480. Memorandum From the Director of the Office of Management and
Budget (McIntyre), the
President’s Assistant for National Security Affairs (Brzezinski), and the President’s
Special Representative for Economic Summits (Owen) to President Carter1
Washington, September 27, 1979
SUBJECT
- 1980 Central American Supplemental (U)
In the attached memorandum Cy
Vance seeks approval of a $145 million Economic Support
Fund supplemental for Nicaragua, Honduras and El Salvador. $120 million
of the request is designed to help fill Nicaragua’s balance of payments gap over the next two years. He
proposes that Honduras receive $13 million for
immediate impact rural development activities to signal support for the
transition to democratic government. The proposed $12 million for urban
impact projects in El Salvador would, he
indicates, be provided only if its government carried out electoral and
human rights reforms. (C)
In addition, the special NSC working
group on Cuba and the Soviet troops issue is considering recommending
stepped-up US security assistance and political impact development aid
to Caribbean countries. If this recommendation is made and accepted, it
would require a supplemental request for some $30 million so as to begin
and expand programs in 1980 which we had previously planned to begin in
1981—plus expanded aid to this subregion in the FY 1981 budget. (C)
[Page 1251]
This memorandum focuses on Cy’s request, and does not consider any
further recommendation that may be made by the NSC Working Group. (C)
Any supplemental request for aid funds faces great difficulty in the
Congress at this time, and could generate reactions in the budget
committees that would endanger their support of your wider fiscal
policy. You have just transmitted supplementals of $206 million for
PL 480 and $25 million for Caribbean
disaster relief. The current Senate budget resolution provides no room
for international affairs add-ons. The House committee version allows
$350 million for PL 480 and other
emergency foreign aid budget increases, but there will be an attempt to
cut it back on the floor, which may well succeed. (C)
The reaction of the budget committees and of the Congress will depend, to
some extent, on the size of a supplemental request, and on whether it is
limited to amounts that must be committed during FY 1980 and cannot reasonably be obtained by reprogramming.
OMB is concerned that requests
beyond amounts justified by emergencies will undermine the
Administration’s close cooperation with the budget committees regarding
government-wide fiscal restraint. (C)
On the other hand, Zbig and Cy believe that the national security case
for increased aid to Central America and the Caribbean is sufficiently
strong that Congress will be hard pressed to resist it, provided it is
presented effectively. (C)
One other factor: If a large supplemental request is made, we will have
to follow through with larger requests for later years. There is no
sense in playing yo-yo with these countries’ aid programs. This has
out-year budgetary effects. (C)
Nicaragua
Uncertainties as to Nicaragua’s balance of payments in 1981 also lead us
to suggest that you confine any supplemental request for Nicaragua to an
amount related to its needs for important financing in the immediate
year, 1980. At this moment, we cannot determine within large orders of
magnitude what aid, if any, Nicaragua will need in 1981 for this
purpose. The 1981 gap can better be estimated later in the fall, during
the FY 1981 budget process, when we will
know more about creditor action to reschedule foreign debt payments, aid
commitments by other donors, private capital movements, and supplier
credit extensions. (C)
We believe that $75 million in Economic Support Funds for general
import-financing is a sufficient and defensible FY 1980 supplemental request for Nicaragua. It could be
augmented by food aid, drawing on the program reserve—in substantial
amounts if the Congress approves your pending PL 480 supplemental budget request. McIntyre and Owen
[Page 1252]
believe it is quite possible
that no further import financing aid will be required in 1981;
therefore, our presentation of the FY
1980 ESF supplemental to the Congress
in October should not commit us to continue in FY 1981 this extraordinary form of aid to Nicaragua.
(C)
Zbig believes that further aid will be needed and that US assurance of
support in providing that aid throughout Nicaragua’s recovery period
(present–1981) is important. He proposes that this assurance be given by
asking for a $75 million ESF
supplemental now and informing the Nicaraguans that we intend to fund
the remainder (Cy recommends $45 million) in the FY 81 budget, provided that there is still a need in
Nicaragua and our current projections prove accurate. (C)
El Salvador, Honduras
In proposing supplemental requests for additional project assistance to
El Salvador ($12 million) and Honduras ($13 million) Cy rejects
reprogramming on grounds that this would cut too deeply into other
country programs already reduced by Congressional cuts. IDCA and AID also oppose shifting development funds to programs
enlarged for short-term political purposes. Further, Cy and Zbig
advocate a supplemental for these countries as a clearer political
signal of a broad US response to Cuban pressure in Central America and
evidence to Congressional conservatives that our support is not limited
to leftist Nicaragua. (C)
McIntyre and Owen submit that the stated objectives
can be accomplished without including El Salvador and Honduras in the
supplemental. Instead, they propose that a willingness to provide
expanded development aid to these countries be foreshadowed in the
testimony on the Nicaragua supplemental and included in the FY 1981 budget. All agree that an
intensified program of Central American development should be
coordinated by the World Bank and engage other donors and multilateral
agencies. The Bank already is preparing to fulfill this role in response
to Central American requests, and an announcement can be made just
before the testimony. We believe Venezuela and other countries would
welcome it.2 Out of
our FY 1981 budget we would provide
increased development aid to Honduras and El Salvador if the World Bank
concludes that this is needed and could be put to good use, and subject
to execution of the promised reforms. If it later becomes evident that
immediate impact development aid to one or both of these two countries
during FY 1980 is absolutely necessary,
McIntyre and Owen would then favor review of
reprogramming or supplemental options. They note that in the 25-year
history of foreign aid attempts
[Page 1253]
to achieve short-term political objectives with
development projects have seldom worked. They oppose such potentially
wasteful aid spending when domestic programs are being cut back to fight
inflation. (C)
If an expanded Central American Development Group is established in early
1980, based on the experience of the Caribbean Group two years ago, Zbig
believes that a successful launching of this initiative will require an
early and firm financial commitment from the US. He therefore recommends
that we request the two additional packages for El Salvador and Honduras
in a supplemental but make clear that our purpose is to give impetus to
the multilateral effort. If we waited until the FY 81 budget is appropriated before making a financial
commitment in the new group, Zbig believes we would deprive the
initiative of urgency and momentum. (C)
Options
Nicaragua:
Option 1: Seek immediately FY 1980
supplemental ESF authorization and
appropriation of $120 million to help cover Nicaragua’s balance of
payments gaps in 1980 and 1981. Vance recommends. (C)
Option 2: Seek immediately FY 1980
Supplemental ESF authorization and
appropriation of $75 million to help cover Nicaragua’s balance of
payments gap in 1979 and 1980, and advise the Nicaraguans that the
remaining amount requested by Secretary Vance ($45 million) will be included in the FY 1981 budget if our current balance of
payments projections for the Nicaraguan economy prove reasonably
accurate. Brzezinski recommends. (C)
Option 3: Seek immediately FY 1980
supplemental ESF authorization and
appropriation of $75 million to help cover Nicaragua’s balance of
payments gap in 1980, deferring to the FY 1981 budget process consideration of whether such
assistance is required in 1981. McIntyre and Owen recommend.3 (C)
Honduras and El Salvador
Option 1: Seek immediately FY 1980
supplemental ESF authorization and
appropriation of $12 million for El Salvador (subject to execution of
stipulated reforms) and $13 million for Honduras to fund additional
quick-impact projects. Vance Recommends. (C)
Option 2: Seek the supplementals for El Salvador and Honduras, as
proposed by State, but with the understanding that we would use this aid
to give impetus to a broad multilateral development program
[Page 1254]
for Central America under
IBRD and IDB leadership starting early in 1980. Brzezinski
recommends. (C)
Option 3: Do not seek supplementals for these countries but, instead,
announce support for a multilateral development effort in Central
America to be organized by the World Bank at the request of these
countries; increase planned FY 1981
development assistance to them, subject to progress on democratic
reforms. McIntyre and Owen recommend.4 (C)
Attachment
Memorandum From Secretary of State Vance to President Carter5
Washington, September 21, 1979
SUBJECT
- Support of U.S. Foreign
Policy
- Initiatives in Central America
Success of our foreign policy in Central America requires a
substantial increase in our commitment of resources to the area.
The Nicaraguan civil war produced death and destruction comparable to
that resulting from our own civil war, and recovery will require
substantial assistance from the United States. The most urgent need
is for flexible balance of payments support, which could most
appropriately be provided from the Economic Support Fund; that
account, however, is almost entirely earmarked by Congress for
priorities in the Middle East. To assure a reasonable chance of
success with our political strategy in this nearby area, I therefore
recommend:
—That we seek a one-time ESF
supplemental of $120 million for Nicaragua to cover the most urgent
requirements in 1980 and 1981;
—That we include in the supplemental $25 million of additional
funding for urgent impact programs in Honduras and El Salvador.
Treating this funding for the next two years as a one-time
supplemental is the best way to demonstrate to the Congress and to
the Central Americans that this is extraordinary assistance and not
the
[Page 1255]
beginning of support
at very high level such as we provide certain Middle East
countries.
NICARAGUA
The Nicaraguan economy requires large inputs of foreign financing.
Our strategy is to support the moderates such as business, labor,
church groups, traditional political parties and the Nicaraguan
economic team which is pro-Western in outlook.
A rapid economic recovery is essential to our political strategy.
Continued large-scale unemployment and economic difficulties will
force the regime to turn to authoritarian procedures. Cuban advice
and influence would then become more important.
However, if we support rapid economic recovery over the next two
years, the existing non-Somoza business and agricultural groups can
be reestablished. A pluralistic political system can develop. U.S. assistance now can reestablish our
credentials as a reliable friend of democratic progress.
All Latin America is watching Nicaragua to see if we will support the
establishment of democracy following the end of a rightist
dictatorship. Some believe the only alternative to such dictators as
Somoza is authoritarian regimes of the left. A vast majority of
Nicaraguans want to prove that is not true. The western financial
community—Inter-American Development Bank, IBRD, IMF and private
banks—is considering large scale support to assure a positive
political outcome. Other Latins are providing major assistance
(Costa Rica, Guatemala, and Honduras have offered $25 million each).
We must make a large contribution not only because it is needed, but
because others will despair of the effort if the largest and richest
country in the hemisphere does not do its share.
This assistance and effective rapid economic recovery will not
guarantee a democratic outcome in Nicaragua. Through control of the
armed forces and active political organization, the communists and
their sympathizers may eventually take over. But failure to provide
adequate U.S. assistance virtually
assures such an unfavorable outcome and suggests that our policies
of non-intervention and human rights mean Latin America is open for
intrusion by Cuba and its friends.
Our mission in Nicaragua projected the balance of payments deficit
before U.S. assistance over the
two-year rehabilitation period at $300 million. The Country Team
proposed $95 million in balance of payments assistance, and $38
million in PL–480 Title I and Title
II. This is an option you may wish to consider.
We have revised, however, the Mission’s balance of payments
projections, because we believe it underestimated: 1) international
inflation, 2) petroleum prices, 3) the need to rebuild stocks drawn
down
[Page 1256]
and destroyed
during the disturbances, and 4) the interest rate costs of any debt
rescheduling.
Our information also indicates that additional financing will be
available from other donors and from use of reserves. The revised
estimates indicate an overall balance of payments gap before
financing of $1.6 billion for 1979 through 1981. We project
financing from the private sector and other donors of less than $1.2
billion, leaving a gap of over $400 million. I do not believe we can
meet this entire gap. But I do believe we should do more than the
$95 million proposed by the AID
mission.
There are three key reasons, in addition to the clear humanitarian
need, for us to seek $120 million of ESF funding instead of $95 million.
—Our political strategy in Nicaragua requires a rapid recovery of the
economy in Nicaragua to support the private sectors there which are
our political friends.
—International burdensharing suggests an even larger share for the
U.S.; including PL–480 we would be meeting only about
10 percent of the gap even with my proposed $120 million; we have
suggested to Venezuela that about $55 million in addition to the $20
million it has already provided would be reasonable; what the
Germans are offering appears to be about equivalent on a per capita
basis to what I am proposing for the U.S. although our interests in Central America are
clearly greater than those of the FRG; even with my higher proposal our effort would not
be comparable to that of Costa Rica or El Salvador with $25 million
of assistance from countries of 2 and 5 million people.
—Following the 1972 earthquake we provided $95 million of assistance;
the present crisis is much worse, the current dollar buys much less;
I believe $120 million in the Nicaraguan supplemental combined with
the $70 million from other sources is the minimum to show the U.S. commitment to democratic change in
the whole Caribbean area.
Whatever assistance we provide Nicaragua will be monitored by our
AID Mission in the country to
insure that none of it could be used to finance the subversion of
neighboring governments. Moreover, the type and level of assistance
we are recommending would involve our Country Team very fully in
Nicaraguan Government affairs so that they would be better
positioned to discourage any action against Nicaragua’s
neighbors.
HONDURAS AND EL SALVADOR
Events in Nicaragua make modest additional funding for Honduras and
El Salvador essential. Honduras is already on the road to elections
and democracy. Its economy and institutions are weak. We need to
increase support for the present political liberalization by
increased funding for immediate impact rural development. A recent
high-level
[Page 1257]
AID mission has identified rural
projects of about $13 million that should be funded within a few
weeks in addition to the programs in the FY–80 budget.
In El Salvador, following your approval of the PRC recommendations,6 we have laid out for the government a major
package of reforms to avoid the same revolutionary polarization as
in Nicaragua. El Salvador can explode any day. We have identified a
$12 million urban impact package to help defuse the explosive urban
unrest while movement to a more democratic government takes
place.
Our assistance for regimes in El Salvador and Honduras will help
liberalize the political structure to avoid Nicaraguan-style
polarization and is key to our worldwide human rights policy. There
will however be criticism of the policy by some who believe we
cannot work with human rights offenders such as the Government of El
Salvador. But the government has said it will carry out promised
democratic reforms and we will make clear to Congress and President
Romero that this assistance will be provided only if the reforms are carried out. Seeking the
supplemental appropriation is essential to increase our leverage for
reforms.
BUDGET CONSTRAINT
I am very conscious of our budget constraints and have examined all
the ways we might meet the Nicaraguan requirements without seeking
supplemental appropriations. We are reprogramming in FY 80 and increasing previously planned
levels within the FY 81 budget
proposal. We shall provide the maximum amount of assistance through
PL–480. The required grant
technical assistance program—a key program because it supports our
unions and many other private groups in working with their
Nicaraguan counterparts—will be funded by reprogramming.
Even with $65–70 million of reprogramming in FY 1980 and 1981, however, a supplemental request is
necessary. The balance of payments requirements in Nicaragua must be
met by flexible funds of the ESF
type and because of Congressional earmarking of ESF, there is no feasible option for
reprogramming significant ESF
funds.
The projects in Honduras and El Salvador could be financed with
AID Development Loans and doing
so is an option for you to consider. However, the FY–80 budget for Development Loans has
already been cut substantially by the Congress, and reallocations to
these two countries of $25 million would have a severe impact on
other countries. Within Latin America it would mean more than a
halving of the Panama
[Page 1258]
program and some cuts in the Caribbean. About half the funds would
still have to come from other regions. I do not believe, therefore,
that we can meet the need for these programs effectively, except by
a supplemental.
Beyond such funding issues, there is considerable political merit to
a supplemental for Central America. It will show that the
Administration is moving throughout the area in response to the
Cuban pressure. Support for more conservative governments will win
additional support in Congress. Because of Congressional cuts, total
foreign aid appropriations and expenditures for FY–80 will be below our original
request level even with a $145 million supplemental.
We are confident that the supplemental can be a one time requirement
to meet an extraordinary situation. After that we will rely on
funding our requirements in Central America within our normal
development assistance budgets. We will be moving as quickly as
possible from a focus on economic recovery and impact type programs
to AID’s traditional development
concerns. We will attempt to do this on a regional basis and we are
already exploring the feasibility with the World Bank of a
coordinated approach in agriculture.
Recommendations
That you approve proceeding with a Central American supplemental
budget request of $145 million, including $120 million for
Nicaragua, $13 million for Honduras, and $12 million for El
Salvador.
Alternatively, that you approve proceeding
with a supplemental budget request for Nicaragua only of $120
million, and approve reprogramming funds for Honduras ($13 million)
and El Salvador ($12 million) from AID Development Loans.
Alternatively, that you approve proceeding
with a supplemental budget request for Nicaragua only of $120
million.
Alternatively, that you approve proceeding
with a supplemental budget request for Nicaragua only of $95
million.7
