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

307. Memorandum From the President’s Assistant for National Security Affairs (McFarlane) to President Reagan¹

Washington, December 7, 1983

SUBJECT

• Approval of U.S. Funding for IDA VII

Issue

What should the annual U.S. contribution to IDA VII be?

Facts

The International Development Association was established in 1960 as a “soft-loan” arm of the World Bank for the purpose of lending to countries too poor to borrow from normal financial channels, including the World Bank itself. In FY 1983 it funded $3.3 billion in interest free, 50 year loans to the world’s poorest LDC’s.

Attached (Tab A) is a memo to you from Secretary Regan on the above subject.² On behalf of a majority of the agencies represented on the Senior Interdepartmental Group on International Economic Policy, the Secretary requests that you approve a U.S. annual contribution to the International Development Association (IDA) of $750 million. He believes that this amount, in conjunction with pro-rata contributions from other donors, would (1) meet the needs of the least creditworthy IDA recipients, (2) encourage a gradual rationalization of the program, and (3) represent the limit beyond which congressional approval is unlikely. A memo to you from Secretary Shultz (Tab B)³ strongly urges a minimum contribution of $900 million annually, and argues that a lower amount would have political repercussions resulting from a U.S. “spoiler” role that would be so serious as to prejudice our leadership in influencing how the World Bank allocates its resources. Chancellor Kohl has also written to you (Tab C)⁴ requesting a U.S. contribution to IDA greater than $750 million. In addition, Sir Oliver Wright, the UK Ambassador to the U.S., called on the Vice President yesterday with the same message. According to OMB’s position paper, State’s FY 85 budget figures are well over target, and an IDA VII funding increase would be at the expense of other bilateral programs (Tab D).⁵ Secretary Shultz asserts that after the Administration’s successful struggle over the IMF quota increase, it would be inconsistent to cut back our IDA contribution (annual FY 83–84 Congressional appropriations for IDA were $945 million).

Discussion

Treasury, with strong support from OMB, argues that increasing IDA VII funding by trimming bilateral programs runs counter to Administration policy aimed at reducing funding for multilateral development institutions and expanding bilateral programs. In addition, Treasury believes that IDA’s procedures and lending rationale need streamlining to ensure that the least creditworthy recipients receive commensurate benefits, while the share of total “grant” resources going to the two major beneficiaries—India and China—are pared down to reflect their greater relative creditworthiness.

The debt crisis has heightened foreign sensitivities to U.S. fiscal and monetary policy and has complicated U.S. economic policy planning. Bearing in mind that policies aimed at reducing multilateral development aid were developed prior to the debt crisis, Secretary Shultz urges increased sensitivity to LDC financial and economic problems in considering U.S. policy on multilateral transfers. Commercial banks and beleaguered LDC governments are closely watching for changes in developed country policies. They may well overreact to a perceived softening or hardening of U.S. policy which, in turn, could have political repercussions in heavily-indebted LDC’s inimical to U.S. interests. A reduction in the U.S. IDA VII contribution could also send a discouraging signal to the financial community, and target the U.S. as a scapegoat in the event of further deterioration in the ability of these countries to service their debt. Although there is no direct connection between the U.S. contribution to IDA and the alleviation of the debt burden of major debtors, the LDC’s, our allies, the Democratic leadership and the press are likely to point to a $750 million funding ceiling as a sign of the Administration turning its back on the poorest countries.

Neither State nor Treasury have a clear reading of the overall Congressional position on this issue. Treasury, however, reports that the $750 million ceiling on IDA VII is considered to be one element of the Hill’s willingness to consider the Supplemental Appropriations Bill. State’s inaction on IDA VII stemming from concern over Congressional antagonism related to the IMF legislation and the debate over IDA VI, does not necessarily support Secretary Shultz’s prediction of Congressional acquiescence to a $900–950 million contribution.

Secretary Shultz argues eloquently for maintaining the U.S. contribution above $900 million. In his view, this action also would (1) represent a tangible demonstration of our commitment to long-term stability and growth in the Third World, (2) stimulate a multiplier effect of additional contributions from other donors, (3) be enthusiastically received by the allies, the World Bank and LDC’s, (4) avoid the U.S. being identified as the “spoiler” of other donor efforts to enhance IDA’s capabilities, (5) be consistent with our approach to the IMF legislation and our lead role in the operations of the World Bank.

Treasury and OMB offer the following additional counterarguments: (1) Treasury foresees the “out year” funding problem with a higher level for IDA VII that has occurred with IDA VI, (we are still committed to coming up with the last $150 million appropriation under that program), (2) failure to gain Congressional support for increased funding for IDA VII in FY 86 and 87 would mean the potential of renewed antagonism with our allies and the Third World in coming years, and (3) an additional $200 million resulting from your acceptance of State’s position on IDA VII would either have to come from trade-offs in other areas of foreign assistance or require relief from the currently imposed OMB targets for foreign assistance levels in FY 85 and would probably require a Budget Review Board meeting.

The U.S. delegation to the December 9 IDA VII meeting will be leaving for Paris on Wednesday,⁶ and a final U.S. position would facilitate the negotiations.

Alternatives:⁷

OK	No
_____	_____	That you approve Secretary Regan’s request (Tab A) and recommend a $750 million cap on the annual U.S. contribution to IDA VII.8
_____	_____	That you approve Secretary Shultz’s request for a minimum contribution of $900 million.9

1. Source: Reagan Library, Executive Secretariat, NSC Subject File, [Security Assistance] Foreign Aid (December 1983); NLR–753–94–6–1–1. Secret. Sent for action. Drafted by Robinson. A stamped notation at the top of the memorandum reads: “The President has seen.” A stamped notation at the top of the memorandum reads: “Received SS 1983 Dec -7 PM 12:20.” A copy was sent to Bush.
2. Not attached. The memorandum is printed as Document 302.
3. Not attached. The memorandum is printed as Document 303.
4. See footnote 6, Document 306.
5. Not attached. The memorandum is printed as Document 304.
6. December 7.
7. McFarlane crossed out “Recommendation” and to the right of it wrote: “Alternatives:”.
8. McFarlane added: “(supported by OMB, TREAS. et al.)”. Reagan placed a checkmark by and initialed the “OK” option.
9. McFarlane wrote: “-OR-” between the alternatives and added: “(supported by State)” at the end. Reagan did not indicate his approval or disapproval of the alternative.