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

304. Memorandum From Secretary of the Treasury Blumenthal to President Carter¹

Washington, May 19, 1978

SUBJECT

• A Strategy For the Multilateral Development Banks (MDBs) Into the Eighties

As you requested, we have developed a proposed strategy for the MDBs into the 1980s. To facilitate planning, I am seeking your approval of an overall strategy for all the MDBs and a preliminary U.S. position for upcoming replenishments in the largest banks—the International Development Association (IDA), the International Bank for Reconstruction and Development (IBRD), and the Inter-American Development Bank (IDB). Your decisions on the Asian Development Fund (ADF) and the African Development Fund (AFDF) have already been made,² and successfully negotiated internationally. My recommendations are agreed by all agencies, with one exception as noted.

IDA

The principal multilateral component of your program to increase U.S. concessional aid should be a major expansion of IDA, in which the U.S. would provide around $1.4 billion annually during FY 81–83. Such an expansion is essential to approach your overall aid target of $10 billion by FY 82.

At this level, IDA would be able to almost double its programs aimed at the poorest people in the poorest countries with almost 50% of lending related directly to food production. It will be able to exercise maximum leverage for appropriate policies in recipient countries. Our participation at this level would induce other donors to maximize their contributions. It would make a major contribution to the overall U.S. posture in the North-South dialogue.³

World Bank

We should seek a $40 billion General Capital Increase (GCI) in the IBRD, with a U.S. share of 24 percent ($9.6 billion). This would enable the Bank to expand its real lending by 5 percent annually for about six years, maintaining its position as the central agent of global development. Such a contribution would enable us to maximize our leverage in the bank.

Annual appropriations of $1.6 billion would be needed during FY 82–87, if there is a continued need to appropriate callable capital—an issue on which we are now working with key Congressional leaders. In any event, however, budget outlays would be only 0 to 10 percent of this total because of the large callable capital component.

With this increase, the Bank could support continued rapid growth in the upper and middle income LDCs and provide a much needed “cushion” for them against many uncertainties in the world economy such as shortfalls in private capital flows. The cost to us is only two cents for every dollar of lending, because of burden-sharing among donor countries and the Bank’s heavy reliance on borrowing from the private capital markets. The major alternative is to limit the GCI to $30 billion, but this would greatly reduce the impact of our pledge—with only a slight reduction in the annual appropriation request and cutting only one year off the replenishment period.⁴

Inter-American Development Bank

In the upcoming IDB replenishment, we should support 7 percent annual real growth in the Ordinary Capital (OC) while reducing modestly the size of the Fund for Special Operations (FSO) because there is little need for highly concessional funds in Latin America. The net result would be a virtually unchanged level of total IDB lending, with a shift from softer to harder terms due to the rapid economic improvement of most Latin American countries. From FY 80–83, annual U.S. appropriations would be $661 million for the OC and $150 million for the FSO.

State prefers to hold the FSO at current levels ($200 million annually) and increase OC lending by 10% annually ($720 million) in order to provide some increase in total IDB activity. They believe that the cutbacks which I propose would have adverse effects on overall U.S. policy toward Latin America.

Approve my proposal

Prefer State proposal⁵

General Discussion

While I am seeking authority for specific U.S. pledges to the replenishments, we need to retain a certain degree of negotiating flexibility to adjust to the position of other donors and maximize our leverage on key policy issues, and to take into account subsequent Congressional views. We should be able to move our pledges plus or minus about $200 million annually in IDA, perhaps $100 million annually in the IDB, and to a lower level in the World Bank. The recommended figures, however, represent the preferred outcome on which we would seek agreement with the Congress and then negotiate internationally.

These recommendations would permit the MDBs to continue to serve priority U.S. interests. Aggregate growth in MDB lending will keep pace with LDC growth, enabling the banks to maintain their share of total aid flows and thus their policy leverage. This leverage will increasingly be oriented towards improved basic human needs (BHN) policies by recipients, as well as more BHN projects. Our human needs and human rights objectives will be furthered by this emphasis. More projects will also be developed in the priority area of energy and raw materials.

These recommendations have taken fully into account our Congressional difficulties with MDB appropriations. In fact, I am encouraged by the prospects for making good on the bulk of our existing arrearages ($835 million) over the course of this year and next, if we continue to work hard with the Congress on the issue. These numbers may, however, result in future arrearages, especially for IDA. My proposals would produce the following appropriations levels for the future:

	($ millions)
Bank	Actual	Request	Est.	Est.	Est.
	FY 78	FY 79	FY 80	FY 81	FY 82
IBRD	380	666+4p	523	—	1600	6
IDA	800	1550+4p	800	1400	1400
IDB	480	914+4p	811	811	811
Subtotal	1660	3130+4p	2134	2211	3811
Others	265	375+4p	450	357	557
Total	1925	35057	2584	2568	4368	8

If you approve my recommendations, our FY 82 appropriations level will be about $4.3 billion compared to our current level of $3.5 billion (a base of $2.7 billion with $835 million in arrearages). If we are successful in eliminating the need to appropriate callable capital, the FY 82 level would be only around $2.0 billion, compared to $1.6 billion in FY 79 on that basis. Congressional support for these figures will be difficult to achieve and will require a maximum political effort by the Administration each year. However, if successful, there will be major benefits for our international economic policy and for overall U.S. foreign policy.

W. Michael Blumenthal ⁹

Attachment¹⁰

1. Source: Department of the Treasury, Office of the Secretary, Executive Secretariat, 1978 Files, 56–83–69. No classification marking. Sent to Blumenthal for his signature under cover of a May 18 memorandum from Bergsten, who noted that Carter had requested the memorandum “for the mid-year budget review, to lay out our overall strategy for the MDBs as part of total U.S. foreign assistance strategy for 1979 and beyond.” Bergsten also noted that Treasury officials had “worked out the memo in some detail with NSC (Henry Owen) and OMB, and believe they will support our proposal.” (Ibid.)
2. See Document 302.
3. Carter did not indicate his preference with respect to this recommendation.
4. Carter did not indicate his preference with respect to this recommendation.
5. Carter did not indicate his preference with respect to this recommendation.
6. If full appropriation required for callable capital. Only 0–10 percent of IBRD total produces budget outlays in any event. [Footnote in the original.]
7. Includes $835 million of arrearages. In practice, makeup will be split between FY 79 and FY 80, thereby smoothing the annual appropriation trend. [Footnote in the original.]
8. If full appropriation required for callable capital. Only 0–10 percent of IBRD total produces budget outlays in any event. [Footnote in the original.]
9. Printed from a copy that bears Blumenthal’s stamped signature “Mike” above this typed signature.
10. Not attached. In his May 18 cover memorandum to Blumenthal (see footnote 1 above), Bergsten noted: “A longer background paper is also attached, which elaborates on the issues in the memo for the President and will be submitted to OMB to provide detailed backup.”