Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

165. Current Economic Developments⁰

Issue No. 673

Washington, April 16, 1963.

[Here follow articles on unrelated matters.]

DAC ADOPTS RESOLUTION ONTERMS AND CONDITIONS OF AID

The OECD Development Assistance Committee (DAC) moved forward at its high-level meeting April 2-3 on a subject which the US has long been pressing—terms of aid.¹ A resolution was adopted which recommends, in light of the increasing problem of the debt service burden of the less-developed countries, that DAC members move toward liberalization of their terms and seek a greater degree of comparability of such terms. A further discussion of tied aid, which some members wanted at this meeting, will take place probably at the next high-level meeting by which time the working party may have completed its study.

This was the first DAC meeting to be presided over by the new Chairman, Willard L. Thorp of the US, formerly Assistant Secretary of State for Economic Affairs. All DAC members were represented: Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Portugal, UK, US, and the Commission of the EEC. The US was represented by AID Administrator David Bell. Representatives of the International Bank, the International Monetary Fund, and the Inter-American Development Bank also participated in the meetings.

Terms of Aid Resolution

The resolution on terms of aid, based on an interim report prepared by the working party,² was not published although the communique reported in general terms on the DAC discussion and the substance of the agreement.³

Specifically, the resolution recommended to the members of the Development Assistance Committee the following:

That they relate the terms of aid on a case-by-case basis to the circumstances of each underdeveloped country or group of countries.

Where aid is on a project basis and where the terms appropriate to the project differ from the terms appropriate to the country, that they should consider whether they can apply one of the following methods: to provide an appropriate “mix” of hard loans and soft loans or grants; to lend under a “two-step procedure” providing for soft loans to governments and lending on hard terms to projects; to lend projects on hard terms and provide separate financial aid for balance-of-payments relief.

That they make it their objective in principle to secure a significant degree of comparability in the terms and conditions of their aid, and so far as possible to eliminate or reduce discrepancies between them. While this would not necessarily entail standard terms and conditions from all donors, it would involve a liberalization of the terms adopted by some members, whether in their individual aid programs or in concerted aid operations.

For the purpose of implementing the above recommendations, the DAC agreed to the following:

1. It should be open to any DAC members or the Chairman to seek an exchange of information and views within the DAC framework, on a confidential basis, concerning any individual, underdeveloped country where it appears of particular importance or urgency to review the country’s external debt position.

2. Concerted action will be undertaken to reduce disparities in the terms and conditions of aid.

3. The methods that the Committee will adopt in order to achieve such concerted action should be based on the following understanding:

a) The recommendation would apply both to aid programs as a whole and to consortia and other particular aid operations.

b) It would embrace not only the terms of aid but also the conditions of aid.

c) Progress toward the agreed objective would be assessed as a part of the annual aid review, so far as concerns aid programs as a whole.

d) In concerted aid operations covered by consortia and similar arrangements, the terms and conditions of aid would be for discussion and consultation among the donor countries in the light of this understanding, and in the light of the terms and conditions of their overall aid effort.

e) This understanding would not necessarily involve standard terms and conditions from all donors, in view of their varying capacities and institutional backgrounds, but donors would be expected to seek any necessary legislative or budgetary provisions to implement the understanding.

f) The efforts of the recipient country to play its full part in any such arrangements by adjusting its policies and planning arrangements to the extent necessary and possible to correct the situation would be given importance in the consideration of concerted arrangements for alleviation of its debt service problem.

g) It would be open to any DAC member or to the Chairman to initiate consultation on these lines in further appropriate cases which are not at present covered by specific coordinating arrangements.

h) In comparison of terms of finance effected in consortia, coordinating groups, etc., note should be taken of the amounts of guaranteed private export credits as well as public loans and grants.

The working party was instructed to make a further study of the probable future trend in the annual debt service of the under-developed countries, and of the problem which this may present. Included in the study should be consideration of a paper to be prepared by the staff of the International Bank discussing the factors which determine a country’s debt servicing capacity.

Discussion

The discussion of terms and conditions of aid was opened by AID Administrator Bell who endorsed fully the conclusions of the interim report of the working party, especially the gravity of the growing problem of the debt burden, the incompatibility of hard terms provided by some lenders with a recipient country’s debt service capacity, and the need for greater comparability of terms through liberalization. Bell also argued for recognition of the two-step procedure as the preferred method to reconcile project and country requirements but, in light of majority preference, he agreed to the more permissive language incorporated in the resolution. He further supported use of consortia and consultative groups to discuss the problem of indebtedness, need for legislative and budgetary provisions allowing soft terms, and inclusion of the export credit problem in coordinated aid efforts.

The most significant and welcome statement by others came from the UK, which gave full recognition to the debt servicing problem and expressed determination to ease terms. Specifically, the British representative indicated UK terms could be lengthened beyond the present customary 25 years and described several possibilities which the UK is considering to reduce the burden of interest charges, where such relief is needed. The Germans, who it was hoped would announce further steps towards liberalization of aid terms, failed to do so, although accepting the resolution. The French questioned the seriousness of increasing the debt-service burden of less-developed countries and noted that creating short-term indebtedness has the advantage of bringing the LDC frequently before such international forums as the IMF and Paris Club⁴ to justify their policies. The French were effectively rebutted by the British and Belgians. The Netherlands, Canada, France and Portugal accepted the resolution only ad referendum.

Tied Aid

Prior to the meeting, the US had opposed introduction of new tied aid proposals at this meeting for two reasons. We felt there was a danger that the important and carefully worked out agreement on terms of aid which seemed virtually assured might be upset by introduction of new and separate issues on the subject of tied aid which the working party had not had adequate time to discuss thoroughly. We also felt that proposals on tied aid should have the same kind of careful analysis and consideration by the working party as did the terms of aid proposals. We agreed, however, to a preliminary discussion of the tied aid problem.

At the April 2-3 meeting, the Dutch and Belgians put great emphasis on the importance of moving rapidly ahead with the study on tied aid. They argued that tying may be damaging in the long run to donors in balance-of-payments difficulties because it supports noncompetitive industries. Van Lennep of the Netherlands⁵ made suggestions in the direction of a concerted movement toward untying aid and he even tried to link acceptance of the terms of aid report to progress on tied aid.

The EEC had announced on March 4 a new untied aid policy, which the US has welcomed as evidence Community desire for liberal orientation of Europe.⁶ The EEC confirmed its adherence to this new policy at the DAC meeting and Mr. Bell emphasized the importance which the US attributed to its being put into effective operation.

The US restated its position of strong support for the principle of untied aid but recognition of the reality that economic conditions sometimes necessitate tying. The long US record of untied aid prior to the recent balance-of-payments difficulties was cited. Our representative stated US willingness to cooperate in the working party study, but voiced doubts on the feasibility of concluding the work by the July DAC meeting. Representatives of the other major donor nations cautioned against any optimism regarding agreement which would bind countries to untie their aid.

The DAC instructed the working party to continue its consideration of the study of the problems of aid tying which had been prepared by the OECD Secretariat,⁷ taking account of the views and proposals put forward in the preliminary discussion at the April 2-3 meeting, with the purpose of submitting findings and, if possible, recommendations on the subject to the next high-level DAC meeting, tentatively scheduled for July.

[Here follow articles on unrelated matters.]

0. Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Confidential. The source text comprises pp. 14-17 of the issue.
1. The meeting was held in Paris.
2. Neither the resolution nor the interim report has been found, but the recommendations in the resolution are summarized in this article.
3. For text of the communique, April 3, see American Foreign Policy: Current Documents, 1963, pp. 393-394.
4. Under the IMF’s General Agreements to Borrow, founded in 1962, the Finance Ministers of the 10 wealthiest industrial IMF countries pledged to lend their currencies to the IMF up to specified amounts when supplementary resources were needed. The Paris Club is also known as the Group of 10.
5. Emile van Lennep, Treasurer-General in the Netherlands Finance Ministry and Chairman,EEC Monetary Committee.
6. Busec 411 to Brussels, March 21, stated in part that the Department of State was “encouraged by EEC announcement of new untied aid policy. Announcement representative of initiatives Commission can take to assert its leadership in Community and to develop liberal and outward-looking Community policies.” (Department of State, Central Files, ECIN 1 EEC)
7. This study has not been further identified.