31. Letter from Charles W. Cole to Edwin M. Martin, July 231
This letter attempts to set forth the most urgent and crucial points in the present situation as regards U.S.-Chile relations. It represents only my own views, though I believe that a good many of the Embassy staff would agree with all or part of it. I wrote this letter before receiving Deptel 58 but found that communication of no real help on any of the major points. I am sending copies to Ted Moscoso, Walt Rostow and Mac Bundy, in the hope that they will be interested. I want to cover three important matters.
1. As I have indicated in various telegrams, I think that President Alessandri and the Government of Chile have a good deal of justice on their side when they ask for a fairly firm indication as to the dollars they may actually expect to receive from us in 1962 and 1963 under the Moscoso-Goodwin agreement and a reasonably clear estimate as to the timing.
The way things have worked out, it has become clear that the PL 480 component of the $120 million of the Moscoso-Goodwin can not amount to more than $20 or $21 million at the very best. Quite probably it will be as small as $14 million and will not be all received in 1962 in any case. As to the $40 million CORFO loan, the difficulties on matching with U.S. imports and with the exchange rate seem to me to indicate that not all of it, either, can be received in 1962. As to the second tranche of $40 million, what with the Ex-Im Bank situation and with the first tranche slow-down, I would guess that not more than $2 or $3 million could get to the Government of Chile in 1962, if any.
So, because of restrictions, legalisms (probably necessary), new developments, etc., it has worked out as with an insurance policy. The big print insures you and the fine print uninsures you. And [Facsimile Page 2] there has [Typeset Page 73] been a lot of fine print. If we have to make the Government of Chile accept a shortfall of 50% or 60% on Moscoso-Goodwin, it seems to me that to enable them to plan and budget we really owe them a pretty firm commitment on amounts and timing. Further, by so much as we fall short on the $120 million, by that much we drive them to expand Central Bank credit and thus make more difficult the IMF agreement which we are urging.
So let us do two things. First, let us give them the best estimates possible on amounts and timing, as mentioned above. Second, let us figure out just what we can do in the way of stand-by and balance of payments support when they do make an agreement with the IMF and tell them about it. I believe that firm information on this score will lead the Government of Chile to conclude such an agreement.
The second step is the more necessary because of the way things have worked out. The second tranche of $40 million under Moscoso-Goodwin was designed as bait to encourage the Government of Chile to agree with the IMF. It is now apparent that they can receive little or nothing of this second tranche for budget support. There is no bait left. The situation is so bad that they may well be driven to believe that an IMF agreement is impossible and there is no use trying for it. If we could tell them that stand-bys, etc. amounting to x million dollars (say $85 million) would be available after the agreement, we would recreate the bait and encourage them at least to try.
2. I think that the Policy Planning memorandum, “Our Alliance for Progress Strategy in Chile”, of May 25 struck at the main point of the problem here in a most effective and persuasive way. If we are to prevent a victory of the FRAP, if we are to improve stability and prosperity here, if we are to make even a partial success of the Ten-year Plan, we must maintain the forward momentum that has developed.
Despite discouraging developments on the exchange and budgetary fronts, and despite the 1960 earthquake, it is clear that Chile has been moving forward. It seems evident that from January 1, 1961, to June 30, 1962, production has been increasing at a rate equal to and probably greater than the 5½ % called for by the Ten-year Plan. At the same time, real wages have been definitely rising, unemployment has been declining, labor strife has decreased markedly. And all this in the face of exchange and financial difficulties and uncertainties.
It seems to me that we simply have to keep aid flowing and to prevent the taking of deflationary or restrictive steps, for a slow-down could be economically and politically disastrous. We are pushing them hard on devaluation. We want to be sure that at the same time [Facsimile Page 3] we help them to maintain and increase the forward movement of the last eighteen months we also see to it that devaluation does not produce inflation, strikes and unrest.
[Typeset Page 74]3. In the last year I have talked with a number of distinguished economists of American or worldwide repute who have grave doubts about the IMF and its policies as regards underdeveloped countries. I find myself joining them in wondering whether the IMF orthodoxy is adequate for the situation of a country like Chile. A lot of competent observers think that when the history is written, the Argentine debacle will be laid at the IMF door, and we know what IMF-type stabilization did to Bolivia.
I sit here every day pushing the Government of Chile hard to reach an agreement with the IMF and realizing that the Government of the United States is hiding behind the IMF and wondering in my heart if IMF has the right prescription for Chile. You and I are going to feel a little odd if Chile lapses into economic chaos and the FRAP takes over and makes another Cuba out of Chile. We will feel even worse if it is recognized by everybody in 1965 or 1966 either that Chile could not possibly have lived with the terms set by the IMF or that, having accepted them, they were quite the wrong medicine.
Can’t somebody with real economic depth and an understanding of underdeveloped countries (Ed Mason, Carl Kaysen, Willard Thorp) be gotten quickly to take a hard look at the IMF and see if we don’t want either to get it to modify and liberalize its views or stop using it as a substitute for policies developed and approved by the State Department itself?
I feel the case and the plight of Chile are of the utmost importance. Right now Chile looks to me like the only country south of Colombia where stability and democracy can possibly be maintained and where the Alliance for Progress can possibly succeed. Let’s stop worrying because the Chilenos don’t do things our way, because they are short on follow-through, because they are too political, etc., etc., and look at the larger picture of the Hemisphere and the next decade.
As ever,
cc: Teodoro Moscoso
Walt W. Rostow
McGeorge Bundy
- Crucial points in U.S.-Chile economic relations. Confidential. 3 pp. DOS, CF, 611.25/7–2362.↩