153. Memorandum of Conversation0
SUBJECT
- West German Foreign Aid
PARTICIPANTS
- Germans
- The German Ambassador1
- The Minister for Economic Cooperation, Walter Scheel
- Gustav-Adolf Sonnenhol, Ministerialdirektor, Federal Ministry for Economic Cooperation
- Fritz Stedtfeld, Ministerialdirigent, Ministry of Economics
- Werner Johann Lamby, Federal Ministry for Economic Cooperation
- Hans Juergen Duerr, Press Chief, Federal Ministry for Economic Cooperation
- Americans
- The Under Secretary Deputy Assistant Secretary William C. Burdett
- Edwin M. Cronk, American Embassy, Bonn
- George S. Springsteen, Office of the Under Secretary
- Jacob J. Kaplan, AID/IDOS
- Joseph E. O’Mahony, EUR/GER
Magnitude of German Aid
Following introductory remarks by both sides, Minister Scheel opened the discussion by stating that he was anxious to receive Mr. Ball’s comments and suggestions regarding the appropriate magnitudes of aid various industrialized countries might be expected to supply to the LDC’s. He pointed out that this subject is of such importance that it must be discussed amongst donors at the highest levels of government.
As far as the Federal Republic is concerned, Minister Scheel maintained, fairly successful foreign economic assistance programs have already been launched and are being implemented. The Federal Government faces a number of problems and uncertainties, however, in regard to the future of the German economy and the size and type of foreign aid program it will be in a position to make available from now on. He pointed out in this connection that current German foreign aid cash outlays are made from funds derived to a large extent from extraordinary, non-recurrent sources (proceeds from the sale of Volkswagen shares, etc.), but that future official aid program payments must come almost entirely from a budget which is already overburdened.
[Page 330]The Under Secretary replied that aid problems, including those related to the need for giving regular consideration to how much economic assistance various countries might provide, will be with us for a long time. We must expect to encounter difficulties in attempting to sustain our aid expenditures. The American and German people may not always be aware of the necessity for maintaining foreign aid programs of sufficient magnitude to do the job that needs to be done. Tangible results from foreign economic assistance usually occur slowly and they may not always be apparent to the public.
We will need to discuss aid problems with each other on a regular basis, the Under Secretary stated, and we must keep in mind that matters such as the magnitudes of various countries’ aid programs have political as well as economic implications. There must, of course, be a mutual recognition of each country’s independence. When the U.S. makes certain suggestions regarding the magnitude of effort the U.S. or Federal Republic might take on as part of the common task, we are in no way suggesting that West Germany is an auxiliary power in this task. We expect to receive suggestions from the Federal Republic, and we are anxious to be of help to the Federal Republic where we can.
Minister Scheel responded that he wanted to assure Mr. Ball that the Federal Republic does not in any way regard U.S. suggestions as demands. The Federal Republic fully realizes that there is a very important and large job to be done, that it cannot be done by one country alone, and that there must be an apportionment of the effort.
The Federal Republic, declared Minister Scheel, does not intend to retreat from the current average level of economic assistance being extended to the LDC’s. Chancellor Adenauer, Scheel added, committed the German Government to this policy at a recent news conference.2
The Federal Republic, the Minister went on, is prevented from doing more than this by financial realities. The West German economy is not surging ahead any longer, and so tax revenues are not increasing to the same extent as in previous years. Deficit financing is impossible—the Federal Government must operate within its revenues—the constitution requires it. Given rising defense expenditures, therefore, there are severe limitations on the amount of funds available to the Federal Government for foreign aid.
The general guideline for German foreign aid, Minister Scheel explained, will be DM 3 billion, or approximately one percent of gross national product. As gross national product increases, the DM 3 billion annual target will be adjusted. However, the Federal Republic might not [Page 331] provide exactly this much every year, but will make it available on an average over a period of years. In 1961, for example, commitments ran far above DM 3 billion. In other years, therefore, they can be expected to run under DM 3 billion.
Public funds, Minister Scheel went on to explain, will not be sufficient to finance the full DM 3 billion annual program. Consequently, private funds must be tapped for this purpose. Private investment, after all, said the Minister, is usually a better form of aid than public investment. The Federal Republic realized a need exists for both kinds of investment, though, and will provide both.
Development Loan Terms
The Under Secretary pointed out that a meeting of minds is necessary on development lending terms. Differences in the terms attached to foreign loans extended by various countries, Mr. Ball stated, can, among other things, create political problems for us. When the U.S. finds it necessary to extend a very large volume of assistance to a particular country “to keep it from going down,” and that country receives loans from other sources on much less liberal terms, the effect is that the U.S. is underwriting the repayment of these other credits. Such situations are obviously difficult to justify.
Minister Scheel answered that maturities for West German long-term development assistance credits have been stretched from 15 to 20 years. Such terms were never heard of in the Federal Republic prior to World War II. Interest rate policy is to charge 3-4 percent for loans connected with infrastructure projects, 4-5 percent on mixed infrastructure-commercial projects and close to German market rates on purely commercial projects. The latter rates, Scheel added, are almost always very far below the market rate of interest prevailing in the LDC requesting the loan.
Perhaps one reason U.S. and German development loan terms tend to differ in places, Minister Scheel remarked, is that in extending development assistance the Federal Republic looks primarily at the soundness of a given project and the outlook for its success, while the United States looks primarily at the balance of payments situation of the country. This whole subject of criteria for aid is going to be discussed in the DAC. While the Federal Republic has moved somewhat in the direction of the U.S. position on this question, very significant differences continue to exist between our two sets of criteria.
The Under Secretary pointed out that we are certainly very much concerned about the soundness of the projects we help finance, but we are concerned at the same time that the LDC’s do not pile up debt service burdens that will lead to financial crises.
[Page 332]The LDC’s, the Under Secretary added, must be taught financial responsibility. It could be extremely unsettling for LDC’s to get into the habit of allowing themselves to get into financial trouble in the belief that they will always be bailed out. If we fail to take into account the ability of the LDC’s to meet their foreign debt obligations, we are not doing them a service.
The DAC, the Under Secretary suggested, should examine the amortization curves of the foreign debts of the LDC’s to avoid crisis conditions from developing. The DAC should take into account the ability of the LDC’s to increase their export earnings. Unfortunately, many LDC’s are unfamiliar with export promotion. In this regard, the OECD can be helpful in alleviating some of the trade problems facing the LDC’s.
Minister Scheel agreed that the DAC and OECD should do these things. He added that in his opinion increased trade is the key to the problem of economic development. It is easier, even if less effective, to give capital to the LDC’s than to open new markets for them.
At the same time, however, we must be careful, Scheel warned, to see that our investments in the export industries of the LDC’s—especially the Latin American LDC’s—are adequately planned on a worldwide basis. We must avoid investing in the banana or coffee industries of every LDC. Otherwise, we will only contribute further to the flooding of the world markets with such products.
Aid Coordination
One piece of unfinished business that lies before us at this time, Mr. Ball stated, is the determination of the roles individual Atlantic nations should play in contributing toward the common effort. We can expect the United States to take a leading role in certain places, the Federal Republic can take the lead in other places, and the EEC can do the same elsewhere. The role of the Federal Republic can be fairly broad, especially since it is unencumbered by a recent history of colonialism.
As colonial arrangements were dissolved, the Under Secretary continued, power vacuums were created in many parts of the world. The Federal Republic has considerable freedom of movement throughout the less developed regions which certain other countries possess to a considerably less extent. The question remains, however, just who will do what, where.
It is the U.S. view that the DAC can play an especially useful role in this regard. The DAC is still in a very early stage of development. We think it can be improved upon and made a more useful instrumentality for achieving this type of coordination.
Minister Scheel replied that the Federal Republic is willing and anxious to coordinate its foreign aid policies and operations with other donor countries. The DAC seems to him also to be the best instrumentality [Page 333] for doing this, but he must agree that the DAC is in need of improvement. We have to consider DAC’s future very carefully. For example, the DAC should be called in at an early stage to help plan development programs for LDC’s and to decide upon assistance arrangements. The World Bank and the DAC need to cooperate very closely.
Minister Scheel then went on to say that the whole matter of coordination and of reaching decisions about the sharing of responsibilities for development assistance is taken very seriously by the German Government. The Federal Republic may appear particularly sensitive about its role at times—it is a new participant in the foreign aid field and needs to gain experience. The Federal Republic does not intend to escape from its responsibilities, but there are a great many problems to work out concerning the best means of coordinating our activities.
Africa
Minister Scheel said he was somewhat concerned regarding our approach to Africa. The Federal Republic feels that, despite the language and ideological barriers which tend to come between Africa and the West, impulses exist which can lead to desirable relationships between these two areas. The nations of the Atlantic Community must take advantage of these impulses, Scheel declared, and help determine future developments on the African continent. This work cannot be left in the hands of international organizations. For one thing, we do not know what the goals of these international organizations may be. We must make our own approaches—only in that way will we know they are being made in pursuance of the goals we establish.
The U.S. and the Federal Republic, the Minister said, have no special relationships with particular African countries such as other European powers have. U.S. and FRG interests will be served by African economic development. It has been his observation that the more stable African countries are those which are more pluralist in structure, especially in industrial structure. Single industry economies are the least stable. To become economically sovereign the African countries must expand their relations with many other partners.
The Minister went on to say that Africa is in need of a long-term trade and development plan. Such a plan should be worked out as soon as the UK joins the EEC.
Attitudes Toward Private Investment and Property
Minister Scheel expressed the view that the availability of large-scale public capital may be having an adverse effect on the flow of private capital. Public capital should supplement, not replace private capital, Scheel said. The terms assigned to public loans are so much more advantageous to the borrower, however, that enormous efforts are made to obtain such funds and the possibility of securing private financing is [Page 334] often neglected. Furthermore, countries that have an unfriendly attitude toward private foreign capital seem to feel they can discourage the inflow of such investments and make up the loss by appealing for foreign aid. Scheel described situations of this kind as intolerable.
The Under Secretary said that he made a similar point in his speech the week before to the IBRD, and added that actions against foreign capital also tend to discourage domestic private investment. The U.S., Mr. Ball explained, does not intend to infringe upon the sovereignty of any LDC, but if an LDC is intent upon following a policy of this sort it must face the consequences.
Minister Scheel and the Under Secretary agreed that economic development would be fostered by a freer flow of capital. Mr. Ball pointed out that internal savings are insufficient to finance economic development programs in the LDC’s. These countries are dependent today upon foreign investment capital much in the same way the U.S. was during its early period of development.
We are not infringing on the sovereignty of the LDC’s, Mr. Ball added, if we tell these countries that we have no intention of sending public capital into their economics to do the job that domestic or foreign private capital can be induced to perform. In the past, declared the Under Secretary, we were overly reluctant to make this clear. In the future we should say it, and say it uncategorically.
During the first half of this year, the Under Secretary pointed out, there was a net outflow of private capital from Latin America. A development of this sort tends to defeat the economic development efforts being made with public funds.
Minister Scheel pointed out that the Federal Republic recently has refused to grant guarantees for investments in Brazil and India because these countries have refused to enter into agreements with the FRG for the protection of private capital. The Federal Republic would like to see an international agreement concluded on private property protection, but, said the Minister, the U.S. has appeared very reserved to this idea.
Mr. Ball pointed out that the U.S. aid legislation requires us to terminate assistance to countries that expropriate private property without adequate compensation. The Under Secretary concluded by saying that the United States has not taken a doctrinaire position on the advisability of an international agreement such as described by the Minister.