Foreign Relations of the United States, 1951, Europe: Political and Economic Developments, Volume IV, Part 2

No. 906

868.00/6–1351

Final Report of the Tripartite Official Conversations Concerning Economic Aid to Yugoslavia¹

secret

London, June 13, 1951.

Introduction

1. This report has been prepared on the assumption that it is of great political and military importance to the United Kingdom, the United States, France and the Western World generally to maintain the advantages which the existence of an independent Yugoslavia outside the Soviet orbit confers upon the West, and to avoid the consequences which a collapse of the Tito regime and of Yugoslav resistance to the U.S.S.R. would entail. The attainment of this objective is threatened by the present economic situation of Yugoslavia, to alleviate which the report sets out a plan of assistance.

2. Before the last war Yugoslavia was a poor country and, generally speaking, its material and human resources were not used to the best advantage. In recent years these resources have been adversely affected by the destruction during the war, the inadequacy of incentives, especially in agriculture, the lack of competent managers, technicians and skilled labour, the dislocations caused by the Cominform blockade, including the necessity of a switch of trade to the West, the drought of 1950, and the adverse movement in the terms of trade. At the same time large demands have been made on these resources for the consumption needs of a population which is growing and becoming more urban in character, for the military programme, and for the investment programme which the régime considers to be both ideologically and politically important. These demands have proved greater than Yugoslavia’s ability to produce, and the Yugoslav Government have found the resources necessary for fulfilling their investment and military programmes on the present scale only by keeping consumption down to a dangerously low level and by obtaining foreign assistance. This position appears to have been aggravated by the Yugoslav Government’s not having applied available resources in such a way as to yield the greatest possible total return in domestic production or foreign exchange within the shortest time, and also by their having pressed on with certain projects the effectiveness of which now waits upon the completion of other projects.

3. Since 1948 Yugoslavia has had a balance of payments deficit of very serious proportions and the Yugoslav Government has requested financial assistance from certain Western states and international organisations. Bearing in mind the great importance to themselves of Yugoslavia’s continued political and economic independence of the USSR, the Governments of the United Kingdom, the United States and France extended assistance to the Yugoslav Government by credits and grants amounting to $48 million,^* $121 million and $4 million respectively up to the end of 1950. This assistance, however, did not solve the Yugoslav payments problem.

4. Yugoslavia continued to run a deficit on current trading account and contracted a substantial burden of debt, not only to those countries which had extended medium and long-term loans, but also in the form of “swings” and overdrafts, to a number of other countries. Furthermore, the International Monetary Fund had in 1949 permitted the Yugoslav Government to obtain $9 million against dinars, and the International Bank for Reconstruction and Development (IBRD) made a loan of $2.7 million for timber equipment.

5. Excluding the prewar bonded debt on which settlements were to be negotiated, Yugoslavia’s external debt obligations at the end of 1950 totalled $182 million (see Appendix A²). The order of magnitude of this figure is seen by comparing it with Yugoslav exports in 1949, which were $192 million.

Prospective Yugoslav Deficit

6. The statistical conclusions set out in the following paragraphs are based on examination of separate studies of the prospective Yugoslav balance of payments for 1951 and 1952, previously made by the United States and United Kingdom Governments. Those studies were founded partly on actual figures of Yugoslavia’s balance of payments in past years, and partly on the Yugoslav Government’s estimates for 1951 and 1952 as appropriately adjusted. In view of the limited information available they are to be treated as no more than the best basis at the present time for taking necessary action and are liable to substantial correction in the light of further information. The period of eighteen months ending 30th June 1952 has been taken as a suitable period for estimating the Yugoslav deficit at this time.

7. In Appendix B Yugoslavia’s deficit on ordinary trade for the eighteen-month period is estimated at $133 million. In addition to ordinary trade two types of imports are required by Yugoslavia during the same period. These are food imports necessitated by the 1950 drought, valued at $62 million, and extraordinary imports for defence purposes of goods capable of being used either for defence purposes or other purposes (in this report called “common-use items”), valued on a very tentative estimate at $50 million. Yugoslavia’s current trade deficit for the period, defined as including the food imports but not the extraordinary imports of common-use items, is estimated at $195 million. Towards covering this current trade deficit, sums totalling $140 million have already been made available to Yugoslavia, and details are given in Appendix C. For the extraordinary imports of common-use items no foreign assistance has been specifically given. The figures just mentioned relate only to Yugoslavia’s trading on current account. Following the Yugoslav Government’s practice they exclude all but minor imports of capital goods. They also exclude any provision for the contractual external debt payments due by Yugoslavia in the period, totalling $18 million, and any payments in reduction of Yugoslavia’s “swings” or overdrafts on trading account which amounted at 1st January 1951 to about $68 million. Details of these liabilities are given in Appendices A and D.

Proposals Concerning Provisions of Funds

8. It is proposed that the Governments of the United States, the United Kingdom and France (in this report called “the participating governments”) should accept responsibility towards one another for providing by way of grant to the Yugoslav Government, in the proportions of 65% by the United States Government 23% by the United Kingdom Government and 12% by the French Government, the funds necessary to meet:—

(i) that portion of the Yugoslav current trade deficit for the period 1st January 1951 to 30th June 1952 which is not covered by the credits and grants set forth in Appendix C or by any other sums that may be made available to Yugoslavia for use in that period; and

(ii) Yugoslavia’s payments in the same period in respect of extraordinary imports for defence purposes of common-use items; and

(iii) Yugoslavia’s payments in the same period in respect of the timber-equipment loan made by the IBRD in 1949; and

(iv) other payments which, in spite of all that the participating governments can do to the contrary, may for a variety of reasons be made by Yugoslavia during the same period and enter into her total balance of payments deficit for that period.

9. The responsibility proposed in the preceding paragraph should not however extend to providing the funds necessary to meet any amount by which the total Yugoslav balance of payments deficit for the period exceeds $265 millions. Should it appear at any time to any participating government that such an excess is likely, the participating governments should at the request of that government confer with a view to deciding on any measures which should be taken, including possible modification of the plan of assistance and of their responsibilities towards one another. The participating governments should in any event keep the Yugoslav economic situation under continuous appraisal, with particular reference to the prospective total balance of payments deficit for the period, and should exchange information and views upon it.

10. The responsibility proposed in paragraph 8 should not be construed as extending to the provision of funds directly or indirectly for the purpose of supplying Yugoslavia with equipment utilisable only for military purposes (military end-items).

11. Appendix E shows the funds which each of the participating governments would provide in accordance with the preceding paragraphs on the assumption that the total Yugoslav balance of payments deficit for the period was $265 millions, and that the funds available from other sources towards meeting it were those already known and shown in Appendix C, amounting to $140 million.

12. As only a very rough estimate is available of the value of Yugoslavia’s extraordinary imports for defence purposes of common-use items, it is proposed that the participating governments confer without delay in Washington with a view to making a better estimate of the value of such imports in the light of what is available and what Yugoslavia needs.

Proposals Concerning Yugoslav External Debts

13. It is proposed that Yugoslavia’s external debts, whether due to participating countries or to other countries, should be dealt with as follows:—

(a) Payments, including interest payments, due on all Yugoslavia’s external debts with fixed repayment dates^† (including compensation payments) should be postponed. Alternatively, if the government of any creditor country should consider an alteration of the contractual terms as impracticable, or for any other reason should so wish, such government may abstain from postponing payments by Yugoslavia, whilst taking such payments into account by adequately increasing its share of assistance.

(b) Five years from 1st January, 1951 would seem to be a suitable period of postponement of these debts but the three participating governments should keep the situation constantly under review, in consultation with the governments of other countries concerned, in the hope that this period may be reduced.

(c) In cases in which the government of any country decides not to postpone the payment of any debt due to that country, but instead to increase its assistance to Yugoslavia by an adequate amount, that government should continue to do so during the period of postponement.

(d) Before the end of the period of postponement Yugoslavia’s capacity to repay its external debts should be reviewed. Yugoslavia’s external debt repayment schedules should be revised along the lines of Appendix F unless review by the participating governments prove some other schedule to be more feasible.

(e) The above subparagraphs should apply also to debts on “swings” and overdrafts. In the case of any such debt, the government of the creditor country should agree that its amount (i) shall not on any 1st January in the period of postponement be less than it was on 1st January, 1951, and (ii) shall not at any time during the period of postponement either exceed or fall short of its amount on 1st January, 1951 except insofar as is justified by normal seasonal trading fluctuations.

The Basic Economic Problem

14. It is desirable to adopt an orderly approach to the problem of Yugoslavia’s economic situation and to minimise the amount of assistance which will be required in the future. The assistance proposed in the preceding paragraphs should accordingly be supplemented by measures to ensure its effectiveness and to improve the basic conditions of the Yugoslav economy described in paragraph 2. It is clear that domestic demand should be reduced and production increased as far as possible.

15. As regards domestic demand, civilian consumption standards are low and probably could not be cut further without endangering the stability of the régime. The military programme is outside the scope of the present report. Therefore, the investment programme appears to be the only aspect of the demand side which offers the possibility of effecting remedial action. While it is understood that some progress in securing desirable modifications has been made by the IBRD further steps in this direction are likely to be required.

16. An increase in production could be achieved in three ways. Through a programme of training, the competence of managers, technicians and skilled labour could be improved and their numbers increased. Some capital expansion would also increase production, as would the giving of greater incentives to the population by changes in the regulations concerning purchasing, rationing, prices and taxation. These measures are of particular importance in agriculture. It is understood that the Yugoslavs are now making some progress along these lines.

Relations With Yugoslav Government

17. In order that the assistance which the participating governments extend to Yugoslavia shall achieve as far as possible their objectives it is necessary to co-ordinate procedure and to obtain certain measures of co-operation on the part of the Yugoslav Government.

18. On the other hand, it must be remembered that the Yugoslavs are proud of their independence. The Tito régime is devoted to its own Marxist ideology, is wary of Western pressure and foreign interference, but has not shown reluctance in dealing with international organisations of which it is a member. The delicate position of the Yugoslav Government both internally and in relation to the Cominform countries will have to be borne in mind in implementing the particular proposals of the participating governments. Though the Yugoslav Government’s relations with the West are changing in the direction of greater co-operation, it would be a mistake to press the Yugoslav Government so hard as to endanger the achievement of the objectives of the participating governments. In the circumstances it is difficult and perhaps undesirable to make a hard and fast assessment at this stage of how far the objectives will be achieved, and the participating governments will have to proceed by trial and error.

19. For the practical success of the plan of assistance co-operation by the Yugoslavs is indispensable. Though the main lines of the plan will have been previously agreed by the participating governments it should be presented to the Yugoslav Government in such a way as to avoid giving the impression that it is cut and dried. A number of changes, which may be necessary to meet objections, can be made so long as the plan is not altered substantially. The aim should be that the Yugoslav Government should agree in principle to the plan and in fact adhere to it later.

20. The participating governments have three types of direct control readily available; supervision of expenditure of funds provided, controls over their exports to Yugoslavia, and the handling of supply assistance. They may also require certain commitments from the Yugoslav Government as pre-requisites to the granting of assistance. Beyond this limited sphere the participating governments will have to rely on influencing the Yugoslav authorities by giving advice. They should seek to establish an atmosphere of mutual confidence in which the Yugoslav authorities will be receptive to such advice.

21. The Yugoslav Government must be left in no doubt that continuance of assistance by the participating governments depends on how far they are satisfied that the Yugoslav Government are taking measures to balance their foreign payments as soon as possible. Satisfactory assurances may be required from the Yugoslav Government of their determination to take such measures.

22. In connexion with paragraphs 20 and 21 the Yugoslav Government should provide such pertinent information as is necessary to enable the participating governments to evaluate and review on a continuing basis the amounts and types of economic assistance to be extended. In general this information is of the type commonly published by other governments, and is indicated in Appendix G. The exact form in which the information should be requested from the Yugoslav Government can be determined only after full discussion with them as to what is practicable, but the highest priority should be given to foreign trade and payments data. From time to time the Yugoslav Government should also provide the participating governments with projections of production, consumption, and balance of payments statistics.

23. Non-statistical information which is desirable includes descriptions of capital projects and progress on them, texts of trade, and financial agreements and arrangements with other countries, and important changes in economic policy or organisation.

24. Periodic review of Yugoslavia’s current needs, and decisions on the allocation and release of funds, shouldprovide a means of control. The mechanism for releasing funds and the periods for which the Yugoslav Government should be promised assistance will need to be worked out in the light of the fiscal and legislative procedure of each of the participating countries, but as far as possible the participating governments should observe the principles of maintaining control of their own expenditure and at the same time giving the Yugoslav Government sufficient assurances to permit planning.

25. With regard to goods in short supply the participating governments should afford whatever assistance is appropriate in meeting Yugoslav import requirements, both in the administration of their domestic controls and in international discussions on allocations. As indicated in paragraph 20 the provision of such assistance in specific instances would, of course, be another way of influencing Yugoslav co-operation in carrying out the plan of economic assistance.

26. The setting up of a joint Mission of the participating governments would raise great administrative and possibly legal difficulties. Each of the participating governments will have representatives in Belgrade dealing with the Yugoslavs, in order to observe the utilisation of imports which those governments have financed and also to offer advice on ways and means of achieving viability. These representatives should maintain close liaison with a view to exchanging information and views. They should also avoid unnecessary duplication of effort, unnecessary burdens on the Yugoslav authorities and divergence in the advice which they give. The participating governments should consult with one another whenever a request for assistance is made by the Yugoslav Government to any one of them. Any information provided by the Yugoslav Government should be checked as far as possible by the participating governments. In particular, statistics established by the participating governments relating to trade between their countries and Yugoslavia should be exchanged as regularly as possible.

Co-operation of Other Governments

27. It is desirable to have as many governments as possible, in addition to the participating governments, associated with the plan of assistance, each making its maximum contribution and cooperating in the necessary arrangements. Non-participating governments should accordingly be approached by the participating governments, but only after the latter have reached agreement on the plan, and in accordance with a suitable time schedule.

28. The governments of other NAT countries have a common political interest with the participating governments in assisting Yugoslavia, and general agreement has already been reached by the NAT deputies on policy towards Yugoslavia. On the other hand, it is desirable to avoid the appearance that economic assistance to Yugoslavia has become a responsibility of NATO. In these circumstances it is proposed that the participating governments should use NATO channels to request other NAT governments to extend economic assistance to Yugoslavia. The request should stress policy considerations and should be in general terms. It should, however, indicate that the participating governments intend to follow it up with separate approaches through the diplomatic channel to ascertain the particular measures of assistance which each country will undertake and to discuss arrangements for co-ordination between the different countries.

29. The participating governments’ presentation of the plan to the Yugoslav Government in accordance with paragraph 19 should begin concurrently with the proposed approach through NATO channels, and the Yugoslav Government should be told that the plan entails their requesting assistance from other governments and that the participating governments will wish to discuss in the near future the arrangements for doing this. The Yugoslav Government should not be told of the participating governments’ request through NATO channels but a short period of time should be allowed for action to be taken on the request made to the Council Deputies. Thereafter discussions between the participating governments and the Yugoslav Government should take place with respect to the Yugoslav Government’s requests to other countries, which should be arranged so as to permit the supporting diplomatic approaches by the participating governments to be as effective as possible. As soon as the arrangements with the Yugoslav Government are completed the participating governments should make their approaches to other NAT governments in the manner already indicated.

30. The participating governments should also suggest that the Yugoslav Government approach the governments of other countries to which it is indebted requesting the postponement of debt payments or equivalent action. The participating governments should indicate that they would give diplomatic support to such request. In making their supporting representations to those governments which are not members of NATO and whose principal reason for contributing would not be political, the participating governments should emphasise that the co-operation of all Yugoslavia’s creditors is necessary to bring order into Yugoslavia’s economic situation, to preserve their existing investment in Yugoslavia and to make possible the continuance of trade with that country.

30a. The situations of Western Germany and that of Austria, which differ both from those of other non-participating countries and between themselves, seem to call for individual treatment. The political considerations are somewhat similar to those affecting the NATO countries, but the participating governments have in Germany and Austria a position of greater and more direct responsibility, and there are additional factors such as the Austrian Government’s relationships with the occupying powers. After necessary consultation the participating governments, acting through such channels as are found to be appropriate, should agree on means of urging the Federal German Government and the Austrian Government to do their part in the common effort to assist Yugoslavia, suggesting the specific measures necessary.

31. While working out with the Yugoslav Government the necessary arrangements and procedure by which the assistance extended can be made most effective, the participating governments should discuss these matters with the other governments associated with the plan of assistance. In particular these other governments should be asked to cooperate by affording whatever assistance is appropriate in meeting Yugoslav import requirements of goods in short supply, by not exporting capital equipment to Yugoslavia except as may be agreed, and by exchanging pertinent data with the participating governments on their trade and financial arrangements with Yugoslavia.

Relations With International Bank for Reconstruction and Development

32. The economic assistance over the eighteen-month period should be, in so far as possible, harmonious with any longer-term programme, including capital development, directed toward making it possible for Yugoslavia in due course to achieve economic viability, as measured by its independence of extraordinary foreign assistance and its standard of living. Since the IBRD was known to be considering the Yugoslav Government’s request for a development loan, inquiries were addressed to the IBRD on this subject. In order to reply to these inquiries, two members of the staff of the IBRD were present in London for a series of consultative meetings with the three delegations.

33. At these meetings the representatives of the IBRD stated that a favourable decision by the Bank on loans to Yugoslavia was subject to certain changes in the Yugoslav investment programme, access to the 18% capital subscriptions of certain European member governments, a satisfactory settlement of Yugoslavia’s outstanding external indebtedness, and satisfactory assurances that Yugoslavia’s current account deficit would be met without increasing Yugoslavia’s debt burden. They stated that the IBRD was interested in the outcome of the tripartite discussions, since the decisions of the participating governments about aiding Yugoslavia were directly connected with these conditions for loans by the IBRD.

34. In the course of the consultation with the representatives of the IBRD there was general discussion on the estimate of Yugoslavia’s current deficit, the magnitude of Yugoslavia’s burden of external debt, Yugoslavia’s chances of reaching equilibrium in its balance of payments, the character of the IBRD’s projected loan programme for Yugoslavia, and the problem of co-ordinating the participating governments’ assistance with any IBRD loan programme. The Bank estimated that at average 1950 prices the Yugoslav deficit in 1951 and 1952 together would be $100–125 million of which 75% would be attributable to 1951. They expected to see a substantial improvement in the Yugoslav short-term situation in 1952 compared with 1951, and they expected that the current trading account should be balanced by the beginning of 1953, provided that assistance in the meantime were made available on a grant basis, as they considered it should be.

35. The representatives of the IBRD stated that the Bank staff were at present concerned with the first two tranches ($27.8 million and $30.1 million respectively) of a loan programme of approximately $200 million dating from 1st September 1950 and including the German, Austrian and Belgian loans totalling $59 million negotiated since that date. The figure of $200 million was based on their investigation of the Yugoslav economic situation which also led to the conclusion that, given this loan programme, Yugoslavia would from 1956 be able to pay a maximum of $25–30 million annually for all external debt service, including the service of any IBRD loan. As the existing contractual position of Yugoslav external indebtedness (Appendix H) requires payments far in excess of this maximum in the next few years, excluding pre-war debts, a tentative schedule of repayments was prepared by the three delegations and the IBRD representatives on the assumption that most of the debts were funded over fifteen years from 1956 at 4½% per annum. This schedule, corrected in a few details, is given in Appendix I: it shows payments in 1956 totalling $46 million, an amount still in excess of the IBRD view of Yugoslavia’s ability to pay. In these circumstances the IBRD representatives considered that they could not properly make any suggestions as to what the participating governments should do, but that if the IBRD loan were to go ahead something would have to be done about the liabilities in respect of present external debts. After careful consideration the three delegations reiterated to the IBRD representatives the importance which they attached to the making by the IBRD of loans to Yugoslavia and of their wish that the Bank should participate with them in helping the Yugoslavs to balance their foreign payments, but stated that they had not at that time been able to give adequate consideration to that part of their plan dealing with Yugoslavia’s present external debt. They agreed, however, that the schedule of debt payments (Appendix I) would require modification in order to reduce the burden on Yugoslavia and that they would make recommendations to their governments to take steps in this direction (see paragraph 13).

36. The IBRD representatives were asked whether they could take over on a long-term basis the German, Austrian and Belgian loans already negotiated, and also miscellaneous items of capital equipment which are included by the Yugoslav Government in the current trading account. They expressed grave doubts about the former, as refinancing was against the Bank’s normal practice, but did not definitely exclude the possibility. The latter would depend on the Bank’s judgment of the specific projects to which the items applied.

37. In response to a number of specific questions put by the representatives of the IBRD the three delegations informally stated the following as their joint views: (a) Yugoslavia should receive assistance in covering its current deficit and should be assisted to carry out an investment programme directed to the strengthening of its productive capacity and the elimination of that deficit, (b) Yugoslavia’s current deficit in the period 1st January 1951 to 30th June 1952 (excluding food imports, the import of capital equipment and the extraordinary import of military end-items and of common-use items for defence) at prices ruling early in 1951, would be about $133 million, (c) The three delegations hoped that as a result of action resulting from their deliberations, including action taken by Yugoslavia, the deficit would decrease, (d) On economic and political grounds Yugoslavia’s current deficit should, if possible, be covered by grants, although certain delegations had not then completed their exploration of the practical possibilities of their governments giving aid in this form (see paragraph 8). (e) Yugoslavia’s imports of capital equipment should be financed on terms similar to those on which the IBRD generally finances such imports. (f) Coordination of short-term current assistance and the programme of investment loans is of the greatest importance.

38. In the light of these discussions, it is desirable that when the plan of assistance has been agreed, the participating governments should comply with any request from the IBRD for general information about it. Close liaison should also be maintained between the participating governments and the IBRD in connexion with the IBRD’s long-term loan programme.

1. This report was transmitted to the Department of State as one of the enclosures to despatch 6067 from London, June 13. The final report, printed here without its covering statement, list of contents, summary statement, or appendixes, ended the work of the U.S., U.K., and French delegations which had been meeting in London since April 19 to discuss economic aid for Yugoslavia in terms of both short-term and long-term needs. Concerning the origin and evolution of this tripartite working group, see Document 870.
2. In this report all amounts are expressed in United States dollars regardless of the currencies actually involved. [Footnote in the source text.]
2. None of the Appendixes is printed.
3. The French delegation reserves the right of its government to raise with the other participating governments the question whether this provision should apply to payments on the prewar external bonded debt due to private persons or whether such payments should be considered as part of the current Yugoslav deficit. [Footnote in the source text.]