INTELLIGENCE MEMORANDUM LESS DEVELOPED COUNTRIES: INITIAL REACTION TO THE NEW US ECONOMIC POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020040-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: March 2, 2010
• Sequence Number: 40
• Publication Date: September 1, 1971
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series No. 30
Less Developed Countries: Initial Reaction
To The New US Economic Policy
Confidential
ER IM 71-186
September 1.971
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
E,cIuded from oulomoIk
downgrading and
dedani&o Non
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1971
INTELLIGENCE MEMORANDUM
LESS DEVELOPED COUNTRIES:
INITIAL REACTION TO THE NEW US ECONOMIC POLICY
Introduction
I. When President Nixon announced the new US economic policy
on 15 August, the less developed countries (LDCs)* responded with a
mixture of understanding and relief that long-needed action is now being
taken, fear of the consequences of this action for their own economies,
and anger at what they consider the injustice of having to pay for a
rich-nation crisis not of their making. The health of the US economy and
the dollar is of paramount importance in a major part of the less developed
world. Most of the LDCs have formally or informally pegged their currencies
to the dollar. Large shares of their reserves - 70% in the case of Latin
America - are held in the form of foreign exchange, mainly dollars. Many
rely heavily on the United States for imports, and US demand in turn
significantly affects the size of their exports and trade deficiis. Finally,
US capital - both official and private -- is crucial to their development
programs, as it has been throughout the postwar period.
2. Although the LDCs will suffer from the 10% cut in foreign aid
(except for Latin America) and the depreciation of their foreign exchange
reserves held in dollars, their most vocal criticism has centered around the
10% import surcharge. This memorandum discusses the major points of
concern to the LDCs and describes their initial responses to various aspects
of the new economic policy.
* In this memorandum, the term less developed countries refers only to
Free World countries and, in accordance with the definition followed by
the Economic Intelligence Committee of the US Intelligence Board,
embraces all countries in Africa (except South Africa), the Near East, South
Asia, the Far East (except Japan), and Latin America, together with Greece,
Portugal, Spain, and Turkey.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Discussion
Latin America as Leader of the Opposition
3. Except for Latin America, official LDC reaction to the new US
economic policy so far has been low keyed. Only a few protests have been
made, and all these have emanated from individual countries. Latin
American criticism, on the other hand, has been highly vocal. Moreover,
these countries have taken the lead in trying to unify opposition to the
US moves and gain full participation for the LDCs in all consultations and
negotiations concerning reform of the international monetary system. Latin
American nations in fact seem to be gaining considerable satisfaction from
the progress made in taking coordinated action to oppose the US program.
The Latin American Manifesto of 5 September that resulted from the
emergency session of CECLA (Special Coordinating Commission for Latin
America) has provided the basis for a unified LDC position both at the
annual session of the Inter-American Economic and Social Council which
began meeting in Panama on 13 September and in current plenary sessions
of the UN Conference on Trade and Development.
4. Latin America's position on major issues oi, which it is attempting
to gain LDC consensus is as, follows:
- The United States should completely exempt Latin
America and other LDCs from the import surcharge.
- The United States should promptly extend general trade
preferences to LDCs, with special consideration given to
Latin American exports.
The foreign aid cutback, while not contributing
significantly to solution of US balance-of-payments
problems, aggravates already serious problems confronted
by the LDCs and compromises completion of ongoing
development programs.
Because the present world monetary situation intensifies
economic difficulties in many LDCs, developed nations
and international financial organizations should facilitate
debt refinancing and soften assistance terms.
Suspension of gold convertibility of the dollar has
adversely affected the value of monetary reserves and the
foundations for international trade and capital movements.
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The International Monetary Fund is partly to blame for
the present world monetary uncertainty in that it has been
unable to force developed nations to take necessary
measures to correct their fundamental disequilibria and has
therefore allowed discrimination in treatment between
developed nations and LDCs.
The LDCs should participate fully in the present and
future decision-making mechanism and in the reform of
the international monetary system.
Current Exchange Rate Situation
5. With the dollar floating, the various LDCs have been forced to
decide whether to allow their currencies to move with the dollar, to maintain
parity with some other hard currency, or to use the occasion as an
opportunity to devalue relative to the dollar as ?w,vell as other currencies.
The great majority of the LDCs have chosen the first course and probably
will continue to follow it. By maintaining parity with the floating dollar,
their exports suffer no exchange-rate disadvantage in the United States (in
many cases, their most important market) and reap the same advantages
as US goods in third-country markets. The second course appeals to some
countries that export goods for which world demand is relatively inelastic
and whose imports are predominantly from the United States. Ex-colonies
with close monetary ties with France, the United Kingdom, or the
Netherlands also are attracted to this course, b;. the trade disadvantages
attending revaluation create strong counterpressures to float with the dollar.
The third course is appropriate for those countries suffering persistent
balance-of-payments problems before the dollar float, but political
opposition to devaluation may be so strong in some, such as Uruguay, as
to prohibit taking advantage of even present circumstances to put their
badly overvalued currencies in order.
6. The Far Eastern nations have reacted variously to the dollar float:
Taiwan, South Korea, and the Philippines maintained parity with the dollar;
Malaysia, Singapore, and Hong Kong are allowing their currencies to float
along with the British Pound; and Indonesia devalued its currency by almost
10% relative to the dollar for reasons essentially unrelated to the new
ec';;iomic policies. In the South Asian area, India, Thailand, and Ceylon
have announced that they would maintain parity with the dollar, while
Pakistan permitted its official rate to float upward slightly after an eight-day
closure of its currency exchanges. Burma has made no announcement but
is maintaining its previous parity with the dollar, as is the case with
Cambodia, Laos, and South Vietnam. The currencies of Afghanistan and
Nepal, being closely tied to those of Pakistan and India, respectively, are
expected to behave accordingly.
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7. In the Near East and North Africa, most currencies have remained
pegged to the dollar. Israel, however, has devalued its pound by 17% --
an action that had long been contemplated to help rectify chronic
balance-of-payments deficits and that probably still leaves the pound
overvalued. Algeria remains pegged to the French franc and Jordan to the
British pound, while Lebanon continues its standing practice of allowing
its currency to float. Libya, which is paid its oil revenues in dinars, has
revalued its currency slightly upward, but Saudi Arabia, other Arab oil
producers, and Iran are continuing to maintain parity with the dollar. The
oil-producing states, however, may demand some readjustment of contracts
with the companies, depending upon final resolution of international
monetary relationships.
8. Among sub-Saharan African countries, Botswana, Lesotho,
Swaziland, Congo (K), Rwanda, and Burundi are maintaining parity with
the dollar, while Kenya and Uganda remain pegged to the pound. Nigeria
has established a two-market system with an "official" market handling
all merchandise trade and associated service transactions, while a "financial"
market handles capital transactions and tourist exchange. The "official" rate
is regulated to correspond to the dollar-sterling rate in London, and the
"financial" rate is allowed to float. A two-tier system identical to that of
France has been adopted by the 14 African countries within the franc zone.
Tanzania, Somalia, Gambia, Angola, and Mozambique are reported to have
revalued their currencies with respect to the dollar.
9. Most Latin American nations thus far have chosen to maintain
parity with the dollar. Some governments are considering using the current
international monetary confusion as a politically opportune time for major
devaluation. As a means of offsetting the expected reduction in the
purchasing power of dollars received from oil sales, the Venezuelan
government is weighing the alternatives of increasing oil prices or revising
the special exchange rate at which oil companies must convert dollars to
bolivares to cover taxes and local costs. A few Caribbean islands with close
relations with France, the Netherlands, or the United Kingdom (and
semi-independent nations such as Surinam, French Guiana, and British
Honduras) are maintaining parity with European currencies. The Jamaican
dollar, however, was untied from its legislated sterling par value on 24
August, and the groundwork has been laid for not following the British
pound should it revalue substantially.
10. Among the less developed countries of Europe, Greece and Turkey
remain pegged to the dollar. Spain and Portugal are. nominally maintaining
the par values of their currencies but are allowing the exchange rate to
move beyond the margins agreed upon with the International Monetary
Fund. Both currencies have undergone a slight upward revaluation.
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Repercussions of the Import Surcharge
11. In its role of self-proclaimed spokesman for the developing world,
Latin America has depicted LDC inclusion under the 10% import surcharge
as perhaps the most hotly resented feature of the new US policy. Although
the surcharge was aimed mainly at Japan and Western industrial nations,
its effects in fact fall most heavily on Mexico, South Korea, Taiwan, Hong
Kong, and Haiti -- all in the less developed category (see the table). Latin
American nations point out that their trade deficit with the United States
has more than doubled and that of the LDCs as a group has increased
substantially in the last five years - a period when the developed nations
either reduced their deficits or created surpluses in their US trade. Only
about 6% of total LDC exports will be affected by the import surcharge,
but an average of some 31 % of their sales to the US market is included.
Even in those countries where the overall impact on sales to the United
States is small, the negative effects on industrialization and export
diversification efforts can be significant because the surcharge falls mainly
on manufactured and otherwise processed goods. In some countries, like
Brazil, these industries have shown the greatest dynamism in recent years
and in other countries, like Argentina, they were expected to be helped
the most under long-discussed generalized trade preferences for the LDCs.
12. Only about 23% of Latin American sales to the United States
and 8% of the region's total exports come under the surcharge, because
export goods such as coffee, sugar, and petroleum are exempt under quota
arrangements and others such as mineral ores are not dutiable. In general,
however, Latin American countries are incensed by the surcharge as a
betrayal of their "special relationship" with the United States and, in
particular, by expected negative effects on their diversification efforts.
Moreover, Argentina views the surcharge as discriminatory in that fresh beef
exports shipped under quota from competitors such as Australia, New
Zealand, and Canada will not be affected, while its canned and preserved
meats may become non-competitive in the US market because of the
surcharge (Argentine fresh beef is denied US entry on sanitary grounds).
Mexico, with 43% of its total exports affected, is the hardest hit of all
countries in the world and has already moved to offset the surcharge by
increasing subsidies and reducing export duties on some of the affected
goods. Brazil also has provided various new tax advantages to its exporters
of non-traditional products. Convoked by Argentina, the emergency meeting
of CECLA brought forth a demand for exemption from the surcharge for
all LDCs and a decision to carry the case to the UN, OAS, GATT, and
other international bodies. Many Latin American governments also have
itemized their specific complaints in bilateral communications with
Washington.
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Countries Most Affected by the Import Surcharge
(Based on 1970 Trade Data)
Percent of Percent of
Exports to Total Exports
US Affected Affected
Less developed
countries
Mexico 50
43
South Korea 95
41
iw
T
an
a
92
35
Hong Kong
82
31
Haiti
35
30
Philippine
s
35
16
Israel
83
16
Barbados
70
15
Turkey
86
12
Spain
73
11
Paraguay
62
11
Greece
88
8
Portugal
80
8
Honduras
14
8
Dominican
Republic
9
7
Uruguay
86
7
Argentina
71
7
Malagasy
32
7
Nicaragua
16
6
Ireland
50
6
Nepal
95
5
Peru
14
5
Developed countries
Total
Japan 94
28
Iceland 54
17
Canada 25
16
West Germany 94
9
Italy 86
9
United Fingdom 72
8
Switzerland 86
8
Sweden 93
6
Belgium-Luxembourg 84
5
Denmark 51
4
Austria 95
4
France 82
4
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13. Despite the fact that most of their exports to the United States
will come under the surcharge, the response of most of the Far Eastern
LDCs has been low-keyed. For many products subject to the surcharge,
? there are no direct substitutes produced in the United States. This is true
even for many of the manufactures sold by Taiwan, South Korea, and Hong
Kong. Moreover, even in the case of products that compete with US output,
the Far Eastern manufactures generally are either much cheaper or of a
greatly different quality. Taiwan, South Korea, and Hong Kong hope to
maintain export growth by cutting costs, trimming profit margins, and
diversifying markets. Malaysia and Indonesia, which export mostly raw
materials not affected by the surcharge, will see little effect on their trade.
The Philippine government - one of the most vocal in the area in its
protests against the surcharge - is requesting a complete exemption.
However, even in this case, the adverse impact of the surcharge is not
expected to be substantial, particularly since the rate applied to many items
will be reduced to 8% under preferential treatment granted by the
Laurel-Langley Agreement.
14. In South Asia, India has protested the surcharge, and Pakistan
is preparing to do so, although the exports of neither country will be
affected very much. Other countries in the area are not greatly concerned,
because of the small volume of their trade with the United States. A similar
situation exists in Africa, where less than 1% of total exports comes under
the surcharge. Israel is the only Near Eastern country to be seriously affected
by the surcharge, which covers some 83% of its exports to the United States
and 16,,0 of its total exports. The recent 17% devaluation will, of course,
do much to counteract the effects of the new US policy. The United States
is not an important market for other Near Eastern countries, and in any
case the area's major export - oil - is exempt from the surcharge.
15. The less developed countries of Europe in general will be hit
somewhat harder by the import surcharge than the highly industrialized
nations in the same area. Among the most vulnerable are Spain, with 11%
of total exports affected, and Turkey, with 12% affected. About 8% of
the total exports of Greece and Portugal are included under the surcharge.
Except for Iceland, no developed European country has more than 910 of
its total exports affected and many run below 510. Nevertheless, of the
less developed European countries, only Turkey has formally requested an
exemption from the surcharge.
Reaction to Foreign Aid Cut
16. As might be expected, major recipients of US aid have shown
considerable concern about the economic impact of the announced 10%
cut in the program. Although at this point they can do little more than
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speculate about the likely extent of a reduction in funding and the projects
most likely to be curtailed, most of the countries issuing statements of
any kind on the subject point to the integral role of foreign financing in
their overall economic programs. Since Latin America recently was
exempted from the aid cut, the measure will have its greatest effect on
several Asian countries, such as South Vietnam, India, Indonesia, and South
Korea, which have sizable US-aided development projects under way or in
the offing.
17. The more radical LDC governments can be expected to take
advantage of the obvious propaganda opportunities presented by a further
reduction in foreign aid. Despite its exemption from the aid cutback, Latin
America probably will continue to repeat its now familiar assertion that
developed nations take out from the LDCs more resources than they bring
in. In particular, countries like Chile - with large foreign debts and reduced
foreign assistance prospects - can be expected to take advantage of present
circumstances to increase their demagoguery and perhaps decrease
repayments.
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