23. Memorandum From Secretary of the Treasury Kennedy to President Nixon 1

SUBJECT

  • IDA Replenishment III

In our memorandum of December 10,2 we alerted you to the commencement of discussions on the Third Replenishment of IDA (International Development Association) resources. In addition, we pointed out that an increase of the capital resources of the World Bank was also under consideration. This second matter is now dormant.

The Part I IDA donor countries will continue negotiations in London on March 9 and the United States needs to have a view at that time on a specific amount if the meeting is to progress well.

The outlook is that Sweden, the Netherlands, the United Kingdom and Canada, joined probably by other small countries such as Denmark and Norway, are prepared to suggest and endorse a figure involving an annual replenishment of $1 billion for each of three years (U.S. share about $400 million), up from the present $400 million annual level (U.S. share $160 million). We do not anticipate any clear statement of position from four major countries: Germany, France, Italy and Japan who are probably thinking of a lower amount and may so influence the final outcome. The management of the World Bank is pushing quietly but strongly for a $1 billion replenishment and they urge that our delegation be prepared to endorse that number.

The Pearson Commission Report3 recommends that contributions to IDA should reach the order of $1 billion annually in 1972 and $1.5 billion by 1975.

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I discussed the matter with Rudy Peterson in November and again with his full Commission in December. I indicated to them that I believe we should go for a substantial IDA increase and that the United States may have to declare itself on an amount prior to the completion of the Commission’s Report. I was encouraged by them to press ahead and get as large a replenishment as possible and that we should not be concerned about making our position known before the Peterson Report is completed. We have recently coordinated our thinking with the Peterson Commission via its staff and have been assured that a $1 billion replenishment is in full accord with the position they will be recommending.4

In your recent foreign policy statement you indicated your readiness “to respond positively” to proposals for the replenishment of IDA.5

This has been coordinated through the National Advisory Council, expanded to include representation of AID, Bureau of the Budget and the National Security Council staff. We recommend to you that the U.S. delegation be authorized to indicate that the U.S. Governor would recommend to the President that the United States support a $1 billion IDA replenishment. Expressed this way in private, you would still be left the opportunity to support the figure publicly in your mid-April Economic Assistance message. From a negotiating point of view, that may also prove to be a desirable sequence.

There are several reasons for taking this step now:

1.
It furthers your objective of increasing the role of multilateral development institutions in the provision of aid.
2.
With the United States declaring itself at the London meeting, we can improve considerably the World Bank’s chances of achieving the IDA replenishment goal. On the other hand, failure to move now would increase the possibility that the ultimate consensus would develop nearer the lowest rather than the highest common denominator.
3.
In IDA we get very favorable burden sharing, with other donors putting up $3 of soft term aid for every $2 we do.

We do not believe that budgetary considerations should keep us from supporting an over-all replenishment of $1 billion in view of our priority for multilateral economic assistance and our preference for IDA as an aid-giving institution. The three $400 million per year U.S. contributions would be paid by letters of credit, and budget outlays would occur only as cash drawings were made. These would be spread out over a period of up to 8-10 years.

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Congressionally, the amount will not be easy. We are talking FY 1972, 1973 and 1974. You obtained ratification of IDA Replenishment II early in the last legislative year (covering appropriations in FY 69-71). We will have to work hard to do as well for FY 1972, but I believe we can. The inherent Congressional strength of IDA is that 18 countries join together to contribute resources to the lesser developed world and the multiplier effect we receive on our funds is a compelling argument on the Hill.

Alternative Amounts

A replenishment of $800 million (double the present size) would only reduce the United States annual appropriation from $400 million to $320 million. On an expenditure basis, in view of the lengthy disbursal period, the savings to our annual expenditure budget would only be in the neighborhood of $25 million average. Moreover, it is not clear that dropping the replenishment from $1 billion to $800 million would give us additional support on the Hill: those who oppose foreign aid would be just as strong against the lower figure as the higher.

Another alternative is to step up the annual amount from $800 million the first year to $900 million the second and $1 billion the third. An advantage of this proposal is that it would show an upward thrust, but it might be more difficult to negotiate with some other donor countries. Also it might be more difficult for us legislatively because it would break the established precedent for IDA of three-year authorizations with equal annual payments and create an implication of progressively higher contributions in subsequent years. Besides, the over-all amount by this method is 10 percent less than the total we recommend. It might nevertheless be considered as a fall back position if one should become necessary.

Should the United States recommend a replenishment of $1.2 billion per annum? While the lesser developed countries would be able to use resources at this volume, we do not consider this figure to be negotiable within the established burden-sharing formula of the donor countries. Recommending it would raise U.S. visibility at the negotiations which we do not believe to be consistent with your approach to international negotiations or with your concept of partnership. If the United States were to raise its share of IDA contributions above 40 percent to achieve a larger replenishment, it would, I believe, grievously impair chances of legislative ratification and also seriously compromise the burden-sharing and partnership approach we are seeking.

In our earlier memorandum, we indicated that the World Bank was considering a capital increase of about 25 percent. The Bank has decided to withdraw this idea—because it seriously complicates the IDA replenishment negotiations and would probably require a lower level of [Page 56]replenishment. While this issue may resurrect itself at a later time, it is no longer part of our considerations in the present exercise. You have already approved a small selective capital increase in the World Bank as a normal counterpart to the IMF quota increase, but this selective increase has no implications for the IDA replenishment.

Balance of payments safeguards

We do not recommend that the United States require the same balance of payments safeguards for the Third Replenishment which we have at present. These permit immediate disbursement only against U.S. procurement, with the balance of our contribution disbursed on a “last-in basis”. To be sure these safeguards were very helpful—if not critical—in obtaining Congressional support. However, they did complicate the last negotiations, and they do represent a privilege available to the United States which other donors do not have. I fear this negotiating complication outweighs the balance of payments and Congressional advantages.

At the same time we must be aware of the substantial balance of payments cost. We contribute 40 cents of each IDA dollar and currently receive in U.S. procurement about 14 cents on the dollar (over the whole period of IDA operations this figure is 19 cents on the dollar). This means the total balance of payments cost to the U.S. of the Third Replenishment of IDA will be between $630-780 million during the calendar 1972-1980 period.

I think we must recognize that with the U.S. providing 40 or 50 percent of the world’s official aid, and our share of the goods imported by the LDCs around 15-25 percent in general, the difference between our share of total official aid and our share of LDC imports is a good rule of thumb guide to the balance of payments cost. It may not be necessary to take a definitive position on balance of payments safeguards at this round of talks, but I believe they will have to be dropped in the interest of multilateral cooperation; and this should be recognized and accepted as a cost of aid-giving through IDA.

In conclusion, I recommend, with the concurrence of State, AID, Commerce, Eximbank, BOB and NSC Staff, your approval for the U.S. delegation (headed by Treasury Assistant Secretary for International Affairs Petty) to support a $1 billion annual IDA replenishment (U.S. share about $400 million) at the March 9 London meeting.6

David M. Kennedy
  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, IDA. Confidential. Attached to a March 4 memorandum from Kennedy to the President that deals with the level of funding if the President preferred something other than a $1 billion U.S. contribution over 3 years.
  2. Document 17.
  3. The Pearson Commission on International Development was established by World Bank President Robert McNamara to stimulate public and governmental interest in foreign aid. Its Chairman, former Canadian Prime Minister Lester Pearson, and its U.S. member, former Secretary of the Treasury C. Douglas Dillon, called on Secretary Rogers on July 17, 1969. In his July 16 briefing memorandum to the Secretary for that meeting, Assistant Secretary Trezise noted that the Commission’s final report might contain a strong recommendation for a larger IDA III. In the attached talking points for the Secretary, the Pearson Commission was viewed as a key element in the U.S. aid strategy that could set the stage for the renewal and recasting of the U.S. aid effort, which would have to be done by the spring of 1970 if a significant U.S. program were to continue. Secretary Rogers was to say that targets were useful only if they could be met but that a “strong push for IDA will be very helpful as we go into the start of negotiations for a further IDA replenishment.” (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, IDA)
  4. The Task Force report was released on March 5; see Document 128.
  5. U.S. Foreign Policy for the 1970’s—A New Strategy for Peace: A Report to Congress by Richard Nixon, President of the United States, February 18, 1970, p. 102. The report is also printed in Public Papers of the Presidents of the United States: Richard Nixon, 1970, pp. 116-190.
  6. In a March 17 memorandum to the Secretary of the Treasury, Kissinger informed him that the President had approved this recommendation. Kissinger also informed the Secretary that the President had agreed not to seek balance-of-payments safeguards for the replenishment. (National Archives, RG 59, S/S Files: Lot 73 D 288, Box 839, NSC/Misc)