Foreign Relations of the United States, 1964–1968, Volume XVII, Eastern Europe

178. Memorandum From the Under Secretary of State for Economic Affairs (Mann) to the President’s Special Assistant for National Security Affairs (Bundy)¹

Washington, July 22, 1965.

SUBJECT

• Yugoslav Request for Assistance to Carry out Liberalization of Economy

The Yugoslavs are seeking financial assistance to support a far-reaching program of economic reform which has been worked out in close cooperation with the IMF. Internally the program involves further decentralization of economic decision making to business firms and banks operating in the context of a market economy. Externally it involves devaluation of the currency (dinar) and use of a customs tariff to reduce reliance on quantitative and other administrative measures. The Yugoslavs are concerned that they will not have adequate foreign exchange reserves to carry the program through at the pace and to the degree they desire. Currently their reserves amount to $70 million, or less than one month’s imports.

The Yugoslavs see as their difficult period the next three and a half years. To support their new program they want to build up their reserves this year to $200 million and by 1968 to $300 million. The attached table shows the details of their requirements and their present plans to finance at least part of them.

Briefly, what they have in mind is a package of $150–$160 million basically in new medium and longer-term credits. They are looking to us, Italy, France and the U.K. to provide these new credits. In addition, they are about to get a $50 million net credit from the IMF.

From the United States, they ask the following:

(1) Assurance that Export-Import Bank will issue guarantees on privately financed medium term credits for purchase of U.S. raw materials and semi-finished goods in an amount of $20–$25 million through CY 1968.

(2) Putting a two-year grace period in the March 1965 PL 480 Title IV² agreement as well as in two 1964 PL 480 Title IV agreements, and extending the repayment period on the 1964 agreements from 3 to 12 years (which may represent a deferral over the short run of about $26 million).

(3) Easier terms (two-year grace period and repayment over 12–17 years) on a 1966 PL 480 Title IV program of about the same size as the current one.

There appear to be no legal obstacles to working out a package meeting these requests, and the President has made the required determination for EX–IM Bank guarantees to Yugoslavia. The 1964 and 1965 PL 480 terms can be made more favorable in the context of a new PL 480 negotiation covering 1966, and the requested 1966 PL 480 terms, while more favorable than recent agreements with Yugoslavia, are within statutory limits.

The requested EX–IM Bank guarantees, however, would be in addition to those which the Bank is already prepared to extend during the period, and the five to seven-year credit period requested for sales of raw materials and semi-finished goods is beyond EX–IM Bank terms for such sales. EX–IM policy now is to issue guarantees only for 18 month credits on such sales.

Political Issues

The advantages to the U.S. of supporting the program are that it will move the Yugoslav economic system even further towards a typical free-world system and away from the typical Communist system. It will mean closer integration with Free World economic institutions (Yugoslavia hopes the program will enable it to move from provisional GATT membership to full membership) and continue the pressures for liberalization in other aspects of Yugoslav life against more doctrinaire Communists. Success in carrying out the program will have a definite showcase effect in Eastern Europe, where dissatisfaction with the current economic systems and tentative experimentation with reform is widespread.

It must be noted, however, that high Yugoslav officials, notably Tito, and the Yugoslav press have sharply criticized in one-sided terms U.S. policies in Viet-Nam, the Dominican Republic and the Congo. The U.S. has vigorously protested this criticism, and the Yugoslavs have been given to understand that it influences what we can do in the economic area. Since these representations were made, public statements by Yugoslav Government officials have been more restrained, and the joint communiqué issued on the occasion of Tito’s recent visit to Moscow³ called for cessation of bombing of North Viet-Nam, not for withdrawal of U.S. troops. At the same time Yugoslavia has no diplomatic relations with North Viet-Nam, and it has not given that country any kind of material assistance. There have been no demonstrations against the U.S. in Yugoslavia and bilateral relations in the cultural and other fields have increased. In the context of criticism of U.S. foreign policy, Yugoslavia as a dissident Communist country presents a different problem than Pakistan, presumably an ally. Furthermore, Yugoslavia has been absolutely opposed to Chinese policies, especially as they relate to wars of national liberation, and has battled Chinese influence in the Afro-Asian world.

Criticism of the U.S. on these matters must be weighed against the advantages to the U.S. of supporting, in pursuit of its long-range objectives, the fundamental movement towards economic liberalization and closer affinity to Western practices inherent in the Yugoslav program and the significance of this movement in enabling Yugoslavia to continue its role as the envied revisionist and historical disruptor of Communist unity. The financial support which the U.S. is being asked to provide for the reform program is relatively small—namely, less than $17 million a year. More importantly, this support is not in the form of grant “aid” but only of extending better terms on credit facilities, all of which are repayable in dollars.

In my judgment, this contribution would not give us sufficient leverage to compel the Yugoslavs to change further their public statements on our military policies in Viet-Nam, since I believe that under existing circumstances it is in the U.S. interest to continue our normal dollar repayable PL 480 program. Therefore I recommend that the U.S. support to the moderate extent indicated the Yugoslav program for greater economic integration with the Free World.

TCM

1. Source: Johnson Library, National Security File, Country File, Yugoslavia, Memos, Vol. 1. Confidential. An attached table, entitled “Yugoslav Requirements and Proposed Financing,” is not printed.
2. For text of P.L. 480, the Agricultural Trade Development and Assistance Act of 1954, see 68 Stat. 454.
3. Tito visited Moscow June 18–July 1.