346. Paper Prepared by the Ad Hoc Group of the International Energy Review Group Working Group1

THE LDC PAYMENTS PROBLEMS RELATED TO HIGHER OIL PRICES

ALTERNATIVES FOR UNITED STATES TACTICS

[Omitted here is a table of contents.]

I. The Energy Crisis and the LDC’s—The Problem

The increase in oil prices announced in October and December of 1973 will create severe balance of payments and economic growth problems for many LDC’s. In order to finance the same volume of imports as in 1973, a much larger volume of capital flows will be required. Estimates of the increase of the oil import bill for the non-oil developing countries in 1974, for instance, are on the order of $9 billion at a $9–10 price (c.i.f.), while the projected current account deficit at this price is about $22 billion, compared with a $10.6 billion deficit in 1973.

The above figures overstate the magnitude of the “real” problem, however, in that most of the increased capital requirement could be on commercial or near-commercial terms. The more difficult financing problem is that presented by many of the poorer LDC’s who are hard hit and who do not have access to world capital markets. For most of the countries of South Asia, Africa, and scattered countries in Latin America such financing would only be meaningful on highly concessionary terms. (Specific countries that are hard hit and which would require concessionary assistance are listed in Table A.) It is estimated that at current prices the amount of concessionary financing required would be about $2–3 billion, and that at a $6 c.i.f. price the figure would be about $1 billion.

In addition to the impact of higher oil prices, many of the poorer developing countries are also affected by the reduced availability and higher costs of fertilizer and by higher grain prices in general. The World Bank has recently estimated that LDC imports of cereals increased from an average level of about $3 billion in 1970–72 to over $8 [Page 981]billion in 1973. (Part of this rise reflects an increase in import volumes due to poor harvests in many of the LDC’s, although most of the increase is due to higher prices.)

Price increases of other commodities, however, have also benefitted some LDC’s. World Bank calculations of additional capital requirements for the LDC’s, which take account of other commodity price increases as well as oil plus the adverse effect of lower growth rates in the developed countries on LDC export growth rates, are about the same order of magnitude as figures based on oil price increases alone. Estimates of additional financing requirements on intermediate and concessionary terms are $1.5 billion in 1974 and $3.1 billion in 1975. These figures represent the residual still to be financed after reserves are run down by 20 percent each year, and they also assume that an IMF oil facility is in existence in 1974.

[Omitted here is a table on “Estimated Increase in Oil Import Bill of Hard Hit LDC’s Requiring Concessionary Assistance.”]

II. Proposals on the Table

[Omitted here are sections A–D.]

E. Debt Relief

The higher oil import bill which LDCs will face can be expected to aggravate the debt service problems of many LDC’s. For this reason it is imperative to obtain concessionary funds from OPEC producers, especially for those LDC’s with debt problems.

While it may be expected that some LDC’s will request rescheduling of debt payments, such requests should continue to be approached on a case-by-case basis, and rescheduling limited to cases of actual or imminent default. At least for the time being, U.S. policy is that the oil problem should be handled by other means.

III. Key Issues

[A.] Effects of Aid to LDCs on Oil Exporters

It could be argued that maximum pressure on oil exporters to roll back prices is maintained in a situation whereby minimal or even no supplemental aid is provided to LDCs hard hit by oil price rises. To the extent that international institutions or industrialized countries mitigate the oil-induced balance of payments difficulties of LDCs, the case for a price rollback is weakened and existing levels of oil prices are “confirmed”; conversely, if we do nothing, the full effects of the financial hardships on LDCs will be manifested in a strong expression of world public opinion aimed at a price rollback.

Such a policy could, however, also have drawbacks. If the economic situation worsens considerably, we might expect certain LDCs to be forced to default on their foreign indebtedness, and since the U.S. [Page 982]is the principal bilateral creditor, we would be most affected. Therefore, it would be in our political interest to promote means to finance the LDCs through this difficult period while we still have some bargaining leverage, i.e., before the situation worsens. Since we will end up paying anyway, we might as well get the credit for it rather than be left holding the bag of an involuntary debt rescheduling.

Moreover, up to what point in human suffering can the rich countries withhold supplementary aid without this policy backfiring on them? The very wealth of the United States, as well as our world leadership role, creates pressures on us to provide some relief, particularly if the situation in some LDCs deteriorates seriously. Adverse effects on us of such a situation include (1) disapproval, condemnation, and possible withdrawal of cooperation on matters of concern to us in various international forums—by LDCs as well as certain industrialized countries strongly motivated by humanitarian concerns, (2) increase in terrorism and threats to security of travel, (3) internal disruption in LDCs, food riots, etc., possibly leading to local conflicts which could affect our own security.

Finally, we question the wisdom of forcing the LDCs into a condition of long range dependency upon the oil exporters for external assistance.

The problem is basically one of tactics, and requires both fairly precise knowledge of the situation in individual LDCs, and a fine sense of timing. Significant amounts of additional aid from the industrialized countries, beyond currently planned levels, appears unrealistic. The most that could be expected is a reapportionment of aid to the hardest hit LDCs, combined with measures for accelerated disbursement, program lending, local currency financing, etc. Even these techniques, however, should not be used indiscriminately pending concrete financial proposals from the oil exporters, in order to maintain maximum worldwide pressure on them. Moreover, these techniques should clearly be labelled as interim measures, to cushion the shock on individual, hard-hit LDCs, until a more lasting financial resolution of the oil problem is achieved in a global framework. Finally, the strongest efforts should be made to combine any such measures on behalf of the LDCs within a framework of supplementary financial assistance from the oil exporters themselves.

[Omitted here are sections B–C.]

D. Proliferation of Institutions and Their Control

A proliferation of international institutions, special facilities and staffs to channel oil producers’ revenues could affect attitudes toward the oil crisis, impact on existing institutions and promote an uncoordinated scramble for resources. Highly visible new mechanisms for using oil producer surpluses could tend to become self-perpetuating, [Page 983]adding certification to and a vested interest in maintaining current oil prices. Potential recipients, particularly LDC’s will place increasing pressures on developed countries for significant additional contributions, while domestic legislatures become even more reluctant to sustain assistance to existing institutions. The very proliferation of proposals, with overlapping or conflicting objectives, could lead to an underfinancing of worthwhile proposals which cannot obtain adequate resources from other sources. And a race to line up oil producer funding commitments could lead to an unwarranted escalation of the terms on which producers ultimately make resources available.

[Omitted here are sections E–F.]

IV. U.S. National Interests

The oil price problems of many LDCs impact on three major aspects of U.S. national interests:

  • —Political-security interests in the stability and economic development of certain LDCs of particular importance to the U.S. such as South Vietnam, Chile, Korea, the Caribbean; these problems are particularly severe for countries such as those in Indochina, where foreign assistance finances a large proportion of imports.
  • —Political-security interests in the more general sense that economic deterioration in LDC areas could result in internal violence and local political tensions or wars which could threaten the structure of peace and draw in the major powers.
  • —Humanitarian interest in avoiding deterioration of living standards for very poor people anywhere and in contributing to improved economic conditions in LDCs more generally.
  • —Assuming a position of leadership on this issue to reinforce our general worldwide leadership role and cooperating with both developed and developing countries on economic assistance as a means of reinforcing the inter-dependency of economies worldwide in an open trade-monetary system increasing the welfare of all.

These three objectives must be integrated to determine the appropriate U.S. posture on special assistance measures for the LDCs.

Political-security interests in a few countries are an immediate priority for U.S. national interests. To meet these needs there is no requirement for a U.S. initiative or even U.S. support for additional multilateral efforts. In fact the U.S. could concentrate on supporting limited arrangements to funnel funds from certain oil producers to countries of particular concern to the U.S., for example special Venezuelan contribution to a compensatory financing window of the IDB could largely resolve the problem in the Central American and Caribbean area.

[Page 984]

The extent of possible political-security problems from economic deterioration depends to a large extent on the internal domestic policies of the LDCs. We have little influence on these policies, but we should maintain a watching brief to assure that situations do not get out of hand.

Humanitarian concerns bring the problems of the Indian subcontinent to the fore and suggest a requirement for substantial additional international efforts, either from the oil producers, the DCs or both.

Concern with the U.S. leadership role suggests a U.S. initiative to offset the oil related balanced of payments problems on a multilateral basis. However, there are positions consistent with leadership which would not necessarily involve the commitment of additional U.S. funds. We could continue to press for continuation of DC aid levels at previously planned levels and urge a gradual redirection of bilateral and multilateral programs to those LDCs with the greatest needs. We could also take a position urging that the oil exporters assume their responsibilities in the existing international financial organizations.

U.S. efforts toward reduction of the oil price represent a major leadership role serving all three of the above national interests. Because price reductions are of much more value relative to the size of economies for both most LDCs and most other DCs, the U.S. leadership role on price reduction is more an effort to expand and improve the world trading system than to advance our immediate self-interest. Moreover, price reduction is preferable to financial transfers in resolving LDC problems because no more than a modest part of financial transfers are likely to be on a grant basis.

[Omitted here is Section V: Alternative Positions for April 3–4 ECG.]

  1. Source: National Archives, RG 56, Records of the Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker 1969–1974, Accession 56–79–15, Box 6, CIEP Meetings. Limited Official Use. According to an April 10 covering memorandum by Flanigan, this paper was part of a larger packet of materials to be discussed at the April 12 CIEP meeting. The Ad Hoc Group included representatives of the Departments of State and Treasury, AID, CIEP, CEA, and NSC.