My dear Colleague:

I know that you have continued to feel uneasy about a number of aspects of the Colombo Plan. Since I still believe that a substantial Canadian contribution would be a sensible investment in the stability of an area which in the long run, I think, is important for our own security, I should like to try in this letter, if I may, to remove some of your doubts and misgivings.

But before doing so, let me restate very briefly the reasons for my support of the Colombo Plan. Although we are still in the dark about much of Soviet strategy, its main outlines are now clear enough, I think, for us to see that we must retain some allies in Asia if we are to prevent the whole of the Eurasian land-mass from falling under Communist domination. At present, the Governments in control of India and Pakistan are our firm friends, notwithstanding their very natural efforts to avoid becoming too deeply involved in the struggle with the Soviet Union. But these new Governments are highly precarious. They need external financial assistance if they are to have a chance of making some improvement in the appallingly low standard of living of their people and so of sheltering them from the attractions of Commu-nist propaganda. We must try, I believe, to strengthen the will and the capacity of these countries to assist in the struggle against Communist imperialism; and one of the very few ways we can do so is by showing a practical interest in their economic welfare.

You have raised the point that, although a Canadian contribution would involve real sacrifice on the part of this country, contributions by sterling area countries would have very little meaning. It is true, of course, that the bulk of the United Kingdom contribution will be in the form of releases from the sterling balances; and for that reason, it could be argued that this is not a contribution but merely the repayment of a debt. On the other hand, I think you would agree that these releases will impose very real strains on the economy of the United Kingdom and will necessitate very real economic sacrifices, since they will make possible unrequited exports from the United Kingdom to the countries of South and South-East Asia. The United Kingdom will be exporting goods to these countries without receiving any goods in return. This is, of course, what any international debtor is obliged to do. But would it be fair to regard the accumulated sterling balances - of India, for example - as debts in the ordinary sense? As you know better than 1, they were run up during the war in order to pay for military supplies and services purchased by the United Kingdom to support forces in India, the Middle East and Burma. They have, therefore, always been considered, I think, as forming a special cate­gory of indebtedness since they represent a debt incurred in the common defence.

The special nature of these debts was explicitly recognized, you will remember, in the Financial Agreement between the United States and the United Kingdom of December 6, 1945, in paragraph 10 of which it was stipulated that the United King­dom would try to make agreements with holders of the balances whereby part would be immediately released, part would be funded on a long-term basis and part would be "adjusted", i.e., cancelled. In point of fact, of course, the United King­dom has never been able to fulfil the intention it expressed in that Agreement. On balance, I think that we should be glad that heavy releases have been permitted from the balances since this has contributed powerfully to such stability as has been maintained in South and South-East Asia over the past five years. Nevertheless, the article of the Loan Agreement to which I have referred indicates that the United States at least did not regard the balances in 1945 as a debt in the ordinary sense. So far as I remember the opinion of Canadian financial authorities at that time, they were in full agreement with the efforts of the United States to scale down the bal­ances and to fund much of the residue. This attitude on the part both of our Govern­ment and the United States Administration persisted at least as late as the Tripartite Economic Discussions in which you and I participated in September, 1949. You will recall that the communique issued after those discussions foreshadowed another attempt to liquidate the problem presented by "the existence of exception­ally large accumulations of sterling which were built up mainly during the war as the result of payments by the United Kingdom for goods and services purchased overseas in furtherance of the common war effort". By its contribution to the Colombo Plan, which is to take the form mainly of releases from the sterling bal­ances, the United Kingdom has indicated its willingness to discharge the whole of its indebtedness and to do so at a rapid rate. In the light of the history of the prob­lem of the sterling balances, this undertaking can properly be considered, it seems to me, as a real contribution to the economic development of South and South-East Asia.

It should also be borne in mind, I think, that although the bulk of the United Kingdom contribution will be in the form of sterling releases, a substantial, although minor, part will take the form of outright gifts to the colonies of Singa­pore, the Federation of Malaya, North Borneo and Sarawak. The sterling require­ments of these colonies over the six-year period will be covered in their entirety by gifts from the United Kingdom. The sum involved is 61 million pounds.

So far as the Australian contribution of not less than 25 million pounds over the six-year period is concerned, it is true that with wool prices at a high level and with Australia's sterling reserves climbing at a rapid rate, the Australians are not going to have to pull in their belts this year in order to meet their contribution to the Colombo Plan. But the time will almost certainly come in the future, as in the past, when Australia will need all her reserves of sterling; and at that time the Australian contribution to the Colombo Plan will have a very real meaning. To put the Austra­lian contribution to the Plan for capital development in its proper perspective, it must also be remembered that Australia has already agreed to contribute 2,800,000 pounds sterling over the next three years for technical assistance in South and South-East Asia.

You have also expressed anxiety that the programme may be too small and, in particular, that the amount of external assistance which is suggested will not be enough either to arrest the gradual fall in the standard of living which is being caused by the pressure of population or to make possible the inception of an upward spiral of economic development. I agree that when set beside the $12 bil­lion of E.C.A. funds which have already been appropriated for economic recovery in Western Europe, the $3 billion of external finance for a programme of economic development in South and South-East Asia over a six-year period seems extremely small. Certainly the programmes of individual countries, with few exceptions, have been pared to the bone.

Nevertheless, I feel that $3 billion may not be far from the proper figure. There are, of course, sharp limitations on the rate at which external capital can be absorbed by countries so poor as India and Pakistan. Indeed, their capacity to absorb outside aid is limited by the very poverty which makes the aid necessary. They have few trained technicians; and they have very limited power to raise the local currency which is necessary to meet the internal costs of the development programme. In some countries, as you will have noticed in the Report, external finance would be used in part to augment the supply of local currency. Some con­sumer goods, as well as capital goods, would be bought abroad with the foreign exchange provided through loans or grants or sterling releases; and the proceeds from the local sale of these consumer goods would increase the internal finance available for development purposes. If, however, it is agreed - and this is implicit throughout the Report - that the chief responsibility for development in South and South-East Asia must rest with the Governments and peoples of the countries in the area, then those Governments must raise themselves the great bulk of the local cur­rency which will be required, and the scarcity of internal finance must impose a sharp limitation on the rate at which external capital can be absorbed. This impor­tant principle has been kept firmly in mind, I think, by the authors of the Report and especially by those who have been responsible for drawing up the country programmes. On the whole, it seems to me, that they have struck a rough, but rea­sonably realistic, balance between the amount of external assistance which, ideally, they might like and the amount which, in fact, they believe they will be able to make good use of over the next six years.

I feel this particularly strongly in the case of India. My opinion rests in large measure on the confidence I have in Deshmukh, who has impressed me whenever I have met him both with his shrewdness and his honesty and who, I gather, has now firm control over economic policy in India. The amount of external finance which India is seeking was set only after he had personally examined the problem with great thoroughness; and that is an additional reason, I think, for putting considera­ble trust in the Indian estimate.

It is true, of course, that even if the $3 billion can be provided from external sources and if the programme is implemented in substantially the shape that is now proposed, there will not be any dramatic improvement in standards of living in South and South-East Asia. There will be, for example, an increase of only some 10% in the volume of food grains produced. That is certainly modest enough when the present poverty of the area and the likely increase in population are taken into account. Nevertheless, it will be something. There will be some visible, if slight, improvement in the standard of living. It is estimated, for example, that if the pro­gramme is carried through, it will be possible in India to provide in the rationed urban areas for cereal consumption of 16 ounces a day instead of the 12 ounces, which is the present ration.

In addition, of course, by the end of the six-year period the countries in the area will have completed important basic developments in the form of dams, irrigation works, hydro-electric installation and improved transportation systems, all of which could provide the groundwork for further development projects, many financed by private capital. I do not think it is too much to hope that, if finance can be found for the Colombo Plan and if, in spite of all the shortages caused by the heavy rearma­ment programme in the North Atlantic area, capital goods can be made available, at the end of the six-year period the countries of South and South-East Asia will not only have a somewhat higher standard of living than they have at the present time and so will be at least partially immune from the attractions of Communist propa­ganda, but will also be in a position from which a much larger programme of eco­nomic development could be undertaken without further inter-governmental finance.

On the other hand, I agree that the estimate of the amount of external finance which will be required to make a start on the process of economic development has been cut very fine. One consequence of this is that those countries which may be in a position to help, including Canada, should all do their fair share in order to see that the amount needed is fully subscribed. What our fair share would be is, no doubt, a question on which there can be honest differences of opinion. But I, myself, feel that it should not be less than $25 million per annum.

Yours sincerely,
L.B. PEARSON