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INTRODUCTION

Issues of public lending and their relation to private investment abroad have posed serious problems for public policy and action since World War II. The amount and direction of private investment is the foundation of our plans, and a full flow of international private investment remains an ultimate objective of our policy. But it was early decided that private investment alone could not meet, fully enough or in time, the requirements of our economic, political, and military policies. Given the necessity for a program of government economic assistance abroad, much of the subsequent debate turned on whether this assistance should take the form of loans or grants. If loans, on what terms? Should loans be fully bankable, somewhat softer, or little more than a cloak for grants in the form of debts that would never be dunned or paid? The relations of private investment to technical assistance were noted, but never adequately clarified in our subsequent policy and action.

The result to date has been a variety of government programs to lend money on terms of varying stringency, to improve the climate for private investment, and in other ways to encourage private investment to flow abroad. These programs pose questions for public policy today. The programs and the emerging problems are set forth below, and followed by a summary of findings and observations.

I. Public Lending Activities

A. FOA Lending Activities

1. Background

In the first few years of the Marshall Plan one of the most active questions before the Congress and the Executive branch was whether the multibillion dollar aid program should be on a grant or a loan basis. This recent bit of history is worth recalling in view of FOA's proposed new program of loans on lenient terms, which is described below. The Export-Import Bank for several years preceding the Marshall Plan had assumed the burden of financing European reconstruction. The decision to embark on a new form of financing was partly based on the assumption that the borrowing countries of Europe were "loaned up" in the sense that their credit was no longer a good enough risk for the Export-Import Bank to assume.

However, it was felt that a gap existed between the Export-Import Bank's standard of reasonable prospects for repayment and an outright grant. It was believed that there might well be further capacity for repayment in Europe if the terms of the loans were sufficiently lenient. The authorizing committees of the Congress were particularly enamored of the idea that a dollar note from a bad credit risk was better than nothing from the standpoint of the United States taxpayer. The result was the ECA program loan. These loans, made through the Export-Import Bank acting as agent for ECA, were agreements to repay a negotiated part of the annual aid allotments over a period of 35 years, with interest at 22 percent (a fraction above the cost of the money to the United States Treasury). The possibility of repayments in local currencies was expressed in a provision for renegotiation by mutual agreement. Even though this provision did not weaken the legal basis for United States claim for dollars, it put a color on these loans which probably has the practical effect of making them junior to all other dollar obligations. However, there have been no defaults to date.

In each of the Marshall Plan years the Executive branch, with varying degrees of success, resisted Congressional preference for loans over grants on the theory that Europe had become "loaned up" even for the ECA type of easy loans. Nonetheless, the aggregate amount of loans of the above described type was around $1,300,000,000.

These loans were characterized at various times in Senate debates as "fuzzy loans" and "disguised grants." There has been considerable difference of opinion both in the Executive branch and the Congress

as to their justification. The principal argument for them has been the simple one that a potentially bad loan is better than a gift from the standpoint of the United States taxpayer. On the other hand, it has been strongly argued, particularly by Treasury and Export-Import Bank officials, that to increase a borrowing country's dollar obligations beyond reasonable prospects for repayment can do more harm than good to that economy by destroying its credit standing and by reducing its opportunity to borrow on a sound basis from the ExportImport Bank, the International Bank, or possibly from private sources. It has also been urged that the strings which can be attached to grants, but not so readily to loans, namely, counterpart, end-use checks, etc., increase the effectiveness of the aid and hence reduce the need for, and ultimate level of, assistance. Furthermore, it has been said that the International Bank and the Export-Import Bank roles are undermined by placing United States foreign aid on a loan basis; the good loans are tainted by the bad; borrowers have less incentive to produce bankable projects.

2. Current Lending Policy

The question of loans versus grants in the foreign aid programs arose again during 1954 as a result of the Randall Commission recommendation, and rising congressional sentiment in support thereof, that wherever possible economic aid be in the form of loans rather than grants. The response of the Executive branch has been a loan program which is about to reach the stage of negotiation with aid recipient countries. The amounts involved are much smaller than in the Marshall Plan days; they probably will not exceed an aggregate of $200 million in fiscal 1955.

The terms which have been agreed to by the various agencies and departments of the Government are these: A maximum term of 50 years; annual interest at not less than 3 percent if payments are to be in dollars, and not less than 4 percent if payments are to be in foreign currencies; interest payments will be postponed for the first 3 years and principal for the first 4 years. The borrower will have an option of delivering a note payable in its own currency or in dollars; it can shift during the life of the loan from foreign currency to dollar payments but not vice versa. Local currency repayments can be used for any United States Government expenditures in that country but not in third countries; local currency payments will be computed at the exchange rate at the time of making the loan so that the borrower bears risk of devaluation. There is provision for renegotiation for payments in strategic materials or other methods of payment. The agreement will provide that the United States take account of the economic position of the borrower in using local

currency. The loan agreements permit advances to be made by the United States Government in foreign currencies rather than in dollars. However, as a practical matter any local currency advances will be from the proceeds of surplus agricultural sales, which is in effect an advance of a dollar commodity rather than local currency.

3. Current Balance of Grants and Loans

FOA has informed the following countries that they must take a specified part of their aid allotments for fiscal 1955 on a loan basis, and that the terms will be negotiated within the above described limits:

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All of these countries except Iran were offered the choice between loans repayable in the currency of the borrower or in dollars. Not surprisingly, they all took the local currency option. Iran was required to take a dollar loan, presumably because of the recent oil settlement. Iran offers an interesting case study in the interaction of the FOA loan program and the Export-Import Bank, as Iran is currently negotiating loans with both agencies.

4. Use of Foreign Currencies for Aid

A new and large source of United States Government held foreign currencies is developing from the agricultural surplus program. Our statutes permit the use of foreign currency proceeds from the sale of agricultural surpluses for loans within the buying country.1 Plans for making loans in foreign currencies have not advanced much beyond the decision on terms summarized above. However, one of the main lines of thinking on this subject is the possibility of making loans to provide capital to new or existing development banks in the recipient countries. The present view in FOA seems to be: (1) That contributions to development banks, whether in foreign currencies or dollars, should be in the form of loans on the extremely lenient terms described above; and (2) that the objective should be to provide a basis to attract private capital on terms more favorable to the capital. It is expected that most of these development banks in Asiatic coun

1 The agricultural surplus program, as is more fully pointed out in a separate paper on that subject, has its roots in both the Mutual Security Act of 1954 and the Agricultural Trade Development and Assistance Act of 1954 (Public Law 480). Authority for lending local currency proceeds of sales has been given in both acts. The above mentioned 10 countries do not include the as yet unknown countries which may receive loans from agricultural surplus sales proceeds generated under P. L. 480. It is understood that the terms of the loans will be the same regardless of which surplus program generates the currency.

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