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

195. Memorandum From David Wigg of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Poindexter)¹

Washington, November 25, 1985

SUBJECT

• Your Request for Ideas Regarding Third World Support

Per your request for a red tag response, this memo lays out some ideas that would help to fill the void between creditors and debtors to reduce the potential for destabilization and collapse on both sides.² Treasury’s efforts as the “front line” in dealing with the crisis aspects of these problems is commendable. But their principal mandate is to protect U.S. financial interests, and only secondarily to assist debtor governments to overcome their problems. I assume that it is State’s job to preserve Third World Democratization while strengthening U.S. ties with key LDCs to serve our strategic interests. Unfortunately, this Administration does not seem to allow for the kind of Cabinet cooperation and balance in this area that would be required if we were to be effective. Sooner or later the President is going to have to take a more active role in delegating responsibility on our debt strategy or the problem will simply overwhelm existing international relationships and financial and trading systems and “solve itself”. I bring this up because I find that having to walk on “eggshells” in this area greatly hampers our effectiveness. Most of the following suggestions are relatively inexpensive but they do require policy-deftness, discretion and an awareness and sophistication not seen much in this town. Many also require expertise that is in short supply in the bureaucracy:

New approaches to the old problems.

○ I have been working since last summer to launch a pilot program of analysis that can only be done by private sector talent. The attached memo (Tab I), working its way to Bud through you, represents our first crack at this approach.³ I believe that the most serious problems confronting debtor-LDC’s lie in their long-term inability to properly convert internal resources (capital, labor, natural resources and domestic savings) into the investment, production and trade engines of growth and development that are essential. Thus, slow or no growth, trade deficits, domestic capital shortages, capital flight and high debt levels are symptoms of LDC inability to deal effectively (and competitively) with the changing global business and financial environment. Lazard Freres can hopefully help the Egyptians “get smarter” and also tell the USG frankly, how serious a problem Egypt represents. If successful, this study should be duplicated in other “strategic” LDC’s who will cooperate. If insights are gleaned, it’s cheap for the price.

○ When the Yugoslav Deputy Minister for Trade came here in December to negotiate textile and steel trade agreements, State asked me to meet with him and propose some new ideas that could help attract foreign investment and stimulate exports. As indicated in the attached cable (Tab A), this initial contact has matured into a State-proposed presentation to the Yugoslav Leadership by Frank Zarb and me scheduled for late January.⁴ The Yugoslavs have been told that the proposals will be practical offers and suggestions requiring straightforward answers and that we are not interested in merely exchanging ideas.

○ I have asked AID to consider hiring an investment banking firm to develop a means of clearing up the blocked trade accounts in Central America so regional trade can resume. This will probably involve the issuing of Central American government-guaranteed promissory notes to be sold at a large discount and the structuring of barter transactions with Asians and other markets to clear up the inter-country imbalances. The new Assistant Administrator for Latin America (Dwight Ink) has asked his staff to work with me to develop a proposal.

○ I heard the President once say that he thought there was too much reliance on expansion of LDC exports to developed country markets as the answer to their economic ills. I agree with him. The resulting pressures on U.S. and EC production, jobs and our trade balance cannot be sustained in our cyclical economies. If Latin American countries do not fully develop their regional trade potential, their economies will be unnecessarily stunted, distorted and less stable. In addition, the development of regional ties in trade and services is an important force for political stability. I tasked the CIA to examine the potential for Latin American regional trade (they anticipated that request [1½ lines not declassified]. I also asked them to come up with a list of potential projects that would benefit from direct foreign investment, but again to further develop regional trade exchanges as well as increasing exports to hard currency markets. We might consider developing a mechanism to forgive or restructure some of the debt “over-hang” owed by Latin American countries in exchange for expanded regional trade and supporting foreign investment. The EC and Japan would probably be strong supporters of such an initiative as their economies are also under pressure from Third World exports. The principal portion of this debt is almost certainly never going to be repaid, and we should use it as leverage while we still can.

○ The President should capitalize on the Baker initiative to announce that in response to the vital need for innovative business activity in Latin America and other regions, he intends to work with Congress to place one-quarter of AID’s Developmental Assistance (DA) pot ($500 million) at the disposal of a new entity patterned after the UK’s Commonwealth Development Corporation (CDC). This new organization could stimulate the kind of business and investment activity that would contribute to solving the Third World malaise. An important emergency (and thus temporary) mandate of this body would be to encourage and facilitate barter transactions with U.S. private and public entities where the proceeds from such transactions would help alleviate pressures on debtor economies (we would have to temporarily suspend official USG position against barter in international trade). Soviet willingness to engage in large barter transactions with Latin American governments is enabling them to gain a better foothold in the region. The latest is an offer to take Bolivian tin (the tin agreement just collapsed) in exchange for Soviet machinery and equipment.

○ If State were given a diplomatic mandate on debt equivalent to Treasury’s financial responsibilities, they should assemble small teams of special envoys/experts to travel regularly to their areas/countries of specialization to work quietly with the debtor governments to help solve debt-related procedural and technical problems. State could contract out for some of this talent that could work at arms length from U.S. policy makers. (Treasury would have a conflict of interest so they cannot do this). They could also regularly brief the various governments on financial developments in the U.S. to avoid potentially dangerous misunderstandings. They could help local governments to educate their public (public diplomacy) on the need for austerity and other related matters. State should have been doing this kind of thing from the moment the debt crisis started. We do it in other parts of the world on other topics and problems.

○ We should send teams to the Hill periodically to educate Congress on the potential dangers and possible needs in the event of a Third World financial crisis.

○ We should establish emergency mechanisms to help key allies (Seaga, for instance) remain in power in the event of a domestic financial collapse that threatens stability (list of critical calls, role of the President, and other actions to be taken to avert panic).

○ Assemble a “Pacific Basin Economic Recovery Committee” made up of distinguished Newly Industrialized Country officials (Finance and Trade Ministers) to tour Latin American-Caribbean countries and educate on the need for foreign direct investment to achieve competitiveness in world markets.

1. Source: Reagan Library, David Wigg Files, Chronological File, November 1985. Secret; Sensitive. Sent for information. “Noted” is stamped in the top right-hand corner of the memorandum.
2. No record of Poindexter’s request has been found.
3. Tab I, a memorandum from Fortier, McDaniel, Stark, and Wigg to McFarlane dated November 22, is attached but not printed.
4. Tab A, a draft telegram to Belgrade and Zagreb drafted on November 21, is attached but not printed.