60. Summary of Meeting1
INTERDEPARTMENTAL COMMITTEE OF UNDER SECRETARIES ON FOREIGN ECONOMIC POLICY
Problems Related to Private Participation in the Alliance for Progress
I. Attendance
[Here follows a list of participants. Under Secretary of State McGhee chaired the meeting.]
II. Problems Related to Private Participation in the Alliance for Progress
A paper on this subject had been prepared by Commerce and circulated prior to the meeting. Mr. Behrman made the initial presentation, [Page 138] discussing specific problems, issues and questions which had been raised by the report of the Commerce Committee for the Alliance for Progress (COMAP) to Secretary Hodges. Comments were then made by most of the agencies represented.
The COMAP Report.2COMAP is an advisory group of about 25 businessmen which Commerce asked to look into the matter of private participation in the Alliance for Progress last spring. The original idea was to have task forces do feasibility studies of industries in specific countries in Latin America. As the Committee got under way, it concluded that the problem was not so much that of identifying specific investment opportunities but rather of getting the obstacles cleared away and, if that could not be done, to find ways of meeting the situation so as to generate more private investment.
The COMAP report does not represent a consensus of the Committee but is almost wholly that of Peter Grace, who contributed some fifteen people from his firm to work on it. It might be added that Mr. Grace is addicted to statistics and the report is full of them. There have been a good many comments on the report from other members of the Committee. Most of them have been in favor of its conclusions, although some exceptions were taken to certain points. Only one was clearly opposed to the tax credit idea. Messrs. Rockefeller, Collado and Wriston3 wrote a long letter commenting on and concurring in the report. Unfortunately, this letter became public and has raised some serious objections in relatively conservative circles in Latin America.
The report concludes that the decline in American private investment in Latin America has become so serious that the situation cannot be remedied by our trying to persuade the Latin Americans to alter their investment climate themselves but that the United States Government should take unilateral action to neutralize or offset the risks to investment there. The report speaks of four main categories of risks: low profit rate, foreign exchange losses suffered by American subsidiaries that are not suffered by local companies, no earnings at all, and loss of the investment capital itself. The report has about twenty-five recommendations which can be grouped under the following headings: 1) tax recommendations; 2) local currency recommendations; 3) investment guaranty recommendations; and 4) general recommendations.
Tax Proposals. Treasury studied the COMAP tax proposals and found most of them not very helpful. Treasury sent a reply to Mr. Grace on most of the proposals, but has not yet had a comment from him. We [Page 139] already have a pretty liberal system of taxation for investments in Latin America and all developing countries, but COMAP is asking for something more than we have now as an incentive to investment in Latin America.
The report asks for tax sparing, but that would pull money out of the countries as it operates only when the money comes back to the United States. We have generally gone on the assumption that any incentive that operates to induce profits to come out of Latin America is not the best kind but that incentives should encourage money to go to Latin America. So the United States Government has decided against action in this regard.
In the United States there is a 5% credit against U.S. taxes for investment. Treasury has thought that could be extended to investment in Latin America. Mr. Grace and others think that is not enough, and have suggested a 25% credit for new investments in Latin America. This is the proposal that is being considered by the Executive Branch. If something like this is necessary to make the Alliance work, Treasury believes it could be added appropriately to the tax system. Whether the Congressional Committees will agree is another question.
We have not been able to come up with any estimates as to just how much investment would flow to Latin America as a result of such action but it may be that this device will transform what might have been a marginal investment proposal into something viable. It may, of course, give a windfall to investors who would be going down anyway.
Treasury has worked out a mechanism with the other agencies which, while complex, should work. The tax credit would not apply to investment in the extractive industries, both because such industries do not seem to need it as an inducement to go in and because politically it would be unwise to do so. This is about ready to be submitted to the President with a recommendation that he submit it to Congress. Responding in this way with something concrete should enhance the Government’s relationship with the public committee and may create a psychological effect that will lead to a broader economic effect.
Local Currency Proposals. COMAP did not seem to understand that under the PL-480 agreements where we have counterpart funds, we must negotiate with the countries on their use. Where we have a shortage of PL-480 funds, which is chronic in Latin America, we have an allocation of 25% and it would not help to raise it to 50%.
COMAP’s chief interest was to find other sources for local currency which could be loaned to investors so they could use it as a hedge against devaluation.
It was suggested that counterpart from balance-of-payments loans be considered for this purpose. On that suggestion we can point to Colombia as a response. A portion of the local currency from the $60 million [Page 140] balance-of-payments loan is being lent through the Central Bank down there to international firms that want to borrow. (COMAP recognizes that such funds must be available to other investors as well as American.)
Investment Guaranty. The recommendations of the COMAP report in the investment guaranty field are not too helpful. AID is already working on this and is making progress. Within AID, it is being recommended that in the next few months diplomatic pressures be used wherever feasible to get the agreements signed. AID is updating the ground rules for investment guaranties and is asking for increases in the ceiling on investment guaranties along the lines of the COMAP recommendation. It will streamline and simplify contracts. We are considering a multilateral risk guarantee but think that we should get other things settled first before pursuing this.
Criticism at the Meeting of the COMAP Report. AID felt that the COMAP report didn’t take cognizance of the difference between two things: a) efforts to improve the climate, which is a very gradual process on which more progress is being made than either the COMAP report or the Rockefeller-Collado-Wriston letter indicate; and b) the impossibility of waiting until we have reached the optimum climate before we become operative.
There is a fallacy in using the statistics and averages in the COMAP report—low return, no return, etc. A businessman does not make an investment in Latin America—he makes an investment in a specific business in a particular town in a selected country because he thinks he will make a profit. Use of the term “Latin America” is misleading, because there are so many differences among the countries and within the countries. Also it is fallacious to speak of the business community as a single entity. There are all kinds of differences of opinion within the community, and the twenty business committees concerning themselves with Latin America do not speak with one voice.
There were comments to the effect that the COMAP report exaggerated the problem—that the investment climate is not as unattractive as the report made out; that some investment is taking place; and that the rate of return is not as low as the report indicated. The major problem is in the Latin American countries themselves and is something we cannot influence in a major way either by agreements, exhortation, or U.S. legislation. The real problem is doubt on the part of the investor deriving from Latin American revolutions, expropriation in Cuba, inflationary conditions, and mismanagement. It is largely psychological, and the only way to offset it is to have it become generally realized that people are doing business in Latin America and doing well there.
Agriculture had a strong reaction against the COMAP report’s desire to back away from land reform. Agriculture agreed with the comments [Page 141] in the Commerce paper that the basic objectives of the Alliance, including land reform, health and educational programs, must go on if the Alliance is to have widespread support in Latin America itself.
Some of the statistics in the COMAP report were criticized as not presenting the true picture. For example, the report shows that in the first nine months of last year there was a net outflow of U.S. capital from Latin America. The other months of that year show a different trend. Also, no account is taken of the Japanese and European investment in Latin America which is considerable.
How to Use the Private Sector in the Alliance. The report, which one official characterized as the worst blow yet to the Alliance, raises a question as to how to use the private sector in approaching a problem that involves the private sector. The COMAP experience is one which would lead a good many to be wary of participating in this kind of an effort. It is a serious problem to bring a group in on an advisory basis. Now we have quite a problem in getting Mr. Grace squared away in testimony.
The longer-range issue is how to mobilize the private sector for the Alliance in Latin America as well as in the United States. This is one of the most difficult problems in the Alliance. The private sector is very disaffected and doesn’t feel it has been adequately consulted. In this regard, one of the problems discussed in Committee IV at Buenos Aires was the place of industrial promotion centers and getting the private sector to take responsibility for doing basic industry feasibility studies to find opportunities for investment which should be pursued and then finding the financing for the investment, through the IDB or elsewhere.
Mr. Rostow said that we should be thinking not merely how to encourage private investment but how our leadership in private enterprise can make a contribution to the structural problems of Latin American countries. Private enterprise activities in the fabrication sector tend to be confined to cities and the middle class urban market. Behind lays the hinterland and the vast slums. A central problem is to break the private enterprise activities out of their limited urban markets and offer on a mass basis the means for increasing productivity in the form of agricultural tools, equipment, fertilizer as well as the incentives in the form of consumer goods. A major contribution of American private enterprise would be to make common cause with those Latin American businessmen who have the energy and potential to break out of the present situation and think in terms of a mass market.
The Problem of Relating Stability and Development. Mr. Rostow spoke of the difficulty of marrying fiscal and banking measures designed to produce stability which have a deflationary effect with development projects which involve government-to-government investment for social overhead projects. There is danger of throttling the private sector. He hoped that problem could be discussed sometime, in this forum.
[Page 142]Need to Improve the Image of American Investment. It was suggested at the meeting that there needed to be a real campaign to remove the bad and unfair image that has been created with respect to American investment. People should be made aware that American private investment has put into less developed countries good housing, schools, hospitals, roads, and other things which improve the standard of living. The Latin Governments should give credit for the benefits, and the American companies themselves should do something about improving their image. Officials of American subsidiaries should take part in the community, for example, participating in the local Chambers of Commerce as well as in the American Chambers of Commerce.
It was noted that enough material was available to make an effective reply to criticisms of the Alliance and misconceptions concerning business; someone high in the Administration should make a speech on this subject.
Summation. Mr. McGhee noted that the discussion had brought out several very important points. The Latin American countries themselves have much to do. We have limited means to induce them.
It is important that we should not be talked out of our basic philosophy on the Alliance for Progress by Mr. Grace. The San Jose meeting of Presidents made clear that we are going forward with social measures at the same time as with the private sector, and that we haven’t changed our philosophy. In individual cases, we have to consider how far to press, but the general basis and objectives are the same as outlined at Punta del Este.
III. Next Meeting
The next meeting is scheduled for April 4, and Governor Harriman will preside. The subject will be “Problems of Foreign Aid: Alternative Means of Helping Nations to Achieve Self-reliance”. AID is preparing a paper which will be circulated.
- Source: Department of State, Bureau of Economic Affairs, Policy Reporting Staff Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Economic Policy, Private Participation in the Alliance for Progress. Official Use Only. Prepared by Ruth Donahue, Chief, Policy Reporting Staff, Bureau of Economic Affairs, on March 25.↩
- Not found.↩
- Reference is to David Rockefeller, Chairman of the Chase International Investment Corporation, Emilio Collado, Director of the Standard Oil Company, and Walter Wriston, Executive Vice President of City Bank of New York.↩
- Printed from a copy that bears this typed signature.↩