Foreign Relations of the United States, 1981–1988, Volume XXXVIII, International Economic Development; International Debt; Foreign Assistance

173. Memorandum From Roger Robinson and David Wigg of the National Security Council Staff to the President’s Assistant for National Security Affairs (McFarlane)¹

Washington, June 18, 1984

SUBJECT

• Breakfast Meeting with Secretaries Shultz and Regan: Financial Conditionality As An Element of US Foreign Policy

Over the past two months, the NSC has been forced to fill an institutional vacuum and intercede over the objection of much of the bureaucracy, in arranging emergency financial packages for three democratic governments caught in severe economic crises. These countries together constitute a critical element of support for U.S. policies in the Western Hemisphere—the Dominican Republic, Jamaica and Honduras.

In each case, OMB and Treasury, together with various bureaus from State/AID, strongly opposed, (and even attempted to block) these packages in order to maintain strict adherence to the conditionality timetables embodied in IMF adjustment programs or adjustment criteria.

After detailed consultations with the relevant agencies, the NSC effort prevailed in each case, but not without a cost both in terms of executive time taken from other national security matters (micromanagement), and incurring the unhappiness of some senior officials in Cabinet agencies. After having worked long and hard to cultivate positive working relationships with the agencies over the past six months, this was not a welcome development. We now have an opportunity to identify a process to structure this new phenomena of emergency packages and to ensure that all concerned agencies have their “day in court.”

U.S. Support for Conditionality

The IMF in fulfilling its mandate, is primarily concerned with helping to reverse LDC economic imbalances which largely grew out of the dramatic shift in world economic and financial circumstances in the 1970’s.

Few, if any U.S. officials would argue against the concept that carefully crafted economic adjustment programs are a vitally important element in helping beleaguered LDC’s (particularly those with excessive reliance on traditional raw material, food and semi-manufactured exports) to adjust to today’s international economic environment characterized by reduced inflation, lower commodity prices, financial retrenchment, sharpened export competitiveness and pressures for increased protectionism in certain markets. U.S. support for IMF adjustment programs—both those already in place and those still under negotiation—has been a central component of our Five-Point Strategy to manage the debt crisis.

For the past two years, Treasury and OMB have properly linked U.S. financial aid disbursements (State ESF, Treasury ESF, PL–480, CCC, etc.) to specified milestones in IMF-debtor country negotiations. This approach is consistent with OMB’s broader mandate to encourage U.S. fiscal stringency and budgetary cutbacks. The key arguments supporting this approach, (now firmly entrenched in the U.S. bureaucracy), are as follows:

○ Uniform treatment of LDC’s by the U.S. disciplines them to accept IMF or State-AID conditionality and prevents an erosion of political will which could result from U.S. differentiation among the debtor countries.

○ The most direct path to long term LDC economic and political stability is rapid implementation of IMF adjustment measures.

○ U.S. policies which strictly enforce IMF conditionality are the best approach to dealing with LDC financing requests because it reduces slippage in economic adjustment and hence out-year costs of economic support to U.S. aid recipients.

Correcting the Conditionality/National Security Balance

Economics and finance are becoming ever more important tools of U.S. foreign policy, particularly in dealing with strategically important LDC’s whose economic policies are often constrained by hard currency shortages and the vagaries of international commodities markets. In the case of those strategic countries with new and/or weak governments and economies (such as the Dominican Republic, Jamaica and Honduras), the sensitivity and sophistication of U.S. economic policies could spell the difference between stability and chaos—of U.S. foreign policy success or the sacrifice of vital U.S. regional interests with negative national security consequences.

Blanket acceptance of IMF conditionality (or U.S.-generated conditionality) is a blunt instrument that may not always serve U.S. interests. The following observations were reported in a recent study by Princeton’s Woodrow Wilson School of Public and International Affairs:²

○ If a regime is already vulnerable to an economic downturn and if this vulnerability is compounded by opposition based on civil liberties issues or ethnic and personal conflicts, agreements with the IMF can increase vulnerability and call into question the regime’s stability.

○ If economic problems are widely perceived as deriving from poor past policies rather than external causes, adoption of an IMF package can easily mean explicit acknowledgement of responsibility for problems and the risk of instability will be increased.

○ An IMF label on policies may provoke a nationalist reaction as a government is seen as being subservient to Western and especially U.S. interests.

Recent Presidential Decisions

The successful formulation of emergency financial packages for the Dominican Republic, Jamaica, and Honduras, approved by the President sent a clear signal to the bureaucracy that an apolitical IMF and an arbitrary conditionality timetable cannot be permitted to supersede vital U.S. national security interests. Clearly, wholesale slippage of U.S. support for IMF conditionality requirements would tend to undermine U.S. national interests over time. Nevertheless, certain countries who play important roles in U.S. foreign policy appear to be approaching the limits of politically viable economic adjustment as evidenced by social unrest, strikes and violence in the streets. This is the sole category of countries we are focusing on—those running low on time and hope, yet who know that compliance with the IMF, State-AID or Treasury adjustment requirements are realistically months away.

Proposed Solution

We have given careful consideration to options for creating a proper interagency mechanism to fill the institutional void created by this new policy requirement (structuring emergency financial packages for strategically important countries).

For example, at first glance, it might seem logical to form an IG under the SIG–IEP to perform this function. It can be correctly argued that the SIG–IEP was originally established to better balance international economic policies against our foreign policy/national security interests, and to ensure that the bureaucracy does not work at cross purposes. Unfortunately, the track-record of the SIG is not promising in terms of providing genuinely balanced recommendations. Furthermore, unless special arrangements were made, an IG of this type would be chaired by David Mulford who has an extremely orthodox view of conditionality and little sympathy for national security considerations.

Another option is to have an IG under the SIG–IEP that is chaired by NSC or State which reports its recommendations directly to the NSC (through the Executive Secretary). A third alternative might be establishing a new IG outside the SIG–IEP framework. The key objective is to ensure balanced representation and hence the adequate vetting of foreign policy and national security concerns.

In sum, we believe that possibly the only way to prevent the erosion of our hard fought gains for the President in correcting the imbalance between conditionality and national security is to establish a relatively small IG task force chaired by Bill Schneider at State (outside the SIG–IEP) composed of the following “core group” of agencies: State, Treasury, OMB, CIA, NSC, Defense, and the VP’s office (Commerce, STR, Agriculture, CEA and OPD have not participated in past exercises). The rationale for this preferred approach is basically three-fold:

○ Schneider already chairs the integrated foreign assistance budgetary process which is responsible for balancing foreign policy considerations against available resource mechanisms (altering of planned rate of disbursement, the reprogramming of funds, and the need to raise new funds not currently appropriated).

○ The State Department is the appropriate agency to chair such a task force as it would deal solely with “foreign policy cases” that may potentially demand exceptional financial treatment (i.e waiving conditionality, accelerated disbursement, etc.)

○ The NSC could return to a low profile overall management role and call on our good relations with Schneider and Secretary Shultz to assist in special cases that demand forward-leaning U.S. action.

The function of this task force would be to deal with any “out of cycle” budgetary items and identify appropriate financial measures by the U.S., if any, to address specific country circumstances. We would envision the development of a range of options for emergency financial packages to be generated with the listing of agency positions under each option. Like the SIG–IEP this would be a recommending body not a decision-making body that would report to the NSC for decision by you or movement to the President. One caution—should the NSC for any reason lose control of this new process and represent only a vote at the table, the return to our previous policy dilemma with these strategic LDC’s is virtually assured. I have informally discussed this approach with Schneider who believes it is logical, defensible, and consistent with his recent conversation with Secretary Shultz concerning the appropriate process for handling these issues.

Finally, we have provided a talking point for your breakfast meeting which addresses the delicate situation concerning Argentina. Undoubtedly there will be a need for secret demarches to President Alfonsin, Economic Minister Grinspun, and other debtor country leaderships in an effort to bring Argentina around to the Fund, or increase the pressure and/or isolation of this potentially destabilizing country. As the debt crisis has long ago crossed the threshold of strictly a Treasury concern, we would urge that you approach Secretary Regan with a request that NSC have an option to be represented in future unpublicized missions to Latin America. Our participation would not only provide important insights for you and the President but would subtly demonstrate to the countries involved that the White House has a strong interest in developments on the debt crisis from this point forward.

Don Fortier, Constantine Menges, Fred Wettering, Gaston Sigur, Geoff Kemp, and Ty Cobb concur.

RECOMMENDATIONS

1. That you approve of the recommendation outlined above that Bill Schneider chair a newly established IG Task Force to develop emergency financial packages for strategic LDC’s.³

2. That you agree to use the talking points (attached Tab I)⁴ for the breakfast meeting tomorrow with Secretaries Shultz and Regan.⁵

3. That you approve NSC representation in future high level meetings with the leaderships of debtor nations particularly Argentina.⁶

1. Source: Reagan Library, David Wigg Files, Chronological File, May–June 1984. Confidential. Sent for action.
2. Not further identified.
3. McFarlane did not indicate his approval or disapproval of the recommendation. In an undated memorandum to Bush, Shultz, Regan, Weinberger, Block, Stockman, Casey, and McPherson, McFarlane described the establishment of a new “ad hoc group chaired by the Under Secretary of State for Security Assistance, Science and Technology (T),” tasked with handling special requests for changes in foreign assistance. (Reagan Library, Roger Robinson Files, Chronological File, Robinson Chron July 1984–August 1984)
4. Tab I is attached but not printed.
5. McFarlane did not indicate his approval or disapproval of the recommendation.
6. McFarlane did not indicate his approval or disapproval of the recommendation.