Foreign Relations of the United States, 1964–1968, Volume XXXI, South and Central America; Mexico

41. Memorandum From the President’s Special Assistant (Rostow) to President Johnson¹

Washington, October 15, 1966, 12:30 p.m.

SUBJECT

• Our Program for the OAS Summit

Secretary Rusk in the attached memorandum² requests your approval of general guidelines for our negotiators on Summit preparations.

The guidelines are based on a Summit program which has substantial inter-agency concurrence except for the budgetary implications. Because of the difference, Secretary Rusk is not asking that you make a decision on this aspect until you can review the Summit price tag in the light of the total aid request for FY 1968.

These guidelines provide adequate interim direction for the preliminary multilateral preparatory work which will take place during the next 6–8 weeks.

The Summit Deal

We are asking the Latins to:

• —integrate their economies and sharply reduce tariffs.
• —revamp their antiquated agricultural and educational systems.
• —work with us in promoting private investment.

It will take courage for the Latin American Presidents to take their countries down this uncharted path.

To induce them to step off into the dark and break past the obstacles, a substantial U.S. “carrot” will help. Expanded economic assistance is our part of the deal.

The guidelines will enable our negotiators to explore:

• —how far the Latins are prepared to go.
• —how much inducement must we offer to make them take the jump.

Based on their findings, you can decide on the specific proposals.

Our Present Summit Program

It is designed to begin meeting now serious social and political problems we see coming in the decade ahead from population increase, growing urban unemployment and continued backwardness of agriculture. The main elements are:

1. Latin American Economic Integration

The broadened, more competitive market that can result from more rapid economic integration is the single, most promising move that Latin America can take to accelerate growth and reduce future foreign aid needs.

We would expect the Latin Americas to agree to a concrete plan for automatic reduction of intra-zonal tariffs and non-tariff barriers; a commitment to adopt reasonable external tariffs, declining as their economies strengthen; competitive investment and internal trade policies; and reasonable access to the region for foreign investment.

You, in turn, would announce at the Summit our readiness to support this effort by expanding our contribution to the Inter-American Bank’s Fund for Special Operations (IDB/FSO). This would involve increasing the U.S. contribution in the three fiscal years 1968–70 from the present level of $250 million per year to $300 million, with an indication that if additional funds are required, we would consider further replenishment of the FSO.

The IDB would agree to set aside a stated amount of the new resources to:

a. finance sound multinational projects in support of economic integration and development of “inner frontiers” (e.g., roads, flood control, hydroelectric power, irrigation, communications).

b. assist countries with temporary adjustment problems resulting from rapid integration (e.g., balance of payment difficulties, affected industries and workers, export financing for intra-Latin American trade).

2. Higher Alliance Targets: Primarily Agricultural and Education

Annual per capita growth rates in Latin America should increase from the 2.5% level realized in 1964 and 1965 to 4–6%. Economic integration will help. But also basic to the objective are more dynamic agricultural sectors and broader access to higher quality education.

The type of across-the-board programs and self-help we have in mind are described in the guidelines paper (Enclosure 1 of the Rusk memo).³ In addition to remedial measures for the more common deficiencies, the programs include some exciting new ideas such as establishing two or three regional centers of excellence in science and engineering in Latin America.

At the Summit you would announce an increase in AID bilateral assistance in these two fields of up to $200 million per year for 5 years.

3. Stimulate Private Investment

There are two proposals for increasing U.S. investment in Latin America under favorable conditions which State has advanced but on which full inter-agency agreement has not been reached. They are:

a. an imaginative idea for expansion of AID risk guarantees developed by Tony Solomon.

b. the negotiation with the Latin Americans of an agreed investment code to encourage use of modern technology and provide for coordination of foreign investment with development plans.

Budgetary Implications of the Package (Linc Gordon’s estimates not concurred in by AID or BOB)

For FY 1968 the implications are

	Appropriation	Expenditure
	(in millions)
Economic Integration (replenishment of the IDB/FSO over the planned level of $250 million)	$50	$5
Increased Bilateral Aid for Agriculture and Education	$200	$50
Total	$250	$55

For the four-year period beyond FY 1968:

• —Replenishment of the FSO will continue for 2 years at $50 million per year.
• —Requirements for bilateral assistance in agriculture and education will not exceed $200 million per year and may be less, depending upon allocation of IDA funds to Latin America.

The Original Package

Linc Gordon’s original Summit proposals⁴ had three elements which have been deleted or diluted. They added a zest to the program which is now lacking.

1. Separate Integration Fund

As an inducement to the Latin Americans to take the plunge on integration he proposed a separate Latin American Integration Fund to handle adjustment assistance and a Multinational Projects window at the IDB to finance such projects. We would contribute up to $300 million to the fund and $500 million to the IDB for multinational projects, both over a five-year period.

Joe Fowler took sharp exception to these proposals and countered with the idea of using the Bank’s FSO and increasing our contemplated annual contribution to the FSO by $50 million for the next three years. Linc reluctantly went along with this.

I think the Treasury formula dilutes the “carrot” aspect of the proposals to such a degree that much of its value as an inducement for prompt Latin American action is lost. We need more flexibility in negotiating with the Latins on integration.

2. Expanded Risk Guarantee Program

The Solomon proposal is to:

• —expand the program in six basic fields: iron and steel, chemicals, fertilizers, pulp and paper, petro-chemicals, automobiles.
• —cover up to the legal maximum of 75% of each investment, and relax the 100% tieing requirement.
• —require the U.S. investor to offer for sale up to 51% of the stock of his company to Latin American purchasers within a fixed number of years after the start of the project (e.g., 15–20 years) and reinvest a percentage of his profits while he still held a controlling interest.

The proposal is encountering heavy going in Treasury and Commerce on balance of payments grounds and the advisability of conditioning guarantees to the mandatory offer of stock sales after a fixed period and to required profit reinvestment. I am not convinced by:

• —the balance of payments argument because Latin America does not leak to Europe, or
• —the preoccupation with conditioning of guarantees since the investor is free to decide whether or not he wants to accept them.

3. Limited Untieing of Procurement

To accommodate Latin American criticism to “tied” aid, Linc proposed extending procurement eligibility for Alliance financing to include Latin America. It would apply, in effect, to manufactured products, mostly capital goods. This is largely a gesture—but symbolically a meaningful one for the Latin Americans—because they produce few such goods on competitive terms. State estimates that over an initial three-year period the procurement might reach $15 million.

The Treasury objection is on balance of payments grounds. Since the proposal is largely cosmetic, Linc dropped it from the package. I think it bears closer examination.

My Reaction to the Program

It goes to the heart of what the Latins must do and only Presidents can take the political decisions required. It is, therefore, of Presidential stature.

If the Latins are willing to start down the track we propose, the bargain to help them financially is a good one.

The portions of Linc’s original package which have not prospered are “carrot” which we may have to use to get the Latins to accept the deal. They should be held in reserve.

Recommendation

That you approve the guidelines proposed by Secretary Rusk, with the understanding that you wish to review at a later date each of the three aspects of Linc Gordon’s original proposals not adequately covered in the Summit program as it now stands.⁵

Walt

Approve

Disapprove

Speak to me

1. Source: Johnson Library, National Security File, Memos to the President, Walt W. Rostow, Vol. 14. Secret. A copy was sent to Moyers.
2. Memorandum from Rusk to the President, undated; attached but not printed. A copy, dated October 14, is in the National Archives and Records Administration, RG 59, Central Files 1964–66, POL 7 IA SUMMIT.
3. Attached but not printed.
4. As contained in a draft memorandum to the President, undated; attached but not printed.
5. Although the memorandum does not record the decision, Bromley Smith subsequently reported that the President approved this recommendation—“with the understanding that no decisions or commitments are to be made with respect to additional United States assistance without prior referral to him along with a firm indication of what the Latin Americans are prepared to do.” (Memorandum from Smith to Rusk, October 19; National Archives and Records Administration, RG 59, Central Files 1964–66, POL 7 IA SUMMIT)