CABLEGRAM FROM EMBASSY IN WASHINGTON TO DEPARTMENT OF EXTERNAL AFFAIRS

Washington, 23 May 1951

1. Priority SECRET

Your 544.¹

Colombo Plan

Following information is based on informal discussion with Malenbaum and Turnage of Investment and Economic Development Staff and Kennedy, Deputy Chief of Office of South Asian Affairs, who attended the last Colombo Conference.

1. We communicated to them the Australian proposals, indicating their tentative nature and our desire to have the benefit of United States experience.

2. The State Department officials expressed gratification that Australia proposed to get its aid programme under way in the near future commenting that it looked as if we would be the first donor government to do so.

3. The following comments were made on tentative proposals for allocations:

(a) India. We were asked whether the grain provided would be over and above what would be shipped on normal cash basis. Kennedy remarked that whether or not it were additional grain, the only way we could ensure that the aid contributed to the Development Programme would be through counterpart funds. We were also asked whether it was proposed to send any developmental equipment to India.

(b) Ceylon. Kennedy observed in passing that £500,000 appeared to be a little high in relation to the proposed allocations for India and Pakistan. Malenbaum and Turnage did not comment, although they agreed that the United States was planning a relatively smaller allocation for Ceylon.

(c) Pakistan. Without questioning our judgment they suggested that in political terms the proposed allocation might be considered high in relation to India’s. They also asked whether we intended to supply any foodstuffs to Pakistan. They observed, however, that as far as they knew Pakistan was only short of sugar. Turnage remarked that it was his understanding that the International Bank was prepared to provide external finance required for the Thai project. He understood, however, that additional external finance as well as internal finance would be required for the Lower Sind barrage and no doubt other developmental projects. The International Bank was prepared to lend up to 60,000,000 dollars to Pakistan, part of which would be in sterling. It was understood, however, that the loan would be less than 60,000,000 dollars as the United Kingdom was reluctant to release the full amount of sterling planned in view of Pakistan’s strong balance of payments situation. Similar difficulties might arise in connection with the Australian suggestion to make convertible currency available in Pakistan. A Pakistan Mission is expected in Washington in June to negotiate the loan.

1. While they did not comment directly on the relative merits of loans or grants, we feel sure that the grant aid would be in accord with State Department thinking.

2. The officials fully endorsed the proposal to make agreements as simple in form as possible. Their view is that this is not inconsistent with the inclusion of the counterpart principle. They remarked that their agreements were not ideally straightforward since Congress insisted on certain limitations being included. United States agreements with South East Asian countries are, however, simpler than those with European countries. We will forward copies of the agreements with Burma, Indonesia, etc., by next air bag.

3. They agreed that we should make provision in our agreements for ensuring some voice for the uses to which our assistance is put. In the case of projects for which developmental equipment is provided, the successful completion of the project would probably be sufficient in itself. However, when we supply consumption goods or make financial grants the adoption of the counterpart principle would be necessary to ensure the application of local currency proceeds to developmental work. The principle has worked successfully in where the E.C.A. Missions do not initiate proposals for using the funds but have a veto on uses proposed by the recipients. However, the United States has had little experience with counterpart funds in South East Asia.

4. Moreover, if we wanted to combat possible criticism in the East it would be useful to be able to point to specific projects which we financed. From this point of view the ideal project would be one for which Australia would supply equipment, finance internal costs from counterpart funds and provide technical advice through the Commonwealth Technical Co-operation Programme.

5. It was important that there should not appear to be competition among donors for projects when there were so many jobs to be done. The important thing was for us to do something useful that would not otherwise be accomplished. With regard to the mechanics of this we might be able to work in with the International Bank or other donor countries.

6. It was mentioned in passing that we might consider the possibility of joining with the other Commonwealth donor governments in establishing some administrative machinery to exercise at least a loose supervision over the use of our aid.

7. It was suggested that there were many advantages in working with the International Bank particularly in exercising necessary supervision over the expenditure of funds. Counterpart funds might be used to provide internal finance for projects. Indian Steel Oil was mentioned as a possible project on which this method might be applied.

8. While considering the brief and straightforward agreements desirable, the officials hinted that it would be embarrassing to the United States if our agreements or those of other Commonwealth countries appeared much ‘easier’ on recipient countries than theirs. They also suggested that National Governments should not provide grant aid for projects on which the International Bank was prepared to lend money. Malenbaum referred in this connection to Gresham’s Law.²

9. The officials said that the International Bank was considering loans amounting to 200,000,000 dollars for the area over an indeterminate period. It was easier for the Bank to impose conditions and we could expect recipient countries to chafe at any limitation we imposed. Kennedy pointed out that if there were to be limitations, recipients should know about them straight away, otherwise there might be misunderstandings later.

10. Malenbaum informed us that the President would probably deliver a speech on United States Foreign aid proposals later in the week and that draft legislation would go to Congress shortly after. He said that about 500,000,000 would be requested for Economic Aid and Technical assistance outside Europe. He also hinted that the amount for Formosa would be larger than the 50,000,000 dollars previously mentioned.

11. They expressed appreciation of our consulting them and are thinking over our request to pass on information to the United Kingdom, Canada, and New Zealand. They undertook to respect the confidential nature of our information. They are considering our tentative proposal at leisure and will let us know what more they have to say.

[NAA: A6364, WH1951/05]