229. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1

SUBJECT

  • Brazilian Performance under the Program Loan

Costa e Silva has been in office for three months and it is apparent that his administration varies in style and substance from Castello Branco’s. Performance in two areas are of particular concern to us: foreign policy and the domestic stabilization program.

Castello Branco carried out tough political and economic measures designed to consolidate the “revolution” with little regard to their impact on his public image. He kept a tight rein over policy making by his Cabinet. Cooperation with us on foreign policy matters could hardly have been closer.

Costa e Silva is much concerned with being “popular,” restoring the “democratic” image of Brazil and “humanizing” the economic recovery program. At the same time, he personally does not want to depart too far from the objectives of the 1964 revolution. Costa e Silva appears to be leaving broad authority with his Cabinet Ministers without [Page 510]close coordination at the top. They have yet to hammer out an overall, consistent policy.

As a result, there is a puzzling ambivalence in the orientation of the Costa e Silva administration. For example, in foreign affairs Costa e Silva expresses close identification with our policies—and I believe he is sincere in this. But his Foreign Minister publicly advocates a “noninvolvement” policy on Vietnam, insists on a nuclear-test-for-peaceful-uses exception in the Non-Proliferation Treaty, strikes a reluctant stance on Venezuela’s complaint against Cuba and takes an equivocal position on our efforts to unscramble the Israel-Arab problem.

On the domestic front, Costa e Silva professed support for stabilization program and accepted the self-help terms of the $100 million program loan negotiated with Castello Branco. On that basis, we authorized the first $25 million tranche with the clear understanding that release of subsequent tranches would depend on performance.

Recent performance has been so poor that fiscal and monetary results deviate widely from CIAP targets which were conditions of the program loan agreement. These targets are no longer attainable. We are therefore being forced to revise our strategy and tactics regarding our economic assistance.

The failure of the Brazilians to meet the targets is illustrated by these key examples:

  • —At the end of May the budget deficit was 1.12 billion new cruzeiros, while the commitment for the full year was projected at 554 million new cruzeiros.
  • —The coffee price decision announced four days ago provides for a price increase to growers averaging 28% for the year, instead of the 10–15%, which we understood would be the target. (The increase will act as a strong disincentive to agricultural diversification.)
  • —The level of domestic credit appears to have expanded during the first five months of 1967 by 600 million new cruzeiros—the amount projected for the entire year.

It is not clear to what extent these policies are the result of catering to domestic political pressures, technical incompetence on the part of the new Ministers, or lack of coordination and control during the first months of the Costa e Silva administration.

What concerns us is that if Costa e Silva does not develop a responsible fiscal and financial program and stick to it, the stabilization program will be undermined and our assistance will be wasted.

State–AID, together with Treasury and BOB, have developed a strategy for trying to make the Brazilians face their problems and take corrective action. It has these elements:

  • —Tuthill will personally discuss the situation with Costa e Silva as soon as possible, making clear that we cannot make further disbursements [Page 511]of the program loan because of wide deviations from the loan agreement. He will also indicate that project and sector loans may be affected. At the same time, he will express our desire to continue to support Brazil’s development and will propose that we renegotiate economic policy targets consistent with effective stabilization, development, and reform programs.
  • —The AID Mission Director will take similar action at the Ministerial level and Covey Oliver will talk to the Brazilian Ambassador here.
  • AID/State will coordinate closely with the IMF and IBRD, both of whom will send review teams to Brazil in early July.
  • —If Costa e Silva is willing to develop a more adequate economic program, we will be prepared to negotiate a new agreement with him for release of the remaining $75 million of our FY 1967 program loan. The new agreement, of course, would be submitted to you before the final approval.
  • —If we cannot negotiate a satisfactory agreement in 1967, the $75 million will not be disbursed and we will try to negotiate a new program in 1968.2

Walt
  1. Source: Johnson Library, National Security File, Country File, Brazil, Vol. VII, 3/67–9/67. Confidential.
  2. Rostow added the following handwritten postscript: “It may be wiser for you to pull him up short with a personal letter expressing your anxiety.” No evidence has been found that Johnson sent the proposed letter to Costa e Silva.