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

335. Memorandum From David Wigg of the National Security Council Staff to Donald Fortier of the National Security Council Staff¹

Washington, July 16, 1985

SUBJECT

• Status of Technical and Financial Assistance Proposals for Strategically Important LDCs

Per your message of last week, I wanted to give you a status report on these proposals. As I see it, there are four categories of assistance/advice we can structure for strategically important LDC’s: Expert advice from newly industrialized countries (NICs); confidential state-of-the-art assistance from an investment banking contractor(s); innovative U.S.G. financial and commodities aid and export of readily available U.S. public-sector technical services.

When put together in a package, these four (and perhaps other) forms of aid/advice could provide a potent force for rational policies and political stability.

Advice from the NICs

The NICs represent the hope of every developing country in the competitive world economy. When it comes to discussing politically tough questions, such as allowing foreign direct investment and rationalizing domestic economic policies, LDC governments are more likely to respond to NIC advice than to recommendations from Washington. I suggest we approach Singapore, Taiwan and South Korea and ask them to form various groups of technical experts which we can choreograph with other forms of assistance. This could be done under the rubric of Pacific Basin cooperation. The NICs would benefit in the form of trade, banking, shipping and other potential market access and new commercial links.

We could send NIC teams to selected amenable countries where the advice is likely to be well received and implemented. Their successes would attract others.

Special Investment Banking Services

As we ponder the problems confronted by many strategic LDCs, certain patterns emerge that require the problem-solving techniques employed (or potentially employable) by investment bankers on individual projects in the U.S. and abroad: How best to leverage limited resources, both domestically and through international trade; what mix of policies should be employed to rationalize economic decision-making and to preserve domestic stability while meeting the demands of international creditors; how to most effectively tap the developed country public and private sectors for financial assistance. Even in the form of alternative scenarios, such advice would be a huge improvement over what these governments work with now.

Central America and the Caribbean, Peru, Egypt and others could all benefit significantly from such assistance, particularly if it could be provided confidentially. We should discreetly approach the major investment banks to discuss possibilities for structuring such services as a close-hold element of U.S. assistance packages.

Innovative Aid

Clearly, the distribution of cash through AID’s ESF is inadequate to address the balance of payments problems faced by many strategic LDCs. It also presents too many opportunities for abuses and mismanagement. Innovative aid and advice is the order of the day in an increasingly resource-strapped world. For example, in a meeting Monday² with the Guatemalans, in which they singlemindedly pressed for $140 million in cash to fill a projected payments gap, I suggested that as they approach the Japanese and West Europeans, that they think in terms of critical commodities imports as being interchangeable with cash (oil, agricultural needs, chemicals, etc.) and be able to offer various concrete commodities options as alternatives to facilitate foreign assistance where cash is not an option. The Nicaraguans have been doing this for years under the tutelage of Soviet Bloc and Western advisors. Even the USG could possibly be of some assistance in terms of moving commodities outside of the traditional programs (CCC, P.L.–480, etc.) if, for example, we could hire the services of the commodities trading side (Philipp Brothers) of Phibro-Salomon Investment Bankers. The fact that the Guatemalans admitted that they had not considered such a presentation, speaks for itself.

A second example would be the structuring of a package of U.S., IADB and World Bank funding to shift rural Peruvians out of Coca production (nearly half of this production ends up in the U.S. as cocaine) and into productive agricultural activity. President-elect Garcia’s top priority is to upgrade the rural economy, and a billion-dollar (or whatever size) multilateral program aimed at stemming U.S. drug imports could well cool Garcia’s ardor for a confrontation over debt, and yet—with the focus on drug-related programs—would not set a precedent in debt rescheduling that could be exploited by other Latin countries. State’s approach is to merely tell the Peruvians that we are open to suggestions for programs. This is simply not creative or aggressive enough to effect a shift in Garcia’s policies. There are many more possibilities. Per Jim Stark’s efforts, the whole FMS program needs an infusion of flexibility if we are to avoid losing customers, allies and lots of cash. Regarding one of the most important elements, the USG “official” policy against barter trade must be reconciled in the FMS program with the financial imperatives of Third World allies.

Conscious effort to introduce more creativity and flexibility into our financial aid packages is mandatory if we are to preserve friendly democracies and keep up with the ironically, ever-flexible Soviets. The Soviet-Peruvian-Nicaraguan barter switch/debt repayment deal is a shining example of what the competition can do.

Public Sector Technical Services

My experience with Los Alamos Labs has convinced me that we are overlooking a valuable resource in our own backyard.³ Advice and technical assistance from the Lab System coupled with the tremendous range of services that could be tapped throughout the government (CIA, Energy, Agriculture, Interior, Health and Human Services and literally dozens of other repositories of expertise and technical capabilities) would significantly strengthen and deepen our aid potential. Where the budgeted resources of many of these agencies are underutilized, or increased program size would allow savings through economies of scale, we could target a very small percentage of each agency’s budget as supplementing our AID programs, on an “extraordinary” basis, as a constructive response to the unprecedented needs of our Third World AID recipients. The qualitative improvement in our AID effort would be a multiple of the increased cost.

As examples of possible programs:

○ [1 paragraph (3 lines) not declassified]

○ The Los Alamos program in Central America is only a tiny glimpse of what is possible with efficient utilization of the U.S. Lab system’s capabilities;

○ At the urging of Ambassador Jordan, a Los Alamos team will be going to Peru in September to explore possibilities for a similar effort there. President Garcia has expressed enthusiasm for visiting Los Alamos prior to the UNGA (perhaps in October). I can envision a global web of interaction of the Labs with strategic LDCs in scientific and other fields where the U.S. has no peers.

The theme that runs through all of this is that there are potentially many somewhat unorthodox, yet practical approaches to helping to reduce North-South and U.S.-LDC tensions over economic issues; to build enduring, positive links with these countries that simple cash will never accomplish, and to elevate the rationale for dealing with heretofore seemingly intractable problems of strategic LDCs to a level where viable solutions begin to crystallize.

1. Source: Reagan Library, David Wigg Files, Subject File, LDC Debt. Confidential. Sent for information. Copies were sent to Poindexter, Martin, Covey, Burghardt, Robinson, Tillman, North, and Stark.
2. July 15.
3. In the effort to assist Latin America, in 1985, USAID funded a $10.2 million program of natural resource development for Central America based at Los Alamos National Laboratory. The Laboratory’s role was to provide technical assistance and establish strategies for effective energy and mineral development in Central America.