Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

285. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Bergsten) to the Under Secretary of the Treasury for Monetary Affairs (Solomon)¹

Washington, November 10, 1977

SUBJECT

• PRC Meeting on the Common Fund

The PRC will meet on Friday, November 11 to discuss various alternatives that might be used to augment the U.S. proposal for a Common Fund. At the last meeting on November 4, the PRC requested that the various “sweeteners” to the U.S. proposal (see paragraphs 10–15 of the discussion paper at tab B)² be elaborated and the advantages and disadvantages outlined.

The attached NSC paper (tab A)³ does not quite meet the request made by the PRC. It discusses two possible approaches to the issue of direct contributions to the Common Fund and does not elaborate much of the detail. In addition, the discussion of possible measures other than buffer stocks, although wordier than in the first presentation, does not add further to the substance.

On the matter of overdraft possibilities and the size of the cash deposits which ICAs might put with the Common Fund, the staff group suggests that further work should be done in the Commodity Task Force chaired by State Department. One aspect of a possible overdraft, that of direct lending by the World Bank, has been eliminated because legal opinions make it virtually certain that the Charter of the World Bank either would or should have to be amended to permit such lending.

Direct Contributions

The NSC paper does not pose the question of the desirability, or otherwise, of direct contributions in any further detail than in the earlier paper (tab B). It is our view, as stated earlier, that the Common Fund proposal as it stands now would be financially viable. The outstanding issue concerns the extent of financial efficiencies which could be obtained over and above what ICAs could obtain on their own. It is clear that some kind of capital base, however minimal, would increase the financial economies to be derived from a Common Fund. In addition, there is the likely tactical need to provide for some direct resources. Nevertheless, the question of direct contributions of this sort needs to be seen in the context of the overall negotiations. We believe the U.S. should agree to them only in order to obtain a positive outcome both in terms of acceptance of institutional arrangements that gives a considerable measure of control to the ICAs and to consuming nations. Preliminary discussions with staff members of relevant Committees on the Hill indicate that—to the extent they represent their Member’s views—there is little, if any chance that Congress would authorize capital funding for a Common Fund that did not have appropriate institutional control features.

If it is decided that some kind of direct contribution is needed, agencies are agreed that any direct contributions to the Common Fund should be relatively small and should be put into a contingency reserve that would be used by the Common Fund to relieve a temporary liquidity squeeze in the event of default by a member government of a particular ICA.

Two approaches have been suggested:

—An additional contribution through the ICA, to be authorized and appropriated at the time governments join an ICA. These contributions would be used for bridging loans only in the event of default by a member or members of an individual ICA. They would not be available to discharge ultimate obligations of that ICA.

—A contribution directly to the Common Fund, to be authorized and appropriated separately from authorizations of ICAs that are concluded. The size of these contributions could be based on the likely number of ICAs to be negotiated or on a negotiated lump sum.

Both approaches would enhance the creditworthiness of the Common Fund and they would permit the industrial countries to move toward the G–77 demand for a fund with its own resources. Either of these approaches would require greater safeguards in the decision making, voting, and operational provisions of the Common Fund.

The first approach would allow us to preserve the principle that no member government should assume responsibility for the liabilities of ICAs to which it did not belong. It seems feasible also to obtain some protection on this principle under the second approach, but the risk of pooling liabilities is considerably greater.

Recommendation:

The PRC should direct the Commodity Task Force to undertake further work, including consultations with members of Congress, to determine the technical and political feasibility of the two approaches and to determine the appropriate time for implementing a U.S. proposal for direct contributions to the Common Fund.⁴

Other Measures⁵

Three possibilities for making efforts in the area more effective have been outlined in the NSC paper:

—Strengthening the role of ICAs in identifying specific commodity problems and making recommendations to international financial institutions and other funding sources.

—Stepping up the efforts of the existing institutions (IFIs, UNDP, FAO, etc.) to identify and coordinate commodity related projects.

—Strengthening the efforts of UNCTAD’s Committee on Commodities in coordinating projects and making recommendations to appropriate institutions.

A fourth possibility, which is not addressed directly in the paper, is a coordinating role for the Common Fund itself.

Because of the substantial efforts already going on in the area of “other measures,” there is considerable sentiment within the U.S. Government and in other major OECD countries that the Common Fund does not need to get involved in additional financing. But the Nordic countries, the Dutch, and some officials in the U.S. Government believe that some concession will have to be made on the issue of other measures, though not necessarily on financing, in order to achieve a successful conclusion of the Common Fund negotiations. It is our view that at most the Common Fund might have a role in identifying desirable commodity projects and in making recommendations to existing financial institutions. It would rely on those organizations to determine the feasibility of such projects and the final priorities of funding.⁶ The Common Fund would have no money to finance such projects.

Although some countries have suggested that voluntary contributions could be used to finance other measures, Treasury believes that any such contributions should be used as part of the backup to the buffer stock financing operations of the Common Fund.

Recommendation:

The delegation should be authorized to support all three possibilities outlined in the NSC paper. In addition, the U.S. should be prepared to support, if necessary to the successful conclusion of the negotiations, a coordinating role for the Common Fund itself.⁷

1. Source: National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 1, Meetings (Mtg’s) 1977. No classification marking. Drafted by Junz and Hazen Gale, Director of the Office of Raw Materials and Ocean Policy, Department of the Treasury. A stamped notation reads: “Noted by Mr. Solomon.”
2. Printed as Tab A to Document 280.
3. Printed as Tab I to Document 284.
4. In the margin adjacent to this paragraph, Bergsten wrote: “Tony—I believe we should oppose direct contributions. Any ‘flexibility’ now will be quickly used up by our negotiators, in a session that will be inconclusive anyway. We should decide either to hold firm (my preference) or make a major offer; the worst approach is to be pulled along inch by agonizing inch; we then lose with both the Congress and the foreigners (LDCs and DCs). Let’s pose the issue that way. C.F.B.”
5. Bergsten added quotation marks around the heading “Other Measures.”
6. Bergsten highlighted the portion of this paragraph that begins with “Common Fund might have a role” and ends with “rely on those organizations” and wrote in the adjacent margin: “This is OK. Is it what is meant by a ‘coordinating role’?”
7. Bergsten underlined the phrase “a coordinating role for the Common Fund itself” and wrote below: “unclear; above seems to suggest a catalytic role, which is OK” and initialed C.F.B.