Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

258. Memorandum From Charles Cooper of the National Security Council Staff to Secretary of State Kissinger ¹

Washington, May 17, 1974.

SUBJECT

• Follow-Up to Your UN and OAS Speeches²

State is drawing together a number of follow-up ideas for your consideration. In reviewing this material, I felt that there was a need for a broader perspective from which to view State’s recommendations. Major points which need emphasis are:

1. The key international economic problem for 1974–75 is not the plight of the most seriously affected LDCs, but the potential deterioration of economic arrangements among industrial countries which could result in trade conflicts and spreading recession. The LDCs would in fact be hurt much more by spread of restrictive trade actions and recession in the DCs than they could possibly be helped by the most optimistic combination of aid measures. Deteriorating economic conditions in the DCs if they continue, as they may, will sour the political atmosphere for initiatives to help the LDCs.

2. The main problem of the most affected LDCs is not increased energy or food costs. It is the continued unwillingness or inability of their governments to adopt policies which will set loose the productive forces in their societies. Countries which have done a good job on development—Brazil, Korea—can weather the problems caused by higher oil prices. Countries such as India, which were in deep trouble before the price increases, find the timing and intensity of their problems advanced. Additional aid to offset oil price increases may buy time for them, but will in all probability also delay the time when they come to grips with their real political, social, and economic problems. Their own improved policy and management performance offers the only medium- and long-term hope for these countries.

3. The UN and to a lesser extent the OAS serve a safety-valve function by allowing governments to externalize pressures resulting from poverty and poor economic performance. However, to the extent the governments of LDCs with poor track records can blame their problems on the rest of the world, they are likely to defer the actions needed to solve their problems. Because of this political need to externalize pressures, there is no combination of policies or concessions that will moderate LDC criticism of the U.S. and industrial nations since our aid won’t and can’t solve their problems, and they aren’t willing to admit to this to their own internal constituencies. My view is that the right response to LDC attempts to externalize their internal pressures is to ignore it politely while we concentrate in the development institutions such as the IBRD and in our bilateral relations on solving their real problems.

There are two particular aspects of the current State thrust which you should consider extremely carefully:

• —Food aid. The timing of an announcement of a greatly increased PL–480 program for FY–75 is crucial. State argues that early announcement is desirable because it would respond to UN and other do-good pressures, but not require any Congressional action. However, a major increase in the program will not escape Congressional notice. An early announcement could rebound against IDA replenishment and the bilateral appropriations. While the Senate may be reasonably relaxed, the House and the budget watchers will not be. The timing and the potential effect on domestic and international prices will be crucial in avoiding the wrong kind of Congressional reaction. A reduction in farm prices this summer and fall is the sina qua non of the Administration’s anti-inflationary policy. It is unlikely that a billion dollars of PL–480 purchases would really make a great difference to food prices during the next crop year. But, as we saw last year, PL–480 is one of the few areas where the USG has real control, and where its actions are explicit. Opponents both within and outside the Administration would severely criticize any public action to increase PL–480 until it is fully clear that food prices have fallen and will stay down. This argues strongly for proceeding now with a moderate first quarter PL–480 program and delaying any announcement of a much larger program until the crop situation is clearer later this summer. This would not affect our shipments anyway since we cannot ship what we have not harvested. Finally, it is important to keep in mind that whatever we do on food aid, the LDCs as a whole will still be purchasing most of their food imports commercially. Thus, a large increase in food aid will cost most LDCs more in higher prices for their purchases. Some LDCs would of course benefit including India (the subcontinent minus Pakistan contains most of the so-called fourth world) but countries such as Korea, Peru, and Egypt which buy most of their food imports would be hurt.
• — Witteveen’s IMF fund. The IMF has commitments of substantial but expensive money from the oil producers. This will help some DCs (Italy) and some middle-level LDCs (Korea), but the interest rate is too high and term too short for the really poor countries. Some LDC enthusiasts suggest we mix the oil producers’ 7 percent money with ordinary resources of the IMF provided largely by the U.S. and other DCs to take care of poor countries at better terms. There are major problems with this idea. It would threaten the basic purposes and stability of the IMF to divert its ordinary funds for this purpose at just the time Italy, the UK and other DCs need IMF support. Although the DCs would in fact be providing the subsidized money, the oil producers would get most of the political credit. Treasury considers this very much its turf, and you should not expend your capital for the very small gains which might be available in this area and for which there is little international support.

The biggest issue for you on LDC economic policy is tactics with the Congress. There are three key LDC actions we need from Congress over the next several months:

• —IDA replenishment (highest priority for the subcontinent);
• —The Trade Bill providing trade preferences (highest priority for the Latin Americans);
• —The bilateral AID program at the higher request level (highest priority for Indochina, the Middle East and agriculture development).

Favorable Congressional actions on these three pieces of legislation, coupled with an expanded PL–480 program later when conditions for it will be much more favorable, would turn the U.S. posture completely around on the LDCs—making us the world leader instead of laggard in responsiveness to LDC problems. You should consider carefully the great risks of overloading the Congressional circuits now. A premature public announcement of increased PL–480 or special support for the LDCs could result in Congressional inaction or greater cuts on these key pending measures—or even on new Congressional restrictions on PL–480, debt rescheduling, or other Administration actions. Moreover, new initiatives on economic assistance could rebound unfavorably in Congress on our military assistance where we are also in trouble because of the increase in total assistance costs.

Finally, I am convinced that there is one economic development this year which would ease all of our foreign policy and international economic problems, and without which we are going to be in trouble no matter what we do, namely a significant reduction of world oil prices. A separate memorandum on this subject is in preparation.³

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 1064, Institutional Materials, NSC Institutional Papers—May 1974 [2 of 9]. Confidential. Sent for information. Kissinger initialed the memorandum.
2. For Kissinger’s speech to the United Nations, see Document 257. Kissinger addressed the Organization of American States General Assembly in Atlanta, Georgia, on April 19 and 20. For the text of his remarks, see Department of State Bulletin, May 13, 1974, pp. 509–515.
3. Not found.