Attached are a discussion paper prepared by an interagency group in response
to the PRC’s request for more information
on possible improvement in the US position on a Common Fund (Tab I), and the
agenda for the November 11 PRC meeting (Tab
II).2 I also enclose the earlier discussion paper submitted to
the PRC for its meeting of 4 November (Tab
III).3
My impression is that working-level agency positions conform roughly to those
expressed at the PRC on 4 November. State,
OMB, Agriculture, and possibly
Commerce, are willing to consider a US indication of its willingness to
discuss direct contributions at an appropriate point in the
negotiations.5 Treasury
staff have been very constructive during the preparations of the discussion
paper, but they are con
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strained, of
course, by Secretary Blumenthal’s
announced opposition to direct contributions. However, the logic of Under
Secretary Solomon’s criticism of the
OECD opening position might lead
Treasury to acceptance in principle of direct contributions. In that case,
the main constraint on Treasury could be concern that direct contributions
could not be sold on Capitol Hill. Further consultations on the Hill will
help clarify that issue.
I recommend that you approve the consideration of direct contributions and
the consequent staff work and consultations.6
I recommend that you approve this delegation of responsibility to the
Commodity Task Force.8
Tab I
Discussion Paper Prepared for the Policy Review
Committee11
THE COMMON FUND: DIRECT CONTRIBUTIONS AND OTHER
MEASURES
November 11, 1977 The Situation Room
The PRC requested, at its meeting on
November 4, 1977, that an elaboration be prepared of possible
improvements in the US position for the negotiations on a common fund.
In particular, more information was requested on the issues posed by
paragraphs 10 through 15 of the Discussion Paper for the November 4th
meeting (Tab A).12
This paper concentrates on the issues posed by (1) a decision on whether
or not to make a direct contribution to a common fund (Paragraph 10) and
(2) the US approach to the demand by LDCs that a common fund include
measures other than buffer stocking in its activities (paragraphs
13–15).
Paragraph 11 of the Discussion Paper raised the issues of whether and
when to propose an alteration of the OECD position on the proportion of cash resources of an
International Commodity Arrangement (ICA) which must be deposited with a pooling arrangement. It
is recommended that a decision on this question be delegated to the
Commodities Task Force, chaired by the Department of State, which will
provide guidance and instructions to the US delegation.
Further work is necessary regarding the possibility of an overdraft
mechanism which might support members of ICAs in the event of a world
recession. It is recommended that the Commodities Task Force
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consider the legal and
financial implications of an overdraft mechanism.
Issue 1: Direct Contribution to a Common Fund
In the negotiations on a common fund the US will have to address the
question of whether it will agree to provide government contributions to
a common fund. These funds would be in addition to the deposits in a
pooling arrangement made by individual International Commodity
Arrangements (ICAs). (It is assumed that the US would agree to make
contributions to a common fund which were for the administrative costs
of a common fund organization.) The purpose of a US agreement to
consider direct contributions would be two-fold; (1) it would permit the
US, at an appropriate point in the negotiations, to move some distance
toward LDC demands that a common fund
have its own capital resources; (2) direct contributions might enhance
the borrowing capacity of a common fund by strengthening assurances to
investors of its continued operation in the event of a default by a
participating ICA or by participating
members of an ICA.
To ensure that a direct contribution would be consistent with our
objectives, we would limit its use to building a contingency reserve
within the common fund. Its purpose would be to enable the common fund
to promptly satisfy its obligations in the event that a member
government defaulted on its obligations to a particular ICA. If that ICA were fully extended at the time and the default
required putting up additional collateral, the common fund could make a
bridging loan to that ICA. The common
fund would not assume ultimate liability for the outstanding loans of
that ICA. This liability would continue
to rest with member governments of the ICA. But the bridging loan would help to keep market
conditions orderly while the ICA’s
procedures for dealing with default of a member government came into
force.
Funds made available for contingency reserve purposes could be either in
cash, in the form of callable capital or in the form of loan guarantees.
From the point of view of creditworthiness of the common fund, cash
contributions would be preferable. They would be available as a liquid
cash reserve and could enhance both the borrowing capacity as well as
the terms on which the common fund could borrow. In addition, cash
contributions would yield earnings on investment, which could help
defray interest and other expenses the common fund might have. The
callable capital option, while also enhancing the financial efficiencies
the common fund could obtain, would do so to a lesser extent. Loan
guarantees would be the least helpful from a capital market efficiency
point of view, because they could be mobilized only in the case of
default and would not be available to bridge temporary liquidity
problems.
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Possible Mechanisms for a Direct Contribution
There are conceptually two approaches to providing contributions for a
contingency reserve within the common fund. One approach would define
the contribution as some percentage (probably less than five percent) of
the financial commitments of each ICA
that participated in the fund. Under this approach, we could, at the
time membership in an ICA was put to
Congress for approval, ask for two authorities in addition to those
negotiated in the agreement:
(a) authority for the US representative to the agreement to vote for
accession of that agreement to the common fund, if and when such a
common fund had been constituted and approved by the Congress; and
(b) appropriation of the amount required for the contingency reserve of
the common fund.
Another approach would be a direct contribution not directly linked to
membership in specific ICAs. Under this approach the amount of the
contribution could be five percent or less of our share in the ICAs in
which we expected to participate. We would seek Congressional approval
of, and appropriations for, the common fund, separately from approval
and appropriations for ICAs.
A variant of this approach would be to make a single contribution without
attempting to estimate requirements of all possible ICAs. This
contribution would probably be smaller than a contribution which was
based on an attempt to estimate needs of all potential ICAs
participating in a fund. This type of contribution could be supplemented
by contributions made through ICAs as they became participants in the
common fund.
Safeguards
Certain safeguards would appear to be essential to protect our interests
in the event we were to contribute to a contingency reserve.
(1) We should eliminate or minimize the possibility that our contribution
would support ICAs in which the US did not participate.
(2) A contingency reserve should be related solely to the price
stabilization objectives of a common fund. It should not be an aid
mechanism, but a stock of cash, callable capital, or loan guarantees
held by a common fund and not intended for transfer to members of the
institution.
(3) The institutional arrangements governing decision-making and
operations of a common fund would have to be acceptable to the United
States.
(4) A common fund, with or without direct contributions, should not
control individual ICAs.
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(5) We should ensure that the relationship among the various elements of
a common fund—deposit ratio, borrowing capacity, callable capital, stock
warrants, and a possible contingency reserve—is consistent with our
interests and the financial viability of the common fund.
Issue 2: Measures Other Than Buffer Stocking
The role of a common fund in financing commodity measures other than
price stabilization will be one of the key issues at the conference. The
LDCs want the common fund to allocate a portion of its resources to the
financing of such measures as market promotion, product research and
development, production expansion, up-grading of production efficiency
and expansion of LDC processing and
transportation activities. This objective is basic to LDC cohesion on the common fund because it
would provide benefits to LDCs unable to benefit from buffer stocking.
Developed countries regard non-stabilization measures as appropriate and
necessary to deal with many of the commodity problems of developing
countries and favor increased international attention to other measures.
However, the major developed countries, including the US, believe that
creation of a new central source of international financing for these
measures is neither necessary nor desirable, and seek to restrict the
common fund to financing of stabilization measures. The prospect of
sharp confrontation at the conference on this issue calls for
presentation by developed countries of as constructive and concrete
alternatives as possible to the financing of other measures by the
common fund. The principal elements of a developed country approach are
outlined below.
1. Producer-consumer cooperation: International
commodity organizations (ICAs) and other producer-consumer organizations
must provide the foundation for effective international action on other
measures. By virtue of their interest in and knowledge of particular
commodities, participants in producer/consumer organizations are
especially qualified to identify and evaluate the need for specific
measures. ICAs, or other producer/consumer organizations, can be
expected to play a major role in implementing market promotion and new
product research and development programs. The International Institute
for Cotton, for example, has a $6 million annual market promotion and
product research program financed by producers and consumers. In
addition to the projects they implement themselves, the ICAs and other
producer/consumer organizations could also provide project proposals and
coordinate recommendations to international development institutions
such as the IBRD or the UNDP. To underline its support for
strengthened producer/consumer cooperation on other measures, the US
should confirm at the common fund negotiations that
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it is prepared to examine, in discussions
of particular IPC commodities, the need
for specific other measures and how they can be carried out.
2. International development institutions:
International technical assistance and development finance institutions
comprise a second key instrument of international action on other
measures. These institutions have extensive experience in development
activities, personnel skilled in project appraisal and established
sources of finance. Although the extent of their commodity related
activities is not generally appreciated, the World Bank will be
financing about $3.0 billion in commodity-related development projects
between 1975 and 1979, and the UNDP,
FAO, UNIDO and the International Trade Center also have
substantial commodity related programs. Developed countries should be
prepared to strengthen the commodity activities of these international
institutions. We should also be prepared to ensure that the World Bank
has adequate resources to respond to the commodity related needs of LDCs
without sacrificing attention to other priority needs. This approach
would provide specific evidence of the constructive commitment of
developed countries to the other measures issue, though it would not
satisfy the desire of developing countries to establish a source of
finance under their control.
3.
UNCTAD coordination:
Effective and comprehensive coordination of international activities
respecting other measures could continue to be carried out under UNCTAD leadership. This coordination
involves all of the international development, finance, and technical
institutions; the ICAs; and the other producer consumer groups. Its
purpose is to tie together the various commodity related activities of
these institutions. Such a formal, continuing coordination mechanism
responds to the fundamental LDC desire
to have the international development institutions to address the
commodity related problems of LDCs on a global, rather than
country-by-country basis. A main purpose of this coordination is to
enable the international development lending institutions and technical
assistance agencies to obtain and share a continuing flow of information
and recommendations from commodity organizations and their members as to
commodity related needs of developing countries. An immediate step might
be for UNCTAD to undertake a general
survey of presently available financial and institutional resources
relevant to other measures and the effectiveness with which they are
being employed.
Next Steps
Issue 1: If the PRC believes that the US can consider making direct
contributions to a common fund, possible mechanisms will need to be
analyzed and evaluated. In addition, detailed consultations with
Congressional leaders and staff will have to be undertaken on this
issue.
[Page 895]
The staff work and consultations related to the direct contribution issue
could be undertaken by the inter-agency Commodity Task Force, which will
provide guidance and instructions to the US delegation in Geneva.
Issue 2: If the PRC believes that the approach outlined under Issue 2 is
satisfactory, this issue and the determination of the manner and moment
of its presentation in Geneva could be referred to the Commodities Task
Force.
