Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

198. Memorandum of Conversation⁰

May 24, 1960.

SUBJECT

• FY 1962 Preview Estimates for the Mutual Security Program

PARTICIPANTS

• The Under Secretary
• State: Messrs. Bell, Murphy, Wilson, Kaplan, Graham Martin, Kerr
• ICA: Messrs. Riddleberger, FitzGerald, Grant
• DLF: Messrs. Brand, Perry, GORDON

Mr. Dillon indicated the following tentative reactions to the issues raised by the agency estimates:¹

1. The U.S. Government needs authority to make balance of payments loans involving long-term commitments, where such loans are required to support sound economic development. We cannot be tied down exclusively to a project approach, although project loans should be the preferred technique where needs can be met in this fashion. Afghanistan and India illustrate situations where present authority is inadequate.

2. The needed authority should be sought for the DLF in FY 1962. This year’s legislation and legislative history raised certain problems, but we should not hesitate to make sound proposals for next year. The new Administration can decide to adopt or modify such proposals. The DLF should be in a position to finance the economic development needs of such countries as Taiwan, Turkey and Thailand, as well as India, in part by means of balance of payments loans if that is what is required. In such cases as India, the level of DLF lending, combined with PL 480 operations, may create problems with respect to the disposal of local currency. It probably does not make sense to relend the local currency at market rates of interest, thus building up even greater accumulations in future years. Probably the best solution is for ICA to be given authority in the first instance to dispose of PL 480 local currency repayments through grants.

3. Great advantages obtain in continuing on a loan basis with at least the more advanced of the under developed countries, especially India. These countries don’t want to be the object of charity; they prefer to get help for their economic development requirements through loans. Our machinery should be flexible enough to meet this view.

4. Special reasons do exist for more ICA money for Africa. Belgian Congo may need budget support and other newly independent countries may also have special needs which are more suitable for grant aid programs. The question remains whether such money should be sought for specific programs in Africa or whether a substantially increased contingency fund should be sought, identifying the increase with requirements in Africa.

5. The need for increased activity in Latin America is clear, but the advisability of providing it through Special Assistance programs is questionable. Discussions are going on in the Executive Branch about increasing the resources available to the Inter-American Bank. A special appropriation may be sought in order to make an additional U.S. contribution to the Bank’s special fund without the necessity for any matching contribution from the Latin American countries. Work on this proposal is going forward with a view to having a U.S. position in August.

6. Mr. Dillon noted the desirability of stepping up assistance for economic development to other countries that are able to make effective use of increased assistance. However, he felt it undesirable to use the term “Islands of Development” which gives rise to invidious comparisons and may raise excessive expectations.

7. Mr. Riddleberger commented that as far as the regular ICA programs were concerned, ICA expected to make modifications in its proposals as the process of programming continues. A reduction of $40 million might be possible in the major grant country programs if political considerations would permit a reduction in the programs for Spain, Israel and Tunisia below the levels which ICA currently thought was desired by the State Department. On the subject of Island of Development, he mentioned that the concept may fall if the Congress refused to appropriate funds for the Taiwan program or if Taiwan fails to fulfill its economic policy commitments. Finally, he noted that ICA undertakes certain types of projects of a non-income earning variety which are not customarily undertaken by the DLF; economic infrastructure projects have been undertaken by both ICA and DLF.

8. Mr. Dillon observed that Congress had suggested, and he agreed, that the Executive Branch should prepare a complete new redraft of the Mutual Security Act for FY 1962. The proposal should provide a new legislative basis for the DLF and should also eliminate the arbitrary limitations inherent in current definitions of Defense Support and Special Assistance.

9. Mr. Brand observed that some of the best loans made by the Ex-ImBank were balance of payments loans. DLF might undertake such loans on a local currency basis. He considered it to be nonsense that the DLF must only undertake project loans. We might indicate to the Congress that, say $700 million of the FY 1962 request would be used for project loans and $300 million for balance of payments loans. This was preferable to giving ICA the responsibility for making balance of payments loans in support of economic development.

10. Mr. Dillon observed that Mr. Hardy’s criticism of DLF operations had never involved arguing that the DLF had made bad loans; the Congressman had only contended that the Executive Branch had never told the Congress that the DLF was going to make loans not strictly tied to individual specified projects at the time the funds were earmarked or committed. Mr. Dillon thought that the DLF should provide more resources to countries like Taiwan and Turkey which have the capacity for more rapid economic growth. The DLF should have the authority to provide balance of payments loans to such countries if their development program required it. Such loans would increase the problem of disposing of local currency accumulations. This problem is made worse by relending repayments at the going interest rate thus assuring even larger future accumulations. The problem might be handled by giving ICA responsibility for making local currency grants out of such repayments. The main problem lies with PL 480 local currencies, but local currencies from all sources must be considered together.

11. Mr. Grant² observed that the U.S. procurement policy was a further obstacle to giving the DLF responsibility for meeting the needs of countries like India. Mr. Brand replied that the DLF is financing certain amounts of offshore procurement for India this year; some offshore procurement could be handled if necessary.

12. Mr. Grant commented that the present Special Assistance Program included about $140 million of financing of non-revenue earning TC-type projects such as those now proposed for Latin America and Africa.

13. Mr. Bell observed that it might be desirable to seek the kind of data from our Latin American Missions that we have recently requested from the African Missions identifying those needs which might be appropriate for U.S. financing. Mr. Dillon noted that the Treasury Department had registered its unhappiness with the cable on Africa, but thought it would be desirable to send an appropriately worded message.

14. Mr. Brand observed that he expected the Ex-ImBank to adopt a more aggressive attitude toward making loans in Latin America. The DLF would undertake other types of loans such as housing, land resettlement and local currency requirements. However, it might be appropriate for ICA to take the responsibility for projects in Latin America which were extensions of its Technical Cooperation work and for projects like hospitals and schools.

15. Mr. Murphy asked whether ICA proposed to obligate funds in Africa and Latin America for projects which do not meet Section 517³ requirements. He felt that authority to waive the Section 517 requirements would be much more difficult to obtain from the Congress than authority to make balance of payments loans. This led Mr. Dillon to comment on the necessity for ICA to undertake more feasibility studies in order to have projects ready when commitments were desirable. DLF had undertaken surveys of this type in the past, but he felt it would be more appropriate for ICA to make a major effort in this direction.

0. Source: Department of State, Central Files, 700.5–MSP/5–2460. Confidential. Drafted by Jacob J. Kaplan of U/MSC and approved by Dillon on June 13.
1. Not found.
2. James P. Grant, Deputy Director for Program and Planning, International Cooperation Administration.
3. Section 517 of the Mutual Security Act of 1954, as amended through the Mutual Security Act of 1959, restricted agreements or grants over $100,000.