318. Memorandum From the Cabinet Council on Economic Affairs to President Reagan1
SUBJECT
- Hungarian Application for Membership in the IMF
The International Monetary Fund’s Membership Committee has completed its technical consideration of Hungary’s application and has forwarded a draft decision recommending acceptance of Hungarian membership and an initial quota of SDR 375 million for consideration by the Executive Board and Board of Governors. The Executive Board is scheduled to consider this proposal on April 2 and, assuming approval, to immediately forward a membership resolution for a mail vote by the Governors for action within thirty days.
The United States therefore must decide now its position on this issue. The Cabinet Council on Economic Affairs considered this issue at its March 29 meeting and recommends supporting the Hungarian application based on the following considerations.2
- 1.
- The Hungarians have fulfilled the obligations of IMF membership—the longstanding essential U.S. criterion for acceptance into membership—including providing detailed economic information to the IMF.
- 2.
- Hungarian IMF membership would provide the U.S. with a continuing flow of detailed data on the Hungarian economic and financial situation and the opportunity, through the regular IMF consultation process and in the event of an Hungarian IMF program, to influence the evolution of Hungarian economic policy.
- 3.
- Hungary has developed an economic system that is more like the West than are other Eastern European economies. Decision making is decentralized and market-oriented, and economic units respond to price incentives.
- 4.
- The Hungarian economic situation is substantially different from that in Poland. Though Hungary currently faces liquidity difficulties, the economy is basically sound, and Hungary’s economic management is respected by the Western financial community.
- 5.
- The IMF members generally strongly favor Hungarian membership. Membership requires only a simple majority vote. The U.S. has about 20 percent of the voting power. If we attempted to block the membership application we would likely fail. Such an effort would inevitably damage our negotiations with the Europeans on other East-West and IMF-related issues, such as preventing PLO observer status at the Annual Meetings.
- 6.
- Hungarian membership, with a quota of SDR 375 million, would have only a miniscule impact on U.S. and other countries’ voting power (the U.S. vote would decline from 19.68 to 19.56 percent of the total voting power).
IMF membership does not mean IMF financing. Hungary will not have any automatic rights to draw on the IMF beyond its hard currency payments to the IMF. Support for IMF membership thus does not entail support for IMF financing for Hungary.
The main concerns with IMF financing, if Hungary makes a request, involve: (1) the adequacy of their proposed adjustment program, and (2) the possibility of “leakage”—financing drained off to support the Soviets or other East European countries. There is, of course, no guarantee that we could prevent leakage. And we have expressed our concerns about this potential problem to Hungarian financial authorities. Their tight liquidity situation and their irritation over Soviet withdrawals of hard currency deposits in Hungary suggest that they will do everything possible to prevent leakage. If Hungary does request IMF financing and the leakage problem arises, we would have legitimate grounds for opposing the financing and we could likely obtain sufficient support from our allies to prevail.
Recommendation
The Cabinet Council on Economic Affairs unanimously recommends that the United States vote in favor of the Hungarian membership application at the IMF Executive Board meeting on April 2 and in the subsequent vote by the IMF Governors.
Federal Reserve Chairman Volcker, the U.S. Alternate Governor in the IMF, strongly concurs with this recommendation.3
- Source: Reagan Library, Paula J. Dobriansky Files, Country Files, Hungary (1). No classification marking. A stamped notation at the top of the memorandum reads “The President has seen.”↩
- The minutes of this meeting were not found.↩
- Reagan checked and initialed the “Approve” line.↩
- Regan signed “Don Regan” above his typed signature.↩