Foreign Relations of the United States, 1952–1954, General: Economic and Political Matters, Volume I, Part 1

S/S–NSC files, lot 63 D 351, NSC 5407 Series

Report Prepared by the Foreign Operations Administration¹

top secret
NSC 5407 Part 3

[Washington,] March 11, 1954.

The Mutual Security Program

Status as of December 31, 1953

[Here follows a three-page table of contents]

Program Highlights

The six months ending December 31, 1953 witnessed marked but spotty progress toward the major objectives of the Mutual Security Program: building military strength of the free world, maintaining economic stability, promoting economic development, and, on occasion, mitigating financial crises. NATO ground forces and Navies met goals, but still were below desired standards. Air Forces lagged behind schedule. The European economic picture was considerably improved in comparison with 1952, although the rate of economic growth is still inadequate to meet long-range civilian and military needs. In the Near East, deterioration of the Iranian situation was arrested; economic development showed progress in India and Pakistan. Demands of economic development programs in Greece and Turkey threatened to detract from continued budget support for military forces. The Arab-Israel deadlock continued unabated, and no appreciable headway was made on the Palestine refugee problem. The war in Indochina continued to dominate Far Eastern developments. On the economic side, declining raw material prices threatened economic stability in Southeast Asia—notably in Indonesia—and Japan’s economic problems assumed new urgency in view of the U.S.-Japanese military assistance pact and Japan’s decision to increase her defense forces. In Latin America, the Milton Eisenhower report focused new attention on the area’s development needs and pointed the way toward broader-gauge U.S. action.

Other major developments during the reporting period included:

1. A new program focus and emphasis—exemplified by FY 1955 budget proposals which virtually place the NATO military aid program on a maintenance basis, terminate most economic aid to NATO countries (except Greece and Turkey), and intensify the drive toward economic development in the underdeveloped areas.

2. MDAP shipments to all areas in 1953 were $3.8 billion, compared with $4 billion for all previous years.

3. New emphasis on special food programs to relieve food emergencies abroad from U.S. excess stocks, under Section 550 of the Mutual Security Act and under the Famine Relief Act. Limited experience indicates that food grants can contribute importantly to U.S. objectives where food is genuinely the primary need (Pakistan, East Germany, Boliva). Emergency food grants have proved to be no substitute for basic increases in food production abroad; and the volume of such grants is unlikely to be large enough to solve the U.S. agricultural surplus problem.

4. Renewed evidence of the vitality of Western Europe. Economic growth—which in 1952 was almost monopolized by Germany—was more broadly based in 1953. The 4% rise in GNP was double the rate of increase in 1952.

5. Levelling-off in defense expenditures and defense production makes it apparent that incorporation of German effort into European defense is of paramount importance in breaking through the present defense expenditure plateau and in utilizing the untapped German and other European military production potential.

6. Continued unsatisfactory volume of U.S. private foreign investment points up urgency of measures—such as those recommended by Randall Commission²—to provide incentive to such investment.

7. The economic impact of falling commodity prices on the economies of raw material producing countries. The near-catastrophic effect of sudden and sharp price fluctuations on Indonesia, Bolivia, and similar countries forcibly illustrated the need for measures to insure greater stability in world commodity prices and the need for greater diversification of the economies of producing countries unduly dependent on a small number of export commodities.

8. Increasing unrest within the Soviet Bloc offered an opportunity to broaden the scope of the Escapee Program, hitherto largely confined to Europe.

9. Extensive reorganization within FOA, both in Washington and in the field, has enabled (a) more intensive attention to the entire range of economic problems which affect attainment of MSP objectives in each region and country; (b) increased decentralization of responsibility to the field; and (c) a 25% reduction of FOA overhead in Washington and Europe while the number of actual workers in the field increased by 35%.

[Here follow two charts: one on projected declines in Mutual Security Program aid levels for fiscal year 1955; the other on MDAP shipments for calendar years 1950–1953.]

Europe

a. the military defense of western europe

1. NATO Countries and Germany

a. NATO Objectives and Forces

The NATO Military Committee has stated (MC 45, December 1952³) that the NATO military buildup is “designed to fulfill two purposes; firstly, together with the complementary threat of Allied atomic air bombing, to deter the Soviet from going to war; and secondly, in the event of war, to provide sufficient initial protection to the NATO area to enable mobilization and expansion of the overall power of the Treaty Nations to take place”. The present military objective of the U.S. is, in consonance with NATO defense plans, to press for the early effective organization and readiness of armed forces of the EDC, including The Federal Republic of Germany.

These objectives remained basically unchanged during the period under review; and efforts were continued to raise, organize, equip, train and maintain the forces specified as necessary for the defense of the NAT area in defense plans approved by NATO. The necessity of maintaining and improving the combat effectiveness of forces in being was emphasized, together with the provision for necessary further growth through inclusion of German forces in the NATO defense complex. Substantial progress toward this latter objective was precluded by failure to conclude firm plans for German participation.

The force goals established by the 1952 Annual Review and the forces actually in being as of December 31, 1953, are shown below. In addition the table indicates the new force goals set by the 1953 AR, showing forces firmly agreed to for 1954; tentatively established for 1955; and provisionally set for 1956.

NATO Force Goals (excluding U.S. and Canada)

	Goal 12/31 1953	Forces in being 12/31/53	Goal 12/31 1954	Goal 12/31 1955	Goal 12/31 1956
Army	90⅓ Div.	89⅔	93	94⅔	95
Navy	1326	1350	1531	1667	1737
	Combat Vessels				Combat Vessels
	238 a/c	232	292	304	280 a/c
Air Force	4292 a/c	3990	4800	5454	5556 a/c

1953 NATO Army and Navy goals were met quantitatively though not qualitatively; but there were some Air Force shortfalls, mainly in France, the U.K. and Italy. Despite generally adequate defense budgets, isolated shortfalls were attributable to lagging expenditures or inadequate budgetary provisions, e.g. to some extent in the Netherlands, Portugal, and in Italy where budgetary limitations with regard to the Italian air force were so serious as to compel the U.S. Defense Annual Review Team to recommend shifting funds from other services if the necessary addition to total defense expenditures could not be achieved.

The major 1954 addition to the Army force goals is 1⅓ Dutch divisions; other contemplated additions to Army strength being almost entirely qualitative (e.g. support units). Navy and Air Force plans contemplate moderate further expansion and some modernization.

b. German Participation

Consummation of the German force buildup plan awaits ratification of the EDC treaty. The most recent NSC review of the German defense contribution (NSC 160/1)⁴ uses January 1, 1954 as the planning date for EDC ratification. Since this schedule has not been met, substantial slippage in activation and training of German units, as projected in the NSC study, must be anticipated. Force planning is based on the ultimate need for 12 army groupements, 1,326 front-line aircraft, 140 naval vessels, and proper support forces. The buildup is planned as essentially a two-year buildup, with some exceptions. Meanwhile, there have been formulated the following tentative December 1954 German force goals, having status only as JCS approved planning goals for development of the MDA program through FY 1954: Army—7 Divisions; Navy—56 Combat Vessels and 8 Aircraft; Air Force—978 Front-line Craft.

Preliminary cost estimates for the Germany buildup were included in the Financial Appendix to NSC 160/1. These took account of direct military costs, U.S. and U.K. support costs, costs of other troop support, infrastructure, EDC, commissariat expenses, Berlin contribution and other national costs. The Appendix estimated that Germany might reasonably be expected to make a defense contribution of about five-sixths of the total cost of over $14 billion (which includes $1.6 billion already programmed as U.S. military assistance).

However, the Germans have now submitted to the Ad Hoc Committee of the EDC a financial and utilization plan which estimates buildup costs far in excess of those shown in the Financial Appendix. These estimates, which total about $15.4 billion for a group of expenditures computed in the NSC paper as costing $7.2 billion, are currently being studied by the Ad Hoc Committee. U.S. authorities in Bonn feel that the estimates in the Financial Appendix were extremely conservative, and that actual costs will be somewhere between these estimates and the estimates the Germans themselves are putting forth.

c. Impact of the Mutual Defense Assistance Program on NATO and Germany

(1) Matériel Programs

Not all the NATO forces accepted at the 1953 AR, nor all of the German forces envisioned in the JCS force base, are supported by the FY 1950–54 MDA programs. These programs are geared to support the following:

	NATO	Germany
Army	93 1/6 Divisions	7 Divisions
Navy	400 Combat Vessels	24 Combat Vessels
	139 Maritime Aircraft	8 Maritime Aircraft
Air Force	2994 Frontline Aircraft	978 Frontline Aircraft

These forces will be supplied not only with initial unit equipment to meet screened deficiencies, but with certain maintenance, training and attrition equipment as well as limited reserves of ammunition and equipment.

(2) Deliveries

In dollar value terms, approximately 44% of the funded programs have resulted in shipments of matériel to NATO and Germany, i.e. $13.5 billion programmed and $6.0 billion shipped. This included shipments to the German stockpile which totalled $.4 billion. In the last six months of calendar 1953, shipments amounted to $1.1 billion, almost 20% of total shipments to date. In terms of major items of equipment, the Army has delivered almost 9,000 tanks, 17,000 combat vehicles and 1.3 million small arms and machine guns out of programmed totals of 10,000, 20,500 and 1.7 million respectively. The Navy, due to the long lead time involved in production of vessels, had still to deliver over 50% of its program, principally in the mine-vessel category. The Air Force similarly had about 50% of its program to deliver.

Recent cables from USRO point out that the rate of deliveries of MDAP end-items is lagging below the $350 million monthly level which the U.S. Government had estimated in connection with the 1953 Annual Review. The cables “strongly urge immediate high level consideration of deliveries situation”, because of the possibility that current delivery rates might “cast serious doubt on reliability of U.S. forecasts and . . . . .⁵ lead to misinterpretations of U.S. policy.” However, since the U.S. delivery estimate was based upon European capacity to effectively absorb the equipment, the U.S. is currently conducting studies to determine if in fact additional capacity exists warranting an increase in delivery levels.

(3) Shortages

The Department of Defense is currently undertaking another report, similar to that prepared in February of 1953 by USEUCOM with SHAPE participation, on the status of matériel shortages. Preliminary reports indicate the following items to be of most concern:

Army—Shortages of tanks, ammunition and Howitzers previously constituted serious problems. These shortages have been largely overcome by recent deliveries; however, a small shortage still exists in self-propelled artillery.

Navy—Deliveries of minesweepers have lagged behind forecasts. The present delivery schedule is considered firm, and it is believed that the slippage which has occurred in past forecasts will actually work to the benefit of NATO by allowing a more gradual buildup. Current shipment schedules will largely complete delivery in calendar 1954 of aircraft and ammunition programmed in FY 1950–53. Deliveries in electronics, considering lead times, are improving, and in most cases are compatible with the countries’ current ability to absorb.

Air Force—Shortages in spare parts and ground handling equipment for aircraft have in some instances hindered the operational training programs. Delay in deliveries of RF–84F aircraft is postponing the activation of some tactical reconnaisance units in NATO.

Electronics Equipment—The lack of an established aircraft and warning system within the NATO area has resulted in the electronics and communications equipment being programmed by country rather than in accordance with the requirements of an area system. In addition, lack of facilities and training personnel have prevented the effective use of electronics and communications equipment already delivered. This latter problem has, in part, been corrected as a result of surveys conducted by the Department of the Air Force.

(4) Capability to Absorb

This was cited in NSC 161 as an emerging problem; however, it has improved and shipments previously suspended have been released for delivery.

New storage facilities are being constructed, but it is not yet clear that they will be able to keep abreast of the increased flow of deliveries. As substantial quantities of MDAP items are delivered, the capabilities of the NATO countries to maintain this equipment will be taxed to the utmost. A SHAPE plan, relating to the entire NATO supply and logistics system, and including the establishment of a central storage depot complex, will be ready for submission to member governments for their consideration early in 1954.

(5) Adequacy of Reserves

The ultimate target for war reserves of equipment and ammunition for the NATO country forces is to achieve the capability of covering the first 90 days of a war. No war reserves in either ammunition or equipment had been provided in programs previous to FY 1954. The refined MDA program included sufficient ammunition to provide for a 90-day level for U.S.-provided weapons in all services. In addition the Army provided for 90 days war reserve of equipment for selected items.

Subsequent program adjustments have reduced the level of reserves which can be provided from the FY 1954 program.

(6) Maintenance

The standard of maintenance of MDAP material has varied by country from poor to good. Primary problem areas have been in spare parts, special tools, and test equipment, all of which are being delivered in large enough quantities to enable NATO countries to make headway toward raising their standards of maintenance. Nevertheless, certain critical shortages, such as spare parts and testing equipment, impair adequate maintenance.

(7) Training

By the end of FY 1954, the U.S. will have fulfilled the greater portion of its training obligations for NATO countries. Nevertheless, the deficiency in unit training is serious and unless corrected will seriously hamper the effectiveness of NATO forces. Plans are being formulated to commence a large training program in Germany for all services, once EDC is ratified.

(8) Construction

National military construction programs appear to be keeping abreast of requirements with minor exceptions. The multilateral military construction program (infrastructure) is similarly making rapid progress. As of December 31, airfield construction was over ⅔ completed, while construction of communication facilities, fuel pipelines, naval facilities, etc. was also making significant strides. With the exception of a few relatively insignificant areas, the infrastructure program as a whole was in phase with the buildup of NATO forces and was able to meet fully their requirements under peacetime or wartime conditions.

d. European Financial Support and Defense Production

(1) Defense Expenditures

[Here follows a chart illustrating NATO European defense expenditures for fiscal years 1950–1955.]

In accepting the principle of planning for the “long haul”, in the 1953 Annual Review, the NATO countries concentrated on realistically adapting both force and expenditure goals to politico-economic capabilities. Since the force goals agreed to in the 1953 AR were felt by member countries to be close to the ceiling of capabilities, the effect is a leveling off in planned defense expenditures, in absolute terms. The AR agreed (C–M (53) 166 Final)⁶ “that for the three years to be covered by the 1954 Annual Review it is reasonable to plan on the assumption that defense expenditures on NATO forces will be required at approximately the present level.” For the longer-range outlook, the Council did indicate some hope—as a maximum goal—that defense expenditure increases proportionate to CNP might be possible, although recognizing that “any substantial increase in the proportion of resources devoted to defense seems unlikely”. Actually, defense expenditures of NATO countries (excluding U.S. and Canada) totalled $11.3 billion in FY 1953, more than double the $5.3 billion of FY 1950, and are expected to level off at about $11.7 billion in both FY 1954 and 1955. The proportion of GNP devoted to defense expenditures rose sharply from 5.5% in FY 1950 to 9.1% in FY 1953 and is now leveling off at the same rate in FY 1954, with a slight proportionate drop to 9.0% anticipated in FY 1955.

The main uncertainty posed by this prospect is the problem of the future recurring cost burden to maintain agreed forces. This problem was brought into focus for the first time in the 1953 AR, and will hereafter receive major consideration and analysis in the Annual Review process. The 1953 analysis of this problem is not yet available; but a rough estimate of the recurring costs, exclusive of replacement for obsolescence, is about $10 billion. In addition, appreciable expenditures will be required over the next few years for “completion of the buildup as now planned”, and for qualitative improvements in existing forces. Finally, the factor of obsolescence cannot be ignored and, if the cost of the initial buildup is any criterion, will run to very substantial figures even if spread over a considerable time span. It is doubtful, therefore, that continuing the present levels of country defense budgets will prove adequate to maintain the force levels at the accepted force goals.

(2) Defense Production

(a) NATO countries

Expansion of the European defense production base has been rapid during the past three years, though it is not possible to measure this expansion with any precision. Improvement has been both quantitative and qualitative. New plants have been built, and old plants have been re-equipped to produce modern weapons efficiently. European deliveries for defense hard goods financed with indigenous funds (i.e. exclusive of OSP) increased from $1.1 billion in FY 1951 to a current annual rate of almost $3 billion in FY 1953 and 1954. With few exceptions, such as ammunition facilities, where expansion of capacity to meet wartime needs has been undertaken, more European production capacity exists than can be utilized with the limited funds available. Activation of any significant additional part of this unused capacity is to a large extent dependent on German defense expenditures. The Financial Appendix to NSC 160/1 indicates that German matériel expenditures from 1953–1956 might be $375 million in other EDC countries and $670 million outside of EDC—mostly in U.K.

U.S. offshore procurement for MDAP, which supplements European defense budget financing of military production, has become an increasingly important factor—supporting in FY 1954 an estimated 1/7 of the overall European defense production base. Contracts placed and expenditures were as follows, with orders placed in 15 countries for items such as vessels, aircraft, tanks, artillery, ammunition, and electronics:

	Contracts Placed	Expenditures
FY 1952	$629 million	$3 million
FY 1953	1,500 million	195 million
FY 1954 (est.)	700–800 million	486 million

OSP serves a triple purpose: (a) providing required items of major matériel, comparable in quality to, and often at lower cost than, U.S. items; (b) enabling a fuller utilization of the existing European defense production base, and an important expansion of this base, particularly in the case of ammunition capacity; (c) providing a major source of dollar exchange.

Among the factors considered in awarding contracts in the offshore procurement program have been the NATO Correlated Production Programs (CPP) which thus far have been developed for selected types of army ammunition, aircraft, artillery, vehicles, electronics equipment, and ships. With few exceptions, notably aircraft, these programs have not yet brought about any significant degree of industrial integration in NATO Europe and have been primarily an exercise in the tabling of individual country intention. There is hope, however, that from this meager beginning more truly integrated NATO defense production efforts will result in the future. Excellent individual initiative is being displayed by Norway and Denmark, which are in the process of correlating and integrating certain of their spare parts programs. Efforts to standardize NATO weapons have made some progress recently, with work on a standard 40 mm AA gun and agreement to accept the 30 cal. rifle as NATO standard.

The United States has given varying degrees of support to these programs through offshore procurement, considering each item in the program on its own merits. To date, CPP includes a $560 million joint aircraft program (1675 aircraft), with the U.S. covering about half the cost with FY 1953 MDAP funds. The recommended FY 1954 CPP includes $620 million for 24 selected items of army equipment, and $840 million for 17 ammunition items. U.S. support of about $612 million was recommended; and current U.S. plans earmark $438 million, mostly for ammunition.

(b) German Military Production

The vast and growing economic potential of the Federal Republic thus far supplies only the relatively minor defense contribution represented by occupation costs. Though total industrial production is well above prewar levels, and NSC 160/1 Financial Appendix estimates potential German matériel production at $2 billion, almost no production is currently being tapped for military purposes. While some slight progress was made during the last six months in initiating defense production—Allied control measures restricting German output have been modified to clear the way for placing about $50 million of OSP orders—discouragingly little progress has been made in the direction of substantive planning for the eventual German contribution to Western defense production. Complicating factors include not only Allied restrictions and French fears but the question of timing—i.e. the choice between a rapid force buildup, requiring immediate provision of equipment once EDC is ratified, and a slower buildup in which German defense production could play a greater part.

The eventual pattern of military production in Western Germany will depend in some measure on the strategic and security concerns reflected in the EDC treaty. By agreement, there will be no manufacture of atomic, chemical, and biological weapons in Germany; while production of certain naval vessels, mines, propellants, guided missiles, and military aircraft can only be undertaken after unanimous agreement of the EDC council. No production of aircraft is planned, though a large capacity exists for the manufacture of aircraft spare parts and ground supporting equipment. Production of finished combat vehicles is limited by the two or three-year lead time required. However, German industry can produce transport vehicles, telecommunications equipment, and radio receivers and transmitters in large volume. Ammunition output could get underway rapidly. Production of smaller type naval craft is underway.

Statement Submitted by Director of FOA Without Evaluation by Dept. of Defense

e. Effectiveness of NATO Forces

USEUCOM has presented to the JCS a report on effectiveness of NATO forces, which is currently being analyzed. The Department of Defense is submitting separately to the NSC the results of this analysis, in the form of an annex to this report on the subject “Effectiveness of Forces”.

The views of the NATO Military Committee provide another appraisal of the effectiveness of NATO forces in relation to their mission. . . .

[Here follow three paragraphs indicating in part that the Committee considered in December 1952 that the Alliance had insufficient forces to discharge its mission.]

(End Statement Submitted Without DOD Evaluation)

2. Non-NATO Country Programs Bearing on the Military Defense of Europe

Yugoslavia, Spain, and Austria have programs, supported by U.S. aid, which assist in and add to the general military defense buildup of Western Europe.

a. Objectives and Forces

The U.S. military objective in Yugoslavia is to assist in the equipping and training of military forces which are essential to resist external aggression, and are of direct assistance in defense of the NATO area. To these ends the U.S. is supporting, through its FY 1950–54 MDA programs, only a small portion of the total military force of Yugoslavia which, in terms of land forces, is the largest in Europe this side of the Iron Curtain, comprising as it does 28 divisions. A military effort of the size which the U.S. desires, cannot be maintained through Yugoslav effort alone.

The U.S. objective for Spain is the development of the military potential of Spain’s strategic position for the common defense of the NAT area. Militarily, this objective is to be achieved by two courses of action: (1) development and use of Spanish air and naval bases by the U.S., and (2) strengthening Spanish armed forces through provision of MDAP assistance. Three related agreements to effect these courses of action were signed by Spain and the U.S. in September 1953. Included in the base program, of which only the local currency portion is financed by MSP appropriations, are 7 air bases and 4 naval bases. The MSP economic program is designed partially to offset the inflationary impact of base construction activities. While preliminary negotiations had been undertaken and contracts let, no actual construction had been undertaken as of the date of this report. The total size of the combined economic assistance and military assistance programs, exclusive of the military base construction dollar costs, has been estimated at $465 million to run over a period of 4 years. For FY 1954, MDAP aid is projected at $141 million, economic assistance at $85 million.

The U.S. military program for Austria has been confined to provision of a stockpile for a post-treaty army. Economic aid has been terminated. The status of National Security objectives is fully summarized in NSC 164/1.⁷

b. Impact of U.S. MDAP Assistance

Programmed Forces

The MDA matériel programs through FY 1954 are geared to support the following forces:

	Yugoslavia	Spain	Austria
Army	8 Inf. Div	1 Inf. Div. 2 AAA Reg	2 Constabulary-type Div.
Navy	13 Combatant Vessels	22 Combatant Vessels 1 Marine Reg.
Air Force	263 Frontline Aircraft	3 Day Fighter Sqds.

Deliveries

Shipments to the Yugoslav armed forces, through December 31, totalled $319 million, out of a total program of $780 million, with $98 million occurring during the period July–December 1953. A first token delivery of $15 million, out of a program of $141 million, was initiated for Spain in October of 1953. The matériel for Austria is sent to stockpile “A”, the major portion of which is located in France and Germany under U.S. custody.

Capability to Absorb

Yugoslavia has been able to absorb efficiently all MDAP matériel programmed. No problems are foreseen for Spain or Austria, though in the case of Spain shipments have only just begun, and in the case of Austria shipments are to the previously mentioned stockpile.

Adequacy of Reserves

No war reserves of equipment have been programmed for Yugoslavia, though a 90-day war reserve of ammunition has been programmed for the Army, with other limited ammunition reserves for Navy and Air Force. Spain’s reserves are limited to small amounts for the Navy and Air Force MDA programs. A 30-day ammunition reserve is provided in stockpile “A” for Austria.

Maintenance

Yugoslav maintenance of MDAP equipment supplied has been uneven in quality: good for the Navy, satisfactory for the Army, and poor for the Air Force. Problems have included lack of trained personnel and specialized maintenance equipment. In view of the newness of the Spanish program and the stockpile nature of the Austrian program, no maintenance problems are seen at this time.

Training

Originally problems with regard to training of Yugoslavs were experienced, due in part to suspicion of U.S. More recently, problems are being overcome by admission of mobile training teams. The Spanish training program will be small, consistent with the limited size of the matériel program. An Austrian military force of 8,500 men is being trained . . . .

b. progress toward a stronger europe^*

Europe in 1953 had a good year economically.

(1) Agricultural production in 1953 was 11 percent higher than in 1949/50, and industrial production reached an all-time high—16% above 1950.

(2) Inflation has been contained and internal financial stability in generally improved.

(3) Western Europe’s balance of payments has improved, both overall and with the dollar area. Gold and dollar reserves have increased to $11.3 billion, an improvement of $2.2 billion over December 1952.

(4) Intra-European trade has increased.

However, the following developments show major weaknesses and underline the fact that gains as measured by economic indices have not yet been firmly secured:

(1) Though European defense outlays have more than doubled since 1950, the rate of GNP increase, estimated at about 4% in 1953, is not sufficient to support any further marked expansion in the indigenous defense effort and at the same time provide a substantial improvement in standards of living. Further sizeable GNP increases seem dependent on shifts in political attitudes toward expansion; the easing of trade barriers and major institutional changes in laws, practices and structure of industry.

(2) Consumption and real wage levels have advanced only slightly as compared to the expansion called for by the exigencies of maintaining the NATO effort over the long haul.

[Here follow three charts inserted at this point in the source text. The first depicts graphically the progressive strengthening of Western European economies between 1948 and 1953. The second depicts graphically the growth of Gross National Products. The third depicts United States dollar inputs in Western Europe to make the point that “Increasing U.S. Military Expenditures in Western Europe Cushion the Impact of Decreasing U.S. Economic Aid.”]

(3) A basic dollar imbalance remains, the improvement in the dollar position being due in large part to OSP and other extraordinary dollar receipts, as well as the maintenance of restrictions on dollar imports.

(4) The Intra-European trade-liberalization program (the removal of quantitative restrictions on imports) cannot go much further without major revisions in the EPU payments system to accommodate chronic debtor and creditor relationships; and without a concerted attack on the more difficult barriers of tariffs, exchange rates and hard-currency restrictions.

1. Termination of Direct Economic Aid

The NSC 162/2⁸ assumption that “it should be possible in the near future generally to eliminate most grant aid” is predicated on the condition “if coupled with appropriate U.S. economic and trade policies”. These policies should include (among others) lower tariffs, incentives to increase the flow of private investment abroad, revision of U.S. merchant shipping policies, as well as leadership in encouraging coordinated moves toward convertibility.

Although legislation to implement such policies has not yet been enacted, new allotments of direct economic aid to Western Europe will be terminated (with the exception of Spain, Yugoslavia and Berlin) upon the completion of the FY 1954 program. The phasing out of direct economic aid marks the shifting of initiative and responsibility to the individual countries themselves for the further efforts toward increased production and productivity required if Western Europe is to achieve full economic and defensive strength.

The economic impact of this termination will probably not be felt until after FY 1955, primarily because U.S. military expenditures in Europe, including special defense financing to the U.K. and France, are scheduled to increase sharply as indicated in the following table:

U.S. Extraordinary Expenditures in Western Europe^†

(billion dollars)

	Actuals		Estimates
	FY 1952	FY 1953	FY 1954	FY 1955
Economic Aid and Defense Support (Paid Shipments)	1.604	1.273	.825	.380
Intermediate Type Budget Support (Special Defense Financing & Special Military Support)‡	0	.123	.512	1.005
OSP (Regular)	.003	.071	.317§	.789
Other Military Expenditures	.587	.871	1.029	1.032
Total Extraordinary Dollar Expenditures	2.194	2.338	2.683	3.206

While military expenditures will probably decline after FY 1955, the magnitude of the decline cannot be estimated with any degree of accuracy until firm decisions are made on such issues as the number of U.S. troops that will remain in Europe and U.S. policy on the problem of annual recurring costs.

The continuing pipeline of extraordinary dollar expenditures provides a period of time in which European countries, individually and collectively, can undertake the domestic measures required for a more vigorous expansion of production and a wider European market, needed to put the NATO community on a firm economic foundation. However, the combined psychological impact of (a) the termination of direct economic aid, (b) uncertainty as to future U.S. trade policies, and (c) fears of a U.S. recession are already visible, and contribute to Europe’s reluctance to undertake further expansionary measures. The continuing availability of extraordinary dollar receipts also provides a period of grace for the U.S. to adopt the “appropriate economic and trade policies” which can establish a strengthened NATO Community on a more enduring base, without continued extraordinary grant aid.

2. Production and the Use of Resources

In 1953, Western Europe’s GNP apparently rose about 4%, a rate faster than the 2% increase of 1952, but under the average annual rate of over 6% from 1949 to 1951. Industrial production increased an estimated 5% and agricultural production an estimated 5%. The main rise in production occurred in the last three-quarters of 1953. The striking feature of the past six months was an accelerated rise in output by most of the Western European countries, in contrast to 1952, when Germany alone among the larger countries expanded substantially. Unemployment fell slightly in Western Europe as a whole during 1953, chiefly as the result of reductions in the United Kingdom, Germany and the Netherlands. However, unemployment increased in France, Italy (the particular countries which are specific sources of weakness in the coalition) and in some of the smaller countries.

The GNP increase is still below the OEEC August 1951 target to “increase overall production of Member Countries by 25 percent for the period 1952–56”. The cumulative increase was only about 6% for the first two years combined.

3. Internal Financial Stability, Investment and Consumption

Inflationary pressures were in general contained during 1953 and prices stabilized; despite the fact that consumer demand expanded appreciably, along with increased defense expenditures and higher investments. With the generally improved economic situation, some countries were able to take additional steps to encourage investments without creating new inflationary pressures.

[Here follows a chart depicting net cumulative positions of EPU member countries, December 31, 1951–December 31, 1953.]

4. Trade and Payments

Midway in 1953, OEEC member countries (excluding Turkey, Greece and Switzerland) reported that they expected a current account surplus with the rest of the world of almost $600 million for the year, compared with a surplus of $730 million in 1952 and a deficit of $1.2 billion in 1951. Western Europe as a whole (OEEC member countries, Spain, Yugoslavia and Finland) had a surplus with the United States in the first three-quarters of 1953 of $747 million, compared with a deficit of $418 million in the corresponding period of 1952.^║

The improvement in the external balance is attributable to several factors: U.S. military expenditures in Western Europe (including OSP and special defense financing to France for Indo-China) increased substantially during the year; the terms of trade continued to move in Europe’s favor, although at a much slower rate in the second half of the year; Europe’s imports of primary products—particularly from the U.S.—fell, while its exports to the U.S. increased, stimulated by high levels of U.S. activity; and the increase in agricultural output during 1952–53, especially a bumper grain crop, permitted some import saving, particularly dollar saving.

5. Intra-European Trade

Intra-European trade had by the second quarter of 1953 increased upwards of 25% by volume and 46% by value over the first half of 1950. In this, the trade-liberalization drive of the OEEC, and the payments facilities provided under the European Payments Union have played an important part. As of January 1, 1954, the OEEC Community as a whole had removed 75% of the quantitative quota restrictions on private trade (91% of all trade) among themselves, as contrasted with 65% last spring, although the percentages vary widely among the member countries.

This achievement is due in no small measure to persistent U.S. persuasion and encouragement, backed up by a net direct contribution of $272 million to the EPU in 1950. However, it must be noted (1) that the achievement of the 75% quota liberalization as of January 1, 1954, is virtually three years behind the initial target of February 1, 1951 set by the OEEC Council; and (2) progress cannot go much farther until there is found a more fundamental solution to the chronic debtor relationships which have developed in the EPU. At the October 1953 meeting, the OEEC Council of Ministers reaffirmed the objective of proceeding to complete abolition of quantitative import restrictions between members, but the 100% goal continues to be jeopardized by the French political and economic situation. [Omission in the source text.] Decisions which do involve the German potential are being reached in other intra-European economic institutions concurrently evolving.

[Here follows discussion of the OEEC and the European Coal and Steel Community, further documentation on which is in volume VI, and various measures and selected assistance to weaken Soviet power by such means as an East German Food Program, an escapee program, etc.]

Near East, Africa and South Asia

a. summary of objectives and accomplishments

MSP objectives in the Near East, Africa and South Asia center on (1) strengthening military and internal security forces in certain countries to deter open aggression and violent revolution, and (2) accelerated improvements in living conditions through economic development. Accomplishments to December 31, 1953, include some dramatic successes, like the rescue of Iran from certain bankruptcy and probable revolution and averting widespread famine in Pakistan, and a number of minor successes which can be evaluated only in the perspective of the slowly-developing cumulative impact of economic development programs. In some areas—the Arab refugee problem, Israel economic difficulties—there is no real progress to report.

The military program includes continuing end-item aid and defense support to Greece and Turkey, but the demands of their economic development programs have threatened budget support for present forces, which have not yet reached NATO goals. Weakening of the Iranian army by the previous government has been reversed, but at present it can be expected to provide little more than the maintenance of internal security. Pakistan has requested military aid and indicated interest in a defense pact with Turkey. It appears probable that such a pact will be concluded. Iraq, also, has shown interest in United States military assistance.

b. military assistance

1. Introduction

a. Present Policy

Since the formal recognition by Secretary Dulles last spring that the time and events were not propitious for the achievement of a Middle East Defense Organization, it has become United States policy to develop bilateral defense arrangements with selected countries of the area. The policy conclusions of NSC 162/2 are that, to assure access to oil and to strategic positions in the area, the U.S. should build on the military strength of Turkey, Pakistan, and—to the extent possible—of Iran and Iraq; at the same time assisting in achieving stability in the region by political actions and by limited military, economic, and technical assistance to other countries. The purpose of bilateral military assistance arrangements is, accordingly, to increase the military strength of the region and to provide a nucleus of military power which may be expanded later into a regional defense arrangement whose strongest members would be Turkey and Pakistan. This concept is the basis of the program which is just now being launched.

b. Recent Developments

A U.S. position on aid to Pakistan has been developed between State and Defense and discussions have been held with Turkey and with Pakistan concerning that country’s request for military assistance. This has brightened the prospect of achieving a regional defense arrangement eventually to include Pakistan, Turkey, Iran and Iraq. MDAP funds are earmarked to permit initial military aid programs for Pakistan and Iraq in the general magnitude of $20 million and $10 million respectively, should the outcome of present negotiations so indicate. For Pakistan, FY 1955 program plans call for an additional $5 million in special economic aid to help counteract inflationary pressure from higher defense expenditures.

Programs already exist for Turkey and Iran as well as for Ethiopia and Saudi Arabia. In addition to the planned programs for Pakistan and Iraq, plans are in process of development for programs for Egypt ($25 million), and Lebanon.

Congress appropriated $30 million for use under the new section 202(b) of the Mutual Security Act of 1951, as amended.⁹ To this amount has been added an additional $50 million by transfer from other military funds. Thus a total of $80 million is presently available from FY 1954 funds.

The above figures are, of course, tentative. Adjustments may be made within the total for small programs in Syria, Jordan and Israel.

c. Policy Questions

Certain major policy questions—together with their related military assistance and defense support implications—are in the process of being resolved:

1. Long-run U.S. objectives with respect to India’s role in Middle East defense strategy.

2. Increases, if any, in Force levels which U.S. will support in Turkey to enable that country to carry out its role in Middle East defense.

3. Definition and implementation of the “Northern Tier” defense concept now being developed by JCS.

2. Iran

a. Introduction

The situation in the military field was altered by the change of Government on August 19, 1953.¹⁰ Former Prime Minister Mossedagh had ordered a reduction in the enlisted strength of the Army, transferring a corresponding part of the Army budget to the Gendarmerie, and eliminating three battalions of 155 mm howitzers from the Army. This was reversed by the new Government. The authorized enlisted strength of Army was restored to 125,000.

b. Objectives

The U.S. military objective with regard to Iran is to develop military strength sufficient to (1) maintain internal security, (2) provide some resistance to external aggression, (3) enhance the prestige of the monarchy, and (4) raise the morale of the Iranian Government.

c. Forces

The forces supported by MDA Programs:

• Army: 15 Brigades
• Navy: 8 Combatant Vessels; 3 Maritime Aircraft
• Air Force: 5 Squadrons

d. Progress Summary

Iran has limited ability to absorb military aid (NSC 5402).¹¹ Its forces have been able to absorb the MDAP matériel programmed to date only with great difficulty. Maintenance has been poor. Training has been greatly retarded as a result of the political situation in that country which resulted in Iranian trainees sent to the U.S. being selected for political rather than military qualifications.

e. Effectiveness

“At present Iranian armed forces are capable of maintaining security against any uprising short of a nation-wide tribal revolt” (NSC 5402). (Additional details to be supplied by DOD Annex on Effectiveness of Forces.)

3. Ethiopia

a. Introduction

The stimulus for an Ethiopian military assistance program arose from a U.S. desire to obtain a long term commitment for the use of Asmara airbase in Eritrea. In exchange for such a commitment the U.S. and Ethiopia signed agreements covering both a base program and a military assistance program in May of 1953.

b. Objectives

U.S. military objectives vis-à-vis Ethiopia are to strengthen the armed forces of that country in order to contribute to the (1) security of American military installations in that country and (2) ability of that country to defend itself.

c. Forces

The JCS by memorandum to the Secretary of Defense, dated April 21, 1953,¹² recommended that arms and equipment be furnished to the Ethiopian armed forces in an amount not to exceed $5 million. Since then, the following JSC force basis has been developed: 1 training center and 1 infantry division.

d. MDA Program

The program to date provides only army equipment in the categories of machine guns, small arms, artillery and ammunition.

4. Egypt

In view of Egypt’s strategic location, the U.S. Government, contingent on settlement of the Suez impasse, decided to provide military assistance to Egypt. By letter of July 15, 1953, the President indicated to Prime Minister Naguib that the U.S. would provide military and economic assistance.¹³

No action has been taken to implement this program in light of the continuing controversy between Egypt and United Kingdom on Suez base rights. The program, when firmed up, should have as one of its major objectives the development of Egyptian capability to defend these bases after withdrawal of British forces.

5. Saudi Arabia

The present grant training program is supplementary to a program of providing military equipment on a reimbursable basis. While the difficulties encountered have been severe, given the illiteracy of the trainees, the program has been adhered to, primarily to assure continued Saudi Arabian agreement to use by U.S. forces of the Dharan Air field. The U.S.-proposed agreement to cover a grant end-item program of $5 million was unacceptable to the Saudi Government and the matter is currently at a standstill.

6. Iraq

In January 1954, Iraq was declared eligible to receive grant aid and negotiations for a military assistance program will be initiated shortly.

c. recent economic developments

The most striking features of the diverse economies of the NEA area are (1) the abject poverty of the great mass of the population, and (2) the dangerously slow rate of improvement. The average per capita income in the area is well below $100 annually.

Best estimates show a rise of only 1.6% in aggregate GNP of the NEA area during 1953. Movements in individual countries generally ranged from fair improvement in petroleum-producing areas to stagnation or actual losses in countries dependent on exports of agricultural or mineral products.

The food situation is generally better than it was a year ago, although chronic population pressure persists in several areas, e.g. India-Pakistan, Egypt. A relatively good crop in India permitted a reduction of foodgrain imports from 3.9 million tons in 1952 to less than 2.0 million tons in 1953. In Pakistan a critical food shortage was relieved by the special U.S. wheat program. Prices have declined and hoarded grain has come out of storage. The outlook for the coming harvest is favorable in both India and Pakistan. During 1953 U.S. wheat aid also helped to relieve shortages in Jordan and Libya. A request by Afghanistan for wheat aid is under review.

The void created by Iran’s petroleum shutdown was more than filled by other countries in the area during 1952 and further substantial expansion was achieved in 1953, especially by Iraq, Saudi Arabia and Kuwait. Total crude oil production in the NEA area rose 4% in 1952 and 19% during 1953.

Development of strategic materials and other primary products in Africa is proceeding at a moderate pace. The present stage is one of consolidation following a postwar period of fairly rapid increases in production. The major bottlenecks at present are shortages of skilled workers and transport facilities. Political problems are also impeding development progress in some areas, e.g. French North Africa, Kenya. Post-Korean declines in metal prices have not been a serious factor, because African output is relatively low-cost.

Depressed world market prices in cotton and jute continue to have an adverse effect upon the foreign exchange position of exporting countries—Egypt, Turkey and Pakistan. In Pakistan the loss of foreign exchange reserves was temporarily halted by the U.S. wheat program and by drastic controls which the Pakistan government imposed to cut the value of imports by one-half during 1953.

d. main program areas

1. Greece and Turkey

Impressive economic progress in both Greece and Turkey has continued to strengthen these two NATO countries. Six years of U.S. assistance have dramatically increased production and enabled Greece and Turkey concurrently to maintain their military establishments, to achieve a substantial degree of political and economic stability, and to continue comprehensive development programs. Neither country, however, has yet reached the point in development which will permit a cessation of U.S. economic aid. Both countries are so determined to continue their development programs that when inflationary pressures recently began to build up, they warned that military expenditures would probably have to be reduced. U.S. country teams have recommended continuation of aid thru FY 1957, at a level rate in Turkey and a descending rate in Greece.

2. Arab States and Israel

Continuing border clashes, climaxing in the Qibya raid in October,¹⁴ emphasized the unabated Arab-Israel hostility as the dominant factor contributing to unrest and retarding progress in the Near East. With no prospect for peaceful cooperation, greater emphasis is being placed upon strengthening the economies of all the nations concerned, improving standards of living, and using peaceful, constructive means to forestall international friction in areas of potential conflict. Since water resources are of paramount importance to livelihood in this arid and semi-arid region, settlement of competing claims on the waters of the Jordan River is being given priority treatment.

a. Jordan River Valley Development

A United Nations report for the UNRWA was submitted last fall to the countries concerned, recommending the comprehensive and unified development of the Jordan River valley to irrigate 232 thousand acres of land in Israel, Jordan and Syria and to develop power in 5 hydroelectric plants.

Ambassador Johnston did not succeed in obtaining acceptance of the plan, but did obtain consideration of it. He will return in March to continue negotiations.

b. Palestine Refugees

Though the Jordan and other development plans hold some promise for the future, no actual progress was made during the last half of 1953 in resettling the Arab refugees. UNRWA relief operations continued. The Special Near East Refugee Survey Commission was unable to visit the site of the refugee camps but submitted an interim report in December suggesting that the U.S. continue to support necessary relief measures and fully cooperate in development and execution of a “permanent and practical plan of development.”

c. Technical Cooperation Programs

FOA missions in Israel and the Arab states are proceeding with technical cooperation programs which vary in emphasis and composition depending upon urgency of requirement, degree of receptivity and resources available. In general, special emphasis is placed upon development of water resources and introduction of effective agricultural techniques. The widespread incidence of disease and high rate of illiteracy require programs to provide elementary public health services and practical education facilities. The low level of competence in managing public affairs has made it necessary to introduce technical assistance in public administration.

Noteworthy successes, as well as some failures, have been experienced, but in the larger perspective of U.S. objectives real progress is not yet measurable. In the underdeveloped Near East it has become apparent that strength and stability require development on a broad base, and that it will require several years of cooperative work to create the conditions which will permit solutions to the area’s basic problems.

d. Special Economic Aid

In addition to the technical cooperation programs, FOA assists some countries substantially with special economic grants. Israel’s foreign exchange expenditures continue to be 5 times as great as her earnings; a debt of $400 million, including a short term debt of $73 million, also has to be serviced. External sources such as World Jewry contributions, bond issues, German reparations, and U.S. aid cover the deficit of approximately $220 million per year. During the first half of fiscal 1953, the U.S. contribution was $26.25 million, with a similar amount earmarked for the second half.

In the Arab States, development programs involving aid grants are under consideration. These may reach $25 million for Egypt, $18 million for Syria, Lebanon and Jordan. $3.35 million has been approved for Saudi Arabia. The final decisions will depend in part upon submission of firm programs, and may be influenced by the outcome of the Jordan River development plan, and by resolution of the Suez controversy.

3. Iran

Speedy provision by the United States of $45 million special economic assistance enabled the new Zahedi regime to stabilize and to initiate its programs of reform and development. These funds will provide emergency help thru March 1954. Until the oil dispute is settled and oil production begins to yield income, Iran will require outside assistance. Once a settlement of the oil dispute is reached, rehabilitation of the refinery establishment will, take about six months. Capital requirements are expected to be met from private resources.

Underlying the immediate and urgent fiscal problems are the age-old social and economic conditions: hunger, disease, illiteracy, insecurity. The new regime recognizes the need for development and reform and has given enthusiastic support to the broad technical cooperation program to which U.S. is contributing $23.4 million in the 1954 program.

4. South Asia (India, Pakistan, Afghanistan, Nepal)

a. Summary

[Here follows a chart depicting India’s food situation between 1946 and 1953.]

The MSP continued to be a major instrument of U.S. foreign policy in this crucial sector of the “uncommitted world”. These programs operated in an atmosphere of difficulties arising from a stalemate in the India-Pakistan dispute over Jammu and Kashmir, adverse reactions in India and Afghanistan to Pakistan’s request for U.S. military aid, and failure of the wheat crop in Pakistan. Offsetting these were encouraging evidences of official and popular enthusiasm for U.S. economic aid and technical cooperation in the four countries, testifying to the real though moderate progress being made toward development objectives.

b. India

India, one of the largest, potentially most powerful nations of the world, has a broad development program in which U.S. aid plays a vital though financially minor role. Despite sporadic indications of official coolness on the international front, the Indian attitude toward the FOA program has changed, to a significant degree, from initial suspicion to genuine cooperation and appreciation.

Food has been and will continue to be the most serious problem. Even with a good crop year, it was necessary to import almost 2 million tons of food grains in 1953. Recognizing that the primary element in the increase in food production was favorable weather, some credit is nevertheless attributed to increased use of fertilizers, new methods of cultivation, better seeds, and more and better tools. Continuation and expansion of these influences, plus completion of irrigation works which will bring millions of additional acres under irrigation, are expected to show results of major significance beginning with the 1954 crop year.

Most agricultural extension work, as well as projects in education, health, rural transportation, and so on, is brought to the rural people through the Community Development program. Nearly half the value of total improvements has been from locally contributed labor. The program has met with such success the Indian government is making it a major part of the Five Year Plan.

Unemployment and underemployment in India are chronic, partly due to the high rate of population increase—about 5 million per year. Recent increases in unemployment have led to a new emphasis upon industrialization, and the U.S. has contributed to Indian acceptance of the idea of an Industrial Development Corporation to stimulate private enterprise.

c. Pakistan

[Here follows a chart portraying the levels of United States wheat shipments to Pakistan in 1953.]

When the present government in Pakistan came into power last April, it was already faced with a serious foreign exchange shortage because export earnings from jute and cotton had dropped nearly half. The failure of the wheat crop had brought the country to the verge of famine and political crisis. A large part of the country’s limited foreign exchange resources went for food, with the result that imports had to be cut drastically and, because of loss of customs revenues, the internal expenditure budget had to be reduced. The Six Year Plan of development was discarded and a National Planning Board was set up to formulate a new program.

The U.S. met the wheat crisis by donating up to 1 million tons of wheat, part of which is being sold and the proceeds used for development projects. The first phase of the wheat shipment, 700,000 tons, was 85% complete by 31 December. In addition to local currency generated by wheat sales, and funds for the technical cooperation program, the U.S. is providing a grant of $14.5 million to step up the pace of Pakistan’s economic development. Much progress has been made in gaining the confidence and respect of the officials and the people, and many technical cooperation projects, primarily in agriculture and natural resources, are finally underway or about to start.

d. Afghanistan and Nepal

Afghanistan and Nepal are primitive agricultural economies with very low standards of living. FOA programs are directed toward increasing the food supply, raising living standards, increasing exports, improving communications, health and education.

Without foreign grants or loans, Afghanistan for the past 8 years has invested about $8 million per year in industrial development, chiefly textiles, power and cement. The other major development in the country is the Helmand River Project, financed by Afghanistan plus a $21 million loan from the Export-Import Bank. FOA is assisting with the Helmand River Project by providing assistance in administration, engineering, agriculture, and community development.

5. Africa

The African area of FOA operations embraces the 3 independent countries of Libya, Ethiopia, and Liberia, and dependent territories of the United Kingdom, France, Belgium, Italy and Portugal.

The program objectives in the territories and in the independent countries are essentially the same. In Libya, Ethiopia and Liberia the programs are continuations of those developed in the past years, emphasizing agricultural extension services in Libya; the agricultural program of the Oklahoma A & M College, and the establishment of agricultural schools, an agricultural experiment station in Ethiopia; and public health, agriculture, elementary education and teacher training in Liberia.

The Metropolitan countries, responsible for the development of their territories, have prepared plans within which the FOA technical cooperation programs operate. In the current program, increased attention is being given to improving the health and the welfare of the people of the territories.

[Here follows a map indicating those Middle East international river development programs receiving FOA assistance.]

e. current program emphasis

1. Programs to Fit the Need

Each country in which FOA operates a program is a separate and distinct program problem. Notwithstanding variations among them, almost all countries need assistance to achieve minimum standards of practical education and health and sanitation, all need more food, most need water, all need improvements in public administration. To put some of these programs in a regional perspective, there follow brief discussions of food production, water development, community development, and public administration.

2. Food Production

A priority program objective in the NEA Region is the production of more food. Agriculture programs in each of the countries consist of numerous specific projects to bring more land into cultivation, increase the per capita acre yield, improve quality of production, and improve range lands for animals.

3. Water Resources

a. The Problem

In the current efforts to improve the living standards of the peoples in the NEA Region, the development of water resources is of paramount importance. Since much of the area is arid or semi-arid, agriculture must be based on irrigation; surface water resources must be controlled and ground water resources developed. Plans are already underway for river valley development programs which will cost hundreds of millions of dollars to complete. Some of them are of major political significance because the rivers involved are subjects of international controversies.

b. International Rivers

The following important rivers are the subjects of planning studies and international negotiations, and around the development of them millions of people are building their hopes for the future.

(1) The Indus Basin: A unified plan is now being developed under leadership of the IBRD.

(2) The Helmand River: Development has been underway since 1946, financed by Afghanistan, partly by an EXIM bank loan of $21 million. FOA is assisting with valley development, settlement of peoples, and irrigation structures.

(3) The Jordan River: See page 24.¹⁵

(4) The Nile River: Years of engineering study would be necessary to develop a unified development plan of the Nile. Egypt’s proposal for a high dam at Aswan is estimated to cost some $500 million.

(5) The Tigris-Euphrates Rivers: Iraq is already irrigating some 6 million acres with these waters. The river has not been developed in Syria and Turkey, where the headwaters rise. A unified plan of development would eliminate the source of potential controversy.

c. National Rivers

Plans are underway for development of the Litani River in Lebanon calling for basic structures which will probably cost more than $100 million. …FOA has programmed $1.8 million for the Keradj River project in Iran, which is estimated to cost a total of $30 million from all sources. …¹⁶ India has underway a river basin development program far exceeding the Federal reclamation programs in the United States.

d. Ground Water

In many areas of the Near East, Africa and South Asia, the demands for quick agricultural expansion are resulting in major efforts to locate and exploit underground water resources. Programs are well advanced in Greece and India and are contemplated in Pakistan, Saudi Arabia, and Egypt.

[Here follows brief discussion of community development and public administration programs in the Near East region.]

Far East

a. objectives and setting of msp in the far east

1. General

From its inception, the Mutual Security Program in the Far East (Burma, Formosa, Indochina, Indonesia, Japan, Korea, the Philippines, and Thailand) has faced two major difficulties: (1) the diversity of problems, involving both the countries themselves and the security interests of the US, and (2) lack of regional defense and economic organizations capable of collective action on area problems. The countries have certain common characteristics: threatened or overt communist aggression or subversion; inability to resist communist invasion (or communist supported subversion) without outside assistance; and importance to US security interests.

In the absence of regional organizations, the most important unifying element in facing up to problems of building military defense, furthering economic development, and arresting economic deterioration, is the device of US bilateral assistance arrangements with individual countries. MSP efforts have necessarily concentrated on key countries, although regional considerations have exercised an increasing influence on country programs.

Major US objectives with respect to the Far East are: (a) to prevent any country in the region from passing into the communist orbit; (b) to assist the free countries to develop the will and ability to resist communism from within and without; (c) to assist the governments in their efforts to achieve political and economic stability designed to enlist the support of their own people; (d) to assist in the development of self-supporting economies under independent, representative governments with pro-Western orientation. These guidelines determine the nature and scope of MSP activities in the area.

It must be recognized, however, that US objectives are not fully coincident with the aspirations of the leaders of several countries in the area, notably in Formosa and Korea. The NGRC’s principal objective is to find the necessary strength to return to the mainland, whereas present US policy is based on the concept of a strategic reserve with more limited offensive capabilities. The Republic of Korea considers the unification of Korea its overriding objective, and has called for fulfillment of this objective through military means; US policy is to work through peaceful means toward eventual unification under an independent democratic government.

2. Regional Integration

In late November, Rhee and Chiang Kai-shek jointly proposed a NATO-type regional defense organization encompassing all anti-communist governments in the Far East. The proposal has not resulted in any military pact, nor does it have US sponsorship at this time. The US would probably be expected to provide funds.

The closest approach to a regional economic organization—the UN Economic Commission for Asia and the Far East—provides a forum for discussion of production and marketing problems, development programs, trade relationships, monetary arrangements, and regional integration. No progress has been made in developing an organization comparable to OEEC. Economic unification of the area depends substantially on Japan’s assuming to an increasing degree the role of principal supplier of consumer goods and principal consumer of raw materials. In 1953, high Japanese prices and increased competition from Western sources retarded Japan’s exports to the area. The total volume of intra-regional trade is declining rather than increasing, the rise in Japan-Formosa trade being the major exception.

3. MSP Setting

In the absence of regional organizations capable of attacking the pressing economic and military problems, MSP efforts have necessarily concentrated on key problems in individual countries. The MSP ranges from technical cooperation with modest provision of equipment (Indonesia) to major military assistance and defense support (e.g. Formosa, where US aid is supporting the continued existence of the NGRC). Major emphasis has centered on military assistance to the French and Associated States forces in Indochina—the key to the security of Southeast and South Asia; and developing and maintaining NGRC forces on Formosa. Of real but restricted value in Indochina, economic support of the military effort has been of crucial importance in Formosa.

Thailand and the Philippines are also receiving both military assistance and economic and technical assistance. Indonesia receives aid under the technical assistance program. The Burma program has been discontinued (at Burma’s request) and is being phased out.

Key programs in Korea and Japan will assume their true stature in the months ahead. The Korean program, to date a reasonably effective relief operation under the “disease and unrest” formula, must now be tailored to meet the need for gradual industrial rehabilitation while providing the consumer goods necessary to combat mounting inflationary pressures. The US-Japanese military assistance agreement will ultimately lead to an increased Japanese defense force and defense production. Concurrently, the US interest demands that all possible steps be taken to further the integration of the Japanese economy with the rest of free Asia.

[Here follows a country-by-country discussion of the military situation in the Far East. For documentation on this topic, see volumes XII–XV.]

c. economic programs and problems

1. Objectives and Highlights

FOA assistance is keyed to specific objectives in each country receiving aid. The broad objectives of US aid programs are: (a) to increase political and economic stability; (b) to make full and efficient use of available resources; (c) to help increase the effectiveness of local governments and thereby broaden their popular support; (d) to stimulate increased agricultural and industrial production; and (e) in countries receiving military aid, to facilitate assumption by them of an increased share of responsibility for their own defense and for defense of the area. Several divergent trends are evident.

(a) A number of Far Eastern countries face balance of payments difficulties which, in the absence of extraordinary dollar expenditures (or, in the case of Indochina, franc expenditures) would have grave consequences.

(b) Continuing declines in world prices of raw materials threaten development plans of countries in Southeast Asia; failure of these countries to find outlets for their products could imperil economic and political stability.

(c) With few exceptions, agricultural production has been restored to or has surpassed prewar levels. Progress in development of marketing, distribution, and credit facilities is notably absent, with the exception of limited beginnings in the Philippines.

(d) Moderate but spotty progress has been achieved in the vital field of public administration, particularly in the fiscal field.

(e) Levels of foreign private investment remain low, in consequence of physical insecurity and unfavorable investment climate.

2. Payments Imbalance

The most disturbing feature of the Far Eastern economic situation in 1953 was the sharply increasing payments deficit—an increase which encompassed rising imports, declining exports, and a drop in net invisibles (apart from US Government expenditures other than grants and loans). The following summary table indicates the magnitude and composition of the imbalance (figures in millions of dollars):

	CY 1952	CY 1953
1. Area exports	3461	3328
2. Area imports	–4837	–5072
3. Area trade balance (1–2)	–1376	–1744
4. Area net invisibles (excluding US Government expenditures other than grants and loans)	–406	–438
5. “Normal” current accounts balance (3+4)	–1782	–2182
6. US Government expenditures (other than grants and loans)	991	1045
7. Area net invisibles (4 + 6)	585	607
8. Current accounts balance including US Government expenditures other than grants and loans (3+7)	–791	–1137
9. French Government expenditures in Indochina (made possible by US aid to France in support of Indochina war effort)	663	457
10. Covered from all other sources (including capital transactions and US economic and technical assistance)	–128	–680

[Here follows a chart indicating that insofar as the Far East was concerned, “U.S. Dollar Input in FY 1954 … Will Directly or Indirectly Cover Over Four-Fifths of Area Payments Deficit”.]

The area trade gap in 1953 approximated $1.74 billion—27% larger than in 1952. Japan’s heavy import surplus accounted for 65% of the area’s total trade imbalance; Indochina and Korea (with a combined import surplus of nearly $650 million) showed imports which were respectively 5 and 8 times as large as exports. Only Burma and Indonesia showed slight export surpluses.

The 1953 payments gap was narrowed by net invisibles receipts of about $600 million, leaving a net payments deficit—excluding US aid programs—of over $1.1 billion. Present indications are that the gap in fiscal 1954 will be somewhat larger than that in calendar 1953, with trade and normal invisibles continuing at the 1953 rate, and a slight decline in US Government expenditures other than grants and loans.

Excluding military end-items, FY 1954 US aid programs for the Far East provide about $836 million in new funds and unexpended obligations from previous years. Actual expenditures for supplies and equipment in FY 1954 are expected to amount to about $337 million. To this should be added $450 million in French franc payments in Indochina, made possible by US budgetary assistance to France in support of the Indochina war. Thus, US assistance programs will directly or indirectly provide a total of about $787 million to meet the Far East trade and payments gap in FY 1954.

	FY 1954
1. “Normal” current accounts balance (line 5 in preceding table)	–2182
2. US Government expenditures other than grants and loans	969
3. Current accounts balance including such expenditures	–1213
4. Direct US support: Expenditures for supplies and equipment under US assistance programs	337
5. Indirect US support: French Government expenditures in Indochina	450
6. Total US dollar input	1756
7. Covered from all other sources	426

Two facts stand out sharply: (1) US economic and technical assistance programs in FY 1954 will cover almost two-thirds of the $1213 million current accounts imbalance in the Far East as a whole; (2) even more significant, the apparently favorable invisibles balance is made possible solely by virtue of massive extraordinary US dollar expenditures above and beyond US assistance programs. These expenditures flow from Allied Force personnel expenditures, maintenance costs for US forces, UN procurement, and military construction activities in Japan; US Army hwan purchases in Korea; veterans, US War Claims Commission, and military payments in the Philippines; and modest but growing MDAP offshore procurement in Japan and Formosa. Totaling $1045 million in 1953 and about $970 million in 1954, these expenditures outweigh the economic aid program in meeting the area payments problem. Continuation of these expenditures is largely dependent upon strategic military decisions—locus of military production, deployment of US forces, etc. Nevertheless, future plans for economic development in the Far East must to a considerable degree take account of these decisions—with their inevitable economic impact. Both present and projected levels of US military, economic, and technical assistance grant aid, taken by themselves, represent a gross understatement of the actual US dollar input toward the stability of the Far East.

[Here follows a chart depicting the Far East trade gap between 1950 and 1953.]

The US plans to remove two army divisions from Korea in 1954, resulting in an estimated decline in special dollar payments from $120 million in 1953 to $30 million per year in the future. Extraordinary US dollar expenditures in Japan are also expected to decline after 1954, as a result of the termination of hostilities in Korea. Special expenditures in the Philippines will taper off gradually after 1955; veterans’ payments, now about $100 million annually, are expected to drop. Area-wise, it appears that unless radical improvement is made in trade and payments balances in the next 12–18 months, the economic impact of declining US dollar expenditures may prove to be serious.

3. Marketing Problems

(a) Raw Materials

Falling sales and declining world prices of raw materials during 1953 have seriously reduced foreign exchange earnings of countries of Southeast Asia. Tin and rubber prices fell by a third in 1953; rice has fallen by 15%, and is expected to drop 20% from the present figure. Burma (rice), Thailand (tin, rubber, rice), and Indonesia (tin, rubber) were particularly hard hit; Indonesia, with exchange reserves already dangerously low, is in serious difficulty. In addition, the expected US decision to discontinue purchase of tungsten under GSA contract poses problems for Korea and, to a lesser extent, Thailand.

Marketing failures are in some cases attributable to factors beyond the control of the exporting nations. Termination of tin purchases for the US stockpile left world tin production a full 25% above present or prospective demand. Rubber, too, is seriously affected by virtual cessation of US stockpile purchases, although in this case the long range demand outlook is more favorable.

Rice is faced with increasing competition from North American grain surpluses and unwillingness of Japan and India—normal importing nations—to pay the still inflated prices. In addition, virtual self-sufficiency in rice in the Philippines and Korea, and increased rice production in Indonesia has further reduced the potential export market. Large carryover stocks and declining salability abroad have depressed domestic prices in Burma and Thailand, interfered with normal movements from farmer to market, and strained storage capacity. The poor crop in Japan may offer a partial and temporary solution to the problem of surplus rice in Thailand, and particularly in Burma. Burmese rice is acceptable to the Japanese—at a price. One result of substantially increased purchases from Burma would be a decline in sales to Japan of US rice. If a distressed US rice market were to result in anything appearing to be a US rice-disposal program, the political and psychological impact in Southeast Asia would be serious. Indeed, US loans and grants of wheat are already having an adverse effect in the rice-exporting countries with which, in a sense, the US is competitive.

Significantly, many of the countries affected by marketing failures have received trade offers from communist China. Indonesia has even concluded a trade agreement with China, calling for shipment of tin and rubber, among other items, although to date no shipments have been made. Continuation of the marketing impasse might result in acceptance of communist trade offers, with concomitantly increased dependence on the Soviet Bloc.

(b) Manufactured Goods

The overwhelming bulk of Far Eastern industrial capacity is concentrated in Japan, which formerly supplied much of the area’s needs for manufactured goods. While Japanese industrial production in 1953 was 15% higher than in 1952, and 48% higher than prewar, high domestic prices made export markets less attractive, and Japanese products became less competitive. Western Europe and North America supplied an increasing proportion of Japan’s “normal” export market; further, the underdeveloped countries of the area are with few exceptions attempting economic diversification and reduction in imports of consumer goods.

(c) Impact

Area marketing problems have not yet been resolved. It is clear, however, that low quality and/or high cost are rendering exports of Far Eastern countries uncompetitive vis-à-vis cheaper or more readily available substitutes. Increased production has not been achieved; shortage of capital, high interest rates, and internal inflationary pressures have kept production and marketing cost high. Further, excessive reliance on one or two commodities has rendered the raw materials producers excessively vulnerable to fluctuating demand and shifts in terms of trade.

[Here follows a chart indicating various aspects of rice production in “Free Asia” with 1938 and 1953 used as contrasting base years.]

In recognition of the marketing problem, the US is assisting in stabilizing markets for tin and rubber. While a recent NSC decision precludes US participation in the International Tin Agreement favored by the producing nations, some 40,000 tons of non-stockpile tin now held by RFC will be insulated from the market, together with 20,000 tons to be purchased from Indonesia—withdrawals to be made only at the direction of the President. The rubber market has been bolstered by revisions in stockpile rotation practices, reductions in mandatory use of synthetic rubber, and shutdown of US-owned alcohol rubber plants.

Resolution of the long-range problems facing the underdeveloped countries of Southeast Asia lies, in large measure, in coordinated economic diversification and solution of the marketing impasse. Funds for such diversification will flow only in part from external grants and loans and from private foreign capital investment. More importantly, they must flow from public and private local capital. Failure to solve the problem of marketing the raw materials produced by these countries would seriously imperil the US objective of increasing economic, political, and social stability. Since declining export sales are directly reflected in national income and government revenues, these countries would be unwilling or unable to devote needed resources to the implementation of development plans. In short, continuation of the 1953 marketing failures could result in retrogression of the Far East toward economic and political crisis in place of the planned advance to more solid ground via development programs.

4. Agricultural Production

Area-wise, the most favorable development during 1953 was the general rise in agricultural production. While Japan suffered a 20% failure in the rice crop (a loss of $300 million) and a $50 million decline in other grains, every other country in the area held even with or showed a marked rise over general agricultural production in the previous year, with food production improvement even more pronounced. Thailand showed a total agricultural production index of 181 (1935–39 = 100); the Philippines (125) and Indonesia (114) were also well above prewar; Korea, with an index of 95, showed a 14% improvement over 1952—percentagewise the largest improvement in the area.

This favorable picture results from exceptionally good conditions this year, and should not be regarded as a trend. Furthermore, population increases have more than wiped out these production gains on a per capita basis. Only Thailand, with an index of 138, showed per capita production above prewar levels. Indonesia’s per capita general index of 97 appeared relatively close to prewar, although the figure was inflated by heavy production of industrial agricultural commodities, and per capita food production was only about 88% of prewar.

5. Public Administration

In the final analysis, the struggle between the Free World and the Soviet Bloc for the allegiance of the Far East depends on the effectiveness of the local governments and the extent of their popular support. The technical assistance program to assist in increasing government effectiveness may have a greater ultimate impact than physical shipments of supplies and equipment.

Japan excepted, the Far East faces a serious lack of trained technical personnel at nearly all levels. This lack underlies the serious internal weaknesses in the organizational structure and administrative procedures of both central and provincial governments throughout the area. While recognizing these deficiencies, the governments of several of these nations have been reluctant to request extensive US technical guidance in a field which appears to impinge on national sovereignty. Hopefully, this reluctance appears to be breaking down, as (1) the need for better use of all available resources has become more clearly evident, (2) host governments have begun to assume more responsibility for mutually sponsored economic and social development programs in public health, agricultural extension, and similar areas, and (3) the impediments to progress posed by inequities and inadequacies of existing statistical practices, budget techniques, tax collection methods and tax laws have become more glaringly apparent.

Progress in Formosa in 1953 was impressive in contrast with the area average. Military budgets and expenditures were brought more under civilian control and total budget estimates are the most carefully calculated and justified in Chinese history. The reorganized Economic Stabilization Board provides a more effective central source for economic planning. The US concept of a joint import program was adopted to enable more efficient use of foreign exchange for development purposes. The land reform program reached the stage of actual transfer of farm land to over 200,000 new owners. US recommendations to increase revenues were put into practice to meet the current budget deficit, and the government moved toward adoption of a more realistic exchange rate. The FOA program is thus approaching the stage where development of capacity for self-support can take equal priority with maintenance of economic stability as a focus of US attention.

In the Philippines, progress in public administration projects was accelerated. The Government was more receptive to technical assistance in labor, fiscal, and trade policy; and progress was made in the development of facilities for rural credit, implementation of tax measures, improvement in import control administration, and implementation of the Industrial Peace Act. With the advent of the Magsaysay Administration, US technicians were requested to assist in government streamlining. Revitalization of the National Economic Council, with extended authority over the country’s economic development program, is expected to be the first product of this technical collaboration.

On the other hand, progress in improving public administration in Indochina, Thailand, and Indonesia has been slight or non-existent. In Indochina, the Pau accords¹⁷ continue to hamper the Associated States from requesting US technical guidance at the policy level in public administration, fiscal, and related fields, although FOA programs have contributed to strengthening the services of individual ministries. War conditions have forced concentration of the aid program into areas of direct need—transportation, refugee care, health, sanitation, agriculture, etc.—with little progress toward resource development, fiscal, or financial reform.

Thailand has been slow in seeking US guidance in public administration, with the minor exception of advice in tax collection methods. Indonesia may request aid in the broad public administration field under the FY 1954 program.

Developments in the Philippines and Formosa constitute the end-product of three years of US technical assistance. Lasting improvement in the fields of public administration, fiscal and budget measures, taxation administration, etc., is not a short run matter. While it is unwise to generalize from specific instances, the possibility should not be overlooked that, in matters appearing to touch national sovereignty, more rapid progress might be achieved by UN than by US technicians.

6. Private Investment

Generation of internal capital is difficult in all of the underdeveloped nations of the Far East by reason of low average income and almost total lack of mechanisms for accumulating private savings. As such mechanisms develop, the rate of domestic private investment may be expected slowly to increase; in the interim, economic development will depend largely upon local and foreign public capital, and eventually, private foreign investment.

The general insecurity of much of the Far East continues to preclude extensive private foreign investment. Unfavorable investment climate is a major barrier in several countries. On the material side, the inadequacy of road, rail, power, and port facilities must be overcome through public capital investment before extensive external or internal private capital can be employed. Equally important is the need to remedy the institutional barriers to investment arising from the shortage of managerial and technical skills, inadequate public services, disease incidence, and low productivity.

Most countries in the area continue to pay at least lip service to the concept of private foreign investment as a major tool in their economic—and particularly industrial—development programs. Indonesia, for example, is reportedly on the point of revising the investment laws to attract outside capital; the Chinese Government on Formosa has acknowledged the inadequacy of its foreign investment legislation, and is actively considering a new US-sponsored law.

On balance, however, recent progress has not been encouraging. On the plus side, some US private capital has finally moved into Formosa, although the volume is still small; US petroleum companies have increased their prior investments in Indonesia; US investors are displaying more active interest in Japan, although Japanese authorities are reluctant to accept foreign control of enterprise. The volume of foreign investment in the area has not been large, however; the total value of US direct private investment (including reinvested earnings of earlier investments) has in no year since the war exceeded $75 million. Incomplete figures for 1953 indicate a considerable shortfall from that amount, with Japan and Indonesia as major recipients. Nor does the immediate future appear brighter: neither Burma nor Thailand possesses the necessary facilities to attract outside capital in substantial volume; both Korea and Indochina appear to be too risky from a security standpoint. Japan, Formosa, and the Philippines appear in position to receive favorable consideration by foreign investors. Indonesia’s development potential may in time attract large-scale private investment; at present, with the possible exception of further petroleum development, most investment possibilities appear to lie in areas where foreign capital would not find it prudent to invest.

Latin America

a. u.s. objectives and courses of action

The Milton Eisenhower visit¹⁸ was a major political and economic event of the year in Latin America. It has contributed to a new spirit of optimism and franker understanding of mutual problems.

U.S. economic objectives and courses of action with respect to Latin America as stated in NSC 144/1,¹⁹ have been confirmed and further articulated in Dr. Eisenhower’s recommendations.

In several areas the Eisenhower recommendations go beyond previously documented policy. The principal recommendations involving either change in policy or substantial shift in emphasis are the following:

1. A long-range basic materials policy permitting purchases for enlarged stockpiles when prices are declining. (Present stockpiling policy does not envisage stockpiling procurement beyond the calculated goals for the subsidiary purpose of international commodity market stabilization.)

2. Maintenance of a national lending institution to make sound development loans which are in our national interest, but which might not be made by an international agency. (This would require changing the present policy under which the Export-Import Bank operates or establishment of a new U.S. lending agency.)

3. Expansion of the technical cooperation problem in Latin America. (Present NSC policy calls for “Continuing the program of technical assistance to the area, but designing individual projects within the capability of the particular country concerned”.)

4. Assigning the consultative part of the technical cooperation task, whenever possible to American universities. (Now done in only a few cases.)

5. Withdrawal of U.S. personnel when a particular project is well established. Dr. Eisenhower states that this is the present policy but that it is not always followed.

The President has expressed his general approval of the Milton Eisenhower report and has asked FOA to implement those recommendations which are within present policy and to give thorough consideration to those recommendations which would require new policy decisions. Development of specific steps to implement the Milton Eisenhower recommendations was the main work of the Lima Conference of USOM Directors of January 13–19.

b. economic trends

Latin America’s remarkable postwar economic growth is evident in the average annual increase of 5.6% in the area’s gross national product at constant prices from 1946 through 1951. The period of rapid progress ended abruptly, however, with overall GNP actually declining in real terms during 1952 and barely recovering to the 1951 level in 1953.

[Here follows a chart indicating the way in which population increases outpaced the rise in gross national product and food production in Latin America between 1950 and 1953.]

In the absence of production expansion, the persistent annual population increase of 2.5% led to reductions in the average Latin American standard of living as measured by per capita income in both 1952 and 1953. The declines generally took the form of reduced availability of food. FOA estimates average Latin American per capita GNP of $318 in 1953.

The recent slackening of economic progress relates in part to imbalances generated by the development efforts of the Latin American countries themselves and in part to changes in external factors such as international commodity markets.

1. Problems of Balanced Expansion

The numerous recent evidences of imbalance in Latin American development include payments crises, inflation, food and power shortages, and reduced petroleum production.

Although Latin America’s aggregate holdings of gold and dollars increased by an estimated $252 million during 1953, critical payments situations developed in several countries, notably Brazil and Bolivia. Moreover, the overall rise in reserves would not have occurred without the Export-Import Bank’s loan of $300 million to Brazil necessitated by a pressing backlog of commercial debts. In Peru, unfavorable year-end trends brought the sol-dollar exchange rate from 17.85 in October to 21.89 on January 26th. The President of Peru has requested a short term stabilization loan from the U.S. Treasury, particularly with a view to improving psychological attitudes on the exchange market.

Inflation is a problem of serious proportions in Bolivia and Paraguay. The cost of living has risen by 135% in La Paz and 72% in Asuncion during the past year. Inflationary pressures are continuing to a lesser, but still critical, extent in Brazil and Chile.

Food supply has become a major problem owing to population growth and under-emphasis on agricultural development. Food output per capita in 1952–53 was only 96% of the prewar quantity. Chronic food deficits exist in some countries, e.g. Haiti, and famine conditions have occasionally developed in various regions, e.g., the food shortage in early 1952 causing the migration of some 300,000 persons from northeastern Brazil.

Electric power rationing is a common necessity in Latin American cities. In view of the great need for rapid expansion in this sector, the rise of 8.7% in production during 1953 appears small in comparison with the increase of 11.5% achieved in the U.S.

Latin American production of crude oil declined about 2% in 1953 as compared with average annual increases of 11% from 1949 through 1952. Reduced levels of output were recorded not only by the major producer, Venezuela, but also in Bolivia, Mexico, and Peru. Latin American heavy crudes were facing soft markets with Middle East production substantially increased and U.S. imports reduced. The reversal of the production trend represents a foreign exchange loss and also aggravates fuel and energy shortages.

2. Trade and Commodity Problems

Although strengthened and diversified by post war programs for domestic development, most Latin American economies are still dominated by international commodity markets. Exports of primary goods are the principal source of income to finance imports for current consumption and equipment required in implementation of development projects.

Substantial improvement in terms of trade was a major dynamic factor in Latin America’s wartime and postwar economic growth. In October 1953 the area’s terms of trade were still 64% more favorable than in 1938, following a decline of about 10% from the average in the peak year 1951. Post Korean price developments have had little impact on the aggregate Latin American terms of trade, but the effects in individual countries have ranged from crisis in tin-exporting Bolivia to general prosperity in the coffee-exporting countries.

The Latin American countries are aware of U.S. policy directed toward liberalization of trade and are disturbed by recent actual or proposed increases in U.S. import restrictions on lead, zinc, fuel oil, wool and oats. A number of individual trade and commodity problems continue to irritate economic relations between the U.S. and some of the Latin American countries. Uruguay, for example, has objected strongly to the U.S. decision that the preferential treatment by Uruguay of wool top exports was tantamount to a subsidy and that a compensatory duty on such imports was mandatory. Chile complained formally to the State Department regarding the alleged loss of her nitrate market in Greece due to unfair competition from U.S. exports of ammonium sulphate produced in plants which were purchased by present owners from the U.S. Government at 20% of cost. The Chilean Government has also felt that we should buy for stockpile in return for their promise to solve the internal copper problem and not to sell to Russia.

c. the fundamental problem—economic development

The promotion of rapid and balanced economic development on the basis of sound policy and planning is the principal objective of FOA in Latin America.

Latin America’s potential for development has been demonstrated by postwar progress. The need for even more rapid development is evident in all of the available indicators of living standards. The insistent demands of the population for immediate economic improvement have an important bearing on internal politics and are of great importance in U.S. relations with the Latin American countries.

Development progress depends on three principal factors, all of which may be affected by internal political considerations in the Latin American countries: (1) realistic country development plans, (2) availability of investment capital, and (3) technical progress.

1. Country Development Plans

A majority of the Latin American countries now have economic development plans and agencies charged with coordinating their implementation.

Experience of Latin American governments in the development field has led to a new awareness of the need for balanced growth of industry, food supply, fuel and energy sources, and transport facilities. One major error in past planning has been corrected by new emphasis on food production in some countries, e.g. Mexico, Argentina, and Chile. Regional planning efforts by the Central American republics, by Brazil, Peru, Chile, and Argentina may or may not be another constructive step, depending on the nature of the results.

FOA has sought to improve country planning, particularly through provision of the technical knowledge on which country government decisions could be based and by advising governments on means of organizing effectively for development planning. U.S. responsibility for actual planning decisions has usually been avoided, however, except in response to specific invitation as in the case of the Joint Development Commission in Brazil. International organizations have a unique opportunity in this field because their advice is likely to be more acceptable than that of any one government.

2. The Need for Capital

Realization of Latin America’s potential for economic development will require a huge investment of private and public capital from both domestic and foreign sources over an extended period. Since World War II total domestic and foreign investment in Latin America has averaged about $7 billion annually, with domestic investment accounting for over 90% of the total.

a. Domestic Investment

Over 90% of total investment in Latin America since World War II has been provided by domestic capital. From 1946 through 1952 the Latin American countries invested an average of some 16% of their GNP annually. Private investment accounts for the major portion of domestic capital formation, although in recent years government investment has increased in quantitative and qualitative importance. A substantial share of domestic investment has taken the form of relatively unproductive types of construction, speculative commercial ventures, and investments in consumer goods industries not directly serving development purposes.

b. Foreign Investment

[Here follows a chart indicating various aspects of the Latin American investment situation between 1950 and 1953.]

The low ratio of foreign to total investment in Latin America obscures the importance of foreign capital, which brings with it technical skills and has usually entered fields of particular importance to economic development. Foreign capital has also encouraged the flow of domestic capital into jointly financed development projects.

(1) Public Loans

Until 1948 the U.S. Export-Import Bank was the principal source of foreign public loans to Latin American countries for economic development. Since then the IBRD has assumed gradually increasing importance in this field and is currently making development loans in Latin America on a substantially larger scale than the Export-Import Bank. Present U.S. policy requires the Export-Import Bank to refer applicants for development loans to IBRD. Dr. Eisenhower’s recommendations, however, point out the need for a U.S. lending agency to make development loans in the U.S. national interest which might not be made by IBRD.

(a) International Bank

IBRD loans to Latin American countries through December 31, 1953, totalled $446.8 million, of which $76.6 million was granted during 1953. Nearly 70% of the total investment is in electric power development with the balance spread out over railroads, highways, industry, agriculture, and ports.

(b) Export-Import Bank

Net active credit authorizations of the Export-Import Bank to Latin America as of December 31, 1953 amounted to $1,348 million, of which less than 10% was for electric power. Latin American industry has received loans totalling $244.2 million, with major emphasis on steel in Brazil, Chile, and Mexico. With the exception of a $300 million loan for Brazil, the Export-Import Bank’s new authorizations in Latin America were extremely limited during 1953—$17.3 million—as compared with the annual average of $126.7 million from 1946 through 1952.

(2) U.S. Grant Aid for Basic Public Works

During World War II, with a view to effecting essential highway construction in the U.S. national interest, the U.S. undertook to contribute grant funds toward the financing of the Rama Road in Nicaragua and the Inter-American Highway. Total U.S. investment to date is $5 million in the Rama Road and $47 million in the Inter-American Highway. Estimated further cost to the U.S. before completion is $3 million for the former and $56 million for the latter.

(3) Private Investment

[Here follows a chart depicting the distribution of United States direct private investment to Latin America as of December 31, 1952.]

Latin America shared in the accelerated growth of U.S. private direct investment abroad during 1950–52, but to lesser extent than other areas, (i.e. up 25% as compared with 48% elsewhere). The total book value is now about $6 billion with Venezuela and Brazil each accounting for over $1 billion. The Brazilian total rose from $588 million at end of 1949 to $1,013 million at end of 1952. Petroleum is still the principal sector (over one-fourth of the Latin American total), but investments in manufacturing and in mining have been gaining rapidly in recent years.

During 1952 U.S. private direct investment in Latin America amounted to $582 million, of which $278 million represented net inflow of new capital and $304 million undistributed subsidiary earnings. In 1953 estimated net inflow of new capital dropped to $113 million, with undistributed earnings staying at $304 million. Recent changes in the private investment climate appear to be generally unfavorable. An intense spirit of economic nationalism continues to operate against the desire and the need for development.

Although the main responsibility for improving the private investment climate must rest with the country governments, there are a number of important U.S. measures in effect or being developed to increase the incentive of U.S. investors. Since the fundamental incentive for private investment is the anticipation of favorable markets, the major potential U.S. contribution in this field lies in fuller implementation of the established policy of encouraging Latin America exports to the U.S. The MSP investment guarantee program, thus far in Latin America limited to a contract with Haiti, will be given a further trial with coverage extended to risks of war, revolution, and insurrection (as recommended by the Randall Commission), in addition to the present coverage for risks of expropriation and inconvertibility. Another possibility for U.S. action is through tax incentive measures as recommended by Dr. Eisenhower and the Randall Commission. Finally, opportunities frequently arise for private investment directly related to U.S. technical assistance programs, e.g. the du Pont plant for insecticides in Peru, Bethlehem’s investment in the manganese mines of Amapa in Brazil.

3. The Technical Base

U.S. assistance programs in Latin America have been directed primarily toward meeting the need for adequately trained technicians and to improve techniques in production and other fields. During the past twelve years some 20,000 Latin Americans have been trained on the job and more than 3,000 trainees have been brought to the U.S. for study. The impact of the programs has been magnified many times by trainees passing on new techniques within their own countries and by inter-country technical exchanges which have been effected under U.S. programs and also at the initiative of the countries themselves. These programs have sought to increase productivity through projects relating to food supply, health, housing, and education; and to increase over-all production through projects in agriculture, industry, natural resources, power, and transportation. Congress appropriated $22.3 million for technical cooperation programs in the Latin American countries during FY 1954 and the countries themselves are making available the equivalent of $44.6 million.

e. military assistance

1. Military Objectives

The military objectives of the U.S., vis-à-vis Latin America, are to establish an Inter-American defense structure which will insure the security of the strategic resources and lines of communication vital to the U.S., with a minimum diversion of U.S. forces; to insure internal security of the Latin American Republics; and to enable those countries to defend themselves against isolated attacks or raids.

2. Forces

Countries included in the Latin American program are: Brazil, Chile, Colombia, Ecuador, Peru, Uruguay, Cuba, and Dominican Republic. The forces to be supported include: Army, 9 battalions and 1 regimental combat team, mainly devoted to anti-aircraft and infantry operations; navy, 4 cruisers, 15 destroyers, 49 patrol craft, 4 submarines, 1 minecraft, and 1 reconnaissance squadron; air force, 10 fighter squadrons, 8 light bomber squadrons, 2 reconnaissance squadrons and 1 transport squadron.

3. Progress Report

Maintenance of equipment has in general been satisfactory. Some problems have been encountered in absorbing matériel, due to training inadequacies. Latin American countries have been slow to take advantage of U.S. training facilities provided under MDAP and this, added to inadequate facilities and a language barrier, has retarded the training programs.

[Here follow a six-page statistical program summary of the Foreign Operations Program submitted by the Office of the Director of Foreign Operations and a 38-page Department of Defense Annex on the Mutual Security Program, concluding Part 3, “The Mutual Security Program” of NSC 5407.]

1. This report is a part of NSC 5407, “Status of United States Programs for National Security as of December 31, 1953,” a collection of 11 reports prepared by various executive agencies in February and March 1954. The Mutual Security portion of NSC 5407 was noted by the National Security Council at its 188th meeting, Mar. 11, 1954. (S/S–NSC files, lot 66 D 95, “NSC Actions—Action No. 1059”) For additional documentation on NSC 5407, see volume ii.
2. For documentation on the Randall Commission, see pp. 49 ff.
3. For documentation on U.S. interest in the implementation of the reorganization of NATO approved at Lisbon, and in the continued strengthening of Western European defense, see vol. v, Part 1, pp. 1 ff.
4. For documentation on NSC 160/1, “U.S. Position With Respect to Germany,” dated Aug. 17, 1953, see volume vii.
5. Ellipsis in the source text.
6. Not printed; for documentation on the consideration of the 1953 Annual Review at the Twelfth Session of the North Atlantic Council at Paris in December 1953, see vol. v, Part 1, pp. 454 ff.
7. For documentation on NSC 164/1, “U.S. Objectives and Policies With Respect to Austria,” dated Oct. 5, 1953, see volume vii.
8. Unless otherwise indicated, Western Europe in this Section refers to the OEEC countries with the exception of Greece and Turkey. Data on Spain and Yugoslavia are not included in the overall indices. [Footnote in the source text.]
8. For documentation on NSC 162/2, “Basic National Security Policy,” Oct. 30, 1953, see volume ii.
9. Excluding Greece and Turkey. [Footnote in the source text.]
10. Includes aid to France for Indo-China. [Footnote in the source text.]
11. The FY 1954 expenditure total of $485 (Section A–paragraph d above) includes $162 in Lisbon–OSP for France and $7 million in regular OSP for Greece and Turkey. [Footnote in the source text]
12. Both the data for OEEC countries vis-à-vis the rest of the world and Western Europe vis-à-vis the United States exclude U.S. unilateral transfers of military goods and services. Otherwise there are certain minor conceptual differences between the two series. [Footnote in the source text.]
9. Section 202 (b) of the Mutual Security Act of 1951, as amended by the Mutual Security legislation of 1953, authorized appropriations not to exceed $50 million for fiscal year 1954 for use by the President to furnish additional defense assistance to any nation or regional defense organization in the Near East and African regions.
10. For documentation on Iran, see volume x.
11. For documentation on NSC 5402, “United States Policy Toward Iran,” Jan. 2, 1954, see ibid.
12. Not found.
13. For text, see volume ix.
14. For documentation on Arab-Israeli border clashes, see volume ix.
15. Reference is to section D–2–a above.
16. Ellipses in the source text.
17. At the Pau Conference, which concluded on Nov. 27, 1950, France and the Associated States sought to achieve the transfer of substantial economic sovereignty to the latter. For documentation on U.S. attempts to give direct aid to the Associated States, see volume xiii.
18. Regarding the visit of Milton Eisenhower to the countries of South America in 1953, see the editorial note in vol. iv, p. 196.
19. For text of NSC 144/1, Mar. 18, 1953, see ibid., p. 6.