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

No. 912

ISAC files, lot 53D443

Paper Prepared by the Economic Cooperation Administration¹

secret
[ISAC D–10/2]

[Washington,] July 13, 1951.

Economic Aid to Yugoslavia

The following is a report of ECA’s activities administering the $29 million raw material program to Yugoslavia and a request for about $10 million a month for similar purposes during the present quarter on the assumption that the Mutual Security Program Bill will not be enacted before the end of September.

I. ECA’s Administration of the $29 Million Program for Yugoslavia

A. Authority. On March 16, 1951 ISAC agreed (ISAC 12) that the United States should make up to $29 million available to Yugoslavia to finance imports of raw materials and similar supplies equivalent to certain consumption needs for supporting its armed forces.² After consultation with the NAT countries the President on April 16th notified Congress as required by Section 408(c) of the MDA Act.³ On April 18, 1951 ECA received an allocation of $10 million for such purposes followed on May 10, 1951 by another allocation of $19 million.

B. Exchange of Notes. On April 16 and 17 the U.S. Ambassador in Belgrade exchanged formal notes with the Yugoslav government supplementing the previous exchange of November 17, 20, and 21, 1950 occasioned by the food program.⁴ In brief this exchange, tantamount to a bilateral agreement, noted that in view of the mutual desire of both countries “of fostering international peace and security” the U.S. government was prepared “to extend immediately assistance in the form of raw materials and other supplies” and agreed that:

1) Imports financed by these funds would be used exclusively by Yugoslavia.

2) Yugoslavia will continue to facilitate the exports of strategic materials to the U.S.

3) The U.S. would have freedom “to observe, supervise and report” the receipt and distribution of the U.S. financed imports.

4) Full publicity consistent with security requirements would be given to the program in the U.S. and in Yugoslavia.

5) Yugoslavia would “take appropriate measures to enable it to become independent of extraordinary outside assistance”.

6) Yugoslavia would deposit dinar counterpart equivalent to the dollar cost of the financed goods, of which 5% would be available to the U.S. and 95% could be drawn by the Yugoslavs for programs agreed to by the U.S. for purposes broadly defined as “consistent with the objectives of this agreement”.

C. Commodities Financed. On the basis of requests submitted by the Yugoslav Embassy in Washington, ECA, and the Departments of State and Defense developed a list of commodities eligible for U.S. financing under this program. By the end of the fiscal year ECA had obligated $27.9 million for the following commodities:

Funds Obligated

Commodity	($ Millions) Value
Raw Cotton	6.9
Iron and Steel Products	6.1
Industrial and Other Chemicals	2.9
POL	2.2
Coke	1.6
Transportation	1.5
Tallow, Fats and Oils	1.5
Wool Rags	1.2
Medicinal and Pharmaceutical Products	.9
Rubber Products	.9
Textile Products	.7
Hides and Skins	.5
Other	1.0
Total	27.9

ECA is holding the remaining $1.1 million in reserve pending a determination of the contractual arrangements established when, with the help of ECA and the State Department, Yugoslavia purchased on an emergency basis about 1,000,000 kgs. of Greek cotton. This reserve will either be used to reimburse Greece or to finance additional goods under the program to Yugoslavia.

D. Problems. Despite 1) the necessity to program efficiently yet to obligate quickly the $29 million, 2) the inexperience of both the Yugoslavs and the economic staff in Belgrade in dealing with this type of program, 3) the unusual amount of inter-agency consultation required in Washington, the program ran surprisingly smoothly. Two problems, however, arose continuously: the limitations of eligibility criteria; and the need for procurement assistance.

1) Eligibility. Among the eligibility requirements those on quantities, prices, and source of procurement established some of the more difficult obstacles to efficient and rapid programming to meet the immediate commodity needs of Yugoslavia.

(a) Quantitative. It was difficult to get the Yugoslavs, who envisage their whole country as an armed camp with the economy geared to an energetic arms program, to understand that ECA using MDAP funds was forced to limit its financing to these types of commodities consumed by the army and the quantities to the equivalents of the consumption needs of the armed forces. Consequently, for example, ECA could not finance newsprint which the Yugoslavs considered a political necessity nor could ECA finance sufficient cotton imports to permit the Yugoslavs to build up a minimum of working inventories which had been completely depleted during the past year. This problem should be alleviated by a more liberal interpretation of the statutory authority especially as these funds could be considered as advances on the 1951/52 program which will not be subject to these limitations.

(b) Prices. Regulation 1 of ECA does not permit ECA to finance procurement of goods at prices which after allowances for differences in qualities, delivery period, or transport costs are materially higher than those ruling in the U.S. Due to the lack of foreign exchange and the ad hoc and emergency nature of previous aid programs, Yugoslavia had placed insufficient forward contracts on many of the goods eligible for financing under this program but in short supply throughout the world. Consequently, these they wished to purchase at spot, grey or black market prices. To a certain extent this problem should diminish as aid programs are planned on a more continuing basis permitting Yugoslavia to avoid high spot prices by forward planning and contracting.

(c) Source. Inasmuch as the London talks (ISAC 10/1⁵) ended in an agreement that France and the United Kingdom would be granting funds to cover about 35% of Yugoslavia’s current balance of payments in all currencies, ECA has endeavored not to finance any off-shore procurement in either the sterling or the franc area. Yugoslavia’s franc needs are small, however, and the U.K. signed a 4 million pound loan to Yugoslavia to finance cotton, wool, jute and rubber from the sterling area in April 1951; consequently, as yet this has not emerged as a serious eligibility problem.

2) Allocations. In some ways almost as important as the grant of dollars to the Yugoslavs has been the procurement assistance rendered by the government for ECA and non-ECA financed goods in large part facilitated by the letter from Mr. Cabot to Mr. Wilson. Although the redtape and prodding involved is probably not much more of a problem for Yugoslavia than for other countries, there has been a tendency among some firms to be reluctant to give preferential treatment to a country which is Communist and which they believe might not be a continuing customer.

E. Effect As the $29 million raw material program is but one among several different programs, it is difficult to isolate the impact upon U.S.-Yugoslav relations of this program from the others. Even at this early date, however, it has been obvious to those working on the program that the aid has helped to provide some of Yugoslavia’s most pressing needs especially for cotton, coke, and tinplate without which manufacturing plants would have had to shut down. Although the Yugoslav’s are still wary in dealing with us, there is a noticeable improvement in the frankness and cooperative spirit in which they have approached ECA.

II. The Need for More Funds

A. Need for Authority. The $29 million program was designed to meet Yugoslav needs only until July 1, 1951 (TF I AS–18⁶). The need for aid continues and although a provision for Yugoslavia is included in the MSP legislative request it is extremely doubtful that funds will become available through enactment of the current bill for several months. Consequently, to continue to “keep Tito afloat”, authority should be found to provide at least minimal funds available from Congressional Joint Resolutions during the interim period.

B. About $30 Million Needed during the Present Quarter. From the analysis of the London economic talks on Yugoslavia and more recent data, ECA estimates that the current balance of payments deficit of Yugoslavia will be about $50 million during the second half of the calendar year ($39 million deficit in trade and services and about $11 million in net loan payments due). Due to seasonality (Yugoslav payments run higher than receipts during the summer before the harvest is in) and because orders for fourth quarter deliveries of some commodities should be placed during the third quarter, funds should be made available to cover about 75% of the deficit for the half-year during the present quarter. This would bring the overall needs for the quarter to about $38 million, of which the share of the United States is 65% (ISAC D–10/1), or about $25 million. This total does not include provision for the U.S. share of so-called extraordinary common-use needs which will probably not run higher than $5 million during the present quarter. Consequently, the U.S. should be prepared to offer between $25 million and $30 million in and during July, August, and September at a rate of about $10 million a month as advances towards its commitments made at the London talks.

C. Authority from Section 408 (c) of the MDAA. For the same reasoning used in the $29 million program (TF I AS–18), funds provided under joint resolutions of Congress could again be allocated to ECA by the President under Section 408(c) of the MDA Act to supply critically needed goods and services to Yugoslavia during the present quarter. These funds could be reimbursed by ECA from its Title I funds upon enactment of the Mutual Security legislation. Although as is indicated in ISAC D–10, this authority should be used sparingly, no other method of maintaining a flow of funds to Yugoslavia is presently available.

Utilization of this authority involves consultation with NATO and notification to appropriate committees in Congress. Inasmuch as the consultation with NATO under the $29 million program was couched in broad terms (Todep 312, March 21, 1951⁷), it need not be repeated for this purpose. Notification would have to be made to Congress, but it could be made once in respect to the amount of funds the President would contemplate allocating if and when funds were made available during July, August, and September.

D. Goods to be Financed. The Yugoslav government is expected to submit a request for its high priority import needs eligible for financing under the MDAP legislative authority within the next few days. Until such a list is submitted the following could be used as an illustrative program for the three month period:

Commodity	$ Million
Coke	2.0
POL	2.5
Iron and Steel Products	6.0
Spare-parts and Tools	2.0
Ball Bearings	.5
Wool, Wool Yarn, and Wool Rags	6.0
Raw Cotton and Staple Fiber	4.0
Rubber and Tires	1.5
Industrial Chemicals	1.5
TNT	.5
Pharmaceuticals	.5
Transportation	1.5
* Other	1.5
Total	30.0

III. Recommended Action

A. Inasmuch as: (i) Yugoslavia will probably require aid under the criteria of NSC 18/6⁸ of about $10 million a month during July, August, and September; and (ii) such aid can only be provided until Congress passes the foreign aid legislation for 1951/52 through Section 408(c) of MDAA, ISAC agrees that:

1) the appropriate committees of Congress should be consulted by a committee representing the Departments of State and Defense, ECA, and the Executive Office with respect to a further interim utilization of MDAP funds to provide critically needed goods and services to Yugoslavia equivalent to certain consumption needs in the support of the Yugoslav armed forces

2) the President be requested to allocate about $30 million during July, August, and September for such purposes.

B. Inasmuch as such funds could be considered as advances which could be reimbursed from Title I funds ISAC agrees that ECA shall have the primary responsibility for determining the precise types and quantities of goods and services financed under this program.⁹

1. According to the cover sheet attached to the source text, this ECA paper was circulated as ISAC D–10/2. Also attached to the source text was a memorandum by Halaby to Cabot, dated July 12, informing him that although the recommendations in this paper are those of the ECA, they were derived from discussions between representatives of the ECA, the Department of State, and the Department of Defense.
2. Concerning this decision by ISAC, see the memorandum by the Foreign Aid Committee (ISAC D–10), Document 874.
3. See Document 892.
4. See Document 892.
5. ISAC 10/1 was a copy of the Final Report of the Tripartite Official Conversations Concerning Economic Aid to Yugoslavia which took place in London; for the text of this report, which was circulated among the members of ISAC, see Document 906.
6. Task Force I Action Summary 18 is not printed, but see footnote 2, Document 874.
7. Document 879.
8. “Other” would include a small amount for technical assistance. [Footnote in the source text.]
8. Not cleared for publication when this volume went to press.
9. According to the minutes of the ISAC meeting of July 18, the following five steps were approved by the Committee:
   • “(a) The U.S. will consult through the Council Deputies with NATO countries on both economic and military end-item assistance to Yugoslavia;
   • “(b) Without waiting for completion of step (a), Congressional Committee approval will be sought for the interim use of MDAP funds to provide critically needed goods to Yugoslavia …;
   • “(c) The President will give the necessary notification under Section 408(c) of the MDA Act;
   • “(d) The President will allocate the funds (about $30 million during July, August, and September) to ECA; and
   • “(e) The funds to be used for this purpose will be reimbursed through transfer for FY ‘52 economic funds to funds available for military end-item programs.” (ISAC files, lot 53D443, ISAC M–31)