Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

370. Memorandum of Conversation, March 20, between Ball and Van Scherpenberg¹

Bonn, March 20, 1961

UNDER SECRETARY BALL’S TRIP TO EUROPE
March 19–22, 1961

PARTICIPANTS

• U.S.

  • Under Secretary Ball
  • Ambassador Dowling
  • Mr. Schaetzel
  • Mr. Rashish
  • Mr. Bator
  • Mr. Bourgerie
  • Mr. Getzin
  • Mr. Bee

• Federal Republic of Germany

  • State Secretary van Scherpenberg, Foreign Office
  • Dr. Harkort, Foreign Office
  • Dr. Hesse, Foreign Office
  • Dr. von Schweinitz, Foreign Office
  • Herr Dumke, Foreign Office
  • Dr. Henckel, Economics Ministry
  • Dr. Stedtfeld, Economics Ministry
  • Herr Seiberlich, Economics Ministry
  • Herr Klamser, Finance Ministry

SUBJECT

• U.S. Proposals for Fourth DAG Meeting

Under Secretary Ball began by saying that he would like to mention two points regarding the matters discussed during the morning meeting. He believed, first of all, that the defense effort of each country should be an element considered in trying to arrive at a fair sharing of the burden of development aid. Secondly, he wished to explain the U.S. attitude toward commercial investment. He believed that in the past the U.S. tended to overestimate the value of financing from private industry. In 1947 the reconstruction of Europe could not have been achieved so rapidly if the major part of the financing had been extended on a commercial basis. Now the situation of the underdeveloped areas is considerably more difficult. The less-developed countries do not have the stable governments, established institutions, technical skills and capital which were available in Europe. It is very difficult to squeeze savings out of people in the less-developed areas and still provide for their minimum needs. Thus capital will have to come from abroad, and most of it from foreign governments. Commercial credit, moreover, does not meet the balance of payments problem of the recipient countries. This kind of credit will create problems so that these countries will have to be bailed out by others. Thus while commercial credit may play an ancillary role, it can do no more than that. Also, commercial credit should be put in the context of the development plan of the recipient country. There have been cases where the supplier has encouraged developing countries to embark on foolish and uneconomic projects. Therefore, U.S. experience shows that the bulk of the financing must be made available from the public sector on very favorable terms.

Dr. van Scherpenberg replied that there cannot be much difference of opinion on these points. The Federal Government believes that private investment should be included in the total assessment of aid effort. Private investment, however, cannot be distributed evenly; about 40 per cent of German foreign investment goes to Latin America while other countries like Ghana and Ethiopia have little chance of attracting private investment. This does not mean that we should take full account of investment in calculating the aid burden, although it does come from the economy of the donor country. With regard to the balance of payments position, Dr. van Scherpenberg said the Federal Republic has been accused of extending too much in the way of 5-year export credits. He believed, nevertheless, that this type of financing was sound, and that commercial transactions should not be made to compete with longer-term credits. At the same time, he added, a large proportion of these export credits cannot be met on time and the Federal Republic is therefore required to arrange refinancing. Dr. van Scherpenberg thought that all types of financing should be assessed within the total program of the recipient country, and should be related specifically to the balance of payments position of the recipient. Thus there would appear to be no basic difference between the German and the U.S. views on this issue.

Dr. van Scherpenberg went on to say that he thought private investment was the best possible form of financing since payments are not made until the project has become profitable. With regard to internal capital formation in the less-developed countries, he believed that one must accept that this can only be done by governments; it is necessary to have government planning and government financing. He also stressed the importance of good will and cited the example of penniless refugees who had formerly been successful businessmen. Many were able to recoup their fortunes rapidly largely on the basis of their good reputations.

The State Secretary also pointed out that in most cases it was not the supplier who persuaded the developing country to undertake uneconomic projects but the other way around. He said he was of the opinion that steel works had very little to do with economics.

Under Secretary Ball suggested that the two sides try to agree on the terms of reference for the experts working group. He thought that while there may be some differences, it might be possible to agree on the basic figures. He believed that the qualitative aspects were as important as the quantitative aspects because over the long term a grant is a greater burden than a loan. He thought that it might be possible to agree on general principles, including recognition of defense effort and the element of progressivity as well as assigning values of different types of aid.

Dr. van Scherpenberg agreed that the experts should consider both qualitative and quantitative aspects. He considered it important to examine first the possibility of finding a simple measure of general burden on the basis of GNP and, secondly, a simple answer to the question of progressivity, perhaps on the basis of per capita income. He also thought that it might be useful to examine what other elements might be added to the standard. He doubted the value of trying to define progressivity and believed the other elements entering into the picture, such as defense effort, should be borne in mind but without calculating them. With regard to qualitative considerations, he thought the experts should somehow try to develop ideas on the needs for different types of aid—grants, hard and soft loans, subsidized loans, etc.

The members of the technical working group were then designated and the meeting was adjourned.

1. Continued discussion of aid proposals. Confidential. 4 pp. Department of State, Conference Files: Lot 65 D 366, CF 1819.