280. Memorandum From Guy Erb of
the National Security Council Staff to the President’s Assistant for
National Security Affairs (Brzezinski)1
Washington, November 3, 1977
SUBJECT
-
PRC Meeting on the Negotiations on a
Common Fund, 4 November 1977, 3:30–5:00 p.m.
Summary of Main Issues
The US is involved in a complicated negotiation with developing countries on
a common fund for commodity price stabilization. The PRC meets to consider these negotiations on 4
November 1977. The main question before the PRC will be: (1) is the US prepared to continue the
negotiations and contemplate compromises which may be necessary to bring
them to a successful conclusion? If the answer to (1) is yes, other
important questions are: (2) can possible changes in the US nego
[Page 856]
tiating position be examined during
November, (a) on foreign policy grounds (given the importance of the
negotiation to the overall North-South relationship) and (b) in relation to
the credibility of the OECD proposals and
the viability of a common fund itself; and (3) should consultations with the
Congress be undertaken on US objectives and proposals within the
negotiations.
If the PRC answers question (1) negatively
we will have to consider urgently a series of steps that might minimize the
damage to US relationships with other OECD
members and the LDCs.
Background
The PRC has received a discussion paper on
the negotiations on a common fund (Tab A). The negotiations, which will take
place from 7 November through 2 December,2 are the fourth major North-South encounter on the common
fund: previous meeting occurred at UNCTAD IV in Nairobi in 1976, at an UNCTAD meeting in March of this year; and at the CIEC meeting last June when it was decided
that a common fund “should be established.”
President Carter has referred twice
to the US intent to negotiate a common fund. The
proposed mechanism has become, for better or worse, the touchstone of the
UNCTAD commodity proposals and a
critical factor in the overall North-South relationship.
Since April 1977 the USG has worked with
other OECD countries to develop an OECD proposal to make to the Group of 77 developing countries. The US
approach has been guided by an April 1977 EPG submission of recommendations on common fund issues (Tab
B).3
At that time, the President approved the following paragraph in which you
summarized the EPG recommendations:
Issue 1. All agencies agree that the US should support a
common fund which permits pooling of the fund of various buffer stocks
and includes a provision for World Bank lending to supplement these
funds. This will be seen as a demonstration of US flexibility,
although it will not meet all the demands of the LDCs. (See your memorandum
to the President, April 14, 1977, No. 2059.) (Tab C)4
With considerable ingenuity, US officials have followed up that Presidential
guideline by crafting a proposal for a pooling arrangement which has become
the basis for an OECD
opening position for the negotiations.
[Page 857]
The US Proposal
The US proposal is summarized on pp. 1–3 of the discussion paper. In my view,
the pooling concept on which it is based has serious technical and political
shortcomings:
My critique of the financial viability of the pooling proposal includes the
following points:
—a pooling arrangement without a back-up facility based on direct government
contributions or guarantees would not offer a significant incentive to
producer/consumer commodity agreements to join the pool;
—a common fund without its own financial resources would not be able to
convince private bankers of its credit-worthiness and consequently would
have a weak borrowing capacity on private capital markets. Note: The World
Bank lending proposed by the EPG was an
attempt to respond to this issue.
—the pooling mechanism envisages a complex way of using the callable capital
of commodity agreements and some existing agreements might not be able to
participate in the pool as presently defined.
On political grounds the pooling proposal:
—risks splitting the group of developed countries in November since some of
the smaller European countries are not satisfied with the proposal as it
stands.
—may well provoke a confrontation with developing countries because it falls
far short of the Group of 77 proposals.
The Proposal of the Developing Countries
The common fund proposals of the Group of 77
now include: (1) creation of a central source of funds for international
commodity price stabilization agreements between producers and consumers;
(2) support by a common fund for “other measures” which would include
improvements in productivity, marketing and diversification; (3) financing
for stocks and other measures for commodities not covered by international
commodity agreements.
Only the first of the above proposals offers us a reasonable prospect for
compromise. This is so because the US cannot at this time responsibly
support a new institution for financing “other
measures” when we must still deliver on commitments of $800 million to existing international development lending
institutions. Moreover, support by a common fund for commodities not covered
by agreements would only be possible if the US and other developed countries
had agreed with producers to international guidelines which were comparable
to those in formal international agreements.
The Group of 77 is not united solidly behind
their proposals, a factor which lends considerable uncertainty to
interpretations of their possible reaction to the OECD proposal. My best guess is that the LDC
[Page 858]
moderates will not be able to
contain sharply critical LDC statements
during the early stages of the November meeting. The ability of the US to
respond constructively to that criticism may determine whether or not we
will be able to channel the common fund negotiations toward technical
working groups following the November meeting. Such groups would be
preferable to another high-level, highly politicized negotiating
session.
The major European countries have been informed of the possibility that the
US might have to revise its position in the light of events during the
November meeting. An improved US response might:
—force the Group of 77 to react to a
constructive proposal rather than maintain their maximum demands in a
confrontational manner.
—enable the US to resist pressure to make more changes in its proposals.
RECOMMENDATIONS
The following are my recommendations related to the main questions posed at
the beginning of this memo:
Question 1:
Is the US prepared to continue the negotiations and contemplate compromises
which may be necessary to bring them to a successful conclusion?
The President has approved your suggestion of a US approach to the LDCs based
on cooperation and shared responsibility. That approach justifies a serious
US intent to negotiate a common fund.5
Question 2:
Can possible changes in the US negotiation position be examined during
November, (a) on foreign policy grounds (given the importance of the
negotiation to the overall North-South relationship) and (b) in relation to
the credibility of the OECD proposals and
the viability of a common fund itself?
We should seek from the PRC policy
guidelines which authorize the serious exploration of improvements in the US
position, for example those found in paragraphs 9–15 of the discussion
paper. A PRC request to explore urgently
those, and other, possible changes in the US position could aim at providing
our representatives in Geneva with the negotiating flexibility that they may
use as needed.6
[Page 859]
Question 3:
Should consultation with the Congress be undertaken on US objectives and
proposals within the negotiations?
As we determine the substance of possible changes in the US position, the
Congress should be consulted on the evolving US position. In our
consultations on Capitol Hill the objective of price stabilization (not
price rigging, not more foreign aid) must be continually borne in mind.
Tab A
Discussion Paper Prepared for the Policy Review
Committee7
THE COMMON FUND
November 4, 1977 The Situation Room
The Setting
1. The UNCTAD negotiations on a
common fund have become a principal focal point in the North/South
dialogue. The March 1977 negotiating conference made little progress in
bridging the major differences seen at the Fourth UNCTAD in Nairobi in 1976. At CIEC the industrialized and developing
countries agreed in principle to establish a common fund. It was clear
on both sides, however, that the type of common fund the major
industrialized countries were willing to consider was a much more
limited and modest mechanism than that sought by the LDCs.
2. Since CIEC the US has led an effort
in the OECD to develop a common fund
proposal for the 4-week negotiating conference that begins November 7.
The US has proposed a common fund that would facilitate the financing of
commodity buffer stock operations by pooling the cash resources of
International Commodity Agreements (ICAs) and borrowing in the market
against commodity stock warrants and callable capital pledged by
governments through the ICAs. The proposed fund would not receive direct
contributions from governments and would not have financial resources
independent of the participating ICAs. Latest indications are that this
approach is acceptable to other OECD
countries as an opening position.
3. The LDCs want the common fund to be a global commodity institution
that would act as a central source of financing for ICAs with
[Page 860]
financial contributions made
directly to it by national governments. Many of them also want the fund
to finance non-stabilization measures—diversification, infrastructure
investment, research and development, product improvement and market
promotion. Inclusion of “other measures” is basic to LDC cohesion because it offers benefits to
LDCs who would not gain from buffer stocking. We and most other
industrialized countries believe these non-stabilization needs are in
large part already being addressed or could be addressed through
existing financial institutions (IBRD,
UNDP, regional banks), bilateral
assistance programs, and ICAs themselves. Finally, the LDCs want the
fund to be a new international institution with its own resources under
their control. We seek to limit the scope of the fund’s activities,
prevent control by the LDCs as a bloc, and preserve the autonomy of
ICAs.
4. We cannot be sure how the LDCs will react to our current proposal in
November. In view of the distance we have come, in the last year, the
LDC moderates may be willing to
work with our approach and attempt to move us along in November and
further negotiating sessions next year. On the other hand, given the
fundamental differences between our concept of a common fund and that
demanded by the LDCs, we must be prepared for a contentious and
politicized session that could end in a stalemate and sour the general
negotiating environment on North/South issues. The common fund
negotiations occur at an important moment in the dialogue, being the
first major “economic” event after CIEC; preceding an upcoming series of difficult North/South
negotiations; and coming before and during the President’s trip.8 The Group of 77 developing countries (G–77) are likely to use the opportunity
provided by the trip to increase pressure on the US.
The U.S. Proposal
5. We have argued in the OECD that our
proposal would offer the following benefits:
a. it would provide economies from the pooling of substantial cash
resources;
b. it would substantially reduce the financial outlays of government for
each ICA by relying on commercial
borrowing to enable participating ICAs to obtain financing up to 100% of
their negotiated financial requirements;
c. it would be able to borrow more effectively and at lower costs than
individual ICAs by consolidating their financial operations;
[Page 861]
d. it would enhance the fund’s standing on the market over time through
the financial solidarity derived from the participation of major
industrialized countries.
6. In advancing our arguments in the OECD we have brought along the major industrialized
countries to the point where—despite some misgivings on the part of the
UK and France—they are now willing
to support our approach as a credible opening position, although LDC pressure could result in a breakdown
of OECD cohesion during the course of
the November session.
7. The scheme has been criticized, even within the USG, on the grounds that its credit
worthiness could be strengthened; that—aside from the economies derived
from pooling cash resources under ICAs—the fund would not provide any
benefits beyond those the ICAs could obtain on their own; and that since
it would have no resources of its own, it is no more than a useless
financial intermediary. In this view, tabling of such a proposal would
be viewed by the LDCs as a failure by the industrialized countries to
live up to their commitment at CIEC
and could, therefore, lead to a major confrontation.
Negotiating Strategy
8. An immediate issue is whether a common fund of the sort outlined above
is of sufficient scope to be a valid basis for negotiations throughout
November and beyond. The basic conceptual difference between the US and
G–77 centers on the provision of
direct financial contributions to the common fund and whether such
contributions can be used for purposes other than price stabilization
through international buffer stocks. The following paragraphs discuss a
number of proposals that have been put forward as possible additions to
our current proposal:
Producer/Consumer Co-financing of ICA Buffer Stocks
9. Link the proposal to an explicit statement by industrialized countries
accepting the principle of consumer participation in the financing of
buffer stocks negotiated by producers and consumers. Although The
Executive Branch has already accepted this principle, further
consultations with the Congress will be necessary. The Germans, in a
major policy reversal, have endorsed this principle as well. The British
are referring it to Ministers and the Japanese have not yet accepted it.
A joint industrialized country statement on this issue would represent a
genuine step forward in assuring adequate financing of buffer stocks. It
would also significantly enhance the credibility of a pooling
arrangement.
Support for Backup Mechanisms
10. Provide government contribution(s) to the fund as a backup reserve,
either directly or through each ICA for
the purpose of enhancing
[Page 862]
the
fund’s ability to borrow. Such funds could not be withdrawn by
individual ICAs. From a financial point of view the desirability of such
contributions is related to the deposit ratio issue discussed below. The
lower this ratio the greater the desirability of such contributions.
This approach has the attraction of offering a limited compromise on the
central source issue—still the major conceptual gap between our approach
and that of the G–77—and providing the
fund with minimal direct resources to assure its continued operation in
the event of default by a participating ICA or participating members of an ICA. Unless we could convince the Congress that such
resources were essential to the fund’s operations and would not be used
for the benefit of ICAs of which we were not a member, such support
would probably not be authorized. And even if we could provide such
assurances, the need to obtain Congressional support would be a major
constraint in introducing the proposal. And were Congress to go along,
we might expect that these appropriations would be at the expense of
other foreign assistance programs.
11. Lower the proportion of cash ICA
resources which must be deposited with the fund. By thus reducing
initial budgetary outlays, this step would make the fund more attractive
to members of ICAs. But there is then a risk that if support for the
back-up mechanism ever shifted from callable capital pledged through
ICAs to direct contributions, we could end up with a fund that a)
required substantial amounts of direct resources and b) required
participating countries to support borrowing on behalf of ICAs of which
they are not members. To avoid this problem, we would have to seek
agreement on the nature of the back-up mechanism before settling the
deposit ratio and other basic issues.
12. Endow the fund with an overdraft within the World Bank or IMF that would be activated in the event
of an IMF-certified recession and if
the common fund had exhausted its commercial borrowing capacity. This
step would be consistent with our position that there are benefits to
all countries in sustaining production and employment by propping up
commodity prices in the event of a severe decline. When this idea was
raised earlier this year with other industrialized countries, it was
generally opposed and we have not discussed it further in the OECD framework. The objections raised to
the proposal were:
a) the existence of such a facility would tend to reduce the incentive
for ICAs to raise the appropriate amount of their own financing when the
agreements are negotiated;
b) the ICAs themselves might have to be amended in order to obtain
financing significantly in excess of 100% of their negotiated financial
requirements;
[Page 863]
c) an overdraft with the Bank or IMF
would require changes in their respective Charter and Articles of
Agreement; such changes could be difficult to obtain and would risk
further undesirable amendments;
d) establishment of such an overdraft facility could result in drawing
away funds for economic development purposes in the case of the Bank and
for anti-recessionary balance of payments financing in the case of the
IMF, when the need for such
financing would be greatest.
“Other Measures”
13. Seek a commitment by developed countries to support increased
attention by the World Bank to commodity problems in connection with the
proposed general capital increase. This step—together with agreement by
the developed countries that the objectives of ICAs could include
financing of product improvement and R&D programs—would be a defensible answer to LDC insistence that a common fund finance
other measures. The disadvantages are: a) we are not in a position to
“earmark” a future general capital increase; b) the LDCs will argue they
are destined to receive the benefits of a general capital increase in
any event and that there is, therefore, no additionality; and c) they
will view this step as a ploy to subvert their concept of a common fund,
which directly addresses “other measures” and, therefore, contains
something of interest to virtually every LDC.
14. Provide for an advisory role for the fund on other measures. Here,
the fund’s membership would issue “recommendations” to other
institutions to undertake “other measures” where traditional price
stabilizing agreements are not feasible. While this might seem better
than nothing to some LDCs and innocuous to many developed countries, it
accepts a definite role for the fund on other measures, thus paving the
way for pressure to move from “advising” to “financing,” and would
almost certainly result in a new large international bureaucracy.
15. Provide for voluntary contributions to a second window for the
financing of other measures. This would provide an outlet for any
voluntary contributions, including those from OPEC, and also perhaps satisfy the LDCs that the fund would
have a financing role on other measures. On the other hand, in addition
to the disadvantages cited in 14) above, it would be difficult for the
US to resist the inevitable pressure on us to contribute to the second
window, which would become in effect a new aid institution requiring
periodic replenishment. A second window is thus inconsistent with our
position, and that of most OECD
countries, that there is no economic justification for common fund
financing of non-stabilization measures.
16. We should bear in mind that there is no certainty that changes in the
US approach would bridge the wide gap between the industrialized
countries and the LDCs. An arduous negotiation thus appears inevitable.
Moreover, our support for consumer-country participation in
[Page 864]
buffer stock financing—which
is a central element in our commodity policy—has not really been tested
yet on the Hill. In determining our position, tactics and strategy, we
must weigh the desirability of a possible short-term political gain
against our own preferred approach to commodity issues and the major
Congressional constraints that loom in the background.
Timing
17. The timing of possible introduction of any of the above changes is a
matter of judgement with respect to negotiating strategy and tactics in
UNCTAD.
18. Introduction of some changes fairly early in the negotiations could
reduce the risk of our immediately being thrown on the defensive and
enhance our ability to make the OECD
proposal the basis for discussion in November.
19. The nature of the North/South dialogue and the entire history of
negotiations between the developed and developing countries suggest that
the latter quickly snatch any concessions made and then up the ante.
Given the conceptual gulf between the two sides on the common fund—even
with the US in its most forthcoming possible posture—there is every
reason to suspect history will repeat itself in November. This argues
for a conservative opening position with some flexibility held in
reserve and used only when absolutely necessary. The limitations on that
flexibility, however, argue for stretching out whatever changes we may
be able to make over the longest possible period. We cannot
realistically hope in November to change the nature of negotiations in
UNCTAD. Despite the obvious
risks involved, we may want to sensitize the LDCs early in the
negotiations to the real limits in our position and to the fact that,
while we hope for some progress in November, we do not expect all major
issues to be resolved.
