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

330. Briefing Memorandum From the Director of the Policy Planning Staff (Lake) to Secretary of State Vance¹

Washington, June 22, 1979

SUBJECT

• North-South Strategy After UNCTAD V

Summary:

UNCTAD V’s results were mixed, but on the whole, not inconsistent with our overall North-South policy.² Several aspects of the Conference reinforce the US approach: UNCTAD V took place in a nonconfrontational atmosphere; general demands for restructuring of the world system were remanded for future consideration; energy was finally acknowledged to be an important development issue; and a consensus was reached on several specific work programs and reform of the secretariat.

Pursuant to your Seattle speech, we should now step up our own efforts this fall in the areas of energy, food, technology, trade, and finance, and seek the support of other governments for specific proposals. As suggested and explained in the body of the memorandum, you may wish to take the following immediate steps:

—Instruct EB and IO to coordinate an effort to seek agreement among the Group B governments, in as much detail as possible, on a set of priorities and initiatives for the series of international conferences on North-South issues to be held over the next 18 months.

—Hold a meeting with Dick Cooper, Jules Katz, Bill Maynes, and me to discuss how we can:

• Get a prompt USG response on the Inter-American Development Bank’s proposal for investment guarantees in the mineral and energy sectors.

• Secure the support of industrial, developing, and OPEC countries for regional energy research and training centers in LDCs.

• Advance the idea of bond guarantees, including obtaining the support of other countries for an IBRD study of a pilot project.

• Obtain a more positive US position on further liberalization of the Compensatory Finance Facility.

• Look at the overall LDC debt/balance of payment funding questions we are likely to face over the next several years, and how we ought to respond.

—Request EB and H to keep tabs on the Food Security Act and to request intervention by you or other State officials if needed.

—Ask Dick Cooper to review with Tom Ehrlich the role his staff might play in lobbying for domestic agency programs which support our North-South goals.

UNCTAD V:

Several features of UNCTAD V deserve note:

—Sweeping resolutions demanding major restructuring of the world’s economy went nowhere. Rather than try to paper over fundamental disagreements between the G–77 and Group B, the Conference remanded the issues on which there was no agreement to the October UNCTAD Trade and Development Board meeting.³

—Expectations for dramatic results were lower than at previous ministerial level UNCTAD meetings, in part because progress on a number of key issues—the Common Fund, results of the MTN, the declaration on resource transfers in the COW, the negotiations on a rubber agreement, etc.—had deprived LDCs of politically attractive rallying points.

—The energy issue deeply divided the G–77. Manila may mark the end of the taboo on discussing this issue in North-South fora, although industrial countries will have to approach this issue with great caution. If we get out front, we may drive the G–77 back together (OPEC’s first instinct will be to try to limit discussion of the issue to intra-LDC meetings).

—LDCs continued to exhibit strong sensitivity to the use of terms such as “differentiation,” “graduation,” and “selectivity” by DCs. Their concern is not so much economic, as that such concepts mask an attempt to divide the G–77 politically.

—Agreement was reached on a resolution concerning protectionism and restructuring, on a special program for the least developed countries, on institutional reform of UNCTAD, and on work programs for commodities, trade, and Economic Cooperation among Developing Countries.

—In spite of the stalemate on some major issues (“global consultations” and evaluation of the world economy, evaluation of the MTN, and several monetary/financial questions), UNCTAD V ended on a quiet note with no strong recriminations on the part of the G–77 (although we are likely to hear such recriminations at the ministerial meeting of the non-aligned nations in September).⁴

The dialogue could go in one of two directions in the aftermath of UNCTAD V. LDC radicals, including some OPEC states, may urge increased militancy as a way to press for further structural reforms of the international system and as a means to restore G–77 unity. This option will probably be considered at the non-aligned meeting.

Alternatively, G–77 moderates will argue that the period of declarations, action programs, and general debate may have about run its course, and further progress for LDCs will depend on tackling specific issues. We can support this view by:

—Doing everything possible within the Executive Branch and on the Hill to keep development assistance and food aid at respectable levels, to fight trade protectionism, and to secure legislation implementing commodity agreements.

—Indicating that genuine progress has been and is being made on North-South issues (MDB replenishments, the MTN, the Common Fund, etc.).

—Publicly noting that modest results from UNCTAD V were primarily a result of lack of focus and priorities on specific issues.

—Making clear that we distinguish between the political unity of the G–77, which the developing countries see as an important counterweight to the developed countries’ economic power, and the need for differentiation among developing countries when it comes to specific economic and development policies.

—Moving forward, preferably with other developed countries, in proposing concrete programs in energy, food, technology, trade, and finance.

The Next Six Months

Over the next six months, we need to continue the program we launched this spring. Events we can use include the Tokyo Summit, final approval and funding of the Institute for Scientific and Technological Cooperation (ISTC), launching of the IDCA, the release of a report by the President’s Commission on World Hunger, the COW and IDS in the UN, the UNCSTD and WCARRD (World Conference on Agrarian Reform and Rural Development) conferences, approval of the MTN package, and the opening address to the UNGA, presumably to be given by you.⁵ Substantively, the following program is suggested:

—Energy: The current international energy situation makes more timely than ever a major effort to assist LDCs with energy problems. We should push forward our ideas regarding energy financing and regional research centers, while increasing our current programs of energy assessments and technical assistance.

• Energy Financing: The IBRD’s new program to finance exploration and development of mineral fuels is getting into gear. Response from developing countries has been strong, and several proposals are now in the pipeline. We believe the first projects under this program should go to the Executive Directors within two to three months. In response to your Seattle speech, Fred Bergsten has sent a letter to Ed Fried officially requesting that the IBRD be asked to study what special financial arrangements might be required to encourage investment in renewable energy technologies in the LDCs.⁶ Funding of renewable energy technology will be aired at the Tokyo Summit.

Also in response to your speech, Treasury, through our executive directors, has asked the regional banks to report on their current energy activities with a view toward encouraging more activity in the field. The Inter-American Development Bank staff has prepared a proposal to provide investment guarantees and insurance for petroleum and mineral exploration and development. The idea has aroused interest in Latin America and a positive response from Japan and several other industrial country members. We have prepared a favorable response which should go to the IDB shortly.⁷

• Research Institutes: The President may reiterate at the Summit your Seattle speech recommendation on regional LDC energy research and training institutes. We also plan to test this idea in bilateral conversations and at the UNCSTD. If the developing countries respond positively to this idea, we may make a specific proposal at UNCSTD for a more detailed evaluation of this approach. We may also be in a position by autumn to make specific proposals in your UNGA speech on this and other energy initiatives.

• Conference on New and Renewable Energy: A US strategy paper is now being drafted for the 1981 Conference.⁸ We would hope that the Conference would endorse progress made in the expansion and creation of regional research centers and in experiments with energy finance (such as those undertaken by the IBRD and regional banks), and might establish some kind of global coordinating mechanism to set priorities and coordinate funding for research on LDC energy problems (probably along the lines of that which exists for agriculture).

• Assessments: DOE has completed an assessment of national energy needs and resources for Egypt, is wrapping up the Peru assessment, and is about to get one underway with Argentina. In addition, an assessment program is probable for Portugal and possible for Yugoslavia and South Korea. AID is launching a major assessment project with Indonesia, and assessment components are included in a number of specific technical assistance projects (see Thailand below, for example). More funds could be effectively used in these programs as well as in the technical assistance and demonstration programs below.

• Technical Assistance and Demonstration Programs: AID is undertaking a $26 million program in 30 countries this year, and plans to expand this to over $40 million in FY 80. A major new program in Thailand provides a good example of our bilateral activity—it will include technical training, building institutional capacity to analyze energy programs and formulate policies, and will particularly highlight rural energy needs, including a fuelwood technology component.

• Tax Policy: Another idea that may warrant serious consideration—but is likely to encounter domestic opposition because it could appear to help the oil companies—is for the US to give more favorable foreign tax credit treatment to income earned by US companies from energy investments in non-OPEC LDCs than to income earned in OPEC states.

—Food:

• Food Assistance: We may be heading for another difficult period regarding availability of adequate food assistance. We anticipate a poor Russian harvest and a mediocre one in Europe. The monsoon in India is late, but it is too soon to predict whether there will be difficulties. It is, however, realistic to assume that grain prices in FY 80 will be at least 25% above those of FY 79. In the case of the US, our PL 480 budget for FY 80 will be about the same level as FY 79, which implies a cut in volume of food assistance of at least 25%. Egypt has requested a 500,000 ton increase in food aid for FY 80, in addition to the 1.5 million ton commitment it already has from us. A detailed memo is being prepared for you on this issue.

These developments increase the urgency of the kind of action called for in your Seattle speech. The US had already pledged to meet its higher levels of food aid commitments which were negotiated as part of a new Food Aid Convention, and called on other countries to do likewise, even though negotiations on a new International Wheat Agreement are not complete. This week the EC announced it will follow our lead and meet its higher commitments. We have also asked other countries to agree to a new Food Aid Convention independently of progress on the IWA. Finally, the Administration’s Food Security Act has been introduced in the Senate and will be in the House. It would allow the USG to set aside four million tons of wheat in an International Emergency Wheat Reserve to meet our volume commitments to the Food Aid Convention in times of short crops and high prices. Chances for passage of the legislation this year are considered reasonably good, but we may need a push from you at some point.

• Research on New Crops and Marginal Lands: The establishment of the ISTC in October will allow us to press forward in these areas. Furthermore, USDA and Interior now seem more inclined to step up research in these areas out of their own budgets. For example, USDA hopes to expand its research program on guayule (a latex producing plant which grows in arid regions) from $250,000 in FY 80 to $2.5 million in FY 81. This undertaking will involve cooperative work with Mexico on new crops and dry lands agricultural techniques.

We need to find a way to insure that these kind of programs get a fair hearing within the Administration’s overall budget planning. Domestic and cooperative research programs such as these often have trouble in fighting for budgets within their own agencies and with OMB. Budgets for such activities are often relatively small and are low on a domestic agency’s overall priority list. Programs which ran into difficulty last year included tropical medicine and immunization research at NIH and cooperative energy research at DOE. The IDCA might usefully devote some staff time to monitoring and lobbying for such activities within the executive branch.

• WCARRD: Preparations are now moving into high gear for the World Conference on Agrarian Reform and Rural Development next month. Andy Young is slated to head the US delegation. His opening address can set forth US priorities. The delegation’s position papers will stress getting our points across in the Conference resolutions, particularly as regards the necessity for LDCs to pursue domestic policies (such as land reform, adequate credit facilities, and technical extension services) which encourage increased food production and distribution. We do not intend to propose new multilateral programs. We will continue to press the issues of domestic policies in the COW and preparatory work on the IDS.

• President’s Commission on World Hunger: The Commission now plans to issue its final report in late August or early September. Our preliminary indications are that the report will emphasize a number of areas in which we are taking initiatives—new crops, research on marginal lands, post-harvest loss prevention, and food aid guarantees. We will try to review preliminary drafts, and help assure that the report gets heavy publicity overseas through our posts and ICA programs.

—Technology: Our main actions here still relate to the launching of the ISTC, now scheduled to go into formal operation on October 1, and the UNCSTD, now moving into an advanced stage of preparations.

—Trade: We want to obtain as many LDC adherents to the new MTN package as possible. Only Argentina has initialed the package to date. We believe the failure of others to do so largely reflects an effort to maintain G–77 unity going into UNCTAD V. It also relates to the desire of many LDCs to see how the negotiations on a new safeguards code are resolved. They regard the demand by the EC for “unilateral selectivity” as a direct threat to the ability of LDCs to increase their manufactured exports. (“Unilateral selectivity” would allow a country which believes it is suffering injury to an industry because of imports from one or several specific countries to take protectionist measures against the sources of those imports, rather than on an MFN basis, without prior consultations.) Up to now, the US has maintained a neutral position, but shares many of the concerns of the LDCs. Should we move in the EC direction, we may badly undercut our objective of integrating the LDCs more fully into the GATT.

Assuming a satisfactory resolution of the safeguard issue, our own legislative trade package may encourage the LDCs to accept the MTN, as the legislation contains several liberalizing measures for GSP which should particularly benefit regional grouping of LDCs such as ASEAN, the Central American Common Market, and the Andean Pact. In addition, the US should play an active role in pressing for GATT responsiveness to LDC concerns, particularly through a strong GATT Special Assistance Unit, which will be launched this fall.

—Finance: Prospects for the future include high oil prices, continued worldwide inflation, slow growth in the industrial countries and stagnant aid levels. As a result, developing countries will again have to choose between cutting their growth rates or borrowing heavily to maintain growth and import levels. Private banks are already heavily exposed in some developing countries, and we do not know if they will be able to respond as readily to LDC demands for credit as they did in the mid-seventies. We can predict that financing balance of payments and debt will again be major economic and political issues in North-South relations. There are several possible responses:

• Bond Guarantee Proposal: An innovative new way to substantially increase resource flows to the LDCs without straining aid budgets would be to provide official multilateral guarantees to support bond issues in the private capital markets by credit-worthy LDCs. Under such a scheme, bonds would be floated on the private bond markets, and the IBRD, developed countries and surplus oil producers would join together to provide partial or full surety for the borrowings. Such a mechanism could be general or limited to certain types of bonds, such as to support energy investments. Treasury has historically been negative on this concept, but Tony Solomon agreed that at UNCTAD V we could support an IBRD study on the establishment of a pilot program to determine the efficiency of such guarantees.

The opportunity to broach this issue did not arise at UNCTAD V, and we must still find an appropriate forum to launch it. The World Bank/IMF meeting in September⁹ offers the best platform. It would be useful to discuss this idea informally with other industrialized countries and some LDCs before then. Although the bond guarantee idea is not slated to come up at the Summit, if the issue should surface, you may wish to note that we are exploring the concept and hope to exchange ideas before the Bank/Fund meeting.

• Compensatory Finance Facility: The question of a further liberalization of the CFF will come up at the September Bank/Fund meeting. As things now stand, the US will probably give grudging approval to some enlargement of the share of quotas which can be borrowed from the facility, while opposing any other liberalizing changes. The IMF staff had made several other suggestions, such as including tourism in calculating shortfalls in export earnings, allowing compensation for sudden surges in food imports, and providing a separate calculation for export earnings shortfalls related to commodities. These suggestions have generally been rejected out of hand in Treasury, and have generated little enthusiasm in some parts of State. We need a fresh look, and then ought to get behind whatever changes we decide upon.

• Other Financing Mechanisms: As usual, any movement in the financial area is most difficult. Over our negative votes, resolutions were passed in Manila asking the IMF to examine the need for a medium-term balance of payments support facility and requiring the Secretary General of UNCTAD to conduct a study of a possible complementary facility to the Compensatory Finance Facility. We believe the Brandt Commission will propose some mechanism to encourage surplus countries to lend on long-term conditions to developing countries.¹⁰ Our bond guarantee proposal could be part of the answer to these demands.

—Launching the IDCA and ISTC: Unless blocked in Congress, the IDCA and ISTC come into formal existence on October 1. We ought to give major publicity to these events. The IDCA should be portrayed as a US commitment not just to foreign assistance, but development per se. Likewise, we should try to gain maximum exposure for the ISTC, both domestically and internationally through ICA.

—Involving Other Foreign Governments in Our Efforts: Up to now we have concentrated on pressing within our own government for a North-South package. We should now step up our efforts to explain our approach in developed and developing countries. The Summit will be a start. However, as we prepare for the UNGA and UNCTAD TDB,¹¹ we may want to do more in several key OECD countries and LDCs, to explain our approach and solicit ideas on energy, food, and financial issues. We will work with EB and IO on a separate memo on this topic.

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 5, S/P-Lake Papers—6/16–30/79. Confidential. Drafted on June 21 by Johnson (S/P) and cleared by Hormats and Deputy Assistant Secretary of State for Economic and Development Policy Marion Creekmore. In a June 22 handwritten note to Vance, Lake commented: “While UNCTAD V made little practical progress, at least the tone was not bad. This memo reviews some steps we could take to support moderate LDC’s who would like to head off a new, unproductive North-South confrontation. The steps are, of necessity, modest. But I hope you get a chance to review this.” (Ibid.)
2. Telegram 10987 from Manila, June 3, summarized the results of UNCTAD V. (National Archives, RG 59, Central Foreign Policy File, D790251–0410) For the text of Young’s statement before the conference on May 11, which included a message from President Carter to the delegates, see the Department of State Bulletin, September 1979, pp. 64–67.
3. The UNCTAD Trade and Development Board met in Geneva October 8–20, with a concluding session held on November 23.
4. The Non-Aligned Movement met at the Ministerial level in Havana September 3–9.
5. For Vance’s September 24 address to the UN General Assembly, see the Department of State Bulletin, November 1979, pp. 1–6. In a September 5 memorandum to Vance, Maynes, Hormats, and Lake discussed “seven proposals in the area of North/South dialogue and how they relate to your UNGA speech.” (National Archives, RG 59, Office of the Secretariat Staff, Official Working Papers of S/P Director Anthony Lake, 1977–January 1981, Lot 82D298, Box 5, S/P-Lake Papers—9/1–15/79)
6. The letter was not found.
7. Not further identified.
8. The paper was not found. The UN Conference on New and Renewable Sources of Energy met in Nairobi in August 1981.
9. The annual joint meeting of the IMF and World Bank took place in Belgrade October 2–5.
10. In 1977, McNamara proposed that Brandt preside over an independent commission on North-South issues. Telegram 15053 from Bonn, September 14, 1977, transmitted a letter from Brandt to Carter on the proposed commission, and telegram 19870 from Bonn, November 30, 1977, reported on a November 29 press conference in which Brandt announced the formation of the Independent Commission on International Development Issues. (National Archives, RG 59, Central Foreign Policy File, D770333–0074 and D770444–0392, respectively) The Commission’s report was issued in 1980; see Document 345.
11. The UNCTAD Trade and Development Board served as a preparatory committee for UNCTAD V.