective in promoting the growth of less developed areas.

5. Scale and Method of Aid. If our development aid programs are to promote growth, their scale and methods must be those best suited to the purpose.

(a) Scale. Existing hard loan institutions-the IBRD and the Export-Import Bank-have at their command the present and future resources necessary to a continued high level of activity. Our existing soft loan institution-the Development Loan Fund-will need greater resources and assurance of continuity if it is to achieve such a level over the next several years. This need is of great importance, since soft loans are a vital element of our development financing. It will also be desirable to encourage other free industrial countries to increase their economic and technical aid to less developed countries; some of these countries-notably Germany-have the capacity to do more than they are now doing.

(b) Method. The DLF was designed not only to provide increased resources for development but also to achieve needed improvements in the method of its financing: to avoid advance country allocations and to provide aid only for specific projects or programs that met sound predetermined criteria, following the practice of the IBRD and EXIM Bank. These improvements are beneficial, and we should seek to preserve and extend them in the Fund’s operations. A great deal of US financing which affects economic development is also provided through non-banking instruments, and we should try to increase the effectiveness of these instruments by seeking greater flexibility in their use. Particularly important in this regard will be consideration of (i) whether the scale and allocation of PL 480 disposal could, without endangering other US objectives, more fully reflect its potential importance as an anti-inflationary instrument of development financing; (ii) whether the administrative requirements associated with programming, project approval, and contracting procedures under Defense Support and Special Assistance could be simplified without detracting from their substantive effect; (iii) whether the effectiveness of our technical assistance programs could be increased through greater use of technicians from other free countries, assignment of technicians or advisers (on a reimbursable basis) to the payroll and control of the host government, and other possible improvements in this vital people-to-people aspect of our mutual security program.

6. Relation of These Programs to Soviet Aid. If our aid programs are to be of maximum effectiveness in promoting economic growth, they must not be diverted from achievement of this purpose by attempts, of uncertain merit in themselves, to imitate or counter Soviet aid programs. This means that:

(a) We should not fritter away our resources and prestige by providing development aid to a country merely because it is seeking or receiving Soviet aid, regardless of whether such development aid would further our own positive objectives. By thus succumbing to blackmail, we will only expose ourselves to contempt and reduce the effectiveness of our aid programs, without in the long run altering the receiving country’s receptivity to Soviet aid. By the same token, we should not be deterred from extending development aid to countries where such aid would serve our purposes by the fact that these countries are also seeking or receiving Soviet aid.

(b) We should not be panicked by Soviet competition into providing development aid through methods which mimic those of the Bloc, where these methods are not suited to our own positive goals. Except in the most unusual circumstances and in the face of overriding political considerations, we should not provide resources for projects without determining their worth or make loans which would overburden a country’s servicing capacity-merely because this sometimes constitutes the pattern of Soviet aid. We should continue to try, through appropriate channels, to induce countries which seek or receive our aid to follow sound policies, which would enable them to use that aid effectively.

While following sound practices, we should make clear to foreign countries the basic purposes which bring these practices into being. We should stress that it is those basic purposes-not the Soviet Union’s tardy entrance into the aid business-which motivate our aid. If we allow the impression to grow that we are giving our aid as a counter to Soviet aid, the countries which receive it will (i) take a cynical view of any alleged difference between our purposes and those of the USSR, (ii) believe that they can press us into increasing our aid, whether this is warranted or not, by applying to the Bloc for aid. And if the Bloc should one day stop its aid, the American public and Congress may wonder whether we should not do the same.

7. Other US Economic Programs. While thus carrying forward development aid programs which are effectively geared to their purpose, we should remember that US policies outside the aid field may sometimes have even more effect on the less developed countries’ growth. By rendering participation in the free world economic system a workable means of achieving such growth, these policies can help us to respond effectively to the challenge posed by Soviet aid programs in the less developed areas. While this is not the place to review over-all US foreign economic policy, three key points deserve emphasis:

(a) The maintenance of a high and sustained level of economic activity in the US will be of critical importance.

(b) US trade and commodity policies should be such as to afford less developed countries access to sound and reasonably stable markets for their principal exports. The proposed strengthening of the Reciprocal Trade Agreements Act is, of course, a key measure. Vigorous resistance to pressures for discriminatory action against imports of particular commodities will also be of great importance in the present period of declining economic activity.

(c) Measures to encourage and assist private investment in the less developed areas can have growing significance. The proposed Pakistan tax treaty is a promising first step.

III. Direct Response to Soviet Programs

8. Objective. While enhancing the effectiveness of our own economic programs, we should also respond directly to the Soviet programs so as to limit the contribution which they make to Soviet purposes. This will involve trying (i) to induce recipients of Soviet aid or aid offers to show reasonable prudence in their dealings with the USSR, so as to guard against dangerous direct extensions of Soviet influence; (ii) to limit the Soviets’ ability to use their aid programs to create a damaging and inaccurate impression of the Soviet system and Communist purposes throughout the less developed countries; (iii) to exploit whatever problems and disadvantages these aid programs may create for the Soviet Union inside the Bloc. Each of these types of response is discussed below.

9. Receiving Countries. The counsel which we give to countries that receive Soviet aid or offers of aid can help to limit the Soviet ability to use this aid for harmful purposes. This counsel will, of course, vary according to circumstances, but two general cases may be described:

(a) In countries where we have influence and which are wholly- or almost wholly-divorced from contact with the Bloc, we should probably try to maintain this isolation by persuading such countries to refuse Bloc aid offers.

(b) In other countries, while also indicating frankly the hazards which we believe are associated with Bloc aid, we should not-except in very special circumstances-commit our influence and prestige to securing rejection of such aid. This course would probably earn us ill will without achieving the desired effect. We should rather set for ourselves the more realistic goal of trying to guard against the most important of these hazards by warning the countries in question against:

(i) accepting Bloc personnel as government advisers or allowing them to enter such sensitive fields as civil aviation, basic communication media, or education;

(ii) allowing such an undue concentration of Bloc aid in key sectors of these countries’ economics as might render them unduly dependent on the Bloc (e.g., for future replacements, spare parts, and servicing);

(iii) permitting the Bloc to use its aid and the presence of Soviet technicians for subversive purposes, directly or indirectly;

(iv) entering into loan agreements which would overburden their servicing capacity or orient them so heavily toward Bloc markets, either in over-all terms or in terms of specific commodities, as to render them vulnerable to Bloc economic pressure in the future.

10. Less Developed Countries Generally. We must guard not only against these direct effects of Soviet aid but also against its indirect effects on the less developed countries generally. This means that we should try to prevent the Soviets from misleading these countries as to the character and purposes of its aid and thus from casting a cloak of spurious respectability over the USSR and the local Communist parties in these countries.

(a) We should point out that the resources provided by the USSR are extracted from a people who badly need and want these resources themselves. The fact that they are given testifies to the ruthlessness of the Soviet leadership rather than to the well-being of the Soviet people. It is hardly an advertisement for the Soviet system.

(b) We should seek to puncture the Soviet claim that these resources are provided without political purpose or distinction. We should stress that the USSR’s aid is designed to extend its influence in certain specific countries rather than to achieve economic progress in the less developed areas as a whole. While Soviet representatives ostensibly told the recent Cairo Conference that their aid is open to all comers, for example, the fact remains that in the Afro-Asian area most of that aid goes to Afghanistan and the UAR, where the Soviets are seeking to establish a special position.

(c) We should treat the scale and nature of Soviet assistance programs factually. We should welcome objective comparisons between the annual flow of aid from the US and the USSR to the less developed countries, to the extent that such comparisons are feasible in view of difficulties of definition.¹ We should emphasize that the Soviet Union was the only donor country recently to refuse to provide information for the ECOSOC concerning its aid programs, and suggest that the reason may well have been its fear that such comparisons would not be to its advantage.

(d) Where deficiencies in Soviet aid programs appear, we should try-without showing our hand, if possible-to make them widely known in less developed areas. As we have learned from our own experience, aid can earn ill will as well as good will for the donor in these areas, depending on how it is administered. When the Soviets err, we can try to make sure that they reap the full whirlwind by bringing their errors to the full attention of all the interested countries.

We should not, of course, be carried away by this effort to the point where we try to do more than describe accurately what the Soviets are doing and why. Any attempt to belittle Soviet aid would be extremely dangerous, if only because of its palpable falsity. Our object should be to prevent Soviet aid from having greater political impact than is warranted by the facts of the case, without resorting to the systematic misrepresentations through which the Soviets have (sometimes successfully) sought to reduce the political impact of our aid.

11. Exploiting Soviet Vulnerabilities. There is one other way in which we might try to limit the net advantage which the Soviets can draw from their aid programs: by trying to compound the internal problems which such aid may create for the Soviet rulers.

(a) We can try to bring home to the people of the satellites and of Communist China the facts about the Soviet Union’s foreign aid to the free world. All these peoples want and need more economic development. They will be interested to learn that the Soviet Government is lending resources to other countries-rather than to them-for just this purpose. The Chinese Communist appraisal of Soviet aid for India will probably be about as enthusiastic as the Baghdad Pact nations’ reaction to US aid for India.

(b) An effort can be made to exploit the exposure of Soviet technicians to outside influences when they emerge from the Soviet Union. As the number of technicians sent abroad increases, the Soviet rulers may have growing difficulty in ensuring that they are so carefully selected as to be wholly invulnerable to the effects of foreign contacts. Discreet attempts to ensure that they are not isolated from newspapers, broadcasts, and intellectual stimulants which they are denied in the USSR may affect the attitudes which they bring back to the USSR and thus the long-term prospects for internal Soviet change.

These efforts will not, of course, convert the Soviet aid programs into net liabilities for the USSR. They can, however, ensure that the Kremlin incurs the disadvantages-as well as the benefits-of its tardy entrance into the aid field, and thus slightly reduce the net advantage which it draws from these programs.

These actions will not, however, equal in importance the measures designed to reduce the direct and indirect effects of Soviet aid in the less developed areas proposed in paragraphs 9 and 10. And these latter measures, in turn, will be much less significant than those set forth under II, which are designed to enhance the effectiveness of our own economic programs in helping the less developed countries to achieve the progress they seek as members of the free world.

0. Source: Department of State, S/P Files: Lot 67 D 548, USSR 1958. Confidential. Filed with a covering memorandum of May 9 from Assistant Secretary of State for Policy Planning Gerard C. Smith to Dillon; a copy of CA–10407 of May 28, which transmitted it to all diplomatic missions and a number of consular missions; and a summary dated June 4. Another copy of the paper indicates that Henry Owen of the Policy Planning Staff was the drafter. (Ibid., S/P Papers, May 1958) Copies of the paper and the summary were sent to the White House with a covering letter of June 9 from Acting Assistant Secretary of State for Economic Affairs W.T.M. Beale to Special Assistant to the President Karl G. Harr, Jr. (Eisenhower Library, Special Assistant to the President for National Security Affairs Records, Communist Economic Penetration)
1. For purposes of this paper, Soviet aid is defined as the provision of goods without requirement for payment, in barter or currency, within a period that would be considered customary in inter-governmental or private trade. [Footnote in the source text.]