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

SUBJECT

  • FY 1969 Assistance Program for Chile

Bill Gaud and Covey Oliver have requested your authorization to negotiate a $68 million economic assistance package with Chile for 1969 (Tab C).2 The package includes a $20 million program loan, a $10 million agricultural sector loan, a $36 million PL 480 agreement, and $2 million in project loans. Orville Freeman joins Gaud in recommending your approval of the PL 480 sale agreement—mainly for wheat, corn, and rice (Tab D).3

Charlie Zwick has some reservations about Chile’s economic performance and prospects. On balance, however, he recommends your approval of the whole package (Tab A).4

Joe Barr is prepared to support all elements of the package except the program loan. He questions the need for balance of payments support of this magnitude, and raises other questions about the realism of AID’s proposed negotiating instructions. He states that he can not weigh what he sees to be economic shortcomings in the program loan proposal against political considerations underlying our support for President Frei, and would have to leave that to your judgment. Barr is satisfied, moreover, that the arrangements governing AID lending in Chile provide reasonably satisfactory protection for the US balance of payments (Tab B).5

We provided a $20 million program loan for Chile in 1968. The final installment was released in December. Chile’s performance on the self-help commitments under that loan and under an earlier agricultural [Page 674]sector loan of $23 million has been reasonably satisfactory—especially when Chile’s economy is being buffeted by the worst drought in its history. As Zwick and Barr state, progress toward price stability has been slipping. The outlook is now for about 30 percent inflation in 1969—up from 28 percent last year. But without substantial continued foreign support, Frei’s stabilization program could completely collapse. The drought has undermined both agricultural and industrial production and sent unemployment rates skyrocketing. To deal with this temporary social and political crisis, Frei is having to divert funds for temporary jobs and emergency farm credit. So far, Chile is managing its economic crisis with considerable skill. The outlook for 1969 is not as bleak as Zwick and Barr suggest.

This assistance package has been worked out in close cooperation with the IBRD and the IMF, both of whom have negotiating teams in Chile now to work out overall agreements to support Frei’s 1969 program. Our negotiating objective in the fields of fiscal, exchange rate, and monetary policies are integral parts of this effort. For example, Chile is seeking an IMF standby, and the IMF team doubts that Chile will qualify without the prospect of the US assistance package outlined in this memorandum. It is very important to the future of Frei’s economic program that we be able to negotiate our package this month in parallel with the other two international agencies. Our negotiating leverage is also augmented by simultaneous negotiations.

Critical congressional elections are scheduled for March in Chile. Frei’s term runs until late 1970. His ability to continue those constructive programs in such fields as agrarian reform and education which have made Chile a leader in the Alliance for Progress depend heavily on the kind of showing his party makes in the March election. With the great strains placed on the economy by the drought, Frei needs both the assistance proposed and the strong moral support implied by a negotiating package of this type. Ambassador Korry urges your approval of the negotiations so that no time-lag can intervene in the rhythm of our support for Frei’s program.

Chile has made outstanding achievements in the social and political fields under the Alliance for Progress—and Frei is currently reasserting a strong leadership position within the Christian Democratic Party to consolidate many of these gains during his two years in office. Although Chile’s economic problems are worrisome, Frei has shown remarkable tenaciousness and courage in facing up to them in recent months. I have looked carefully into the reservations expressed by Barr and Zwick, and I think they are based to some extent on a misunderstanding of recent actions taken by the Chilean Government and Congress.

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On balance, I think Chile is a good bet and that President Frei deserves our full support. I recommend that you authorize negotiation of the full assistance package as outlined in the Gaud memorandum at Tab C.

Walt

Approve6

Disapprove

Call me

  1. Source: Johnson Library, National Security File, Country File, Chile, Filed by LBJ Library. Confidential.
  2. Tab C was a memorandum from Gaud to the President, December 23; attached but not printed.
  3. Tab D was a memorandum from Gaud and Freeman to the President, December 23; attached but not printed.
  4. Tab A was a memorandum from Zwick to the President, January 6; attached but not printed.
  5. Tab B was a memorandum from Barr to the President, January 10; attached but not printed.
  6. The first and last options are checked and the President wrote: “Let’s pass until next week.” In a January 16 memorandum to the President, Rostow reported: “Rusk is inclined to go with Ed Korry’s view on the Chilean loan. If you approve, he will clear with [Secretary of State-designate William P.] Rogers—if it is the transitional problem that concerns you.” In response, Johnson checked the “Talk to President” option. (Johnson Library, National Security File, Country File, Chile, Filed by LBJ Library) On January 17 Korry reacted angrily to a report that the Department of the Treasury had “rejected” the program loan: “If parochialists in Treasury are going to exercise veto power over US foreign policy, if they are to be both arrogant and powerful enough to assume such political responsibilities in defiance of the considered judgments of State, AID, and the President’s personal representative, then it is the latter’s responsibility to record for history the range of possible consequences of their action.” (Telegram 215 from Santiago, January 17; National Archives and Records Administration, RG 59, Central Files 1967–69, POL CHILE–US) President Johnson subsequently approved the loan.