224. Memorandum From Secretary of State Rusk to President Johnson in Texas1

The Problem:

Your authorization is requested to proceed in early December with negotiations with the Government of Brazil for a program loan to cover Calendar Year 1966, and to conclude the loan if negotiations produce a Brazilian commitment to a satisfactory program. Concurrent negotiations are expected to be in process between the IMF and the Government of Brazil for an extension of Brazil’s IMF standby agreement, and the United States and IMF expectations of Brazilian commitments have been coordinated.

Discussion:

Since coming to power in April 1964, the Castello Branco Administration has conducted an admirably tough economic program of stabilization, development, and reform. These self-help measures have been on the whole very effective in reducing the rate of inflation and commencing a broad-based and very promising process of economic development and social progress. We consider that Brazil has made excellent use of the support we have been providing and is today conducting the strongest program of economic self-help in the hemisphere.

AID provided a $50 million contingency loan to the new government in June 1964, and on the basis of formal self-help commitments made by Brazil to CIAP, a $150 million program loan was authorized last December. Other international assistance for 1965 included a $53.6 million U.S. Treasury exchange agreement and a $125 million IMF standby agreement, as well as project assistance from AID, the Inter-American Bank, and the World Bank, and a modest amount under PL–480.

The Brazilian performance this year has on most points exceeded the commitments for self-help undertaken a year ago. This record was warmly endorsed in a formal CIAP review last month.

Additional funds are required for 1966 to support an expanded level of import necessary to achieve Brazil’s investment and growth [Page 500]objectives. Ambassador Gordon and his country team have strongly recommended an AID program loan of $150 million, plus a number of project loans (estimated to total around $75–$100 million) and a new PL–480 agreement (preliminary estimate: $35 million). The program loan decision needs to be taken now, in order to relate the timing and the content of our negotiations properly to those of IMF.

The country team’s estimates are that Brazil’s needs for net capital imports to support an adequate rate of economic and social development, supplementing intensive self-help measures to mobilize internal resources, are on the order of $600–$1000 million a year for the next several years. The country team considers that, allowing for imports from private investment, international institutions, PL–480, and AID project loans, the “resource gap” justifies a program loan of at least $200 million in 1966. The structure of Brazil’s trade and balance-of-payments, however, makes it unlikely that more than $150 million of resources in the form of additional developmental imports from the U.S. can be effectively transferred and used. Even this figure implies a substantial increase in Brazilian imports from 1965 levels.

Administrator Bell and his staff in Washington, recognizing the uncertainty of any balance-of-payments projections and the greater familiarity of the country team with conditions in Brazil, nevertheless consider that the very substantial improvement in Brazil’s balance-of-payments position over the last year, the doubts about the amount of increase in Brazilian imports in 1966, and the availability for emergency needs of additional sources of funding from the IMF, combine to suggest that $100 million might turn out to be enough to support the Brazilian self-help program.

The question has been raised whether a portion of the development import needs should be financed by drawings on the IMF over and above the amounts needed to repay IMF loans coming due in 1966. Such IMF resources, however, should be reserved for unforeseen short-term balance-of-payments difficulties arising from commodity price fluctuations or other factors beyond the country’s control. (Note that a one cent per pound drop in coffee prices loses Brazil $25 million over a year.) What Brazil currently needs is long-term development capital rather than short or medium-term balance-of-payments support. Like many other less developed countries, Brazil’s foreign indebtedness structure is already overweighted with short and medium-term debt, and we have been pressing them to avoid further such accumulations.

Both Ambassador Gordon and Administrator Bell agree that if Brazil continues its present strongly favorable economic progress it [Page 501]should be possible to reduce the level of the program loan for 1967 and to reduce AID assistance to Brazil progressively thereafter.

Ambassador Gordon and his country team believe that their recommendation for a $150 million program loan on economic grounds is strongly reinforced by political considerations. Their views are summarized in the following paragraphs.

From a situation of galloping inflation, growing stagnation, and imminent leftist, anti-American dictatorship less than two years ago, the Castello Branco government has brought Brazil halfway along the road to price stability. It has restarted development on a sound long-term basis. It has reversed the nationalist and statist trends to favor private enterprise and foreign investment. It has undertaken major modernizing reforms. It has adopted a strongly pro-Western foreign policy. It is fighting a life-and-death struggle against both right and left-wing extremists to preserve these policy lines, ensure a like-minded successor regime, and restore constitutional normality. It has enjoyed our vigorous political and economic support.

In October 1966, elections are scheduled for Congress, eleven State Governors and all State legislatures; as well as an indirect election of the successor President by the Congress. Castello Branco has only recently and belatedly begun the task of building a strong political base and popularizing the positive goals of the revolution. The local currency counterpart of our program loan, to be applied largely to private enterprise expansion, education, health, and agricultural development can make a major contribution to the success of this effort.

To reduce our program loan for 1966 from the $150 million level being provided in 1965 would appear to be a withdrawal of U.S. support at the most decisive moment in the Castello Branco effort.

Nor can we neglect the effect of reduced support for Brazil on our whole stance toward Latin America and the Alliance for Progress. The proposed loan, while large in dollars, is relatively small in relation to Brazil’s size. It amounts to $1.77 per capita, compared with proposed program loans for 1966 of almost $10 per capita for Chile and $4 for Colombia. A reduction now would look like a penalty for effective self-help. It would be taken as a deliberate blow to the largest nation in Latin America, in face of the Castello Branco regime’s wholehearted cooperation with us in hemispheric and world affairs, including the provision of a sizable military contingent in the Dominican Republic. Since Brazil by itself is 35 percent of Latin America, and the Alliance stands or falls by success or failure there more than anywhere else, reduced support for Brazil now would look like a retreat from our renewed commitments to sustain the Alliance, including your warmly welcomed pledge reported by me to the Inter-American Conference in Rio.

[Page 502]

The risks to U.S. political and security interests if our policy should fail in Brazil are enormous and the costs of failure would be very large in relation to the sums under discussion. Such failure might take the form of an anti-American nationalist military dictatorship or of a Communist-controlled regime. Both are plausible hypotheses. Continued full support for Castello Branco and his policies is the best insurance available against these contingencies.

Use of U.S. Funds. The program loan will be used to finance basic imports from the United States. A major share of the counterpart funds will be used for loans to finance private sector development in agriculture, industry, and housing. Other amounts will be used to finance special programs in education, labor, and public health.

Effect on U.S. Balance of Payments will be minimal in view of the restriction on the use of the loan funds for imports from the United States. Disbursements will not occur until well into 1966. Measures introduced by the Central Bank will increase the attractiveness of United States exports and thereby result in additional follow-on exports from the United States. The expectations for 1966 are that there will be a net capital inflow into Brazil from Western Europe, Japan, and the international financial institutions.

Recommendation:

Weighing these factors together, it seems to me we have two alternative courses of action:

1.
To authorize a program loan of $150 million, stating during the negotiations that we are not sure that the requirements of Brazil’s recovery will in fact call for the full amount during 1966, that we expect to review requirements quarterly during the year, and if less than the full amount is needed, the remainder will be held back for disbursement in the following year and taken into account in negotiations for AID loans at that time.
2.
To authorize a $100 million program loan, stating during the negotiations that requirements may in fact call for larger amounts if the actual pace of Brazilian recovery and growth so indicates, and we would be prepared to add to the loan up to a maximum of $150 million if it is needed during the year.

I consider that the minimal economic needs of the situation might be met by the second alternative, especially if there is some lag in the implementation of the Brazilian investment program. On the other hand, political considerations so strongly favor the first alternative that I believe it to be the clearly indicated course of action.

Accordingly, I recommend that you authorize us to proceed with negotiations for a $150 million program loan under the general framework outlined above, and in accordance with the detailed statement of [Page 503]proposed terms and conditions which is attached to this memorandum. Administrator Bell joins me in this recommendation.2

Dean Rusk
  1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, AID(US) 9 BRAZ. Confidential. No drafting information appears on the memorandum. According to the President’s Daily Diary, Johnson was at his Ranch in Texas, November 19–December 12 and December 21–January 2, 1966. (Johnson Library)
  2. A note on the memorandum indicates that the President approved the loan on December 11. In telegram 1014 to Rio de Janeiro, December 11, Harriman informed Gordon that, although the loan was not tied to Vietnam, the Department urgently sought his advice on how to approach Castello Branco for a suitable military contribution. (Ibid., National Security File, Country File, Brazil, Vol. VI, 12/65–3/67) In response Gordon suggested an informal approach without reference to the program loan. Any linkage between Vietnam and the program loan, he explained, “would be disastrous, and even private hint would arouse resentment from Castello Branco, who although good friend is also very dignified and proud Brazilian.” (Telegram 1432 from Rio de Janeiro, December 12; ibid.) The Department agreed to treat Vietnam separately, but instructed Gordon to approach Castello Branco in an official capacity, i.e. on behalf of President Johnson. (Telegram 1018 to Rio de Janeiro, December 15; ibid.) The United States and Brazil signed the program loan on February 10, 1966.