1. NONMEMBER COUNTRIES Since the IBRD may not make loans to nonmember countries, such countries or nationals thereof would continue to approach Eximbank for loans as they have in the past. A large portion of the loans made by Eximbank in the past 3 years have been in nonmember countries. Some of these countries have since joined the Bretton Woods organizations. 2. MEMBER COUNTRIES (a) Government Loans.-Government of member countries should in general look to IBRD for foreign exchange loans in connection with large long-range development programs, such a flood control, irrigation, transportation, etc., where private interests are not prepared to carry out the program. This does not mean however that Eximbank should not make loans to governments of member countries for development purposes. If such a government makes application to Eximbank and it is the opinion of the United States Government that the interests of the United States can best be served by using the facilities of Eximbank, the fact that the prospective obligor is the government of a member country should not in itself be cause for referring the applicant to the IBRD. It is also quite conceivable that the IBRD might deny an application which, in the opinion of the United States Government, should be approved. The fact that the IBRD refuses a loan should be taken into consideration but should not in itself be prima facie evidence that the loan should not be made by anyone else. (b) Government-guaranteed loans. In those instances where loans are to be made to agencies of governments of member countries with or without a government guaranty to carry out large development programs such as those mentioned in (a) above, the same criteria should be applicable as in (a). In those instances where private entities are in a position to carry out such development programs and Eximbank is approached for assistance, the application should be considered by Eximbank and, if it is found appropriate to do so, the loan should be made even though it may be found necessary to request a guaranty of the government of the member country or an agency thereof such as a central bank. It is obvious that the program outlined in (a) and (b) requires coordination. This should be done through the facilities of the National Advisory Council, which, as pointed out above, was established to coordinate, among other things, the policies and operations of the United States representative in the IBRD and the Eximbank. (c) Loans to private entities.-Due to the fact that the IBRD must operate through governments of member countries or agencies thereof and cannot make loans without government or government agency guaranty, it is not in a position to make loans to private entities without requiring such a guaranty. To do this just to make it possible for IBRD to make a loan would be very inappropriate. It would destroy the very principle of private enterprise and should never be countenanced by the United States Government. It is, therefore, obvious that private entities should have free access to the Eximbank without any suggestion that they apply to the IBRD. 3. APPLICATIONS BY UNITED STATES EXPORTERS It has already been pointed out that IBRD may not show preference to the goods of any particular member country. It, therefore, behooves the United States Government, in order to protect the interests of its exporters, to follow the policy of assisting them, as it has in the past, through the facilities of Eximbank even though such assistance may involve taking the obligations of government of member countries or agencies thereof. If the proposed financing involves a segment of a program that is under consideration by the IBRD, it should be coordinated and, if the proposition is approved by the IBRD, Eximbank should finance that part of the business that is secured by the United States exporter, assuming, of course, that the proposition is satisfactory to Eximbank. This suggestion may raise a question in connection with the IBRD's practice or requiring borrowers to secure bids and placing the business with the successful bidder. It is believed, however, that, if Eximbank makes a loan to cover the goods supplied by the United States exporter, there should be no problem. It should be pointed out again at this juncture that other member countries who have the same obligations to the IBRD, except possibly as to amount of participation, do not appear to hesitate to bolster their foreign trade through unilateral action in the form of loans and export credit insurance to cover orders secured by their exporters. 4. LOANS TO EXPAND OR COMPLETE PROJECTS THAT HAVE RECEIVED PRIOR ASSISTANCE It should be understood that the bank that has previously granted loans with respect to a given project should consider any further assistance except in those cases where private interests have taken over the project. In such cases it would be appropriate, after consulting with IBRD, for Eximbank to consider any additional financing. 5. LOANS CONCERNING STRATEGIC MATERIALS TO BE IMPORTED INTO THE UNITED STATES It does not appear that there could be any question concerning the fact that such loans should be made by Eximbank, since they are of direct interest to the United States. Applications for such loans should be considered by Eximbank even though the prospective obligor may be the government of a member country or an agency thereof. 6. SHORT-TERM (COMMODITY) LOANS The record will show that Eximbank has performed a real service in assisting United States exporters in financing commodities such as cotton. This service should be continued through the facilities of Eximbank even though such loans mav involve taking the obligations or the guaranty of the governments of member countries or agencies thereof. It is believed that the principles outlined in this paper are consistent with the obligations of the United States in connection with the Bretton Woods Agreements. It is also believed that the IBRD has a real duty to perform in the field of longrange reconstruction and development work. There are many countries importing food even though there are vast areas that, but for the lack of water, could produce large quantities of food. There are rich areas that are inaccessible due to the lack of transportation facilities, such as railroads and highways. It can, therefore, be seen that the 1BRD has a great obligation to the world and can be of great service in raising the standard of living, thereby increasing international trade. The Export-Import Bank has a long history of successful operation. The record will show that Eximbank has made a substantial contribution to the export trade of the United States and to the economic development of many foreign countries. It has assisted in developing vast industries in such countries, using products and know-how of the United States. The bank in this way has materially assisted in developing international trade. lt, therefore, seems obvious that the bank should continue to perform the functions for which it was established. It is obvious that the demand by foreign countries for foreign and domestic capital is in excess of all the private capital available for investment in such countries as well as all funds that can be provided through the operations of the IBRD and Eximbank. Mr. STAMBAUGH. Next there are three memorandums: Role of the Economics Division in the Export-Import Bank, Role of the ExportImport Bank in Fostering the Investment of United States Capital Abroad, and Export-Import Bank Loans Through Foreign Financial Agencies and Development Corporations, by Edward S. Lynch. THE ROLE OF THE ECONOMICS DIVISION IN THE EXPORT-IMPORT BANK (By Edward S. Lynch, Chief, Economics Division) The Economics Division collects and analyzes financial and economic information and advice required in connection with the operations of the bank. It participates in all loan negotiations and analyzes the existing and prospective internal and international financial and economic conditions of all countries from which loan applications are received or in which loans are active, as well as the economics of specific enterprises or projects proposed for financing. It makes recommendations to the Managing Director on all loan applications, including recommendations as to whether a loan should be made or rejected, the use to be made of the proposed loans, interest rates, and repayment provisions and other conditions to be attached to credit commitments. In evaluating requested credits, the economists analyze their probable effect upon the economies of the countries in which the borrowers reside, in order to determine whether the credits will further the longrun trade interests of the United States. Another major task of the economists is judgements of the prospects of repayment of any proposed loan. The division informs the Managing Director continuously with respect to economic and financial developments in connection with credits in operation and advises on all economic aspects of loan disbursements. The division also, on the basis of domestic and international financial and economic conditions, advises the Managing Director with respect to the general policies and activities of the bank. The Economics Division represents the bank on interagency committees. The most important of these and the one which represents the largest workload is the National Advisory Council on International Monetary and Financial Problems, where members of the division represent the bank at the staff committee and working committee levels. The economists travel abroad regularly for the investigation of specific loan applications, of financial and economic conditions in countries requesting loans and to which loans have been made, and of the progress of projects which are being financed by the bank. THE ROLE OF THE EXPORT-IMPORT BANK IN FOSTERING THE INVESTMENT OF UNITED STATES PRIVATE CAPITAL ABROAD (By Edward S. Lynch, Chief, Economics Division) The Export-Import Pank is enjoined by the act creating it from competing with private capital. The Export-Import Bank has not only scrupulously lived up to that injunction-it has done more. The bank has considered it its duty to help create the conditions necessary for the free flow of United States private capital abroad. Prof. Willard Thorpe, of Amherst College, speaking at a conference held at Princeton University in December 1952 took the position that United States Government loans had not competed with private capital and added: "There are cases, particularly involving the Export-Import Bank, where public capital has gone into channels more closely in line with private investment. But it has then been in support of private enterprises and largely of the American businessman. Unfortunately, the Export-Import Bank has never done a good job of showing how much of their loans are given directly to private American enterprise abroad, like Bethlehem Steel, or go-by building up public utilities and transport-to improve the physical setting within which private investment can operate." Secretary of Commerce Sinclair Weeks, in a recent report entitled "Study of Factors Limiting American Private Foreign Investment," also called attention to the Export-Import Bank's role in promoting the flow of United States private capital abroad in the following words: "Loans by United States Government agencies can, if properly administered, help to establish the conditions abroad which will be conducive of increased private investment. If public loans are granted for the purpose of facilitating the growth of such basic facilities as transportation, power, irrigation, and the like, they can help in establishing the economic base for development through private channels." The great bulk of the bank's loans to underdeveloped areas since the end of World War II has been in Latin America. Yet no less than 40 percent of all United States private capital that has gone abroad since the war has gone to Latin America. Most of the rest of the private capital investment has gone to the Middle East for petroleum development and to Canada. The Export-Import Pank also played an important role in rendering Canada's investment climate favorable. The Export-Import Bank authorized a $300 million credit to Canada in 1947. At the time there was considerable uncertainty in international financial circles about Canada's economic future. Canada drew only $150 million of the credit authorized. Less than a year after the authorization, United States investment institutions refinanced the credit. The Export-Import Bank was largely instrumental in effectuating the refinancing. Then, as now, Export-Import Bank The wanted no business that private investors would take on reasonable terms. Bank held on to the Canadian credit only as long as it appeared unacceptable to United States private investment institutions. That Canada during the past several years has had a very favorable climate for United States private investment needs no elaboration. The Export-Import Bank has confined its activities in that country to participating with United States private capital in the development of materials of great importance to the United States economy, a story which is related in another report. The recent Brazilian $300 million credit made to enable Brazil to normalize its trading relationship with the United States has had the immediate effect of reassuring United States private investors and of maintaining thereby the rather large flow of United States private capital to that country. Since the war, the Export-Import Bank has assisted in financing privately owned United States ventures abroad. Over $200 million of credits have been authorized for this purpose. This type of operation may well prove to be one of the most important directions Export-Import Bank activity may take in the future. Export-Import Bank operations of this type can be broken down into three categories. (1) Loans to existing United States enterprises abroad which have not been able otherwise to raise the capital necessary to their fulfilling normal public utility obligations incurred by them. The various credits extended to the foreign subsidiaries of American and foreign power fall in this category. It would have been inconsistent of the United States Government to refuse to assist in these instances while at the same time urging very strongly the investment abroad of United States private capital. (2) Loans to new United States private enterprises abroad to provide a psychological umbrella, to give these enterprises assurance of United States Government moral support, as well as to provide loan capital otherwise unavailable against a privately financed equity base. Recent credits to the Utah Construction Co. and to Cerro de Pasco in Peru, to Firestone and Koppers in Brazil fall in this category. These credits were very effective means of overcoming in the minds of the private United States investors concerned the very real impediments to United States private investment abroad. (3) Strategic materials loans, described in detail in another report, have been made to a number of American enterprises. Export-Import Bank financing was considered essential in those cases to encourage the speedy development of materials of great importance to the United States. In alnost all instances provisions were made for the export to the United States of the materials produced. The oldest of the bank's lending devices is the so-called exporter credit. This type of credit usually takes the form of purchasing notes of foreign buyers from American exporters without recourse to the latter. Often the arrangement between the bank and the exporter is made in advance of the final sales contract. Typically, the bank has insisted that the American exporter assume part of the total credit made to the foreign supplier in percentages ranging from 15 to 50. The bank's purpose in this latter requirement has been twofold: (1) To insure that the American supplier would retain an interest in the effective operation of the equipment sold and thus help to maintain the reputation abroad of American products and (2) to accustom him and his banks to foreign lending. The bank believes that it has succeeded through this type of operation in eliminating some of the psychological impediments to foreign lending by United States banks and exporters. Detailed statistics on the subject are not available, but it is well known that United States exporters are making more and more credits available to foreign buyers in countries with which the bank has had successful operations over the past two decades. The bank has made over three-quarters of a billion dollars in credits for transportation, communications, and power developments in the underdeveloped countries of the world. As Secretary Weeks says, the development of such basic facilities is important to the establishment of an "economic base for development through private channels." The fact need hardly be labored that private capital-domestic or foreigndoes not find particularly attractive an area lacking basic facilities such as transportation, communications, and power. It need hardly be argued that the creation of such basic facilities is essential to the growth of the national income of underdeveloped areas and essential therefore to making them good customers of the United States as well as favorable locations for the investment of United States private capital. 42493-54-pt. 2-5 As a result of a program of about 100 different projects financed largely by the Export-Import Bank between 1938 and 1941, basic transportation facilities were constructed which have opened agricultural regions previously unexploited and have induced numbers of private capitalists to invest their funds in Haiti. Another example is the effect of the rehabilitation of the Vitoria a Minas Railway in connection with the development of the Itabira iron ore deposits in Brazil on the creation of new enterprises throughout its length. It is fitting to conclude this statement by referring to the role the bank has played in introducing United States engineering firms and the know-how that they carry into the underdeveloped areas of the world. United States engineering firms introduced into Latin America and other underdeveloped areas have been_reemployed again and again for other projects in these areas, even where the Export-Import Bank financing has not been involved. They have, through the transfer of their know-how and through the training of technicians in the foreign countries, improved the climate of those countries for the investment of private United States capital. That transfer of know-how is fairly effective may be illustrated by reference to the experience in the case of the Volta Redonda steel mill in Brazil and of the Chilean steel mill. When the former was inaugurated it had 50 highly specialized Americans on its payroll. Today-although its capacity has been doubled-only 15 remain. The jobs of the other 35 are competently performed by Brazilians. The Chilean steel mill had a staff of 110 American specialists; today it has only 80, although its capacity has been increased by 25 percent. Within a very few years it is expected that qualified Chileans will be trained to replace the remaining 80 specialists. Incidentally, the American management firm employed by the Chilean steel mill is now engaged in the operation of other projects in Chile and elsewhere in Latin America. EXPORT-IMPORT BANK LOANS THROUGH FOREIGN FINANCIAL AGENCIES AND DEVELOPMENT CORPORATIONS (By Edward S. Lynch, Chief, Economics Division) Four paramount interests have governed the Export-Import Bank's lending activity. Before any credit has been extended, the following criteria have had to be satisfied: 1. The loan had to be in the national interest of the United States. 4. The credit would promote the foreign trade of the United States. The Bank has found that no single pattern of lending could, in all countries and at all times, satisfy these criteria. It has made loans to United States foreign subsidiaries directly, with and without foreign governmental guarantees. It has made loans to foreign private companies directly and through the agency of the foreign government concerned. It has fostered exports by buying from United States exporters the notes of their foreign buyers and by extending credits directly to those foreign buyers. In short, the bank's policies and techniques have been sufficiently flexible to enable it to carry out its functions in the most effective manner. It has sought to confine its loans to responsible borrowers with sound projects. The bank's definition of a responsible borrower is more searching than that of a commercial bank. It is not enough that the borrower have a reputation for repaying his debts. The bank must also be satisfied that the borrower will use its funds scrupulously for productive purposes. This is not only because the bank is in a peculiarly responsible position as lender of public funds; it is because the bank has the function of assisting in the development of United States foreign trade and as such must assure itself that the funds it loans will (1) increase the productive capacity of the country in which they are used over and beyond what is needed to repay the bank, (2) thereby increase that country's annual income, and (3) accordingly make that country a better customer of United States suppliers of goods and services.1 Export-Import Bank, in its role of fostering the foreign trade of the United States, has not done its job completely when it finances an export. It is only 1 Dr. Paul Prebisch, former Governor of the Central Bank of Argentina, has concluded that Latin American imports typically increase by 1.8 percent for every percent increase in the national income; in other words, that the rate of increase in imports of those countries is related to the rate of increase in their national income in the order of 18 to 10. |