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

9. Memorandum From Secretary of State Rusk and Secretary of the Treasury Dillon to President Kennedy⁰

Washington, April 9, 1962.

SUBJECT

• Relation of Foreign Assistance to the Balance of Payments

Department of Commerce statistics show that in 1961 total foreign economic aid expenditures (including PL 480 and Ex-Im Bank) were $4.1 billion, of which $1.3 billion was paid directly to foreign countries or international organizations and therefore involved an immediate dollar outflow from the United States. Treasury is of the opinion that steps should be taken to limit this outflow in future years to $1 billion as part of our over-all program to overcome the current U.S. balance of payments deficit. While AID seriously questions whether this can be done without jeopardizing the effectiveness of the foreign aid program, it is prepared to make a serious effort to meet the Treasury goal. As a first step, the Agency is presently attempting in cooperation with Treasury and State to develop possible techniques for achieving this goal. Should this prove impossible without undue risk, in the judgment of AID, a further report will be submitted to you.

The $1 billion limit poses a difficult problem in view of the increase in the AID program to almost $3.4 billion out of about $6.2 billion in total foreign economic aid anticipated for programming in FY 1963. Dollar outflow payments from the $6.2 billion are expected under current policies to be about $1.25 billion, of which the AID program will account for roughly $1 billion.

Inevitably there will be some delay before any policy change which might be made affecting the FY 1963 program will be reflected in a reduction in actual dollar outflow on an expenditure basis. During 1962 and 1963 expenditures will to a large extent be made from funds programmed in earlier fiscal years, but since these funds have already been committed, we have little or no power now to influence the manner in which they are spent.

FY 1963 Program Projections

As indicated in the table below, under current policies the composition of payments involving an immediate dollar outflow is shifting away from procurement of commodities from third country sources to direct cash payments to the aid recipient countries.

	1960 Expenditures (millions)	1961 Expenditures (millions)	FY 1963 Program (millions)
Third country procurement1	673	412	250
Cash grants and local cost financing	108	400	500
Other (mainly contributions to international organizations and overseas operating costs)	470	498	500
Total	1,251	1,310	1,250
Total Foreign Economic Assistance	3,381	4,100	6,200
Payments abroad as a % of total foreign economic assistance	37%	32%	20%

The reduction in third country procurement reflects decisions made in 1959 to emphasize U.S. procurement with Development Loan funds and in 1960 to confine ICA procurement to the U.S. and less industrialized countries of the free world. Third country procurement being currently authorized is almost exclusively from the less developed countries themselves.

The increase in cash payments to the aid recipient countries is not due to grants for political or security support, which will continue to run at about $100 million annually, but rather to rapidly increasing programs for the financing of local development costs, particularly in Latin America and Africa.

It is clear that if the $1 billion limit on dollar outflow is to be achieved, it will have to be by changing the form in which AID supports local costs or possibly by cutting back on our assistance to these areas. Further cuts in third country procurement would impinge primarily on the less developed countries and could adversely affect our development objectives. Other payments, which consist principally of contributions to international organizations and program operating costs, provide little margin for reduction without either lessening our participation in international organizations or substantially reducing over-all programs.

Local Cost Financing

The local cost financing problem arises from the need to get important projects under way rapidly in Latin America and Africa where there have been no substantial assistance programs that generated local currency in the past. These areas have a high priority need for infrastructure facilities with a large local cost component. In the absence of local currency counterpart, such as can be used for these purposes in the Middle and Far East, it is often necessary to pay out dollars to obtain the local currency needed for getting the projects started without undue delay.

We must be careful not to take action which would unduly restrict our freedom of operation in these areas or uneconomically force a substitution of less efficient projects and techniques making relatively intensive use of imported capital equipment for more efficient projects and techniques making relatively intensive use of local resources. The need is for a mechanism enabling us to stimulate the most appropriate approaches to development while at the same time minimizing the advance pay out of untied dollars.

Possibilities now being studied include:

(1) Concentrating U.S. aid on projects with a high foreign exchange rather than local cost component when a country’s total program consists of both types of projects;

(2) Where dollar financing of local costs is necessary, restricting it to the additional import demand which can be expected to result from the development program in question;

(3) Agreements, such as that recently made with Nigeria, requiring the developing country to increase its imports from the U.S. by the full amount of dollar aid received;

(4) Financing local costs to the extent possible by a commitment of funds to be drawn upon through the procurement authorization system or some similar device for maximizing U.S. procurement and avoiding an initial transfer of funds into foreign hands; and

(5) Arrangements, such as segregated accounts, for tying dollars tendered for local cost financing to U.S. procurement when circumstances necessitate an initial transfer of funds to the foreign government or its central bank.

Tying foreign aid to U.S. procurement should not be regarded as a permanent policy. It is expected to continue at least at its present level while our over all payments situation is in deficit and until we can persuade other donor countries to increase their aid efforts. We are currently stressing with these countries that assistance extended by balance of payments surplus countries should be on an untied basis, and we must ourselves be prepared to shift to that basis once our deficit is overcome.

Dean Rusk²

0. Source: Department of State, Central Files, 811.10/4-962. For Official Use Only. The date, “9 Apr 62,” was added by hand. A longer memorandum from Frank M. Coffin to Secretaries Rusk and Dillon, April 6, which was transmitted under cover of an April 6 memorandum from Coffin to Secretary Rusk, is ibid. In this covering memorandum, Coffin suggested that the Secretary sign the memorandum printed here and forward it to Secretary Dillon (who had already approved it in draft) so that it could be sent to the President by the close of business April 6.
1. Commodities procured for import into the aid recipient countries from non-U.S. sources. [Footnote in the source text.]
2. The source text bears no signature by Dillon above his title, which appears on the left-hand side of the page. George Ball’s initials appear next to Secretary Rusk’s signature.