114. Letter From Acting Secretary of State Richardson to Secretary of the Treasury Kennedy 1
If anyone had told me a few months ago when I came into this job that I would be writing to the Secretary of Treasury about “additionality,” I would have said that such esoteric practices seemed far indeed from what ought to be the concern of an Acting Secretary of State for the foreign policy of the United States. I now find that foreign policy is indeed quite closely and adversely affected by these procedures.
One of the great strengths of our system with its regular, peaceful changes of leadership, is that we are able on occasion to pull policies up by their roots and examine them free from past commitment and bureaucratic position. I know from my own experience that governments often head down particular paths for perfectly good reasons and end up in quite ludicrous situations without knowing quite how to turn back. My brief exposure to the question of “additionality” leads me to believe that this is one deadend from which we should withdraw.
I want first to assure you that I and this Department fully share Treasury’s genuine concern for our balance of payments problem. The comments I make here are given in full appreciation of the necessity for dealing with our adverse balance. But my review of the “additionality” problem leads me to believe that for practically no balance of payments gain we buy bad policies, bad relations and particularly bad precedents. While recognizing that the reactions I have are strictly those of a layman, let me just briefly summarize my impressions after examining the arguments of experts:
- On April 4 the President announced in a message steeped in refreshing Republicanism that with respect to capital controls “fundamental economics call for … ultimate dismantling of the network of direct controls which may seem useful in the short-run but are self-defeating in the long-run.”2 I assume that this principle applied to private capital controls ought also to apply to Government operations more generally.
- In order to improve our balance of payments situation and avoid the replacement of possible direct American exports by our aid shipments, [Page 270]we have instituted an elaborate program of negotiated “additionality” agreements which result in a small gross gain to the balance of payments. And at what cost?
- Our balance of payments surplus with Latin America amounts to
$300 million annually while at the same time the Latin Americans
run a good healthy surplus with Europe and Japan. To further
improve our balance of payments situation, we negotiate
additionality agreements with those countries to further divert
their import demand to US suppliers by encouraging those
governments to engage in the most illiberal actions:
- In the case of Colombia, the IMF, the IBRD and AID have all tried to persuade that Government to liberalize its exchange and import regime because we believe this is sound economic sense and will lead to self-sustaining economic growth. We turn around and insist that the Government of Colombia make sure that 39 percent of their commercial imports come from the United States. To accomplish this onerous directive, controls must be imposed. How do we convince Colombian legislators that controls are not good for their economic development but they are good for forcing them to buy what are, by definition, uncompetitive US products?
- In the case of Chile we not only encourage them to go against all the best economic advice we and others have been giving them but we even go so far as to encourage them to initiate a preferential tariff system—what amounts to a reverse preference. I understand we have argued vehemently that reverse preferences are bad and they should be eliminated entirely from the Common Market/African Yaounde Convention.
- Bolivia was advised by the IMF to follow a stringent stabilization plan and to institute a series of reform measures. Many of these were adopted by the Bolivian Government. They included reorganization of its customs service, institution of controls over fiscal performance of independent public agencies, cuts in government expenditures, etc. We could not proceed with a loan to back these reforms because of an inability to reach agreement on additionality which would have taken the form of tying AID credits to a positive list of imports to be financed by its free exchange resources.
- Let me just list some of the other practices we have encouraged besides preferential tariff rates/positive lists—the sale of exchange at preferential exchange rates for AID imports (Indonesia and Costa Rica), reduction of tax surcharges for AID imports (Uruguay), preferential credit and reduced interest for goods coming from America (Ghana), low cash deposits on imports (Chile and Colombia), special exchange guarantees (Brazil), and special payment delays for AID goods (Brazil).
All of these laborious, and—from our economic-system point of view—by definition distasteful negotiations reduce the limited leverage we have to use our assistance to promote sound economic policies in the developing world, to say nothing of their deleterious effect on our foreign relations as such.[Page 271]
There is no reason for me, as a non-expert, to continue long in this vein but I felt that it was important for me to bring to your personal attention the anomalies of this situation to be certain that you had focused on this problem.
John Hannah has previously written a letter to Paul Volcker, and I now see that Paul has replied saying that his committee will indeed look at this problem. I am a little disturbed, however, by the third paragraph in that letter which indicates a certain lack of zeal because it appears to condition our changing this policy on favorable developments in the balance of payments, negotiations for the activation of special drawing rights, and legislation relating to bilateral and multilateral assistance.3 Why not add, for good measure, a winning streak of ten games for the Washington Senators?
With kindest personal regards,