In sum, your affirmative decisions on the most important of these four
issues, coupled with the more forthcoming position already agreed upon by
the EPG in a number of other
areas—including softening aid terms, improved procedures for assessing
LDC debt problems and a willingness to
negotiate an international grains reserve—will represent a positive, but not
dramatic, movement in the US position toward the LDCs.
The LDCs will doubtless want more; and a number of smaller industrialized
countries may sympathize with the LDC
demands. However, it is the view of your advisors that our proposals achieve
the proper balance between being politically forthcoming and economically
sound, and are important steps in a positive direction. The larger developed
countries (Germany, Japan and probably the UK) will be highly supportive; and a number of LDCs will also
regard them as constructive.
The key to how our position is received by the LDCs as a group, and whether
CIEC will be seen as a “success” or
“failure,” will be whether we can convince influential LDCs that (a) our
proposals represent a positive first step by the Carter Administration, and that (b)
although the proposals do not meet their every expectation, the LDCs do have
more to gain by accepting them as a sincere effort, pointing to the CIEC as a positive step, and continuing the
cooperative process than by decrying them as unacceptable and returning to
the confrontation of 1974. (We believe that our proposals, and others
developed in CIEC, will be adequate to
avoid a new confrontation, but there is no cer
[Page 791]
tainty.) In order to encourage the LDCs toward the more
constructive of these two outcomes, we will consult actively with them prior
to the next meeting of the CIEC at
official level (April 26–27).
There is a risk in offending Congress by an implied pre-commitment to double
aid, which could endanger aid increases we are now seeking for FY 78, and there would be advantages to
avoiding such an announcement before completing our aid review. However, a
“doubling” announcement would demonstrate a sustained multi-year
Administration commitment which might help deter annual piecemeal,
Congressional cuts, and it might help stimulate similar efforts from
Germany, Japan and OPEC.
A pledge to seek major increases in foreign assistance is highly important
and I recommend that you approve it. A “doubling” announcement, although
beneficial from a foreign policy perspective, is not as critical; a
commitment to a “substantial increase” would also be quite useful.
Tab A
Memorandum From the Chairman of the Economic Policy
Group (Blumenthal) to
President Carter
6
Washington, April 9, 1977
SUBJECT
- North/South Economic Strategy: Major Decisions Issues
The EPG has reviewed the economic
aspects of North-South policy. Tab 1 summarizes the EPG’s discussions/recommendations on
various elements of our overall strategy. This
memorandum covers four major issues highlighted by the EPG review which require
your early decision in view of pressures arising from the
Summit and CIEC. In each case, if you approve our recommendations we will seek
Congressional support prior to consulting with our OECD partners.
Decision Issue 1—Common Fund for Buffer
Stocks
Issue: The developing nations
have placed a great political priority on the establishment of a
common fund for financing commodity buffer stocks. We are now
being pressed to further specify our policy and should
be prepared to take a clear position by the Summit or CIEC
Ministerial.
Background: The less developed
countries (LDCs) are backing a $6 billion common fund which they
could control. They want to establish the
[Page 793]
fund prior to concluding new individual
commodity agreements. In current negotiations we have expressed
willingness to consider a common funding arrangement for financing
buffer stocks where they are part of commodity agreements. The European
Community has just gone one step further by stating unconditionally that
it will support the establishment of a common fund—but clearly not the
one proposed by the LDCs.
We do not recommend a commitment by the US to a common fund now, but need
to lay the groundwork with the Congress in coming weeks.
The common fund arrangement we believe we could
eventually support is a pooling of buffer stock funds supported by
some lending to the pool, preferably by the World Bank. Aside
from any contributions which we would make to individual commodity
agreements, we plan no budgetary outlays. While this position responds
to the real problems in financing buffer stocks, the developing
countries will find it wanting. If we have a positive US approach on
aid, trade and individual commodity agreements, however, we believe our
approach to a common fund will further an overall constructive U.S.
stance in North-South relations.
Recommendation:
The
EPG unanimously recommends
that you agree to the following approach as a basis for our
consultations with Congress:
1. We will consider participating in financing
individual buffer stocks where direct government contributions
are necessary.
2. We could support a common fund arrangement
consisting of a) a pooling of the funds of various buffer
stocks—preferably linked institutionally to the World Bank; and b) provision for the World Bank, on decision
of its own board, to lend some supplementary funds to
the pool, should extraordinary circumstances such as a severe
recession cause most buffer stocks to draw all their funds from the
pool. (Such World Bank loans would be financed from its regular capital
resources.)
3. We are prepared to negotiate toward establishment of
a common fund arrangement, parallel with specific commodity
negotiations, but we believe one or more commodity agreements beyond
the existing arrangements for cocoa and tin should be in place before a common fund arrangement is
implemented.7
Decision Issue 2—World Bank Capital Increase
Issue: The World Bank will
inevitably need an increase in its general capital to support a
lending level beyond the current one. Should we
participate, to what extent, and
when?
Background: McNamara is pressing for an early decision on a
large general capital increase for the World Bank. Politically we see great ad
[Page 794]
vantage in responding now to such an increase as part of a
forthcoming overall U.S. position on aid at the Summit and CIEC Ministerial. Increased World Bank
resources would enable the Bank to expand lending in its normal
programs. Also, it would enable us to propose new
departures in its lending to promote energy development in
non-OPEC LDCs, to increase production of minerals in short supply, and to aid
diversification in LDCs dependent on commodities with bleak long-term
prospects.
We believe an ultimate U.S. contribution to a World Bank capital increase
could involve up to $2 billion annually in FYs 81–83, with probably no
more than 10% or $200 million annually for 3 years representing cash
outlays.
Recommendation:
The EPG unanimously
recommends that we agree at the Summit and/or CIEC Ministerial to negotiate a
substantial World Bank general capital increase but leave the
amounts and timing to be worked out in the Bank Board.8
Decision Issue 3—Strategy on Future Aid
Levels
Issue: A forthcoming position on future aid
levels is essential to meet long-term development needs. A commitment by the US now would pay major political
dividends at the CIEC
Ministerial. Should the US publicly pledge this
spring to seek major increases in our aid, and if so, should we specify our plans in general or quantitative
terms?
Background: The EPG
unanimously agrees that our present aid levels need to increase
to respond to the legitimate development needs of LDCs as well as to
sustain our objective of a constructive US position in North-South
relations. A key element of our Summit and CIEC strategy should, therefore, be a general undertaking
with other major donor countries to increase substantially our foreign
assistance over the coming years.
A significant increase in development assistance
levels might take the form of doubling U.S.
appropriations over the five years FYs 78–82 (from the base of
$5.8 billion in FY ’77). Doubling would
imply our seeking total U.S. aid appropriations of $11.6 billion by
1982, compared to $7.6 billion we are seeking for FY ’78. A World Bank general capital
increase (as described in the previous issue) would account for about
$1.5 billion of the increase. The remaining $2.5 billion might be
utilized in our bilateral development and food aid programs and in other
multilateral pro
[Page 795]
grams. Attached
are some illustrative tables, but the program mix is very flexible (Tab
2).9
Alternatively, you could announce a pledge to seek a
substantial increase in future aid levels, but with no quantitative
target. Specific levels would continue to be decided on the
basis of annual budget submissions.
If you agree to increasing aid levels, then the issue is how we express
our pledge.
Factors favoring an announcement to double our
appropriations:
—It could help to stimulate similar efforts of West Germany, Japan and
other donors.
—It could provide a firmer basis for engaging the recipient countries in
the policy and institutional reforms required for more effective use of
development assistance.
—It would enable us to demonstrate a sustained commitment to development
and thus might help deter the annual piecemeal Congressional cuts in our
requests by placing them in a more appropriate multi-year context.
—It would provide a constructive US stance in the North-South dialogue in
this critical first year of your Administration.
Factors favoring a non-quantitative announcement:
—The announcement of specific increases over coming years could offend
Congress through the implied pre-commitment of its action, and this
could endanger aid increases we are seeking now for FY 1978.
—We would be committing ourselves to specific levels before completing an
overall review of our foreign assistance programs.
—It would not accord with the stated intent to conduct zero based
budgetary reviews of all programs.
—A failure of Congress in future years to go along with quantitative
targets would damage our relations with LDCs and other OECD countries.
Recommendation:
The EPG unanimously
recommends that you approve in principle a public pledge by the U.S.
this Spring to seek major increases in foreign assistance.10
If you approve there are two options:
Option 1: Announce this Spring an Administration
intention to seek a five-year doubling of U.S.
foreign aid appropriations from the 1977 base. (State, AID, NSC,
HUD, and Labor support this
option.)
[Page 796]
Option 2: Announce our intent to seek substantial
increases in US aid over coming years. (Treasury, OMB, CEA,
and Commerce support this option.)11
Decision Issue 4: Immediate Action on Additional
Aid for the Poorest LDCs
Issue: The European Community (EC) places great importance on its plan to propose at
CIEC a $1 billion increase in
industrial countries’ aid to low-income LDCs to be complemented
by similar action from OPEC countries.
What should be our response?
Background: The EC
believes that its proposal is critical to a successful CIEC outcome. We
believe it is less important to the Ministerial, but would have
serious coordination problems with the EC if we flatly refused to join in. Even if we did
participate, however, we could not accept three features of the present
EC plan: that the money come from
1978 appropriations, that it go to IDA,
and that it be used for balance of payments support as opposed to
specific projects. Compromises in these areas would have to be
negotiated with the EC.
The advantages of joining the EC plan would be to
improve our stance on North-South issues, bolster the final CIEC package, and improve OECD coordination. The principal
disadvantage is that your FY ’79
budget flexibility would be constrained. Moreover, it would be difficult to sell to the Congress,
and as it now stands is of questionable substantive merit.
Recommendation:
That we inform the EC
that we can participate in a special effort for the low income LDCs
subject to the caveats noted above by declaring our intent to
seek Congressional approval in FY ’79
for $300 million additional (over FY
’77) for these countries in our regular bilateral aid programs. (We
would also cite our requested FY ’78
increase of $100 million for these countries.)
State, Treasury, AID,
NSC, Labor, HUD, and CEA support this recommendation. OMB believes a decision on FY ’79 aid requests for these countries should await our examination of the entire FY ’79 foreign assistance
budget.12
[Page 797]
Tab 1
Paper Prepared by the Economic Policy Group13
Washington, April 8, 1977
Review and Recommendations of Economic Issues in
North/South Relations
1. Should the U.S. improve the “quality” of its aid by
softening terms, untying procurement, making multi-year
appropriations, and enhancing the developmental focus of food
assistance programs?
Recommendation (1): Provide assistance including food
aid to the least developed countries (29 countries identified
by UNCTAD) primarily on a grant
basis; (2) provided other donors take similar steps, untie bilateral
assistance except security supporting assistance to the Middle East,
food aid, and technical cooperation grants; (3) earmark minimum regular
quantity of grain for multi-year food aid programming according to
development criteria.
LDC Position: Developed
countries should: provide all assistance for the poorest or least
developed countries (LLDC’s) by
grants; untie all development assistance; increase the dependability of
food aid; and commit to multi-year aid appropriations.
Industrial Countries Position: Despite some
reluctance on the part of France and Canada, industrial countries are
likely to support U.S. initiatives.
Summit Action: Inform our allies of what aid
quality improvements we plan to adopt and seek assurances that our
approach is consistent with their plans. Perhaps the Summit could
recommend improving the quality of aid by donor countries.
CIEC Action: Seek: a uniform
developed country commitment to U.S. proposals on the “quality” of aid;
and an agreement that OECD
negotiations on aid untying be accelerated to permit agreement in
principle so that the results could be mentioned in the CIEC ministerial communique. We would
seek comparable commitments from OPEC
countries.
Options Considered and Rejected: TERMS. Adopt
terms to individual debt servicing capacity and project characteristics
while continuing to provide all development assistance as grants to
LLDCs; give all bilateral assistance in grant form; provide AID development assistance to LDCs with
per capita annual income under $300 base essentially
[Page 798]
through grants. UNTYING. Untie all
development loans, except SSA; untie
all AID bilateral assistance provided
other donors untie their loans. MULTI-YEAR COMMITMENTS/PL 480 PROGRAMMING. Oppose multi-year
programming; continue PL 480 program
as it presently exists; abolish PL
480 Title I and appropriate equivalent dollar amount for
additional official development assistance (ODA).
2. Should some form of generalized debt relief be
provided LDCs? They desire additional resource transfers, and
believe debt relief is more readily obtainable than additional foreign
assistance. The issue has taken on disproportionate significance
relative to its economic impact because of the importance accorded it by
certain LDCs in terms of their political leadership among developing
countries.
Recommendation: Continue to oppose all proposals
for generalized debt rescheduling because: (a) the distribution of debt
accumulation markedly mismatches current need of LDCs; (b) the U.S.
would bear a disproportionate share of cost; (c) incentives for
efficient LDC resource management would
be reduced; (d) LDC creditworthiness in
world capital markets could be undercut; and (e) there would be little
development payout.
LDC Position:
ODA loans outstanding to LLDCs should
be converted to grants; ODA loans to
the other poor countries should be rewritten on IDA terms or better; and debt relief (on unspecified terms)
should be granted any other LDC
requesting it.
Industrial Countries Position: Although the
weight of industrial countries’ opinion is against generalized debt
relief, the industrial countries are not united. Strongest opponents of
debt relief are the U.S., France, Germany and Japan; advocates are
Sweden and the Benelux countries.
EC unity is not easy to maintain
because some regard debt relief as a low-cost pacifier of the LDCs
(important because the EC depends
heavily on trade with LDCs).
Summit Action: Be silent on this issue.
CIEC Action: Support existing
U.S./EC proposals that: improve
functioning of “Creditor Clubs”; provide a new mechanism for speedy
assessment of LDCs with serious balance of payments difficulties
(including debt service problems); and coordinate donor responses.
Options Considered and Rejected: Use debt relief
as a normal means of transferring aid resources to LDCs; provide
generalized debt relief on a one-time basis and limit the cost by
controlling the number of recipients, terms of relief and the
consolidation period.
3. To what extent should the developed countries commit
themselves to provide increased market access to developing country
exports and how do we respond to domestic requests for increased
protection against imports from LDCs?
[Page 799]
Recommendation: That the substance of the Tokyo
Declaration be reaffirmed at the Summit,14 while we
try to make significant progress in the multilateral trade negotiations
(MTN) on issues of interest to
LDCs.
LDC Position: LDCs want DCs to
remove restrictions on imports of LDC
goods with no or very limited reciprocity on their part.
Industrial Countries Position: These countries
generally favor a moderate and preferential liberalization of tariffs
affecting LDCs, although with sufficient U.S. effort they might support
a substantial but non-preferential reduction in tariffs.
Summit Action: The Summit declaration would
reaffirm the general principles of the Tokyo declaration regarding
LDCs.
CIEC Action: The industrial
countries should commit themselves to make reductions in the MTN to barriers to LDC trade with a view to enabling LDCs to
increase their share in world trade over time. LDCs would be expected to
reciprocate in ways consistent with their development.
4. Should the United States support international grain
reserves that emphasize price stabilization?
Recommendation: There should be speedily
negotiated an international grain reserves system within the context of
a general agreement on grains. Leave open the possibility of
simultaneous inter-related bargaining in Geneva and London and the issue
of whether to use a quantity or price trigger mechanism in the
reserve.
LDC Position: Developed
countries should bear the major burden of financing an international
system of nationally-held grain reserves to provide food security in
times of world crop shortfalls. These reserves should be made available
to LDC’s at concessional prices.
Industrialized Countries Position: Most other
countries support the concept of price stabilization scheme for grains.
They oppose further concessions for LDCs on prices of grain during
periods of shortage.
Summit Action: Seek support in the Summit
declaration for the concept of an international system of
nationally-held reserves, without explicit agreement on details and
endorse negotiations to this end, without prejudging the relation to the
MTN.
CIEC Action: Seek G–8 agreement for a unified announcement
that there should be negotiated an international grains reserve within
the context of a general agreement on grains.
Options Considered and Rejected: United States
has proposed a grain reserves system based on solely quantity triggers; other countries have suggested a
price-trigger system.
[Page 800]
5. Should the IMF
Compensatory Financing Facility (CFF) be further liberalized? Drawings from the
CFF played a significant role in
meeting the financing needs of the LDCs in 1976. The chief advantage of
expanding compensatory financing to offset downward fluctuations in
LDC export is that it operates
through income mechanisms rather than market intervention.
Recommendation: That we would sympathetically
consider, with-out a prior commitment, liberalization of the IMF’s CFF
if quota limits become a binding constraint and IMF resources have been expanded.
LDC Position: The CFF should be liberalized by: (a)
calculating shortfalls in real terms, (b) relaxing or abolishing quota
limits, (c) requiring repayments only from export earnings above norm,
just as drawings are now based on “shortfalls” in export earnings, (d)
allowing LDCs to draw without “basing claims entirely on balance of
payments criteria,” (e) compensating for increased import volumes due to
climatic or other factors beyond a country’s own control, and (f)
providing drawings in the form of grants in some cases.
Industrial Countries Position: This issue has not
been actively discussed since the 1975 liberalization. The Germans are
reported to be considering recommending a liberalization of the CFF in the Interim Committee.
CIEC Action: Let it be known
that the U.S. would sympathetically consider, without prior commitment,
increased compensatory financing once the two conditions outlined in the
recommendation are met.
Options Considered and Rejected: Liberalize the
CFF at this time.
6. Should there be an expanded STABEX15 Facility
outside the IMF? We could
consider globalization of an European STABEX-type scheme and expand its coverage to more
commodities.
Recommendation: That we not pursue a globalized
expanded STABEX on the grounds that
it would: (1) require additional Congressional appropriations; (2) lead
to recurring LDCs’ pressure for replenishment; (3) work outside the
IMF framework—thus avoiding balance
of payments need, IMF quota limits and
mandatory repayment schedules.
LDC Position: The LDCs want
compensation on highly concessional terms based on shortfalls in all
commodity export earnings. They have expressed interest in CIEC in a Swedish proposal for a
[Page 801]
global, highly concessional
income stabilization scheme in the U.N. framework.
Industrial Countries Position: The EC, particularly Germany,16 favors a globalized STABEX-type scheme, as does Sweden. Some elements in
Germany believe such a scheme can substitute for the Common Fund and
individual commodity agreements, a view we do not share.
Summit Action: Chancellor Schmidt has said he will raise the
issue of a global STABEX. We should
be prepared to explain our opposition to this approach.
CIEC Action: Same as the
Summit.
7. Should we take new initiatives towards Saudi Arabia
to obtain Saudi cooperation in ensuring adequate quantities of
energy at manageable prices? The Saudis have expressed a
concern over the safety and value of the surplus financial assets they
are accumulating although this concern does not appear to have been an
important factor affecting Saudi production policy thus far, and it is
unclear whether it will become a constraining factor with regard to
future production policy.
Recommendation: That, while we should be willing
to discuss the OPEC assets issue if
raised, we should not get out in front on the issue, and we should
continue to oppose providing special treatment. Considerable further
study is needed of the likely determinates of future Saudi production
and pricing policy and of possible options for affecting Saudi policies.
State and Dr. Schlesinger should
work together to devise a U.S. position on overall international energy
policies.
LDC Position: The non-OPEC members have only grudgingly
supported the Saudi demands for special treatment of OPEC assets. They presumably would
welcome an agreement which resulted in OPEC price moderation. Aside from the several other OPEC surplus countries (Kuwait and the
UAE) the other OPEC members do not feel strongly about
the OPEC asset issue but surely would
be against any Saudi agreement to increase production or moderate
prices. While the Saudis have asked for special treatment of their
assets they, to date, have not aggressively pursued this request. The
Saudi position on the possible contingency options is unknown.
Industrial Countries Positions: Other developed
countries agree with the U.S. position on OPEC assets. Their position on the possible contin
[Page 802]
gency options is unknown
although they clearly recognize the importance of ensuring adequate
Saudi production and price moderation.
Summit Action: Reaffirm U.S. opposition to
providing special treatment to OPEC
assets or remain silent on the issue.
CIEC Action: Continue to
support developed country position for calling for fair
nondiscriminatory treatment of OPEC
assets but not preferential treatment.
Options Examined on a contingency basis: Offer
preferential treatment for OPEC
(Saudi) assets in return for (1) a Saudi commitment to progressively
increase production levels, to continue to moderate price decisions
within OPEC and to produce enough oil
to prevent future tight market conditions, or (2) a Saudi commitment to
enforce within OPEC an oil price
agreement that provides for small price increases over a limited time
period.
8. Should the U.S. consider changes in its policy on
the transfer of technology in order to accommodate the demands of
the LDCs? Present USG policy
is to work towards a voluntary Code of Conduct for Technology Transfer
in the UNCTAD and to engage in
various development programs to increase effective utilization of
technology in LDCs.
Recommendation: That the U.S. (a) continue to
oppose binding international obligations on corporations while
emphasizing the importance of private sources of technology and, (b)
increase technological assistance through existing or new government
programs in the LDCs.
LDC Position: Developed
nations should pressure their companies through binding codes of conduct
into (a) transferring more technology (b) transferring it under more
favorable terms and (c) transferring resources for development of
indigenous technological development. LDCs also want more government
resources to spur local research and technology.
Industrial Countries Position: Opposed to a
binding code of conduct, however, opinion differs on the levels of
governmental assistance to LDCs.
Summit Action: NONE
CIEC Action: Reaffirm the
benefits from private transfers of technology and our continued interest
in assisting LDCs in developing their capacity to utilize technology
effectively.
Options Considered and Rejected: Accede to LDCs’
demands for more regulation of technology transfers.
