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

321. Memorandum From the Director of the Policy Planning Staff (Lake) and the Deputy Assistant Secretary of State for Economic and Business Affairs (Hormats) to Secretary of State Vance, the Deputy Secretary of State (Christopher), and the Under Secretary of State for Economic Affairs (Cooper)¹

Washington, November 9, 1978

SUBJECT

• North-South Strategy for 1979

INTRODUCTION

Several exercises have recently been launched within the Department to examine how we can steer the North-South dialogue in a more constructive direction. We believe that by UNCTAD V, if agreement on the Common Fund can be reached, commodity and debt issues will move off center stage. This will reflect the fact that we have made considerable progress in these areas. New issues, however, will emerge to fill the agenda. We want to be in a position to guide the selection of issues and shape the way in which they are addressed.

Internationally, the G–77, UNCTAD Secretariat, and the OECD countries have not established a clear set of new priorities for the North-South dialogue nor settled on specific reforms they want to press. There is a danger that if alternatives are not offered by us, LDC radicals may focus attention on controversial and symbolic demands in areas such as trade and monetary reform which will lead to new confrontation and sterile debate.

Domestically, North-South issues tend to be greeted with confusion or lack of interest. Next year’s Congressional debates on an MTN package, commodity agreements, and aid reorganization will require us to try harder to explain the importance of the developing countries to the US and to present a coherent and domestically defensible overall North-South policy linking such areas as aid, human rights, trade, and conventional and nuclear arms non-proliferation.

For both international and domestic reasons, then, we believe the Administration should launch a well-planned strategy on North-South issues beginning in January with UNCTAD V, the COW, the International Development Strategy (IDS),² and UNCSTD as key focal points. We would also step up our bilateral and regional approaches on North-South issues. Our ASEAN activities provide a good model, and we hope that the Colombo Plan meeting³ can also be helpful. Multilaterally and bilaterally, we would seek to clarify the major framework of our North-South policy, endeavor to have a major influence on the setting of the international agenda on North-South issues over the next half decade, and announce several carefully designed new initiatives which we believe would be politically appealing, economically sound and domestically supportable, and respond to real LDC needs. This memo summarizes the proposed approach, while the attached paper⁴ spells out a variety of possible initiatives in greater detail.

Many of the specific ideas are tentative and represent possibilities which might be explored rather than recommendations for action. Those which are particularly controversial (including between EB and S/P) are marked with an asterisk.

A US FRAMEWORK FOR NORTH-SOUTH POLICY

The North-South dialogue ranges over a wide spectrum of specific political and economic issues. US policies must be designed to deal with each. These policies should be consistent with, and indeed supportive of, four central US North-South objectives:

—the alleviation of the worst physical aspects of poverty;

—the promotion of self-sustaining growth with equity;

—the encouragement of societies which value individual civil and economic rights;

—the integration of the developing countries into an open and equitable international economic system.

These objectives are both altruistic and in our self-interest. They were developed jointly between this Administration and the Congress and became law in the International Development Assistance Act of 1978.⁵ They make sense and should be acceptable to the LDCs. We should refer to them more actively in outlining our basic North-South policies.

These are essentially long-term goals. The LDCs have established a North-South agenda in various international forums which is much more short-term in scope. The focus is on three issues:

—means by which the LDCs (often through rather dramatic intervention by governments) can obtain more external resources through trade in manufactures and commodities, through attracting for-eign equity and debt financing, and through official development assistance;

—means of encouraging the creation, transfer, and application of technical knowledge needed for development;

—means to increase significantly the development orientation of international economic institutions and to enlarge the decision-making role of the LDCs in them.

This formulation has major flaws from our perspective. The issues as couched above are all in terms of more—more resources, more technology, more power in international institutions—to the LDCs, with little attention to the uses to which such additional resources, technology, and power will be put. Nor does this formulation address the most central developmental issue—the question of how the LDCs can effectively marshall and focus their own human and capital resources. In fact, the central irony of the North-South dialogue is that while it ostensibly centers on development, development per se is almost never discussed. Finally, the high flown rhetoric in North-South forums and concentration on demands for concessions by the industrial countries has also cost the LDCs considerable US domestic support, particularly in the Congress. Both substantively and tactically, DCs and LDCs need to find a better approach to North-South problems.

In our preparations for UNCTAD V, the COW, and the IDS, we have tried to develop such alternative approaches. Hormats is chairing an interagency group to develop a US approach to the IDS which focuses on four clusters of issues: the supply side of basic human needs (food, education, housing, health and population); the demand side of basic human needs (employment and income); effective utilization and husbanding of resources (energy, commodities, deforestation and desertification), and engineering and industrial science. This should provide a comprehensive and internally consistent basis for US development policy and our international activities. For purposes of focusing international and domestic attention, however, we suggest concentrating US proposals on a more limited number of specific substantive areas in which the LDCs have clear interests, where we have particular strengths, and where we can obtain domestic support for our actions. We have identified five priority areas (under which many of the above subjects can be subsumed) which seem generally to meet those criteria and which we believe could provide focal points for US North-South activities in the months ahead. These include:

—Energy;

—Food;

—Health;

—LDC Capacity for Development;

—Institutional Reforms for Development.

If handled properly, these substantive packages might marry our long-term development objectives with the more immediate concerns of the LDCs. Certainly each of the suggested areas of US concentration involve questions relating to resources availability, knowledge, and institutions. The issues are of interest to all LDCs; specific proposals are designed to meet the needs of different specific clusters of LDCs, ranging from the poorer to upper tier countries. We will, of course, have to be able to address specific LDC proposals and the existing agendas of such forums as UNCTAD V and the COW. But if in our speeches on North-South issues, in our legislative and domestic agency priorities, and in our bilateral and multilateral activities, we can emphasize the themes suggested above, we may be able to slowly shift the North-South dialogue from an almost exclusive preoccupation with mechanisms to greater attention to specific goals.

We should note, of course, that our ability to conduct such a North-South strategy will depend in large part on our performance in meeting past obligations and living up to our own stated current policies. Thus our adherence to trade liberalization, our ability to meet past commitments in commodity agreements and our moving forward with new ones, our efforts in increasing our bilateral and multilateral assistance along the lines of the Presidential commitment for 1982, and our success in making up arrearages with the MDBs, will all have an impact on the credibility of our leadership efforts in the North-South dialogue and the interest with which initiatives such as those outlined below are greeted.

ENERGY

Of the substantive areas we wish to highlight in the North-South dialogue, energy offers the most scope for positive initiatives. This is also an area where our domestic interest in helping LDCs reduce their reliance on petroleum-based energy is clear. We have several suggestions for action, of which the most important are:

—International Renewable Energy Program: We are taking the lead in fulfilling the Bonn Summit commitment to coordinate individual country bilateral programs on renewable energy for the LDCs. We are encouraging particular attention to R and D programs on biomass conversion, non-electrical applications of solar energy, and forestry programs which include firewood and charcoal as important components.

—Renewable Energy Financing Mechanisms:* As unconventional renewable energy technologies become more cost effective, there may be a gradually increasing need for expanded or new mechanisms to assist LDCs finance such technologies, which tend to have relatively high initial costs and a long-term payback period. We could design and propose such a mechanism, which might involve such options as a special window at the MDBs, a new bank or fund, or a special bond underwritten by an international institution or consortium of OECD and OPEC countries.

—International Research Institutes: We might take the initiative, perhaps through the FITC, to stimulate the establishment of several international energy research institutes in the LDCs using the model of the international agricultural centers. We would try to mobilize foundation, MDB, and bilateral funding, plus a major commitment from host LDCs.

—Nuclear Energy Program:* It is inevitable that LDCs will include nuclear power as a component in their energy programs. We can take some steps to try to limit the ways in which such nuclear programs can complicate our non-proliferation effort. We might consider expanding membership in the London Suppliers Group to LDCs with nuclear technologies, establishing internationally controlled enrichment cen-ters in upper tier LDCs, and pushing the Nuclear Fuel Bank concept.

FOOD

Although good weather in grain producing countries over the past three years has reduced worldwide concern with ensuring adequate food supplies and stocks, long-range projections, particularly for Africa and Asia, point to large and growing food deficits over coming decades. We need to include food as a central North-South issue. The President’s Commission on World Hunger is an important vehicle, and we should use it. Four specific initiatives we may wish to press are:

—World Food Security Reserve for LDCs: Should the current grain negotiations fail, we could propose a world reserve of 13–15 million tons of grain to be held by key producing countries which could be made available to LDCs suffering from substantial crop shortfalls or when world prices increase sharply.

—Food Aid: We should continue to push for an international food aid commitment of 10 million tons annually, of which the US would provide about half, even if we cannot achieve it through the International Wheat Agreement’s Food Aid Convention.

—Agriculture Research: We might announce a research package geared to the crops (tubers and tree starch crops), livestock (goats and sheep) and techniques applicable to the poorest rural populations. FITC and domestic reserves could be used.

— LDC Public Policy: We could make a major effort through bilateral programs and via international institutions to help LDCs develop the public policies most conducive to increased agricultural production, e.g. tax, investment, transport and price policies.

HEALTH

Diseases in LDCs result in high infant mortality, adult disability and lower productivity. Waterborne diseases are particularly prevalent, and children are still not immunized against most diseases for which vaccines are available. We suggest two initiatives:

— UN Water Decade: A strong commitment might be made, using projected AID resources, to support the UN Water Decade goal of bringing clean water to one billion people in rural areas over the 1980–1990 period. A plan of this kind has been approved on behalf of the Department by Undersecretary Benson.⁶

—Worldwide Immunization Program: We could announce we were ready, in cooperation with other donors, to back a global WHO program to innoculate children with multiple antigen vaccine for measles, smallpox, yellow fever, tetanus, whooping cough, and diptheria. Cost to donors per shot would be about $1.

LDC CAPACITY FOR DEVELOPMENT

LDCs have taken a renewed interest in the availability of technology appropriate to their development needs, and in their institutional capacity to apply it. We want to steer them away from sterile exercises on international codes on technology transfer and focus attention on building their capacity to obtain, generate, adapt, and utilize technology. We suggest several initiatives; the two most important being:

—Foundation for International Technological Cooperation (FITC): The launching of the FITC will be the Administration’s main effort in the technology area. We could ensure that the FITC emphasize our priority subjects (energy, food, health), center its activities in LDC institutions where feasible (to build local institutional capacity), and support projects which include a regional focus, often located in upper tier LDCs, but with participation by lower income LDCs.

—US Agency Mandates: We may wish, through executive and legislative means, to broaden US agency mandates to allow greater activity in R&D in our priority areas. For example, NIH and DOD could expand their research in tropical medicine, DOE could do more in LDC-oriented non-conventional energy research, and USDA could increase its tropical and subtropical research programs.

INSTITUTIONAL REFORMS FOR DEVELOPMENT

The international economic system has already undergone many modifications to make it more responsive to LDC development needs. Successful resolution of the Common Fund issue would result in a new institution believed important by the LDCs. There are additional changes which could usefully be made, and we should have some concrete suggestions before UNCTAD V. We have over a dozen ideas for alterations in international institutions or in the way we fund our multilateral and bilateral assistance programs. The most important are:

— GATT Special Assistance Unit: The US could support the continuation of the GATT Special Assistance Unit after the end of the MTN to assist LDCs in handling trade complaints within the GATT dispute settlement mechanisms, particularly during the next two–three years when new codes will be put into practice.

—Compensatory Finance Facility (CFF):* Successful commodity agreements and a Common Fund may provide greater price stability for a few commodities, but still leave some problems with income stabilization for LDCs dependent on commodity earnings (during a recession or after a crop failure, stable prices will still mean lower incomes for an LDC). Rather than bow to pressure for a new Stabex program, either worldwide (the Schmidt proposal) or regional (ASEAN approach), we could consider further modest changes in the IMF’s CFF, such as allowing drawings when export earnings from specific commodities suffer temporary shortfalls, gearing payback of drawings to restoration of earnings from the affected commodities, and increasing the percentage of a country’s quota which may be borrowed in single year.

— IMF–IBRD Special Financial Assistance Unit: LDCs argue that the IMF conditions are too tough and disrupt economic development. The IMF complains LDCs approach them only when events have reached a crisis stage and drastic measures are needed. A joint IBRD–IMF unit could assist LDCs approaching debt difficulties with a mix of development and financial advice, thereby encouraging LDCs to seek advice earlier. Such a unit might also advise LDCs which are dealing with a creditor club.

— IBRD Bond Guarantee Facility: Only a handful of upper tier LDCs obtain long-term financing through international bond markets. The IBRD has the authority to guarantee such bond issues, but technical restrictions have precluded use of this facility. We should examine changes which would allow this facility to be utilized.

—International Development Cooperation Administration (IDCA):* Depending on the final stance of the Administration on the establishment of an IDCA, a new institution could have symbolic and real value in demonstrating our commitment to development.

—Callable Capital: Appropriating callable capital (and some guarantees) in the same manner as funds to be disbursed inflates our foreign assistance bills and limits more imaginative uses of guarantee schemes. We suggest establishment of a callable capital guarantee fund whereby we would only appropriate a fraction (say 10%) of callable capital to all the MDBs to go to a pooled guarantee fund in Treasury. This parallels the approach to FMS credits. We might also try appropriating large multi-year callable capital commitments, particularly for the IBRD, at once in separate bills, to reduce the annual development assistance appropriations.

STRATEGY

We suggest that an overall North-South tactical strategy covering all of 1979 be developed. A speech by you or the President at an appropriate forum in early January might lay out our overall North-South framework, touch on our substantive priority areas (particularly energy), and provide details on certain initiatives. Such a speech, before the G–77 ministerial in Arusha in early February⁷ might help moderate LDCs to ward off a hard-line G–77 platform. Another major address might be delivered several weeks before UNCTAD V, again stressing our overall approach and detailing a number of institutional initiatives. By making such a speech in advance of UNCTAD V, we would avoid a repeat of the tactical disaster at UNCTAD IV where US proposals were delivered at the Conference itself. A speech by you or another US official at UNCTAD V could review our overall North-South policy and suggest priorities for future discussions.

A major food address might be geared to the President’s Commission interim report, which is due about June of next year, and is expected to contain a number of recommended policies. Proposals on LDC development capacity, particularly regarding our program for the FITC and any decisions to broaden US agency mandates, might be outlined at the UN Conference on Science and Technology for Development next August.

By determining initiatives now and laying out a program of Congressional consultations and public addresses for all of next year, we can avoid many of the tactical problems which have plagued US North-South activities in the past. We would also be able to coordinate our efforts in various North-South forums (COW, UNCTAD, ECOSOC), improve the effectiveness of bilateral and regional consultations, and increase our chances of steering the dialogue in more constructive directions.

Should this approach meet with your approval, we suggest that you request the proposals in the attached memo to be fully staffed out by the Department and then cleared with other agencies (Guy Erb has seen all the preparatory work for this memo and agrees with its substance. He has notified Brzezinski of this project). We could work toward a final package by year end.⁸

1. Source: National Archives, RG 59, Office of the Secretariat Staff, Official Working Papers of S/P Director Anthony Lake, 1977–January 1981, Lot 82D298, Box 4, S/P-Lake Papers—11/1–15/78. Limited Official Use. Drafted by Johnson.
2. Reference is to the new International Development Strategy for the Third United Nations Development Decade (1981–1990).
3. Apparently a reference to the Colombo Plan Consultative Committee meeting that took place in Washington November 28–December 6.
4. Attached but not printed is a paper entitled “The North-South Dialogue: A US Agenda for the Future.” The paper was drafted on November 9 by Johnson.
5. Carter signed the International Development and Food Assistance Act of 1978 into law on October 6. For his statement on signing the bill, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, p. 1721.
6. Documentation on U.S. planning for the UN Water Decade is in Foreign Relations, 1977–1980, vol. II, Human Rights and Humanitarian Affairs.
7. The G–77 met at the Ministerial level in Arusha, Tanzania, February 12–16, 1979.
8. In a December 5 memorandum to Department of State principals, Lake and Hormats, noting that Vance had requested that they “more fully evaluate the proposals contained in the memo sent him on November 9,” announced the establishment of a series of working groups on North/South issues. (National Archives, RG 59, Office of the Secretariat Staff, Official Working Papers of S/P Director Anthony Lake, 1977–January 1981, Lot 82D298, Box 4, S/P-Lake Papers—12/1–15/78)