Foreign Relations of the United States, 1958–1960, Eastern Europe; Finland; Greece; Turkey, Volume X, Part 2

163. Memorandum of Conversation⁰

MC/12

Belgrade, July 18, 1960, 9:30 a.m.

UNDER SECRETARY’S VISIT TO YUGOSLAVIA

July 17–20, 1960

PARTICIPANTS

• United States
  • The Under Secretary
  • Elim O’Shaughnessy, Chargé d’Affaires, a.i., Embassy Belgrade
  • Leonard Weiss, Economic Counselor, Embassy Belgrade
  • John Leddy, Special Assistant to Mr. Dillon
  • William D. Broderick, Second Secretary, Embassy Belgrade
• Yugoslavia
  • Vice President Todorovic
  • Vladimir Popovic, Member Federal Executive Council
  • Bogdan Crnobrnja, Assistant Secretary of State in Secretariat for Foreign Affairs
  • Janko Smole, Governor Yugoslav National Bank
  • Franc Primozic, Director IV Political Division

SUBJECT

• United States-Yugoslav Economic Relations

Mr. Todorovic opened the talks with the remark that the timing of Mr. Dillon’s visit was fortunate for a review of mutual economic relations and for seeking new forms and areas of cooperation. He stated that he wished to discuss three related topics: Yugoslavia’s internal economic development; her international economic relations; and mutual economic relations between the United States and Yugoslavia.

Mr. Todorovic began with a survey of Yugoslavia’s internal economic policy. He stated that preparations for a new Five Year Plan were nearly completed and that the plan would soon be presented to Parliament. In its basic character, the plan continues the present policies of (a) a further rapid development of the economy, (b) a further raising of the living standard and (c) a further development of the social system in the direction of more decentralized and more democratic self-government. Stress will be placed on self-management by individuals and groups. Progress in this direction has been considerable but it is not good enough as yet.

National income is expected to increase 11% annually in the period 1961–1965. Although this is a high rate, Mr. Todorovic pointed out that the annual increase in national income during the last four years was 12%. Exports will increase 12% annually while imports will go up 9% annually. Thus the present $700 million level of exports of goods and services will increase to $1.3 billion by 1965 and imports will rise from $800 million to $1.3 billion. Thus it is anticipated that by the end of the Five Year Plan the balance of payments deficit will be more or less eliminated.

Mr. Todorovic pointed out that the above program was possible, as the record to date has proven; it was also essential that it be carried out. In order to strengthen Yugoslavia’s independence, to raise the low level of the economy and to introduce more freedom into the social system such a program of development must be undertaken.

The present per capita national income according to Mr. Todorovic is $350. This compares with a pre-war level of $170 and the 1947 level, also of $170. While this is indicative of the progress that has been made, it is in contrast to the situation in most European countries whose per capita national income is more than $1,000. Mr. Todorovic pointed out that whereas the present level of national income is equal to that of the U.S. at the end of the nineteenth century, in 1954 it was only equal to that of the U.S. at the end of the eighteenth century. He stated that by 1965 it was expected that per capita national income would reach $570, which would bring it close to Italy’s present level.

The new Five Year Plan provides for approximately 25% of national income to go to investment, with an annual increase of personal consumption at the rate of about 9% annually, and investment in social projects (housing, schools, hospitals, etc.) at the rate of about 13% annually.

These rates, which are high, were set with two basic factors in mind. First, living standards are still low and rapid growth of living standards has taken place only in the last two years. Secondly, the Yugoslav economic system is characterized by the fact that a rapid rate of increase is linked with a rapid growth of living standards.

Mr. Todorovic stated that Yugoslavia was counting on foreign assistance for the implementation of its Five Year Plan in the gross amount of $1 billion. He pointed out however that net foreign assistance would be significantly lower because of heavy repayments schedule for credits contracted. He stated that most currently available credits in Europe are short term.

Mr. Todorovic stated that Yugoslavia has taken great strides forward in decentralizing its economy but it is not yet satisfied with the extent of decentralization. Further movement in this direction can only come by strengthening the material basis of the economy. He pointed out that 40% of total investment is still channeled through Federal sources and that enterprises have at their free disposal only l/6th of their total profits after taxes. It is desirable to leave them with a larger share of profits and the Yugoslav Government will move in this direction. However, success will depend on available resources. He stated that a law is now under preparation which will increase the role of local communities in the control and operation of schools (to be managed by parent-teachers associations), hospitals and similar institutions. It is also planned to permit enterprises an increasing share in the management of funds through the creation of a system of commercial banks through which the distribution of social capital can be made.

Overall direction, however, of economic development must be based on the social plans, both to insure development along sound lines and to prevent inflation.

Mr. Todorovic next turned to the question of the foreign exchange reform. He stated that the contradiction between the movement towards economic freedom on one hand and the bureaucratic elements in the foreign trade and exchange system on the other had long been obvious to them. Efforts to date to carry out a reform have been inhibited by the lack of foreign exchange and the need for heavy expenditures on national defense and on economic development, among other things. Today however the prospects of carrying through such a reform have greatly improved. The reform itself, concerning whose details the American Embassy has been informed, marks, according to Mr. Todorovic, a qualitative change towards freer relations in this area. Although it will cause problems at first, it will in the long run provide a new impulse to the economy.

Mr. Todorovic stated that in undertaking such a reform Yugoslavia did not want to affect adversely the growth in living standards nor to slow down the rate of social economic development. He said that his country was counting on foreign aid in order to implement the reform. According to Yugoslav calculations $340 million in medium and short-term credits would be needed to carry it out. Yugoslavia looks both to Western Europe and the United States in addition to the IMF to provide such assistance. It anticipates that much of the assistance as well as help in obtaining assistance from Western Europe must come from the United States. Mr. Todorovic stated that it was hoped that the reform could take effect on January 1, 1961. An IMF commission is to visit Yugoslavia in August and detailed estimates are now being prepared for this group.

Turning next to bilateral relations Mr. Todorovic said that mutual relations in the last ten years had been positive, successful and mutually useful and had helped Yugoslavia to weather many extraordinary difficulties resulting from the international situation and from such internal problems as drought and post-war reconstruction. The forms of aid have of course changed in accordance with changing needs. He proposed to review our relations today with a view to the promotion of stable, long-range economic relations. In addition to present aid new and more lasting types of assistance would be desirable. Mr. Todorovic stated that quantitatively the general level of economic aid from the U.S. was stagnating at the same time that over-all Yugoslav exports and imports were increasing. While earlier forms of assistance had now ceased (i.e. PL 480 wheat) there were possibilities to replace them with new forms of long-term aid. He stated that Yugoslavia was not satisfied with its present level of exports to the United States and that measures, including a visit by a group of prominent businessmen to the United States, were now being undertaken to increase mutual trade. He stated that Yugoslavia found it easier to get credits and technical cooperation from private firms and banks in Europe than from those in America. He said he found it somewhat surprising that U.S. banks and businessmen were more conservative in this regard than those of Western Europe and he thought it would be useful if the U.S. Government, possibly through the EXIM Bank, could give some encouragement in this direction. He pointed out that they had done no business with the EXIM Bank or with the IBRD for ten years. Now that the problem of pre-war debts had been settled¹ his government anticipated assistance from the IBRD in the near future, and he requested U.S. support for such help.

Mr. Todorovic concluded by stating that it was hoped Yugoslav exports to the United States could be tripled by 1965.

Mr. Dillon, after thanking Mr. Todorovic for his exposition, stated that the United States has wanted to assist Yugoslav development as much as possible within the limits of its available means. He pointed out that development was perhaps the most important problem of our time, and that we considered Yugoslavia to fall within the category of those countries which have a real capacity for development. He stated that the United States wishes to continue its very satisfactory cooperation with Yugoslavia and that as the situation changes within Yugoslavia the form of such cooperation will naturally change. He stated that we agree with the goal of moving towards a more natural and long-term relationship based on trade. The decline in the total value of U.S. assistance both now and in the near future does not indicate our lessened interest in Yugoslavia but rather a change for the better in the Yugoslav economic situation. For example, the large shipments of wheat we had previously made under PL 480 were now no longer necessary because of Yugoslavia’s success in increasing its grain production. Mr. Dillon pointed out that, apart from wheat, the level of our economic assistance to Yugoslavia as a result largely of the DLF is greater than previously. He stated that we intend to continue to make loans to Yugoslavia in accordance with available funds and world-wide demand.

Mr. Dillon said he considered it useful for Yugoslavia to develop trade relations with our private companies. Insofar as the government is concerned, we favor an expansion of such trade relations. He stated that as a former businessman himself he could only speculate as to why American businessmen were so conservative vis-à-vis Yugoslavia. He suggested that once our businessmen become personally acquainted with the country and its markets this situation should improve. Many private businesses, he pointed out, like to begin operations in a new country by working out technical cooperation agreements which, if successful, are often followed by loans. Practically all private investment abroad, he pointed out, is undertaken by individual companies and not directly by banks.

Regarding Yugoslavia’s exports to the U.S. Mr. Dillon observed that as the Yugoslav economy develops, its range of export products should increase. He was sure that the U.S. Department of Commerce would be ready to help in any way possible to promote U.S.-Yugoslav trade. He also stated that on his return to Washington he would see what could be done to encourage the Export-Import Bank to cooperate in this regard. He indicated however that the EXIM Bank, although within the government, is a completely independent institution not subject to the directives of the State or Treasury Departments.

Mr. Dillon expressed pleasure that relationships had been regularized with the IBRD. He stated that Mr. Black had informed him following the visit of the IBRD mission to Yugoslavia that the Bank looks forward to renewed collaboration with Yugoslavia.

Mr. Dillon then asked certain questions in connection with the foreign exchange reform. He stated that the figure of $570 per capita national income for 1965 was most impressive and if achieved would mean that Yugoslavia should no longer be considered an underdeveloped country. It is generally calculated, he said, that when a country attains $500 per capita national income this means that rapid and easy development is possible without outside assistance of a special nature. Pointing out that the figure was given in dollars and that a country with multiple exchange rates presented special problems in this regard, he asked what was the conversion factor. Mr. Todorovic replied that this was a very complex calculation done by the Yugoslav Planning Board taking into consideration internal prices, tariffs, etc. and for this reason he described it only as approximately $570. Mr. Dillon then asked whether there were estimates of how much of the $1 billion of external assistance needed in the Five Year Plan would come from Western Europe. Mr. Todorovic said he was unable to give a precise breakdown since much depended on the types of credits available. However, they were counting on Italy, Germany and France as well as Switzerland, Belgium and Great Britain. They also anticipated getting some credits from Japan.

Mr. Dillon then stated that our Government has felt strongly that short-term credits are not very helpful for development projects. Therefore the United States had used its influence in Western Europe to lengthen credit terms. It was found that many countries, Italy and Germany in particular, had no mechanism for making longer term loans but both are now in the process of creating such mechanisms. The Development Assistance Group created in Paris last January has as its purpose to increase the amount of long-term development funds, although it does not get into specific operations. The United States and other countries have agreed that loans for a term of five years or less cannot be classified as development assistance. We believe this will help all countries like Yugoslavia which are in need of development funds.

Mr. Dillon stated that we think the proposed exchange reform should be helpful for the economy. We are not, he said, in a position to comment on it in detail. When the report of the IMF is finished and made available to us, it will be studied and determined at that time what can be done specifically by the United States to help.

Mr. Dillon stated that in Geneva he talked with Mr. Jacobsson whose impressions of Yugoslavia had been most favorable and who felt that some arrangements of this general nature were possible.

Mr. Dillon then asked whether the funds needed for the exchange reform, which had been stated at $340 million, were included in the $1 billion of foreign assistance anticipated in the Five Year Plan. Mr. Todorovic replied that it was not. The $1 billion of which less than $500 million would be available for net investment, was in addition to the exchange reform sum. Mr. Dillon then inquired as to the reasoning for assuming that the reform would cause a decrease in exports, since in most cases a unified rate at a devalued level results in an export increase. Mr. Todorovic in reply emphasized that the reform will eventually bring about an increase of exports but that there would be a temporary drop while certain firms which have to date enjoyed very high profits and premiums for their exports are able to adjust to the new conditions of the market.

Mr. Dillon felt that the unified exchange rate in itself would be a great help to an increase in trade on a multilateral basis. As to the $340 million total it was a very large one. The first step would be to get the full agreement of IMF on details of the program and on the amount of outside funds the IMF in Yugoslavia agrees are necessary. He said he hoped that it would be found possible to lower the total. It is difficult to find funds available for stabilization purposes only. In the help which the U.S. had given in recent years to Turkey, Spain, and Argentina it was found necessary to use all kinds of different assistance, including the DLF, PL 480 and EXIM Bank, in order to make up the overall total. Congressional funds for grant assistance had been declining in recent years. Nevertheless once we receive the IMF report we will see what can be done and talks will be held both here and with the Yugoslav Embassy in Washington at that time.

Mr. Dillon stated that we felt the Western European countries should play an important part in this effort, particularly because the immediate trade benefits would be greater for them than for us. He assured the Yugoslavs that once agreement is reached with the IMF and the Yugoslav Government, the United States Government would be glad to do everything possible to promote the cooperation of Western European countries which could assist in the reform.

Mr. Todorovic in reply stated that he had not reckoned with DLF and PL 480 as means of supporting the exchange reform because these had already been planned to be used for investment purposes, as is their function. He stated that the figure of $340 million was a realistic sum which would enable the reform to be successful without jeopardizing economic stability. Yugoslavia he said was very sensitive regarding such stability because public opinion would not easily accept measures to check the growth in living standards. The measure he said also has important international political aspects. The Yugoslav system is considered by some a bold and risky experiment and Yugoslavia would not wish to give certain outsiders a chance to comment negatively on or attack Yugoslav economic developments. Yugoslavia feels it must be cautious in implementing such a program.

Mr. Dillon agreed that the reform would be a substantial step forward if successful and that it should be done with caution. While it is impossible for us to know at this time how much of the necessary support can be mobilized, the United States will be glad to work closely with the Fund and the Yugoslav Government to see where we can help and to energize the governments of Western Europe. Regardless of how this particular program works out, the United States will continue to support Yugoslavia in the remarkable efforts it is making. Mr. Dillon concluded by stating that he was particularly impressed by the fact that Yugoslavia’s economic growth had been accompanied by improvement in the standard of human welfare and a growth in consumption. He wished Mr. Todorovic well in his efforts in the coming years.

Mr. Weiss then asked whether the $60 million decrease in exports was an absolute or relative decrease. Mr. Todorovic explained that this was not a decrease anticipated from the present year’s levels but from what next year’s exports would have been had there been no reform. Mr. Todorovic concluded by stating he was convinced the talks had been useful and that his government appreciated Mr. Dillon’s appraisal of Yugoslav efforts and the role of the United States in Yugoslav developments. He stated that Yugoslavia intends to carry through an exchange reform regardless of outside aid because it is in the interest both of the government and the people of Yugoslavia. The rate at which the reform can be implemented however depends on the amount of outside assistance available.

0. Source: Department of State, Conference Files: Lot 64 D 559, CF 1724. Confidential. Drafted by Broderick and approved by Leddy on July 26.
1. On April 6 the Yugoslav Government announced that it was assuming responsibility for the prewar debt of the Kingdom of Yugoslavia. A temporary 5-year settlement, approved by the Foreign Bondholders Protective Council, provided for the resumption of payment on bonds at a rising yearly rate through 1964. A final settlement more favorable to the bondholders would then be negotiated.