\Jr\ 33v U . S . i '*»'"nO U S E - - C O.Vlfv ITTEE ON GOVERNMENT OPERATIONS! REPORT- ON ECONOMIC ASSISTANCE TO SPAIN. aPHHMR Return this book on or Latest Date stamped before the below. University of Illinois Library 3 n o i zn CO DEC - 5 I9B3 DEC 2 t* 1363 JflN 2" t fr. ■ APR 25 • ' r U w. ‘ vj L161 — H41 Digitized by the Internet Archive in 2018 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/reportoneconomicOOunit [SUBCOMMITTEE PRINT] 83D 2isSf} HOUSE OF REPRESENTATIVES REPORT ON ECONOMIC ASSISTANCE TO SPAIN INTERNATIONAL OPERATIONS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS united states GOVERNMENT PRINTING OFFICE WASHINGTON : 1965 56981 COMMITTEE ON GOVERNMENT OPERATIONS CLARE E. HOFFMAN, Michigan, Chairman R. WALTER RIEHLMAN, New York CECIL M. HARDEN, Indiana GEORGE H. BENDER, Ohio CHARLES B. BROWNSON, Indiana MARGUERITE STITT CHURCH, Illinois GEORGE MEADER, Michigan FRANK C. OSMERS, Jr., New Jersey CLARENCE J. BROWN, Ohio LOUIS E. GRAHAM, Pennsylvania WALTER H. JUDD, Minnesota GORDON L. McDONOUGH, California KATHARINE ST. GEORGE, New York WILLIAM E. MILLER, New York JEFFREY P. HILLELSON, Missouri GLENARD P. LIPSCOMB, California WILLIAM L. DAWSON, Illinois CHET HOLIFIELD, California FRANK M. KARSTEN, Missouri JOHN W. McCORMACK, Massachusetts BILL LANTAFF, Florida EARL C HUD OFF, Pennsylvania FRANK IKARD, Texas JACK B. BROOKS, Texas LESTER HOLTZMAN, New York ROBERT L. CONDON, California ROBERT H. MOLLOHAN, West Virginia L. H. FOUNTAIN, North Carolina J. L. PILCHER, Georgia HARRISON A. WILLIAMS, Jr., New Jersey Helen M. Boyer, Staff Director Clyde W. Smith, General Counsel Annarell Zue, Chief Clerk Christine Ray Davis, Minority Professional Staff International Operations Subcommittee CHARLES B. BROWNSON, Indiana, Chairman GEORGE MEADER, Michigan FRANK IKARD, Texas WALTER H. JUDD, Minnesota LESTER HOLTZMAN, New York KATHARINE ST. GEORGE, New York HARRISON A. WILLIAMS, Jr., New Jersey Members Ex Officio CLARE E. HOFFMAN, Michigan WILLIAM L. DAWSON, Illinois Maltrice J. Mountain, Staff Director Edward C. Kennelly, Counsel Wallace Parks, Staff Associate Arthur Perlman , Staff Investigator Walton Woods, Staff Investigator n ■^o.q L /^ l sp t7 CONTENTS — I. Foreword_ II. Summary_ 1. Findings_ 2. Recommendations_ III. Defense support assistance program_ 1. Background_ 2. 1954 and 1955 defense support program_ 3. Utilization of defense support assistance_ 4. Organization for the defense support assistance program Page 11 III :: REPORT ON ECONOMIC ASSISTANCE TO SPAIN I. Foreword On September 26, 1953, after more than 18 months of negotiations, the United States concluded 3 bilateral agreements with Spam. The first of these is a defense agreement which provides for United States development and joint use with the Spanish armed forces of certain air and naval facilities. The second is a military defense assistance agreement involving the buildup of Spain's military strength and includes United States military end-item assistance to Spain which, subject to congressional appropriations, is being extended over a period of several years. The third bilateral agreement covers defense support or economic assistance to strengthen the Spanish economic foundation for the program of military cooperation. The Subcommittee on International Operations is charged with the responsibility of examining the international operations of the United States Government, other than military, from the standpoints of efficiency and economy. In the field of foreign aid the subcommittee has been primarily interested in the procurement and disposition abroad of aid goods under the mutual security program. 1 In preparation for the subcommittee’s examination of the progress and implementation of this defense support assistance program, extensive background information was assembled in Washington. Officials of the Department of State, 2 Foreign Operations Adminis¬ tration, 3 Department of the Air Force, Department of Agriculture, Department of the Treasury, 4 and the United States Information Agency 5 were consulted. On November 16, 1954, four subcommittee members, Charles B. Brownson, chairman, George Meader, Katharine St. George, and Harrison A. Williams, Jr., and four staff members, Maurice J. Moun¬ tain, Wallace Parks, Arthur Perlman, and Walton Woods departed from Washington by regularly scheduled MATS aircraft. The sub¬ committee was accompanied by State Department Escort Officer E. M. Rabenold, Jr., Air Force Escort Officer Lt. Col. Gerald Jor¬ genson, and House of Representatives Official Reporter Mrs. Althea A. Eccles. The International Operations Subcommittee inspected United States and Spanish installations and held hearings in Madrid November 22 1 In this connection see other reports of the subcommittee entitled “Report on Foreign Aid Procurement: Hexylresorcinol Purchases for Indochina” and “The Foreign Operations Administration End-Cse Control Propram.” 2 E. M. Rabenold, Jr., Spanish desk officer, John Wesley Jones, Director, Office of Western European Affairs. 3 Clarence S. Oulieh, Chief, and Samuel Levine of Spain and Portugal Division. Oflloo of European Affairs, FOA; John Napple. Assistant Chief, Administrative Budget Branch, FOA; Thomas H. Callahan, Budget Officer, Administrative Budget Branch, FOA. 4 C. Dilllng Glendenning, Deputy Director, Office of International Finance, Maurice Taylor, and T. P. Nelson. 5 Fred L. Jochem, Chief, Euroj»ean Division, Ofllceof Policy and Programs; Earle O. Titus, policy Officer, Office of Policy and Programs. 1 2 REPORT ON ECONOMIC ASSISTANCE TO SPAIN and 23 and in Barcelona November 24, receiving detailed testimony from the following United States officials: The Honorable James Clement Dunn, Ambassador Extraor¬ dinary and Minister Plenipotentiary to Spain Homer M. Bvington, Jr., Counselor of Embassy, Madrid William Pierce MacCoy, Administrative Officer Stuart W. Rockwell, Chief, Political Section James L. Lee, Budget and Fiscal Officer Ernest J. Warlow, Foreign Buildings Operations Representative The Honorable Edward L. Williams, Minister for Economic Affairs and Director, USOM Roy R. Rubottom, Deputy Director, USOM Harry C. Thomas, Controller, USOM Oliver L. Sause, Jr., International Economist Raymond R. Dickey, General Counsel, United States Informa¬ tion Agency (Washington) Robert D. Smith, Information Officer John T. Reid, Cultural Affairs Officer Joseph McEvoy, Press Attache Maj. Gen. August W. Kissner, Chief, JUSMG Adm. Robert Meade, Deputy Chief, JUSMG Col. Louis A. Guenther, JUSMG Control Officer Col. D. M. Smith, Comptroller Col. W. C. Garland, Chief, Operations Section, JUSMG, Briefing Officer Burl Stugard, Agricultural Attache Charles P. Fossum, Chief, Food and Agriculture Division (USOM) Hon. Milton K. Wells, Consul General, Barcelona Harry R. Zerbel, Consul II. Summary This report is concerned primarily with an analysis of the economy, efficiency, and effectiveness with which the defense support assistance program in Spain is being administered in its early stages. A separate detailed study was also made of one particular phase of economic aid to Spain, the financing by the Foreign Operations Administration of cotton purchased in the United States for the use of Spanish textile mills. 6 Spain, with a per capita income of about $250 a year, is normally a poor country whose economic difficulties have been aggravated by severe drought and other unfavorable conditions. The defense support assistance program is essentially economic aid to bolster its economy to a point where it can support sizable increases in military expenditures and to improve the logistic capabilities of the economy in relation to bases for joint use with the United States. Because Spain cannot undertake a program of increased military activity by drawing on its own resources, the L nited States, in con¬ nection with the bilateral defense and military assistance agreements signed with Spain, has made $85 million available out of fiscal year 1954 funds, including $15 million in surplus United States agricultural 6 See subcommittee report entitled “Procurement of American Cotton by Spain.” REPORT ON ECONOMIC ASSISTANCE TO SPAIN 3 commodities, for defense support assistance. In this connection, it is estimated that the $85 million will generate approximately $60 million in counterpart funds available for the base construction program. The amount of aid to be furnished out of fiscal year 1955 funds, although not finally determined, is expected to total about $85 million with $55 million in the form of agricultural commodities. However, as much as $40 million of this is expected to be available for United States expenditures in Spain in connection with the base construction program and administration. The United States programs for construction of bases and for mili¬ tary assistance are being administered under United States military authorities. The defense support assistance program, however, is separately administered under a United States operations mission which functions under the general direction of the United States Ambassador. United States procurement authorizations have been issued for all of the $85 million worth of assistance. These fluids have been allo¬ cated to assist every major sector of the Spanish economy. Priority has been given to agriculture, transportation, and electric power, each of which has an immediate impact on the progress of the military program. Lesser expenditures are planned for renovation of coal mines, steel mills, cement plants, and other industries whose contri¬ bution to the current military efforts are more indirect. A large share of the program involves commodity imports. The role of these imports is a dual one: First, they are intended to supply needed raw materials for the operation and expansion of the Spanish industrial machine; second, they are intended to aid in combating any possibility of infla¬ tion arising out of the military programs. In view of the multiplicity of peseta exchange rates used by the Spanish Government, there is a continuing problem of negotiating with Spanish officials for the rate to be used in connection with aid funds. FINDINGS 1. Some defense support assistance to Spain is necessary if the cooperative military programs now underway are to be carried out. 2. The present level of expenditure in the defense support assistance program appears justified. Allocation of fiscal year 1954 funds to various segments of the Spanish economy appear to have been care¬ fully planned and well integrated. 3. The utilization of fiscal year 1955 program funds has not yet definitely been determined, although 6 months of that fiscal year lias already passed. 4. Although the United States has issued procurement authoriza¬ tions for the entire amount of the $85 million of fiscal year 1954 aid up to November 22, 1954, according to reports rendered by the Spanish Government, only little more than $32 million in actual contracts have been executed. 5. Testimony of United States officials indicates that the Spanish Government has frequently gone beyond the letter of existing agree¬ ments in cooperating with United States authorities. 6. Although some inflationary tendencies are present in the United States-Spanish military cooperation program, as presently in effect 4 REPORT ON ECONOMIC ASSISTANCE TO SPAIN and projected, these appear to have been offset in large part by careful planning and by the defense support program. By the time the base- construction operations should be in full swing with expenditures at the rate of $5 million a month, the production increases resulting from the FOA programs will have materialized. 7. A major factor in Spain’s economic future will be an increase in both agricultural production and electric power output. Although much can be done to alleviate the impact of any future droughts, the success of the defense support assistance program will always be sub¬ ject to the potential disaster which is always possible because of Spain’s uncertain rainfall. RECOMMENDATIONS 1. That, defense support assistance for Spain be continued but that further authorizations take due notice of the fact that less than half of the funds authorized in 1953 has actually been used to date. 2. That the use of United States farm surpluses to supply industry with raw material and the Spanish people with food be continued as an integral part of the defense support assistance program. 3. That further efforts be made in accordance with the terms of the economic aid agreement with Spain to discourage cartel and monopolistic business practices and business arrangements which result in restricting production and increasing prices or which curtail international trade. This would result in the establishment of con¬ ditions under which private foreign investors could supply a substan¬ tial portion of the outside capital for capital expansion. 4. That future defense support authorizations for Spain provide for a continuing review in the light of the immediate situation. Since Spain’s future economic ability to finance its share of the cooperative military program without defense support grants may be expected to vary with crop levels and hydroelectric power production, both dependent on weather conditions, the existing time lag between authorization and use of funds may well result in unnecessary expenditures. III. Defense Support Assistance Program BACKGROUND Defense support assistance is the official designation given to what is essentially economic aid made necessary by military expenditures. Typically, it is aid extended to a foreign nation either to shore up or energize its economy to enable it to avoid breakdown under the burden of military expenditures or to support sizable increases in military expenditures. In the United States, the diversion of large resources from normal peacetime channels and uses into defensive military strength causes many dislocations. However, due in considerable measure to the plenitude of those resources, productive capacity shifted to military output does not necessarily mean a proportionate reduction in current standards of living. Within limits the whole economy, as has been proved in the past, is capable of expansion to take up much of the increased load. REPORT OX ECONOMIC ASSISTANCE TO SPAIN D This is not the case with Spain which, in economic terms, is a poor country. As presently constituted, its economy provides the more than 28.5 million Spanish citizens with one of the lowest living standards in Europe. Per capita income is estimated to be no more than $250 annually. Furthermore, the population is increasing at the rate of 1 percent a year, ah expansion which promises to create an additional burden. Every major sector of the Spanish economy is faced with chronic problems. Agriculture, transportation, coal mining, electric power, steelmaking and other industry are all operating at marginal levels. So interrelated are these segments of the economy that improvement in one area, is in many ways, dependent on simultaneous improve¬ ment in others. In part, Spain’s present difficulties can be attributed to the extraor¬ dinary events of the past two decades. The disastrous civil war that ravaged Spain from 1936 to 1939 destroyed many of the country's P h ysical assets. Then, 5 months after the end of the civil war, World War II broke out, cutting off the normal supply of foreign materials and blocking any consideration of foreign trade and investments. In addition to the economic reverses resulting from the civil and world wars, major droughts occurring in 1941, 1945, 1949, and 1953 wrought havoc with the economy by seriously damaging crops for •exports and home consumption and cutting hydroelectric power. To obtain necessary imports Spain must expend its slim holdings in foreign exchange. Yet here Spain’s position is constantly pre¬ carious. Exports of fruits, vegetables, and other foodstuffs are Spain’s main source of foreign exchange earnings. Foreign demand for Spanish agricultural products, however, is highly unstable since they are of the less essential type, and such “luxury” items as oranges and olives are among the first to feel the pinch of any slump in inter¬ national trade. This situation is further complicated by the fact that the volume of agricultural products available for export fluctuates. The orange crop, for example, which usually provides between 10 and 20 percent of the annual value of exports, was seriously damaged by severe frost last February. It is estimated that this will mean a drop of $40 to $50 million in earned foreign exchange in 1954. This disastrous turn of events followed hard on the heels of the severe drought of 1953 which so reduced their grain crop that it was necessary to use $90 million of Spanish foreign exchange to import wheat to prevent starvation. Thus it is clear that Spain cannot undertake an extensive program of increased military activity by drawing exclusively upon its own resources. It is for this reason that defense support assistance is a necessary adjunct to the air and naval base construction and the build¬ up of the Spanish armed forces upon which the United States and Spain have concluded agreements. Economic aid is needed to enable the Spanish Government to sup¬ port higher defen.se expenditures in its budget, to offset tin 4 potentially disruptive impact on the sluggish Spanish economy of the base con¬ struction program, and to provide for local production of some military end items. Spending on the base program alone will be at the rate of $5 million per month. Under the current defense assistance agree¬ ment the United States will supply economic aid in the amount of 6 REPORT OX ECONOMIC ASSISTANCE TO SPAIN $85 million in fiscal year 1954 including $15 million of surplus farm commodities, and $30 million in fiscal year 1955 funds to which must be added $55 million of surplus farm commodities to be sold to Spain for pesetas. These funds are only a portion of United States grants and loans to Spain in the postwar years. 7 In 1951 Congress authorized a loan program of $62,500,000. All but a fraction of this had been committed prior to the 1954 fiscal year. These credits financed the import of a wide variety of industrial raw materials and plant equipment. Also, under its regular lending authority, the Export-Import Bank authorized $24 million in cotton credits in 1952 and 1953. 1954 AND 1955 DEFENSE SUPPORT PROGRAM The 1954 FOA defense support program was $85 million, in round figures, which included roughly $15 million in surplus agricultural commodities. It should be noted, however, that the peseta equivalent of approximately $60 million of this is available for United States expenditures—including base construction costs. During the 1954 fiscal year the United States sold $20 million worth of surplus wheat to Spain—taking pesetas in return. These pesetas went into a United States account available to finance United States expenditures in Spain including base construction. The 1955 FOA program is expected to be $30 million of which 70 percent or $21 million will be available as counterpart funds for United States expenses including base construction. In addition, $55 million of surplus commodities are to be sold to Spain for pesetas— of which it is probable that about $11 million, or 20 percent, in peseta equivalents, will go into an account available for United States expend¬ itures. Most of the balance is expected to be loaned to Spain and upon repayment in pesetas to be available for United States purposes. If all these figures are added we find that through the end of the present 1955 fiscal year the net total of grant aid available—aside from military end-item aid—can, by one method of computation, be figured at approximately $40 million. All of the rest has been received or will be received by the United States from Spain in the form of 7 The funds are broken down as follows: Year au¬ thorized Amount Description Millions 1951 $62.5 Loan voted by Congress to be administered through the ExDort-Import Bank. $39.8 million of this was spent for capital investment, $22.6 million for commodities. 1951 100 Grant voted by Congress. This was never used and has been carried forward to finance the present program. 1952 25 Grant voted by Congress. This was never used and has been carried forward to finance the present program. 1952 12 Short term loan entered into by Export-Import Bank to finance cotton pur¬ chases. This has been repaid. 1953 12 Short term loan entered into by Export-Import Bank to finance cotton pur¬ chases. This is not due vet. 1953 101 Grant voted by Congress which, with the 1951 amount of $100 million and the 1952 amount of $25 million carried forward, brings total to $226 million. Of this amount $141 million is for military end items, and $S5 million for de¬ fense support assistance. In addition to the above, the United States in 1954 entered into a special agreement to sell Spain 300.000 tons of wheat through the Commodity Credit Corporation. This amounted to $20 million and was payable in pesetas. The pesetas will be used by Department of Defense or other Government agencies in Spain who will reimburse the Department of Agriculture in dollars. This arrangement obtained wheat for Spain with¬ out requiring expenditure of its foreign exchange and affords the United States a supply of pesetas for local expenditures. REPORT ON ECONOMIC ASSISTANCE TO SPAIN repayment of loans in pesetas available for United States administra¬ tive expenses and United States base construction expenditures. To be sure, Spain is acquiring dollars which otherwise would not be available. Further, if we consider the less favorable exchange rate at which some of the peseta equivalents accruing to us were computed (35 to the dollar) then the amount of grant aid we have extended would be increased by several million dollars. The utilization of the funds and commodities to be supplied under the 1955.program has not yet been definitely determined, even though 6 months of the program period already has elapsed. The subcom¬ mittee favors exercise of due care and prudence in committing aid funds; however, it is difficult to understand why such a long delay in firming up the distribution of aid is necessary. Beyond 1955, it is not possible to predict the amount of defense support that will be needed. Much will depend upon the weather’s influence on crops and hydroelectric power. On the basis of the pre¬ liminary data furnished the subcommittee, it is believed that the amount of aid that can be justified beyond the present fiscal year will be small. The subcommittee considered the economic relationships between the defense support program and the end item aid and base construc¬ tion programs. The military end item assistance program has little economic impact. Over the 1954 and 1955 period this program will make a contribution of over $200 million to the Spanish military budget almost entirelv in the form of military end item deliveries. However, during this same period Spanish budgetary expenditures for military purposes are expected to rise with the result that no budgetary relief for the Spanish Government is involved. Perhaps the chief economic impact lies in the amount of procurement under this program that will take place in Spain—approximately $11 million to date. This pro¬ vides the Spanish Government with dollar exchange and stimulates certain sectors of Spanish industry. At present, it is definitely contemplated that at least 250 to 300 million dollars will be spent by the United States on airfield and naval base construction over a period of several years. Approximately 70 percent of this will be spent in Spain. Most of the subcontractors those firms actually engaged in the construction of base housing, paving, access roads, and the production of supplies—will be Spanish. At the present time only two of these contracts have been let (Terrejon and Zaragossa), but over the next several years a considerable slice of the total amount appropriated will go to Spanish labor and to Spanish suppliers. Pipelines placed on Spanish soil in connection with base construction will carry future economic benefits. Civil aviation will be improved as a byproduct of improved and enlarged facilities for military aviation. When tin; new United States bases are operational a large amount of dollar exchange will become available in return for the peseta expendi¬ tures of increased numbers of United States military personnel. One of the great hazards of any effort to help any nation to modern¬ ize or enlarge its national economy under forced draft, as was brought home to the subcommittee in its study of the United States aid pro¬ gram for Korea, is the danger of inflation. It was, therefore, a matter of particular interest to tin* subcommittee to determine the extent to which the shadow of inflation hangs over the economic aid program in Spain and to reassure itself that adequate preventive measures were being taken. 8 REPORT ON ECONOMIC ASSISTANCE TO SPAIN Expenditures under the base program clearly involve some infla¬ tionary potential—especially in local areas. This, however, can easily be exaggerated. The labor that will be hired, for example, may not increase its total consumption of consumer goods and services greatly over its present level. In Spain there is very little unemployment—• partly because of what amounts to a system of compulsory over¬ employment by firms, both private and government controlled. The government holding company—the INI—for example, keeps on its rolls a great many more workers than is needed partly because it is not allowed to lay off men when they are not required. In the testi¬ mony, for example, it was stated that the Spanish railroads, under the INI, employ about 15 times as many workers as the Denver & Rio Grande which hauls about the same amount. It seems reasonable to assume that the base construction program will draw workers largely from other payrolls rather than from the ranks of the unemployed. It is clear that no serious inflationary problem has yet appeared. However, as has been pointed out, actual base construction has barely begun. According to information given to the subcommittee, how¬ ever, both the United States operations mission and the Spanish Government are fully cognizant of the situation and have already taken steps to deal with it. In the $85 million of aid being furnished out of fiscal year 1954 funds, approximately 33 percent has been utilized for import of com¬ modities which are intended to offset the inflationary impact of the remaining 67 percent which has gone into capital construction. For the future not only is some division planned in the allocation of aid funds as between commodity imports and capital investments, but under section 109 of Public Law 778 (the McCarran amendment) sizable imports of agricultural commodities will be heavily relied upon to offset the inflationary pressures arising out of the military base construction when it is fully underway. UTILIZATION OF DEFENSE SUPPORT ASSISTANCE The essential criteria determining the division of the $85 million of economic aid for 1954 were set shortly after the signature of the defense assistance agreement in late 1953 when the Spanish Inter- Ministerial Committee for Economic Cooperation and the United States Operations Mission to Spain were first established. Agreement was reached between these two groups that agriculture, power, and transportation needs were of primary importance. It was also determined that such supporting industries as steel, coal, and cement also required immediate aid. These decisions are reflected in the following allotments of the fiscal year 1954 aid funds: Agriculture and hydraulic works_ $10, 500, 000 Transportation_ 14, 700, 000 Electric power_ 12, 500, 000 Coal mining_ 2, 000, 000 Steel industry_ 8, 000, 000 Cement industry_ 2, 000, 000 Other industry_ 3, 400, 000 Technical assistance_ 600, 000 Vital raw materials_ 31, 300, 000 Total_ 85, 000, 000 REPORT ON ECONOMIC ASSISTANCE TO SPAIN 9 How these funds are intended to be expended under each of these allotments is described below. Agriculture About $8.5 million of American economic aid lias been programed for imports of urgently needed farm machinery and for irrigation and land-reclamation machinery as well as spare parts for existing equip¬ ment. Expanded farm mechanization will provide Spain with a better means of developing and utilizing its land resources and manpower and thus increase agricultural production. About $2 million more is being spent for additional heavy earth- moving and construction equipment to hasten the construction of dams, reservoirs, and main canals in connection with water-supply and land-irrigation projects. The completion of these projects will help to reduce the vulnerability of agriculture and the economy generally to recurrent periods of drought. Transportation The transportation system of Spain is hardly adequate for the needs of the relatively slow-moving normal Spanish economy. The sub¬ committee was informed that as a result even the construction machinery and materials for the building of the bases may have to be routed through 6 or 8 Spanish ports and road and railway nets to prevent overloading of any one channel. When it comes to keeping the completed bases supplied with such daily needs as food and fuel, present Spanish facilities are totally inadequate. Enlarging the Spanish economy in these respects is, therefore, a logistic necessity stemming directly from the base construction program. Expenditures for transportation include $11 million to modernize important segments of the Spanish railroad system, particularly the line between Cadiz and Madrid over which much of the supplies for the new bases will have to move. Three million dollars will be spent on improving the Spanish highway system which will also mean greater “logistic accessibility” for the new bases. Electric power An adequate and dependable supply of power is a prerequisite to increased Spanish production. The subcommittee was informed by Mr. Williams, who heads the United States operations mission, that in 1953 the loss of industrial production time due to power restrictions in Spain was tremendous. Of the $12,500,000 of economic aid which has been allotted to projects for increasing Spain’s electric power avail¬ abilities, about $5 million will be devoted to eliminating a wide range of bottlenecks which have been seriously impeding the distribution or production of electric power. The remaining $7,500,000 will be utilized to build 2 new thermal plants whose combined production of 120,000 kilowatts will reduce Spain’s dependence on hydroelectric installations, the output of which is constantly subject to fluctuations in the rainfall. Coal mines Production of coal in Spanish mines has been seriously hampered by a lack of modern coal-mining machinery. Thermal power generation, the steel industry, the cement industry, the railways, and many other vitally important elements of the Spanish economy must have coal. As a result of an Export-Import Bank credit of $3 million and the $2 million provided under the economic aid program for rehabilitation 10 REPORT ON ECONOMIC ASSISTANCE TO SPAIN and modernization of 15 different mining properties, coal production is expected to increase by 528,000 tons in 1955 and to farther increase by about 1 million tons in 1956. The savings in Spanish foreign exchange as a result of these increases are estimated to be equivalent to about $10 million. Steel industry The greatest gap between Spain’s needs in steel products and actual production is in crude steel and cold rolled flat steel including tinplate in which there is a particularly critical shortage. The approximately $8 million being allocated to the steelmaking industry is therefore being divided between an increase in present blast furnace capacity to produce crude steel and an addition to existing cold rolling mill equipment. About $4 million has been allocated to each of these projects. One important gain from this part of the program will be an increase of 60,000 tons in the annual production of tinplate which has been badly needed by the fish canning and fruit and vegetable canning industries for many years. Cement industry . An increased supply of cement will be of enormous benefit to irriga¬ tion works, power dams, and reservoirs as well as to highway con¬ struction and housing. Seven carefully selected plants scattered throughout Spain in areas where there is an urgent need for their output will be the recipients of over $2 million in spare parts and modern equipment. It is expected that the increase in the combined production of these plants will be 500,000 tons per year—an 18 percent increase in total Spanish cement production. Other industries Certain secondary industries such as those concerned with the pro¬ duction of locomotive frames, trucks and tractors, and precision tools will be allocated approximately $1 million. By far the largest allot¬ ment under this category, however, will be some $2,400,000 to be used to promote the manufacture of munitions and to increase the produc¬ tion of certain items of great military significance to Spain and to other nations of the West. Raw materials Additional expenditures of about $31 million will be utilized to purchase basic raw materials that Spain lacks and which, in the past, have been in inadequate supply because of the shortage of foreign ex¬ change. Under this program such items as $3,500,000 worth of copper and aluminum, $1,250,000 worth of coal and coke, $3,000,000 worth of steel products, $1,185,000 worth of tinplate, $3,650,000 worth of fer¬ rous scrap, and $15,000,000 worth of raw cotton will be imported. Many of the requirements in raw materials will be substantially re¬ duced as the development of Spanish production progresses. They are, however, vitally needed to get the program underway. Technical assistance Within the total economic aid program, over $600,000 has been authorized for 10 major groups of technical assistance projects, each directly related to other aspects of the total economic aid expenditure. The technical assistance projects involve an exchange of persons be¬ tween the United States and Spain with United States experts in the REPORT OX ECONOMIC ASSISTANCE TO SPAIN 11 fields of agriculture, power, transportation, steelmaking, munitions manufacturing, highway construction, and mining going to Spain as advisers and Spanish representatives of these same industries coming to the United States to study American methods. Restrictions on private enterprise In the utilization of aid funds, the degree to which the economy is pervaded by Government controls complicates the problem of speeding expansion of Spanish production. Not only does Spain’s economy function under a host of licensing arrangements, multiple exchange rates and subsidies, but a large portion, estimated to be as high as 50 percent, of its industry is directly controlled by a central Government agency, the National Institute of Industry (INI). Moreover, of the estimated 15 billion pesetas (about $360 million) a year available for capital improvement the Government takes 9 billion (about $210 million) leaving only 6 billion pesetas (about $150 million) for private investment. While much of this arrange¬ ment is doubtless due to totalitarian aspects of the Spanish govern¬ mental structure, a considerable amount can be attributed to the undeveloped state of the entire economy and the consequent impera¬ tive need for governmental action to conserve the nation’s meager resources, particularly its foreign exchange. There is, the subcommittee was informed, a growing body of opinion in Spain for moving the economy in the direction of greater freedom and scope for private enterprise. To the extent that the total eco¬ nomic picture improves it may be hoped that present restrictions on the development of private enterprise can be removed. Only by moving in this direction can a favorable climate be estab¬ lished to induce foreign private investors to supply needed capital to Spain. Such a development would be consistent both with Spain’s best interests and those of the United States. To the extent possible, therefore, the United States program of defense support assistance which under the economic aid agreement with Spain is predicated on reduction of restrictive business practices, should offer every encouragement to the Spanish Government in this regard. 8 ORGANIZATION FOR THE DEFENSE ASSISTANCE PROGRAM A rather complicated administrative structure involving both the Air Force, as executive agent, and the Navy’s Bureau of Yards and Docks, as construction agent and including a joint United States mili¬ tary group, has been set up to carry out the air and naval base con¬ struction. In addition a military advisory assistance group has been established to coordinate the military assistance program with the Spanish authorities. Since the operation of this administrative machinery of the military was beyond the purview of the subcom¬ mittee’s mission, it was not examined in detail although the subcom¬ mittee was given an extensive briefing by Maj. Gen. August W. Kissner, USAF, who is chief of United States military activities in Spain. In connection with the economic and technical assistance to Spain, a. United States operations mission, headed by Mr. Edward L. W il¬ liams, has been established. This mission functions under the general 8 The Influence of Government control In the purchase of cotton has particularly been the .-.ubject of controversy. See the subcommittee’s report “Procurement of American Cotton by Spain.” 12 REPORT ON ECONOMIC ASSISTANCE TO SPAIN direction of the United States Ambassador and is integrated with the Embassy operations. Mr. Williams, for example, although head of the Foreign Operations Administration’s personnel at Spain, is also Minister for Economic Affairs of the Embassy. His staff has been combined with the economic section of the Embassy with FOA and Foreign Service personnel working side by side. Principal dealings with the Spanish Government on technical aspects of the program are carried out with an interministerial com¬ mittee upon which are represented all Spanish Government ministries concerned with the economic assistance program. There was unanimous testimony on the part of United States officials who appeared before the subcommittee that the Spanish Government has demonstrated every willingness to cooperate fully with the United States mission and in many instances has gone far beyond the letter of the agreements. There was no implication that the Spanish Government at any time disregarded Spain’s proper self- interest. Nevertheless, the subcommittee was impressed with the evidence on every hand that the sincerity and good faith of the United States in this cooperative endeavor were matched by equiva¬ lent contributions and efforts on the part of Spain. One aspect of the problem of coordinating United States operations that did come to the subcommittee’s attention, however, involved the Export-Import Bank. Credits extended by the bank fall outside, the economic aid program yet have an important bearing on deter¬ mining which projects receive priorities as aid funds are distributed. Efficient and economical use of all available resources is an absolute necessity if the ends of the program are to be accomplished. It is, therefore, important that the United States operations mission be constantly informed of the resources being made available through the Export-Import Bank and the uses to which they will be put. The subcommittee learned that while the United States operations mission has been informed of what is being done with the $62.5 million loan authorized in 1951 and administered through the Export-Import Bank, information of other operations of the bank regarding Spain has not been supplied to the mission, itself, as promptly as needed. Since what is involved appears to be chiefly an interchange of informa¬ tion, the subcommittee suggests that this deficiency can easily be remedied, largely within the Foreign Operations Administration. STATEMENT OF CLARE E. HOFFMAN, CHAIRMAN OF THE FULL COMMITTEE ON GOVERNMENT OPERATIONS Although, by committee resolution adopted on July 15, 1953, the chairman of the full committee and the ranking minority member were made ex officio members of all regular subcommittees, I was not notified of subcommittee hearings nor did I participate therein; hence, do not express any view. The foregoing statement is not in any way critical of the lack of notice. o Clare E. Hoffman. . *