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284. Memorandum From Guy Erb of the National Security Council Staff to the President’s Assistant for National Security Affairs (Brzezinski)1

SUBJECT

  • PRC Meeting, 2:00 p.m., 11 November 1977: Negotiations on a Common Fund—Direct Contributions and Other Measures

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

Direct Contributions

The first issue before the PRC, direct contributions to a Common Fund, derives from the divergent views of Secretary Blumenthal, on the one hand, and yourself, Under Secretary Cooper and Ambassador Wells, on the other. You will recall that Secretary Blumenthal favored US adherence to the OECD opening position for a pooling arrangement. He was against making any direct contributions to a Common Fund. The opposing view expressed during the PRC meeting was that a constructive response to LDC and developed-country interest in direct contributions, plus the impact which such contributions would have on the financial viability of a Common Fund, justify a change in the US position at an appropriate moment.4

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[Page 889]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.

Other Measures

The second issue before the PRC relates to measures other than buffer stocking. Because of the $800 million US arrearage to the hard- and soft-loan windows of international development lending institutions, there is little that we can offer here. The discussion paper puts the best face possible at this time on a US approach to this issue.

Recommended Next Steps

The discussion paper requests PRC guidance on whether the US can consider making direct contributions to a common fund. If that is the case, further staff work and consultations with the Congress will be necessary.

I recommend that you approve the consideration of direct contributions and the consequent staff work and consultations.6

I also recommend that you raise at the PRC meeting the possibility that the US discuss the direct contributions issue within the OECD. This may be farther than other agencies are willing to go without a reading of Congressional attitudes. However, I believe that cautious OECD consultations are a logical consequence of a decision to consider making direct contributions.7

The PRC is also asked to refer the issue of direct contributions to the interagency Commodity Task Force, which is chaired by State (Katz or Bosworth) and which provides guidance and instructions to the US delegation in Geneva.

I recommend that you approve this delegation of responsibility to the Commodity Task Force.8

The discussion paper suggests that the PRC refer the Other Measures issue to the Commodity Task Force for the determination of the manner and time of its presentation during the negotiations in Geneva.

I recommend approval of this step.9

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The discussion paper also suggests that the PRC refer to the Commodity Task Force questions relating to (1) the deposits by International Commodity Arrangements to a common fund, and (2) an overdraft mechanism.

I recommend approval of this suggestion.10

Tab I

Discussion Paper Prepared for the Policy Review Committee 11

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 [Page 891]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 [Page 894]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.

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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.

  1. Source: Carter Library, National Security Council, Institutional Files, Box 66, PRC 043 11/11/77 Common Fund Negotiations. Confidential. Sent for action.
  2. Tab II is attached but not printed.
  3. Printed as Tab A to Document 280. For the November 4 meeting, see Docu-ment 281.
  4. Brzezinski highlighted the portion of the paragraph beginning with “that a constructive response” to the end of the paragraph.
  5. Brzezinski underlined the words “a US” and “willingness to discuss” in this sentence.
  6. Brzezinski indicated his approval of this recommendation, writing “ok.”
  7. Brzezinski underlined the words “that cautious OECD” in this sentence. He did not indicate his preference with respect to this recommendation.
  8. Brzezinski did not indicate his preference with respect to this recommendation.
  9. Brzezinski did not indicate his preference with respect to this recommendation.
  10. Brzezinski did not indicate his preference with respect to this recommendation.
  11. Confidential.
  12. Tab A, attached but not printed, is an excerpt comprising paragraphs 10–15 of the Discussion Paper printed as Tab A to Document 280.