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

SUBJECT

  • Offer of Integration Adjustment Assistance to the Andean Subregional Group

In the memorandum at Tab A,2 Under Secretary Katzenbach requests authorization to explore with the governments of the Andean Subregional Group (Bolivia, Chile, Colombia, Ecuador, Peru and Venezuela) a United States loan of up to $25 million for adjustment assistance to industries affected by formation of an Andean Common Market.

This group of six middle-size countries is now considering a treaty establishing a common market. The private sector in three (Venezuela, Ecuador and Peru) is nervous about adverse effects of rapid integration and are pressuring their governments to delay the treaty.

A year after Punta del Este it is clear the Latin American Common Market is more likely to come through a series of subregional groups than the merger of the Central American (CACM) and South American [Page 173] (LAFTA) blocs, as contemplated at Punta del Este. That is why the action of the Andean Group is the most promising development on economic integration since the Summit.

The last-minute opposition of the private sector in some Andean countries threatens establishment of this subregional common market. By offering to join in establishing adjustment assistance, we may help the governments overcome this resistance. No loan would be made unless this objective is assured.

The key issue in making an adjustment loan offer is the tying arrangement. State argues that we will maximize our chances of getting governments to move if we follow the formula we use in the Inter-American Bank—our dollars could be used only to purchase goods and services in the United States, in the country of the user, or from other members of the Andean Group. This is also the formula we use in our loans to the Central American Integration Bank. (We allow this flexibility in Latin America because a large proportion of Latin foreign exchange eventually comes back to the US, even if it is not directly tied to US purchases.)

Secretary Fowler raises three issues on the State proposal (Tab B):3

1.
He takes sharp exception to the tying formula. He wants the dollars tied to 100% US procurement, as we do in our bilateral aid loans. To do otherwise, he says, would undermine your January 1 balance-of-payments program and subsequent directive to AID to tighten up on balance-of-payments aspects of its operations.
2.
He questions the wisdom of immobilizing $25 million of scarce FY 1969 funds. He thinks $25 million should be an upper limit and it should be used for adjustment assistance and capital financing.
3.
He wants the Inter-American Bank to be associated with integration lending proposals. He recalls that in considering adjustment assistance for the Latin American Common Market prior to the Summit, Treasury took the line that the IDB should manage the adjustment fund.

These are my comments on Secretary Fowler’s points:

1.
The State tying formula would be a significant sweetener which would improve the odds on moving the proposal forward. The balance-of-payments impact would be minimal and at least a year in the future. The State tying arrangement would not weaken your January 1 program4 because it would not cause substantial outflow nor [Page 174]introduce a new principle in balance-of-payments policy. AID’s ability to achieve its new outflow targets would not be impaired. The targets will still be met.
2.
AID would not automatically immobilize $25 million of FY 1969 funds. AID wants to talk to the Andean group about our joining with them in setting up an adjustment fund. The $25 million is only a ballpark figure. There would be no obligation of funds until a concrete loan proposal is worked out—based on the Andean Common Market coming into operation on terms satisfactory to us—and your approval under the new commitments procedure obtained.
3.
Inter-American Bank Association with the Andean group can be explored when we discuss the loan with the Andean governments. I would not make the IDB association an absolute condition.

I recommend you decide this one in favor of State, in the understanding that the amount of our loan offer will be flexible and participation of the Inter-American Bank will be examined further if the Andean countries are interested in the proposal.

Walt
1.

Authorize offering Andean Group adjustment assistance loan up to $25 million

Yes

No

Call me5

2.

On the tying formula, approve:

the formula we use with IDB

the restrictive formula recommended by Secretary Fowler

  1. Source: Johnson Library, National Security File, Country File, Latin America, Vol. VIII, 9/68–10/68, 2 of 2. Confidential.
  2. Tab A is a May 29 memorandum from Katzenbach to the President; attached but not printed.
  3. Tab B is a June 1 memorandum from Fowler to the President; attached but not printed.
  4. Reference is to the President’s statement on January 1 outlining a “Program on Action to Deal with the Balance of Payments Problem.” (Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1968–69, Book I, pp. 8–13)
  5. The President checked this option. No indication of the President’s subsequent decision appears on this memorandum. In an October 23 memorandum to the President Rostow noted: “Last June you authorized State to explore with the six governments a possible AID loan of as much as $25 million for ‘adjustment assistance’.” Johnson subsequently approved a proposal to proceed with the loan, even though several countries, including Venezuela, Peru, and Ecuador, appeared reluctant to join the subregional group. (Johnson Library, National Security File, Country File, Latin America, Vol. VIII, 9/68–10/68, 2 of 2)