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

191. Memorandum From Stephen Danzansky and Helen Soos of the National Security Council Staff to the President’s Assistant for National Security Affairs (McFarlane)¹

Washington, October 4, 1985

SUBJECT

• African Economic Initiative

Treasury plans to announce a major African Economic Initiative which, like the recent G–5 meeting, has not been cleared by the NSC or with the President.² Treasury has been discussing this initiative with State and AID for several months. There was a Wall Street Journal article on it a week ago (Tab A),³ and State sent Helen a copy of a proposal (Tab B).⁴ Helen called Treasury and was told they could not provide a copy. Treasury advised OMB that they would not provide them a copy unless instructed by Baker who is on an airplane. Steve called Darman directly and was supplied a copy at 7:00 PM this evening.

The proposal involves a joint IMF/World Bank Facility for Economic Reform which is designed to reschedule IMF and other debt for up to 50 years on a low-interest basis. Eligible countries would be those with 1) low per capita income and reliance on concessional aid; 2) protracted balance of payments problems, and 3) willingness to undertake comprehensive economic policy reform. The funds would come from the IMF Trust Fund ($2.7 billion); existing World Bank funds ($1.8 billion); the Sub-Saharan African Facility ($1.3 billion) and donors. From the U.S. they would like to absorb the Economic Policy Initiative which the President announced 18 months ago, or scarce ESF funds.⁵ We think that would be a mistake, since the program has resulted in significant policy reform, directed in large part at reforms promoting private sector development. State, however, has agreed to the change.

While not exclusively directed at Africa, all but 6 African countries would qualify for the program, in terms of income levels. Not all African countries need the program, however.

The idea has many merits and some weak areas which should be strengthened. Encouraging the IMF and the World Bank to work together is a big plus. The IMF has dealt with stabilization without regard to growth criteria, which it considers to be outside its domain. However, how a country implements stabilization factors such as credit ceilings and imports can impact heavily on growth. This deficiency has led to a great deal of economic stagnation, whereby countries simply cannot generate growth while achieving stabilization, thereby falling to lower income levels which have led to political instability. The World Bank could focus on these issues and improve the stabilization process.

One weakness of the proposal is that reform is limited to 2-year programs, with the option to follow up. For a 50-year loan, 2 years of reform, which always turns out to be gradual, is insufficient. Another potential weakness is that the nature of reforms is not specified. Until we focus on private sector growth, we are unlikely to see any growth. Neither the IMF nor the World Bank seem to understand this, and this program could provide a major impetus to this type of policy reform. These points are details which could be worked out later. Helen has discussed some of them with one contact at Treasury, and he seemed to be interested. But it is important that NSC play a role to ensure this happens.

State is pleased with the proposal, but fears that the IMF and World Bank staff may sabotage the plan because it would force them to change the way they do business.

Early this week Steve and Dave Wigg sought your approval to request a briefing of the debt issue from Treasury. Deputy Secretary Darman casually mentioned the matter to Steve yesterday, expressing uncertainty as to whether it would take place because of “problems at State”. Steve spoke with Darman again this afternoon and was told State had signed off on a proposal. When asked what proposal Darman responded that it was incorporated in a paper which he would send over. Darman continued that the paper proposal was not what would be announced in Seoul since there was some negotiating to be done and the extent of U.S. commitment wasn’t to be revealed. When asked what was to be announced in Seoul, Darman responded, “I don’t know, they are working on that on the plane.”

The “final” proposal that Darman sent this evening from Treasury, contains a copy of a statement supposedly to be delivered by the Secretary of the Treasury in Seoul on October 6, 1985 (Tab C).⁶ The statement indicates that the USG will use $75 million in bilateral assistance in FY86 and “seek to assure roughly equivalent amounts in direct contributions to the facility in FY 87–91, provided other donors also make equitable contributions.”

While we expect this to be discussed as a U.S. proposal in Seoul, we are unclear whether that means there will be a major announcement by Baker, or merely a statement read to the interim committee. Perhaps the form and content of the announcement are being massaged on the airplane. If you and Don Regan agree that the announcement should be made by the President, some contact will have to be made with the delegation on the plane to clarify what it is that can be announced and to stop any pre-conference “leaks” by Treasury here or in Seoul. Your decision.

Clearly, the NSC and the President have been left out of the process. We understand Treasury has been discussing a proposal for Latin American and other middle income countries as well, and we should insist upon participation in that process immediately.

Phil Ringdahl concurs.

1. Source: Reagan Library, Stephen Danzansky Files, Chronological File, Danzansky Chron October 1985; NLR–733–20–2–5–8. Unclassified. Sent for information. A copy was sent to Poindexter.
2. In a September 23 memorandum to McFarlane, Danzansky and Wigg stated that NSC staff had not been “privy” to interagency discussions regarding two major economic developments, both of which were reported in the press that weekend: “the G–5 Conference and new initiatives on international debt.” The memorandum is scheduled for publication in Foreign Relations, 1981–1988, vol. XXXVII, Trade; Monetary Policy; Industrialized Country Cooperation, 1985–1988.
3. Tab A, Art Pine, “U.S. to Propose Lending Pool to Aid Africa,” Wall Street Journal, September 20, 1985, is attached but not printed.
4. Tab B, “Proposal for a Joint IMF/World Bank Facility for Comprehensive Economic Reform,” is attached but not printed.
5. In January 1984, Reagan submitted legislation to Congress called the Economic Policy Initiative for Africa, which called for $500 million in U.S. aid to African countries over 5 years. He outlined the initiative in his remarks at the annual meeting of the Board of Governors of the International Monetary Fund and World Bank Group on September 25, 1984. For the text of Reagan’s remarks, see Public Papers: Reagan, 1984, Book II, pp. 1365–1370. See also Foreign Relations, 1981–1988, vol. XLI, Global Issues II, Documents 236, 244, and 251.
6. Tab C, Baker’s statement to the IMF Interim Committee dated October 6, is attached but not printed.