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

327. Paper Prepared in the National Security Council¹

Washington, undated

U.S. Economic Strategy Toward the Third World

Summary of the Issue

The policies of the first term aimed at advancing Third World economic development, combined with a major push on enhanced U.S. hunger relief efforts in Africa and elsewhere, have had a significant and positive impact on U.S. relations with the developing world. Your speech to the 1984 IMF/World Bank annual meetings highlighted our sensitivity to the plight of these nations and cited some of our accomplishments in this area.² In the next four years, the largely intractable problems of the Third World will present a major challenge for U.S. policy planning and implementation, particularly as the impatience of the world’s poor will continue to provide fertile ground for political instability and violent change. While some 10–15 Third World countries (the Newly Industrialized Countries or NICs, and some oil-rich states) have achieved developed country status, most of the remaining 125 or so countries are unlikely to reach this level of development for decades. Among this group, are a sizeable number of ministates (50)—with populations less than 2 million—where development options are severely limited.

Currently, there are a number of factors working to limit Third World economic development including, the slowdown in the growth rates of industrialized countries, protectionism in Europe and Japan, relatively weak primary commodity prices, a sharp reduction in foreign direct investment and the uncertainty of oil price movements later in the decade. In addition, a number of NICs are moving rapidly into head-to-head market competition with the U.S. and our allies in the area of sophisticated manufactured goods. As a result, these countries are increasingly able to produce strategically sensitive items that the West is attempting to control through COCOM and other export control measures.

On the positive side, changes in the economic conditions in developing countries have brought about a rather striking shift away from the more ideologically inspired policies of the 1960s–1970s, toward more pragmatic, market-oriented approaches. Years of harsh economic retrenchment, failures in experimental state planning, and imbalanced, military-oriented Soviet assistance are gradually reinforcing the view that the diversity of Western civilian aid offers better prospects for long-term economic development and political stability. This new climate, in turn, offers opportunities for the U.S. to meaningfully strengthen our ties with all categories of the developing world.

Objectives

We have a number of opportunities to promote the evolution of LDC perceptions of the efficacy of private enterprise and free market policies. Among our key objectives are the following:

○ A greater focus on encouraging the trend toward a more market-oriented approach to agricultural reform as a fundamental part of our strategy toward the poorest countries.

○ Identify and reward those Third World governments and leaders willing to accept and implement progressive economic policies.

○ Restructure our aid, investment and trade financing mechanisms (AID, Eximbank, OPIC, etc.) to more effectively capitalize on the changing perceptions and circumstances in the developing world and to be more responsive to your foreign policy priorities.

○ A new emphasis on pinpointing available technologies that can be rapidly adapted to specific LDC needs, as well as the dispatching of teams of experts to work with counterparts in the country to apply them.

○ Reverse the trend of declining foreign direct investment by providing enlarged insurance and project-finance facilities.

○ Continue our efforts within the multilateral financial/aid institutions to reorient their programs and policies toward a more balanced, rational use of their limited resources.

Proposed Policies

In the interest of capitalizing on the gradual surfacing of market-oriented trends in Third World economic deliberations, we believe it is timely to consider some bold, new approaches to all levels of Third World economic development. A comprehensive review should be undertaken to more clearly categorize LDC economies to assist in defining U.S. policy initiatives and responses to both immediate and long-term development needs. As several of the economic characteristics of each category of Third World development are shared by the countries of that group, we would concentrate on designing more creative policies for all three—category I (the very poor), category II (the coping poor) and category III (those coping poor that are approaching the status of NICs). An important aspect of U.S. policy deliberations concerning categories II and III will be a vigorous effort to demonstrate the long-term bankruptcy of Soviet-style command economies and to highlight the enduring growth possibilities facilitated by private entrepreneurship and pursuit of market-oriented policies.

As Soviet aid to the Third World has generally declined substantially in recent years and is traditionally dominated by military-oriented goods, Soviet clients such as Angola, Mozambique and Ethiopia appear to be recognizing that the underpinnings of their economic future and, indeed, sustained political support are increasingly tied to civilian economic assistance, infrastructure development and access to new technologies and expertise best offered by the West. We intend to fully utilize the new technological capabilities of our Crisis Management Facility to, for the first time, catalog all U.S., as well as Soviet, aid and assistance efforts to individual countries along with category aggregates in an effort to: (1) better structure the mix of U.S. assistance programs; (2) improve the monitoring of individual country economic developments so that our policy initiatives remain dynamic; and (3) target those category II and III countries that traditionally are under a Soviet (or Soviet client-state) economic umbrella, and which are either becoming estranged or disillusioned with the lack of civilian economic emphasis and long-term hope for the future.

Other proposed policies include:

○ Catapulting your forward-looking initiatives in Third World food aid into a global initiative, calling for the redirection and harmonizing of industrialized country economic assistance to improve Third World agricultural self-reliance. This “second-stage” proposal would, in turn, lead to increasingly sophisticated agribusiness initiatives in the developing world over the next few years.

○ Completion of a newly initiated NSC study on major financial programs linked to U.S. foreign policy (e.g., State/AID ESF, the entire AID organization, Eximbank, OPIC, Treasury ESF, etc.), and recommendations for structural and programmatic changes to make these entities more responsive and effective in carrying out your policy priorities.

○ Better utilization of existing U.S.-budgeted resources to channel greater amounts of World Bank lending into the hands of the private sectors in the Third World. The revised Foreign Assistance Act also now allows for the conversion of certain types of Third World debt to U.S. official sources to be converted to grants in local currencies which, in turn, can be used at U.S. discretion. We may wish to actively support and expand this type of program.

Your Involvement

You will have a number of opportunities to present your views and policy proposals at future economic summits and other multinational fora. For example, the “second-stage” initiatives to foster Third World agricultural self reliance could be presented at the 1985 Bonn Summit, or alternatively, at next year’s IMF/World Bank meetings.

1. Source: Reagan Library, David Wigg Files, Chronological File, November–December 1984. No classification marking.
2. Reagan delivered remarks at the Annual Meeting of the Boards of Governors of the International Monetary Fund and World Bank Group on September 25, 1984. The text of these remarks is in Public Papers: Reagan, 1984, Book II, pp. 1365–1370.