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

172. Current Economic Developments⁰

Issue No. 681

Washington, August 6, 1963.

[Here follow articles on unrelated matters.]

HIGH-LEVEL DAC MEETING CONSIDERSMAJOR ISSUES IN THE AID FIELD

The second annual aid review of the OECD Development Assist-ance Committee, held at a high-level session July 24-25,¹ was characterized by free, honest discussion of basic issues and was unanimously regarded as being more successful than last year’s meeting.² There was intensive discussion of major issues in the aid field, including levels, terms, coordination, technical assistance, the role of private enterprise, and measures to improve the effectiveness of aid. US viewpoints were effectively presented by AID Director Bell, who stressed particularly our concern over the increased US share in the total flow of aid and the lack of increase in the over-all volume despite the growing requirements of the less-developed countries.

The session resulted in: a) reaffirmation of the London resolution on the common aid effort;³ b) determination to examine the pipeline problem and study measures to reduce the increasing lag between commitments and disbursements; c) a rededication to the resolution of last April on the terms of aid;⁴ d) a restatement of the Bonn understanding favoring untied aid to the extent possible but taking into account balance-of-payments considerations;⁵ and e) agreement to arrange a schedule and procedures for more regional meetings.

Levels and Adequacy of Aid

The net flow of official financial resources from DAC countries in 1962 was maintained at but did not exceed the level of $6 billion which had been reached in 1961 as the result of an increase of over 20% compared with 1960. Official statements during the aid review suggested that the total this year is likely to be larger than in 1962.

The countries which were most forthcoming to the US plea for a greater effort were the UK and Japan which indicated that the 1963 flow will be substantially higher than 1962. The Canadians also indicated greatly increased disbursements in 1963, estimated at $125 million, although there has been no basic policy review yet. The most pessimistic response came from the Italians who thought little expansion could be expected from them in view of the serious deterioration in their balance-of-payments situation the first half of 1963. Most delegates suggested that figures for any one year may be seriously affected by unusual special circumstances and that trends can be measured only in terms of longer than the annual period.

In a discussion of the pipeline problem, the French called attention to slow drawdowns and lack of projects and suggested focussing attention on assistance in project preparation and planning. The IBRD observer made an effective statement on the Bank’s experience with pipelines. He suggested that these are incident to an expanding aid program and imply no reason to diminish aid, and emphasized the Bank’s technical assistance efforts in this connection.

Terms of Aid

Terms of aid were discussed in the light of the April resolution which had recommended, in light of the increasing problem of the debt service burden of the less-developed countries, that DAC members moved toward liberalization of their aid terms and seek a greater degree of comparability of such terms. (See page 14, April 16 issue.)⁶

Director Bell vigorously restated the US position. While noting that the US is hardening its terms wherever appropriate, such as Greece and Taiwan, he emphasized our continuing concern about the debt service problem and the need for better comparability of terms.

The British effectively presented their recent liberalization action. The UK has in some cases (notably for Pakistan and India) waived interest payments on new commitments over a seven-year period, cutting effective interest rates nearly in half. The French indicated progress this last year in extending Government loans to non-franc areas for the first time, in combination with exporter credits. Others pointed out improvements, described their limitations, and left the impression that considerable improvement had been made and that there was continued but slower progress toward the goals. The IBRD again made an effective presentation both on the debt service capacity problem and on the proposal now before the IBRD Board to lengthen maximum loan terms and thereby take up previously excluded projects.

Several delegations pointed to possible abuses in the use of exporter credits. The French delegate, supported by others, stressed the responsibility of governments for such credits in view of the guaranties they typically offer, and thus broke ground for major work by the DAC on this matter.

Tied Aid

The meeting had before it a draft resolution on tied aid which contained substantive proposals unacceptable to the US. We felt that the limited progress thus far in the working party⁷ reflected the current attitudes of the major countries and that it would be inadvisable to reach agreement on any tied aid resolution containing proposals which the US and other major members avowedly are unprepared to implement in the foreseeable future.

A pre-meeting canvass by our delegation revealed little enthusiasm for the draft resolution but reluctance to take the lead in opposing it. We indicated that if others wished to go forward with a resolution we would concur in it only on condition it was clearly understood that the resolution was not binding on the US in any way in view of our balance-of-payments problems. Bonn had reacted negatively to the draft resolution which appeared pointed principally at the Federal Republic. Thus, in a pre-DAC meeting, the Six apparently agreed that the resolution should not be adopted. At the DAC meeting, the Japanese stated at the outset their inability to accept the full resolution and suggested elimination of some of the specific recommendations aimed at reducing the scope of tying. Citing the inability of the US to untie, the Germans then suggested postponing the resolution, and were joined by Italy, Japan, the UK and France.

Director Bell countered the impact of remarks tending to put the onus of rejection of the resolution on the US by frankly stating that the US believed in the desirability of untied aid, had furnished untied aid in the past, is tying only in the light of its well-known balance-of-payments constraint, and is effectively limiting the adverse effects of tying in the LDC’s.

At the suggestion of the Dutch, the resolution was recommitted to the working party for future consideration in light of results of studies the working party is to make of measures aimed at reducing the scope and harmful effect of tied aid.

Coordination

Chairman Thorp raised a number of problems on aid coordination. The French delegate thought that, by and large, coordination needs are being met on a pragmatic basis by consortia, consultative groups, and the Paris Club. He ended by suggesting that there be further consideration of: a) countries with no looming problems, and b) countries with looming difficulties. As examples of what he meant, he referred to the Far East regional meeting and the meeting on Latin America at which Assistant Secretary Martin made a presentation. The French suggested, in the category of countries with no looming problems, that DAC might discuss tropical Africa next winter. The British suggested a review of experience with past coordinating activities, but cautioned about overburdening DAC machinery and overlapping with other organizations.

Director Bell emphasized that although the US has departed from a strict matching formula in consortia, a rising US share of consortia contributions could not be justified and a declining share would often be appropriate. He also endorsed the idea of a review of past and current coordination activities. The Germans, Japanese and Belgians supported a more regular schedule of regional reviews. The consensus was in favor of such meetings, with the Belgians emphasizing “systematic reviews”, and the Chairman stressing the necessity of preparatory work to ensure substantive comment. The discussion indicated that reviews would be of value in identifying country problems.

Technical Cooperation

There was a general agreement with Chairman Thorp’s statement on the importance of technical cooperation in the development process and the need for more attention to the essentiality of relating technical cooperation more closely to capital assistance. Mr. Bell called for increased attention to potential technical cooperation with specific emphasis on assisting LDC’s to improve their development planning and assess long-run manpower needs. Statements of several delegates reflected concurrence on the importance of coordination at the field level, and the significance of the role of the UN resident.

At the meeting of the technical cooperation working group earlier in the month, the US had announced a decision to cease the Third Country Training program. It was generally acknowledged that this was appropriate and that the bilateral programs of other DAC members could absorb the trainees.

Role of Private Capital

Discussion produced general endorsement of statements in the Chairman’s report as to the important role of private capital in the development of LDC’s and concern about the decline of direct and indirect private investment. Our delegation mentioned the International Bank’s work on an arbitration convention and the Bank observer gave some details. The IDB also gave an effective statement of its activities along this line and prospects and discussed parallel financing with the EEC and others.

The Germans reported that a draft law is now before the Federal Republic Parliament designed to encourage private flows. The Dutch urged increased pressure in OECD to push through a convention on protection of private property. They noted that the findings of the report on a multilateral investment guarantee produced no unsurmountable technical or legal difficulties and suggested that the November meeting might be an appropriate time to get a positive reaction thereon. The EEC proposed the IFC as a possible solution to the institutional arrangement. The French endorsed continuation of study of investment guarantees but made clear that the time of decision would find France reluctant, as it is fearful this might involve payment of compensation on old investments in former colonies. Mr. Bell expressed general concurrence in the desirability of a continuing study of a multilateral investment guarantee as one measure of stimulating private flow, but cited other possibilities. The observer from the IBRD said the Bank would be pleased to collaborate with the Secretariat on the study but confessed doubt as to the extent to which discussion of the institutional arrangements could go. The Chairman summed up the discussion by accepting the instruction to continue to search for ways of encouraging private flows.

Effectiveness of Aid

There was a general consensus that in considering effectiveness of aid more attention would be needed to standards of evaluation, and it was agreed that more should be done by DAC on this topic. The German representative suggested a two-pronged approach to evaluation: a) exchange of donor impressions in consortia, and b) establishment of a working group to study ways of setting standards for measuring effectiveness. The Chairman indicated that consideration would be given to the desirability of a working party on evaluation, and cited also the resources of the OECD Development Center.

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0. Source: Washington National Records Center, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use. The source text comprises pp. 14-17 of the issue.
1. The session was held in Paris.
2. For text of an OECD press release issued at the end of the session, see American Foreign Policy: Current Documents, 1963, pp. 418-420.
3. See Documents 99, 101, and 102.
4. The DAC communique issued on April 3 reads in part: “the Committee agreed that members should 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 disparities among them. It was clear that in practice, though 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.” (American Foreign Policy: Current Documents, 1963, p. 394)
5. An apparent reference to the understandings reached at the meeting of the Development Assistance Group in Bonn July 5-7, 1960.
6. Document 165.
7. Documentation on the Economic OECD Policy Committee and its working party meetings is in Department of State, Central File E 3 OECD.