Foreign Relations, 1977–1980, Volume XXIII, Mexico, Cuba, and the Caribbean

356. Action Memorandum From the Acting Assistant Secretary of State for Inter-American Affairs (Bushnell) to the Under Secretary of State for Economic Affairs (Cooper)¹

Washington, May 6, 1978

SUBJECT

• Caribbean Group

ISSUE FOR DECISION

To identify a means for the U.S. to contribute to a new facility proposed by the IBRD for assisting Caribbean Group recipients and thereby put reality in our new Caribbean policy and assure the success of the Caribbean Group initiative.

ESSENTIAL FACTORS

A number of proposals will be considered at the first meeting of the Caribbean Group for Cooperation in Economic Development now scheduled for June 19–23, and at a preliminary meeting of donor countries to be held in Paris on May 16. However, the proposal of the World Bank for the establishment of a facility to assist Caribbean Group recipients in meeting local currency costs and cost overruns of important development projects has emerged as the centerpiece of the Caribbean Group effort. The Bank attaches great importance to this fund, and it is supported by the other IFI cosponsors of the Group and, we believe, has the support and approval of recipient country members of the Group. Both the sponsoring IFI’s and the recipients will look to us to take the lead in supporting the IBRD facility at the May 16 donors’ meeting and subsequently at the Caribbean Group meeting in June. If we fail to provide adequate support to the IBRD facility, it is unlikely that other donors will be willing to make contributions. In short, a modest contribution from us to the proposed IBRD facility could be the “horseshoe nail” which eventually decides the success or failure of the Caribbean Group. This memorandum discusses the need for the IBRD facility and suggests the best means for us to support it.

The Caribbean is confronted with a serious conflict between the need to stabilize domestic and external accounts on the one hand and the need to stimulate growth with equity on the other. This not only limits the countries’ abilities to generate public savings with which to finance key development activities but also undermines their absorptive capacity for utilizing external assistance. The result has been a slowdown in economic activity, rising unemployment, serious inflation problems in many countries and a decrease in the quality of life for the poor majority.

IBRD analyses have indicated the need for a special, interim assistance instrument to help the recipient countries during this critical adjustment period. This instrument would be employed to maintain acceptable levels of development expenditures while permitting the recipient governments to execute prudent economic policies directed toward achieving sustained financial stability. The instrument proposed by the IBRD to achieve these objectives is a special facility to provide supplementary financing toward the local costs of development projects. The facility would be administered by the IBRD in conjunction with the IMF, IDB, and CDB (Caribbean Development Bank). A total of about $125 million annually is the estimated requirement for the facility during the first three years of the program.

A financial contribution to the IBRD’s fund is considered essential. A modest amount of $15–20 million will probably be adequate to attract other donor contributions. While the proposed assistance has some features (and effects) common to program assistance, its primary purpose and utilization is at the project level. Nearly half of the projects supported by the facility in the first year would be in the agricultural sector and a further 15% would be in education. As the purpose of our contribution is project assistance, there is no conflict with the Foreign Assistance Act prohibition on the use of development funds for resource transfers (program lending).

A decision on this matter is urgent. If Governor Gilligan agrees in principle with the proposed contribution, we would announce at the May 16 meeting our intention to actively consider such a contribution, and, assuming other donors are also prepared to support the facility, we would conduct consultations with the Congress prior to the June meeting of the Caribbean Group.² Actual obligation of funds could be concluded by August, if funds are available. If FY 78 funds are insufficient, we would plan to commit a significant portion of the $15 million included in the FY 79 Congressional Presentation for Caribbean Group initiatives for this purpose. An internal A.I.D. memorandum is en route to Governor Gilligan recommending that he actively consider a cash contribution of $15–20 million to the IBRD local cost facility subject to the expression of intent of other donors at the May donors’ meeting.

Recommendation:

That you send the attached memorandum³ to Governor Gilligan urging him to approve a cash contribution of $15–20 million from FY 78 fallout funds to the IBRD local cost facility, subject to support of the facility by other donors.⁴

1. Source: National Archives, RG 59, Central Foreign Policy File, P780178–2249. Limited Official Use. Drafted by Hewitt on May 3; cleared by Gower.
2. In telegram 15743 from Paris, May 17, the Embassy reported that at the May 16 meeting, the United States pledged $37.5 million to the Caribbean Development Facility, on the condition that other nations would fulfill the rest of the $125 million goal. (National Archives, RG 59, Central Foreign Policy File, D780210–0389) In telegram 162574 to certain diplomatic posts, June 26, the Department transmitted an account of the June meeting, which it called a “significant success,” with the prospect that the $125 million goal would be met. (National Archives, RG 59, Central Foreign Policy File, D780269–0768)
3. Attached but not printed.
4. On May 9, the disapprove option was checked and an unknown hand wrote below it, “Instead of sending memo, RNC [Cooper] called Gilligan. Gilligan agreed to go ahead with ’78 fallout plus some PL 480 funds. Staff is now looking up the amounts.”