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

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

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

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 46, Latin America: 10/1–14/79. Confidential. Sent for action. Carter initialed the first page of the memorandum. Tabs 1–4 are not attached.
  2. Carter wrote in the left-hand margin next to this portion of the paragraph: “I agree w/ Owen & Mc.” Reference is to McIntyre.
  3. Carter indicated his approval and added his initial.
  4. Carter indicated his approval and added his initial.
  5. Confidential. Tabs 1–4 are not attached.
  6. See Document 475.
  7. Carter did not indicate his preference with respect to any of the recommendations; see, however, footnotes 3 and 4, above.