We had hoped to have ready for you, before the visit of Sir Anthony Eden and Mr. Selwyn Lloyd,⁸² an agreed paper (a) reviewing the methods and degree of Soviet economic penetration in the uncommitted and under-developed countries between Cairo and Djakarta, and (b) considering in a preliminary way some of the possible Western responses to the new competitive co-existence in this area.

Unfortunately we have not yet reached complete agreement within the Department in our appreciation of the dangers of the new Soviet tactics nor on the more fundamental question of whether, in our own thinking, Western aid policies may be viewed as a response to Soviet activities without detracting from the basic purposes for which we assist the under-developed areas.

I should naturally have preferred to have given you an agreed paper, and less reading, but in order to let you have, before the visit of the United Kingdom Ministers, the Department's reflections on these questions, I am enclosing two papers both of which take into account the comments of the other Divisions.

(a) a paper prepared by Economic Division examining the possible effects of Soviet economic activities in the under-developed areas and suggesting various ways in which Western aid to the under-developed countries might be stepped up and made more effective; and

(b) a paper prepared by European Division analyzing current Soviet objectives and activities in the light of recent intelligence and suggesting that it would be in the interests of the Western powers to internationalize the competition as much as possible, starting with the establishment of SUNFED, although this would be only one of the responses which deserve study.⁸³

We are all agreed, I should add, that new Western initiatives in this field should not be taken at the expense of existing programmes such as Colombo and U.N. Technical Assistance.

We are also agreed that any element of response in future Western actions should so far as possible be publicly played down lest what we do be tainted, in the eyes of the people we are helping, with political motives. This is one reason why we are all in favour of giving more sympathetic consideration to SUNFED this year.

I assume you will not wish to show either of these papers to the United Kingdom Ministers, since the papers have not been discussed with other Departments.⁸⁴

J. L[ÉGER]

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Note de la Direction économique

Memorandum by Economic Division

FUTURE AID TO THE UNDER-DEVELOPED COUNTRIES
IN THE LIGHT OF RECENT SOVIET MOVES IN THOSE AREAS

The following notes are intended for possible use by Mr. Pearson in his discussion with Sir Anthony Eden and Mr. Selwyn Lloyd concerning specific steps which the Western countries might contemplate taking in the situation described in the various intelligence papers and commented on in the memorandum prepared by other Divisions in the Department.

2. It would seem unwise for us to assume that people in the under-developed countries necessarily regard the recent flurry of Soviet activity as overshadowing the less publicized aid which has been reaching them over the past several years from the West. The ordinary people and official circles in those countries may well recognize that the Soviet offers are a rather belated response to what we have been doing for some time, provided that we ourselves do not appear to be accepting the Soviet thesis that they are the pioneers in this field. Our aid has of course been much more substantial and has reached widely scattered localities. It has probably made a much deeper and more lasting impression than we realize. The fact that we have not indulged in a great deal of fanfare may well be appreciated by the people of these countries and may be contrasted favourably with the behaviour of the Soviets. If our future aid operations were to be too evidently designed to counter these recent Soviet activities we might contribute to the impression which the Soviets are undoubtedly trying to create, that they have started the whole thing and that directly or indirectly they deserve the credit for everything which may follow. Any real or apparent increase in our assistance and any softening in our attitude toward such projects as SUNFED (Special United Nations Fund for Economic Development) might then be represented as something which would not have happened if the Soviets had not provoked us by their example.

3. We might fairly warn our friends that there may be more strings attached to Soviet assistance or trade than may be evident on the surface. While undoubtedly many of the Soviet technicians may be real experts, the recipient countries should be aware that the acceptance of large numbers of Soviet technicians might present a real danger from the point of view of internal security. Even in the case of goods received from the Soviet countries there is the risk that the economy of the recipient country may become too dependent on Soviet sources for repair and maintenance parts, especially if the specifications are not similar to those employed in one or another of the Western countries. The very fact that the credit terms offered are apparently generous may incline some recipients to over-extend themselves and become hopelessly in debt, with the result that they will be vulnerable to various pressures from the USSR. (Although experience has shown that in relations between international creditors and debtors the advantage is not always on the side of the former, it would appear that where the Soviet Union is involved it would be in a position to exert a good deal of leverage on any country which was heavily in its debt.)

4. While issuing these friendly warnings in a discreet manner, we should probably not deplore, at least publicly, the fact that the Soviets are offering these opportunities for the under-developed countries to receive assistance or to expand their trade. Most of these countries are badly in need of more aid than the West can supply and for more markets for their basic products than are accessible to them in the West. At a time when assistance from the West is considered by them to be insufficient and when it is evident not only that sales opportunities in our markets are limited but some of our surplus commodities, (eg. U.S. cotton and rice), are reducing their chances to sell abroad, these countries could hardly be expected to take in very good part any suggestion from us that they should reject all offers from the Sino-Soviet bloc. Our relations with the under-developed countries would hardly be improved if we were to adopt such an attitude and express it publicly.

5. Moreover, it is not clear that acceptance of such Soviet offers will necessarily work against our long-term interests. To the extent that aid from, or trade with, the Soviet bloc will increase the resources available to the present governments of some of the under-developed countries, they may be better able to carry their development programmes forward with less direction of their economies or regimentation of their people than would have been the case if these added resources had not been received. The Indian economy, for example, is probably less likely to develop along Soviet lines if more resources are at the disposal of the Indian Government, whether those resources come from the Soviet side or from the West. The more rapid improvement in living standards which such increased resources would make possible might also be expected to serve our purposes rather than those of the Soviet bloc. The expansion in exports to the Soviet bloc (especially in cases where the West is not able as a practical matter to offer sufficient markets) may also not be unwelcome from our point of view provided that the trade is of such a character that it can be terminated at will if that is desirable for political reasons or if alternative markets develop in the West. There would seem to be no substantial reason why in such cases the under-developed countries concerned should not enjoy the full benefits of this trade with the Sino-Soviet countries in the meantime. These longer term material advantages from our viewpoint in a careful development of trade with the Soviet bloc may turn out to be much more important than the temporary propaganda gains which the Soviets may hope to achieve by these activities. They do not of course provide any excuse for us doing less than the maximum of which we are capable in terms of either aid or trade. It would undoubtedly be best if the bulk of the resources required by the under-developed countries from outside were to come from the West. It is probably better, however, that some of these resources should come from the Soviet bloc than not come at all.

6. In any consideration of what the West should be doing in view of these recent Soviet activities, it would seem most important not to lose sight of the fact that our main interest continues to lie in the provision to the under-developed countries of the largest volume of resources which we are able to make available and which they are capable of absorbing effectively, with a view to strengthening their economies and improving living conditions. This has been repeatedly declared by ourselves and others in the past to be our objective and it would still seem to represent the soundest and most promising approach. It would seem most imprudent for us to depart from this objective in response to these Soviet manoeuvres. Their purposes rather than ours would probably be best served by any tendency on our part to distort our aid programmes in order to counter their twists and turns on political or military grounds. These moves should not determine our judgments of what we should do and whom we should help. Over the long run (and not too long a run at that) the programmes of the West are surely likely to have the greatest and most lasting effects if they are based primarily on economic needs and potentialities and if they are not, and do not appear to be, unduly affected by political and military calculations. Even in the very short run it would seem evident that our aid activities would be less effective if they were regarded mainly as responses to Soviet ventures. There is probably nothing the Soviets would like better than to have us admit by implication that our aid was motivated mainly by political and military considerations. This is what they and the local Communist parties have been alleging. We would be giving credence to these allegations and would thus make it more difficult for the under-developed countries to accept our assistance in preference to Soviet aid.

7. When the Soviets are receiving a large amount of publicity in the under-developed countries for their reputed generosity it might be tempting for us to press for more public notice of the helpful things which we are doing and have been doing for some time. Within limits it would no doubt be desirable for the Western countries to receive rather more credit than they have in the past for the contribution which they have been making both through the provision of aid and through the wide range of commercial and trading relations which they have with the countries of Asia, the Middle East, Africa and Latin America. We should probably not, however, go so far in seeking publicity for our efforts that we appear to detract from the achievements of the governments of those countries themselves.

8. Against the background of these rather general observations the following comments might be made on the detailed points which might be raised:

A. Actions to Offset the Temporary Propaganda Effects of Soviet Gestures

9. As suggested above, it might be agreed that somewhat more publicity than has so far been given might now be encouraged without, however, approaching the point where we were getting so much credit as to reflect on the position and prestige of the local government. It would seem desirable generally to place emphasis on the joint and co-operative character of our economic relations with the under-developed countries. In this connection it may be that increased use could be made of the Information Unit in Colombo for spreading public information on these matters more widely in South and Southeast Asia.

10. As increased effort might be made to field more and better technicians whose presence in the under-developed countries could bring greater attention and credit for the West. The various United Nations and Colombo Plan programmes might be used for this purpose. While the assignment of such experts should obviously be based mainly on technical needs of the countries and on our own ability to supply really competent people, some emphasis might unobtrusively be given to those fields and countries where the Soviet appeared to be particularly active. (We feel that our nomination of Dr. Keyfitz for the Directorship of the Bureau of Technical Co-operation in Colombo gives some evidence of our desire to see Technical Assistance matters in that area approached more imaginatively. We would hope that the United Kingdom would find it possible to support suggestions that Keyfitz might feel able to make for improving the effectiveness of our Technical Assistance programmes under the Colombo Plan.)

11. Visiting teams of distinguished Western technicians and scientists might be organized to impress the people in those professions in the under-developed countries with the quality of the work which we are doing. (In this connection, following and improving on an example set by the United Kingdom earlier, we are making plans for a medical mission to India and possibly Pakistan and Ceylon which might be headed by someone such as Dr. Penfield or Dr. Frappier. Similar teams might be organized in other fields possibly involving joint participation by several Western countries.)

12. Possibly we and the other countries of the West should reconsider our rather passive attitude towards trade fairs in the under-developed countries. The Soviets have not hesitated to provide lavish exhibits even where there was little intention of following up these displays with an expansion of trade. Canada and other Western countries might consider it appropriate in these circumstances to participate much more actively in these fairs and to publicize both what we are able to offer for sale and also (and probably equally important from the point of view of countering the Soviets) what we have been customarily buying from such countries.

B. Longer Term Actions

13. It might be desirable to impress on United Kingdom Ministers the importance which we attach to the Colombo Plan as a vehicle for providing assistance to countries of South and Southeast Asia. The United Kingdom has of course always expressed warm support for the Plan, has played a constructive role in the Consultative Committee meetings and has provided a good deal of technical assistance. It might be doubted, however, whether the United Kingdom's heart is really in the Plan, especially since the United States became an active participant. The very fact that the United States is somewhat inept occasionally in handling its aid programmes and the fact that United States aid tends to be rather suspect, would seem to us to increase the value of the Colombo Plan as an instrument for providing the maximum amount of assistance to this critical area in the most acceptable and effective manner.

14. It might not be too early to give some preliminary consideration now to the possibility of other Western countries joining in some major projects which would greatly assist the economic development of the countries affected,⁸⁵ substantially influence political relations in the area where they would be located and at the same time dramatically overshadow the projects in which the Soviet bloc are involved. (In a modest way we might regard our Indian reactor project as in this category.)

15. The High Aswan Dam in Egypt is already under consideration and the importance of early joint action on this project (along with the International Bank) is probably fully appreciated although there is evidence that the requirements of the Western countries concerned may be rather severe. It is still possible that this venture will be taken on by the Soviet bloc instead.

16. An equally or even more constructive joint project to which the Western countries probably should be giving increased attention is the financial, engineering and construction requirements of any settlement of the Canal waters dispute between India and Pakistan. An indication by the Western countries at this stage of a willingness to share in this project might hasten a settlement. The effects on the position of the West in the sub-continent could be very substantial and out of proportion to anything which the Soviets are likely to accomplish. The carrying out of this project, unlike the activities of Messrs. Khrushchev and Bulganin, could at the same time greatly improve relations between India and Pakistan and contribute to the stability of that region.

17. In the same category it might be desirable to ascertain what the United Kingdom attitude is towards the Johnston project for the Jordan Valley and what they understand the intentions of the United States to be towards this project.⁸⁶

18. The possibility of using the United Nations Technical Assistance programmes more extensively for securing experts and training opportunities for United Kingdom dependent territories (particularly those which are on the verge of independence) might be discussed. It might be indicated that we for our part would be anxious to do our best to meet requests which we might receive in respect of such territories through these programmes. If the United Kingdom authorities were troubled by the prospect that Soviet experts might work their way in through the United Nations programmes it might be possible for some understanding to be reached in advance about our intention to meet particular requests which we were in a position to fill.

19. We would also, of course, as suggested above, have in mind the desirability of countering Soviet activities in determining in which cases we would supply experts or training facilities to various under-developed countries or territories under these programmes.

20. Perhaps the major question in this field which might be explored with the United Kingdom Ministers has to do with the attitude of the industrialized Western countries towards an international economic development fund under the United Nations (e.g. SUNFED). In the past the United States, United Kingdom and ourselves, as well as several other Western countries, have been pretty negative in our views, and expression of views, on such proposals (even though, unlike the Soviets, we were taking a constructive part in such related international arrangements as the International Bank and the International Finance Corporation). It might be questioned whether this is still an appropriate attitude. While it is not possible at this stage to be very definite about the position of the Canadian Government as this subject has not recently been discussed among Ministers and is only now being reviewed by officials, it would seem desirable to suggest that perhaps our traditional views should be re-examined. It would seem fairly evident that SUNFED is either going to come into being very soon or there is going to be a sharp and serious division among the members of the United Nations. The delaying process has probably gone about as far as it can go and the bringing in of the 16 new members has probably increased the likelihood that this issue will come to a head this year.

21. In deciding our attitude towards SUNFED and determining how we should conduct ourselves in any international discussion of this proposal, it would seem desirable for us to have very much in mind such considerations as the following in connection with the activities of the Soviet bloc in this field:

(a) We should be careful to avoid giving any impression that we regard the value of this project to the underdeveloped countries themselves as a less important factor than the opportunities which it may provide for outmanoeuvreing the Soviet bloc.

(b) As the same time we should endeavour to avoid a situation in which the Soviets are able to appear passive or even sympathetic towards this proposal while we seem to be standing out against it when it is clearly supported by the bulk of the members of the United Nations.

(c) If we decide that SUNFED is going to come into being and that we are going to participate, we should join actively in the preparatory discussion in order to exercise our influence and ingenuity to shape the organization in such a way that the resources at its disposal will be used most efficiently and in the places where they will have the most value.

22. In the light of such considerations as these we should regard, and represent, SUNFED as intended mainly to mobilize funds from as many sources as possible for use in as many areas of the world as may seem desirable. Such an organization would have the advantages over other existing grant-aid arrangements (e.g. Belgium, France, the Netherlands, Scandinavia, etc.) in that it would cover more under-developed countries of the world (e.g. Africa, the Middle East and Latin America as well as South and Southeast Asia). Our decision to support it, if that turned out to be the case, should presumably be based on those advantages and on the fact that the creation of such a fund is favoured by a large majority of the membership of the United Nations. In supporting it we would of course also have in mind its usefulness in connection with current Soviet activities in the under-developed countries. If we are able to take a positive attitude towards it, and to declare our intention to do so at a fairly early date, we shall incidentally improve our position in relation to the Soviets in the eyes of the under-developed countries. The Soviets' bluff would then be called. They would either have to declare their inability to participate, in which case their rather hypocritical attitude towards those countries would be exposed. Alternatively, they might decide to come in, in which case at least some part of their activities in the under-developed countries would be brought under a degree of international discipline.

23. It is of course possible that by participating in such a fund the Soviets might get more credit than they deserve, as probably happened in the case of UNRRA. Some countries might tend to regard SUNFED as something which the Soviets were responsible for. The likelihood of such an outcome could be minimized if we (with the co-operation of the under-developed countries themselves) succeeded in getting the contribution required from the Soviets set at a fairly high figure. The Soviets would also be deprived of excessive credit for the creation of SUNFED if we were to adopt a sympathetic attitude very soon and thus avoid the impression that we were going along with the project only reluctantly and only because of the political necessity of matching or countering the Soviets. On the general reasoning set forth earlier in this memorandum it would in any event seem logical to consider SUNFED as more likely to serve our longer range purposes than those of the Soviet bloc since it would have the effect of increasing the resources available to the under-developed countries, thus enabling them to accelerate their economic development and improve their living standards more rapidly. From an immediate propaganda point of view, however, the balance of advantages in SUNFED as between the West and the Soviets will depend very much on how we handle ourselves in the international discussions on this subject over the next few months.

24. There are other actions which might be taken in the present situation but which it probably would not be particularly profitable to discuss with the United Kingdom at this stage.

25. For instance, it may well be that we should contemplate some bilateral semi-commercial loans or credits to certain of the under-developed countries (particularly India) to finance individual projects which are included in the development programmes of those countries and which are attractive from our own point of view (e.g. a fertilizer or cement plant).

26. The possible relevance of commodity agreements and stockpiling arrangements to the marketing problems of some of the under-developed countries which have to rely on sales of a few primary commodities, may also have to be examined in the period ahead. As a matter of record Canada has generally co-operated in such arrangements in the past although we have had our doubt about the efficacy of some of them (and are now wondering whether even the International Wheat Agreement is as satisfactory a device as it appeared to be previously). This is not, however, a subject which it would be worthwhile exploring with the United Kingdom Ministers on this visit.

27. The effects which the general commercial policies of the major trading countries can have on the economies of the under-developed countries and on their dependence on markets in the Sino-Soviet bloc is also a matter of considerable interest. Here again, however, it might be questioned whether there is a basis for any useful talk with the United Kingdom Ministers at this time.

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Note de la Direction européenne

Memorandum by European Division

COMPETITIVE CO-EXISTENCE
THE NEW SOVIET CHALLENGE IN THE UNDER-DEVELOPED AREAS

In their year-end messages, the Soviet leaders clearly restated both the theoretical foundations and the practical applications of their current emphasis on competitive co-existence. Messrs. Bulganin and Khrushchev maintained that the success of their Asian tours showed the correctness of the Leninist principle of peaceful co-existence of nations with different political and social systems. Lenin had predicted that the time would come when the tens of millions of people of Asia would play a part in deciding the destinies of the whole of humanity. This time has now come, Bulganin resoundingly declared.

2. Last October the Soviet periodical Communist published an authoritative exposition of current Soviet policy towards the West which was defined as prolonged co-existence and economic competition between the two systems.... The future development of society is determined in the last analysis not by means of war but through peaceful economic competition. Only in such competition can a historic superiority of one or other social system be proved in practice.

3. Nothing could more clearly reveal the fundamentally political motivations of competitive co-existence, Soviet style. As always, trade and foreign economic policy is to serve political objectives. In the under-developed areas of South-east Asia, the Middle East, and now Latin America, a serious attempt to step up trade with the Soviet bloc is being made in order to achieve the following principal objectives:

(a) the penetration of these countries through trade missions and technicians imported in order to train local people in the setting up and operation of heavy industrial equipment;

(b) the demonstration that by means of the Soviet economic system under-developed countries can achieve the most rapid rate of industrialization without having to depend on the financial and technical resources or methods of the former colonial powers; and

(c) ultimately to detach some of the neutralist or uncommitted countries of South-east Asia, the Middle East and Latin America from their economic and political association with the West and if possible to bring them into the Soviet sphere, though the Soviet Union would no doubt be satisfied if they could counter Western diplomatic action in these areas which have traditionally been beyond the sphere of Russian influence.

4. In the West, there has been a tendency, reflected even in President Eisenhower's State of the Union Message,⁸⁷ to interpret the new Soviet initiatives which have been greatly accelerated since the Geneva Conference last summer, as if they were the forerunners of large scale Soviet foreign aid programmes in the under-developed areas. But Soviet leaders have been at pains to make it clear that they do not contemplate a foreign economic aid programme in the Western sense. As Mr. Khrushchev said emphatically in his statement to the Supreme Soviet on December 29:

The colonizers give a dollar in the form of `aid' so as to obtain ten dollars later in return through exploitation.... They then enslave the peoples politically ... not only in the under-developed countries ... but more and more in Europe.... In essence this is not aid but handouts from the master's table made conditional on enslaving obligations.

The Soviet Union condemns such a policy. It builds its mutual relations with all countries on the basis of equality of rights and mutual advantage and non-interference in internal affairs.

5. Protesting over much, Mr. Khrushchev insists that the U.S.S.R., having no surplus capital because its economy is planned, has no economic interest in exporting capital to foreign countries; nor does it have to export goods, for economic reasons. Indeed, unlike the capitalist countries, the Soviet Union (their leaders repeat) is not embarking on a capital development programme.

6. At the same time Messrs. Khrushchev and Bulganin are paradoxically maintaining that the Western countries are guilty of withholding from the under-developed areas the means to industrialize themselves, since it is in the interests of the colonizers to draw upon the primary products of the under-developed areas, whereas the U.S.S.R. seeks to assist their industrialization. The Soviet alternative to capital assistance is to offer capital goods, either as gifts or on highly competitive terms. Apart from wishing to avoid being labelled as capitalists themselves, the Soviet Government no doubt prefer to offer a factory or a steel mill (with all its accompanying technicians) rather than playing the role of financier. It has a double advantage: repayment in goods and in political gains.

7. Our information on the Soviet bloc's economic penetration of the under-developed countries is as yet incomplete and only partially digested. But apart from a few relatively small gifts and vague offers of aid, the pattern emerging from specific agreements so far concluded by countries of the Soviet bloc cannot in any sense be described as a give away programme. It is Soviet-style trade, not Western aid. Whether it was arms for Egypt or a steel mill for India, something of economic value to the Soviet bloc was generally asked in return. Although the terms for such exchanges have not always been economically advantageous to Soviet bloc countries, the commercial losses were more than counter-balanced by the political gains. Even so, there has been no evidence of what might be called Soviet dumping, although Hungarian locomotives, for example, are probably being sold to Egypt at below cost (certainly below competitive West German costs). Even in purely economic terms the Czechs may have been justified in selling at cut-rate prices arms which for them were becoming obsolete in exchange for Egyptian cotton which they are going to need over a long period.

8. Similar considerations may apply to the sale of capital equipment for heavy industry. With the growth of automation in the U.S.S.R., they will be able to unload in underdeveloped countries a good deal of plant machinery they no longer regard as economic.

9. As compared with the West and particularly with the United States, the Soviet Union is, of course, in the happy position that they can make use of many of the raw materials which the under-developed countries are anxious to sell - rice, cotton, sugar, beef. The United States, on the other hand, has its own surpluses; and Western countries generally shy away from the bulk purchases and State trading agreements characteristic of the Soviet bloc deals. In these circumstances, the Soviet bloc is entering into the arena of competitive co-existence at a favourable time. Its purchases of Burmese rice, Cuban sugar, Argentine livestock, and Egyptian cotton make sense in economic terms alone, although the motivation is undoubtedly political. Moreover, it offers credits at much lower interest (usually 2 1/2%) and on longer repayment terms than Western governments or international agencies.

10. From the point of view of the under-developed countries, expanded trade with the Soviet bloc is in many ways preferable to continuing or increased dependence upon Western capital or United States foreign aid programmes. Any self-respecting country would prefer to trade, even when it suspects that the terms of trade may have been somewhat rigged. It may realize only later that the objects of Soviet trade - as in the case of military aircraft or industrial plant equipment - are as full of agents as the Trojan horse. Knowingly or unknowingly risking some political and economic penetration through such trade, the under-developed areas nevertheless avoid the innumerable administrative and political headaches involved in meeting the requirements of United States aid. There is no accounting to inquisitive visiting missions nor is it necessary to be humbly grateful to touring Congressmen. Though a deal with the Soviet bloc would in fact be much more dangerous for the political independence of the country concerned, as compared with a foreign aid agreement with the United States, it is superficially an agreement between trading equals rather than a charity hand-out.

11. United States foreign aid programmes are at present operating under a further serious disadvantage in that they are liable to contain - certainly if Senator Knowland has his way - unacceptable strings attaching aid to military commitments. The timing of the new Soviet initiative may have been dictated first of all by the necessity to postpone such a programme until the internal economic and military needs of the bloc had been more or less met. But it was obvious from the tour of the Soviet leaders in India, for example, that they were able to capitalize in 1955 on the political opposition to the system of regional military alliances built up by the United States and the United Kingdom in South-east Asia and the Middle East during the two previous years. This combination of circumstances makes military strings attached to foreign aid programmes doubly unattractive. Interest in the new Soviet alternative is correspondingly increased.

12. The most important advantage enjoyed by the U.S.S.R. in their new form of competition with the West among the under-developed countries is that the Soviet government can control and direct their economic efforts to a degree quite impossible for Western governments. They can afford to ignore domestic consumer demands to a degree that we cannot; and they can solve what is fast becoming a major problem in the technical assistance programmes of the Western countries - the shortage of technicians willing to go to unhealthy parts of the world at lower salaries than they can command in the domestic market - by simply directing their experts to go where they wish them to go. Indeed, technical assistance - including offers to train large numbers of engineers and technicians in the U.S.S.R. - may be one of their strongest suits, as well as one of the least costly. For trade will surely follow in the wake of their trainees.

13. Partly because of the Soviet capacity to direct goods and personnel, and partly because of the very rapid progress bloc countries have made in industrialization, United States and United Kingdom intelligence appreciations consider that it would be a mistake to underestimate the capacity of the Soviet bloc to make good their present contracts and offers of trade and economic aid to the under-developed countries. Soviet bloc assistance could be doubled and perhaps trebled during the current five year plan period. India can be provided with a modern million-ton capacity steel mill, and the Aswan High Dam can be built, without significantly affecting the planned defence effort, internal economic expansion and external trade of the Soviet bloc. They have the capability; and it will increase substantially by 1960, though in absolute terms it will still be well below that of the United States.

14. Soviet capabilities are, of course, greatest in the under-developed and politically uncommitted countries adjoining the Sino-Soviet land mass. Discounting for the next few years the possibility of any economically significant volume of economic aid from Communist China to these countries, we may expect that Soviet bloc efforts will be directed chiefly to the Middle East and to South and South-east Asia. (Penetration in Latin America and Africa has not been analyzed in detail in this paper for lack of information, but it is at a much earlier stage.) At present, in terms of the dollar value of Soviet bloc deals, economic penetration has gone furthest in Egypt, India, Syria, Indonesia, Afghanistan, Burma and the Sudan - in that order. But in political terms, there has been much more serious penetration in Afghanistan, and, to a lesser extent, in Egypt, than in the other countries.

15. Soviet offers and deals have been handled with such astuteness that they have received publicity in the under-developed countries out of all proportion to their importance in economic terms. By good timing and careful selection of politically important projects, Soviet propaganda has tried to derive as much political advantage as has accrued to the West from far more massive undertakings.

16. By adapting Western foreign aid and technical assistance methods to their own purposes, the Soviet bloc is in a position to give the West stiff economic political competition in the under-developed areas. Yet we - and we hope the under-developed countries - must retain a sense of scale. We must remember that a much higher proportion of Western aid is given free. It is much larger and economically more significant. In spite of strings and conditions attached to much of the bilateral aid from Western countries, the scale, quality and reliability of Western help to the under-developed countries very greatly exceeds that offered by the Soviet bloc. And though we now give them the capability, the Soviet Union has in the past not always been able to fulfil satisfactorily even the limited agreements it has undertaken - to wit the Soviet-Argentine agreement of 1952, and its agreements with Yugoslavia before the break in 1948. Even without such doubts as to Soviet performance, most of the uncommitted and under-developed countries would much prefer other things being equal, to deal with the West; for their leaders are not unmindful of the necessity for those who sup with the Soviets to use a long spoon.

17. During the present calendar year, the United Kingdom Joint Intelligence Committee recently estimated, Soviet bloc countries may provide about $140 million worth of capital equipment (non-military) to South-east Asia and the Middle East. Their major deal last year was the Czech-Egyptian arms agreement valued at another $140 million. A $10 million arms deal with Syria is in the offing.

18. We do not have precise comparative figures, but United Kingdom effort in the same area is at present running at about the same level (about $212 million annual outlay). United States aid, however, is measured in many hundreds of millions of dollars and in most cases requires no economic return. Some Western technicians may have been irritating and officious in their attempts to introduce Western methods too quickly in some of the under-developed countries; but there can be little doubt in the minds of those governments which have had practical experience of Western assistance that their experts are genuinely trying to improve the basic economic position of the assisted country. Parallel Soviet activities have often been clumsy, and blatantly political - for example the paving of the streets of Kabul - with little regard for purely national economic priorities.

19. From the information at present available to us, it seems fair to assume that over the next five years the USSR will be able to increase its capabilities in the foreign aid field to the point at which (if Soviet aid to China is included) they may be able to approach the Western effort even in terms of scale, though probably not in terms of quality and reliability as well. The chief reason for this expectation is, as noted above, their capacity to direct their economic enterprises for state purposes regardless of the individual. The new five year plan gives further proof of their intention to concentrate on the development of their economy largely at the expense of the individual. It would therefore be most imprudent for us to under-estimate, as there has been some tendency to do in the press, Soviet capabilities in competitive co-existence. Their leaders have chosen the form and timing of their new challenge deliberately and with the facts before them.

20. During the period in which Western programmes had a virtual monopoly in the foreign aid field, their inherent limitations and even their mistakes did not greatly matter. The under-developed countries which were being assisted were grateful to the only group of countries who felt able and inclined to help. But now that the Soviet Union is entering this field - though on its own terms - the situation is bound to change radically. Comparisons will be made both in political and economic terms. The principal Western countries already involved in either national or international foreign aid programmes should, if the foregoing analysis is approximately correct, be considering how they are going to meet the new challenge. For much hangs on the success of the response.

21. It was perhaps no coincidence that before going to the Middle East Secretary-General Hammarskjöld threw out the suggestion at his press conference in New York on January 13, that in place of rival bilateral economic aid programmes, members of the United Nations should agree to channel their efforts through the United Nations.⁸⁸ He maintained - and with some reason - that the United Nations was better equipped than any single nation to assist in this field and that a United Nations programme could best avoid competition developing in an atmosphere of strife. He also implied that economic aid given through the United Nations was more objective and less suspect because there was no national axe to grind - nor, he might have added, any military or political strings attached.⁸⁹

22. It would need very careful consideration and consultation, first between Departments and later between Governments, but there may be a good deal to be said for a United Nations approach as a partial answer to competitive co-existence, especially if the initiative could come from the United States. If competitive co-existence is permitted to develop very largely on a national basis, the Soviet Union may be able to exploit more skilfully the political advantages of direct national programmes, for the reasons which we have already analyzed. Soviet penetration in Afghanistan and in Egypt, where the West has spent and given substantially more than the USSR, gives us no grounds for resting on the good work already accomplished by the West in the under-developed areas. An international programme developed through the United Nations would provide for a more or less effective set of ground rules for the new type of competition - and since the Western countries, by and large, respect these ground rules anyway, they would serve principally to curb Soviet penetration by means of their national trade, aid and technical assistance programmes.

23. To secure the optimum result, the West should try to secure Soviet agreement to internationalize a significant part of their efforts outside their own bloc (in which we of course include China), leaving them a correspondingly reduced capability to devote to national programmes outside the United Nations.

24. This approach would seem to require, as a prerequisite, Western agreement on a proposal to be made in the United Nations offering to devote a substantial sum to the capital development as well as the technical assistance of under-developed countries. Such an offer might, or might not, be made on condition that the Western contribution be matched by the contribution of the Soviet bloc members, in proportion to their ability to pay - judged perhaps, on a GNP basis. It would be premature to suggest a more precise formula at this stage.

25. From the point of view of demonstrating the purity of Western motives, an unconditional Western offer to support a United Nations programme would be more effective in the under-developed countries. Objectively, it is something that should be done, even if the Soviet challenge had never arisen. If the West present their action as an overt response to the U.S.S.R., the Soviet leaders are ready to claim the credit - indeed, Mr. Khrushchev has already done so, in anticipation, in his statement to the Supreme Soviet on December 29. The fact remains, however, that without United States support a United Nations approach would be of little value. Congressional approval, even after the elections, is unlikely unless there is an anti-communist element in the presentation. The principle of requiring a Soviet contribution proportional to that of the United States would have a greater appeal in the United States than an unconditional proposal. Moreover, the Americans will be quick to see the risk of making an unconditional offer which, if the U.S.S.R. does not participate, would commit the United States and other Western countries to a sizeable and continuing financial outlay under U.N. administration. By tying a proportion of Western resources to a U.N. programme, without insisting in advance that the Soviet bloc does likewise, some flexibility in programming would be lost. This loss would have to be weighed against the greater impact on the under-developed countries of an unconditional offer by the West to establish SUNFED. Though our estimate of Soviet capabilities is still based on incomplete information, it is clear that the West should not expect an automatic Soviet refusal, whether or not our offer was conditional. The Western countries should be prepared to be taken up on our offer and to follow it through.

26. One possible means for doing so already exists. The under-developed group of countries in the United Nations - the Latin Americans and the Afro-Asians - have already drawn up the blueprints for such a scheme in SUNFED.

27. With the addition of sixteen new members, most of them under-developed countries, it seems unlikely that the more prosperous members of the United Nations will be able to continue to fend off the demands of the under-developed countries indefinitely. At the next session of the General Assembly, SUNFED may either come into being or a sharp and serious division may be created among members of the United Nations. This issue will have to be faced before long by the Canadian delegations to ECOSOC and to the General Assembly. If in our judgment SUNFED is likely to be established with Western (and possibly with Soviet) participation, Canada should join actively in the preparatory discussions in order to influence and shape the organization in such a way that the resources at its disposal will be used most effectively and in the places where they will have the most value. This objective approach, rather than any attempt to out-manoeuvre the USSR, will have the greatest impact on the under-developed countries themselves.

28. Moreover, the establishment of SUNFED would bring in Western contributors who are not at present participating in foreign aid operations (e.g. Belgium, France, the Netherlands, Scandinavia, etc.) and it would cover not only South and South-east Asia but the Middle East, Latin America and Africa.

29. A further reason for considering this suggestion of the Secretary-General's carefully is that if the West does not decide to take the initiative soon, it would be quite in line with current Soviet policy for the Soviet Union to announce, say, at the next General Assembly that they had effected a further reduction in their armed forces and were prepared to devote the savings to an initial SUNFED programme. Such a Soviet initiative will become increasingly likely as the sixth Five Year plan's objectives are realized and the Soviet economy develops more fat which could be devoted to fairly large scale foreign aid programmes and not merely to politically managed trade.

30. By choosing our own terms and timing for challenging the Soviet Union to put up or shut up, the Western Powers would stand to secure for themselves the following principal advantages:

(a) a major diplomatic initiative which would once more leave the Soviet Union on the defensive; if the proposal were rejected by the USSR, their pretensions would have been unmasked with maximum publicity and propaganda effect;

(b) if the Western proposal were accepted, we would have an opportunity of exposing the USSR to the test of serious competitive co-existence in the practical field on terms we could largely control;

(c) we could count on a United Nations programme being politically much more acceptable to uncommitted under-developed countries than national programmes of either stripe;

(d) a United Nations attack, on a sufficient scale, on the massive problems of poverty in the under-developed areas would be of more help in effectively raising living standards than all the present Western programmes put together; by the same token such a programme would help to reduce the inroads of Communism among the under-developed peoples;

(e) political and economic penetration of the under-developed areas would be more difficult for the USSR to achieve by means of their contributions to a United Nations programme than it would if they were to devote the same effort to a bilateral programme; and

(f) the capacity of the under-developed countries to shop around and bargain between East and West (as Egypt has been doing rather successfully over the Aswan High Dam) would be reduced.

31. Whether the Russians refused or accepted, the West would stand to gain. If the Russians are prepared on a bilateral basis to assist the under-developed countries on a large scale with technicians and capital equipment (but not capital), it is in the interest of the West to try to draw them away from competitive give-aways or credits which open the door to subversion and political blackmail. If the Russians nevertheless prefer to go ahead on their own, it might still be preferable to handle an important proportion of Western aid through the United Nations and other international channels such as the Colombo Plan, rather than through purely national agreements. But if the Russians go it alone, the balance of advantage might shift from SUNFED to an expanded Colombo programme. (In any case, Colombo and UN Technical Assistance programmes should not be reduced).

32. It may be argued that the Western propaganda to be derived from a large-scale bilateral programme might be dissipated if it were partly diverted to a Fund administered by the United Nations in which the under-developed countries now have increased representation. This would certainly be a difficulty for the colonial powers, including the United Kingdom and France. In any event, it would be strongly resisted in the United States by many members of the present Administration. There are, however, indications that Mr. Stevenson may be well-disposed towards a SUNFED programme. If he made it an election issue, there appears to be some chance that President Eisenhower might counter with a more sympathetic response to SUNFED than his Government has previously given. (The United States' contribution would be of the order of $100 million on the basis of a programme of $250 million a year requested by the under-developed countries.)

33. A further complication - although by no means an insuperable one - is that for obvious reasons China, in present circumstances, could not be included in a United Nations programme. It would in any case be contrary to the aim of Soviet propaganda to put China in the same category as South-east Asia. Whatever happened, China would remain a recipient of Soviet aid and its demands for technical assistance and capital requirements would presumably continue to be one of the principal foreign calls on the Soviet economy, and the USSR would be under pressure to increase its assistance to China as it expanded its aid to non-Communist countries.

34. The development of a United Nations approach in which the Western countries would be challenging the Russians to join them in an international attack on the economic problems of the under-developed areas is one way in which the Western countries might respond to competitive co-existence. As already mentioned, a good case could be made, even without the spur of Soviet competition, for international co-operative activity on a greater scale than anything so far realized through the United Nations, the Colombo Plan, or other arrangements. Indeed, as Mr. Denis Healey has pointed out in an article in the January issue of International Affairs:

"Such `peaceful competition' may be an invaluable asset to those in the West who believe that large scale economic aid to non-Communist Asia is desirable for moral, political, and economic reasons. Just as postwar Soviet military pressure provided the West with an indispensable incentive for building NATO, so nothing but active Communist intervention in Asia will force the rich Western states to do their duty by the under-developed areas."

35. Interest has also been expressed in a NATO approach. At the last Ministerial meeting of the NATO Council in December several Ministers felt that NATO should take fresh initiatives in the non-military field in response to the new Soviet tactics.⁹⁰ The Italian Foreign Minister thought that NATO members should co-ordinate their technical, financial and manpower resources for intensifying their assistance to under-developed countries in the vulnerable areas of the world, while the Greek Foreign Minister proposed that NATO countries should embark on bulk purchasing of surplus raw materials to forestall Soviet deals in the under-developed countries. Although the Netherlands Foreign Minister thought that the Western response should be to support SUNFED, the French Foreign Minister felt that NATO should first study the possibility of proposing to the United Nations a world plan for under-developed countries. In accordance with the Council's Resolution on Article 2, the NATO Secretariat may shortly be preparing an analysis of Soviet economic penetration efforts, as a background paper for the further study of this question in the NATO Council.

36. SUNFED, Colombo, and even NATO, do not, of course, exhaust Western possibilities. More effective and imaginative use could be made of national programmes - Canada's NRX reactor for India is an example - and greater efforts could be made through existing international programmes - to start the Aswan High Dam, to undertake the Canal Waters project affecting Kashmir, India and Pakistan, or to press the Jordan River development plan. These and other suggestions are considered in greater detail in a supplementary paper,? attached.

37. Without alarm or undue haste, all these possible responses to the needs of the under-developed areas and to Soviet competitive co-existence will require further study; but the Western countries should not defer action too long. Soviet competition is at present being manipulated artificially so as to have a greater impact than its quality or quantity justifies. But their capacity is increasing and it may not be long before the Western countries find that they cannot easily call what is still partly Soviet bluff.

38. Finally a word might be said about what the Western countries should not do:

(a) We should not depart from our general objective of securing for the under-developed areas all the economic aid which they can absorb and which the Western countries can afford to supply; this aid should continue to be administered with regard primarily to the economic needs of the area.

(b) Although it may be appropriate in certain cases to convey discreet warnings to some of the under-developed countries of the dangers we see in certain types of Soviet economic penetration, we should not advise them to reject all Soviet trade and aid offers; not only would such advice backfire, but, provided it is carefully handled, there are categories of Soviet trade (e.g. short-term exchanges of raw material surpluses for Soviet finished products) which may strengthen the economies of the under-developed countries without running undue risks.

(c) Above all, we should make no attempt to intimidate the under-developed countries, threatening to cut off Western aid or trade if they deal with the Soviet Bloc - as the Egyptian Ambassador in Bonn has recently charged the Federal Republic of Germany with doing, whether rightly or wrongly.