Foreign Relations of the United States, 1964–1968, Volume IX, International Development and Economic Defense Policy; Commodities

23. Memorandum From the Administrator of the Agency for International Development (Bell) to President Johnson¹

Washington, December 9, 1964.

SUBJECT

• New Directions in Foreign Aid

For at least the next decade, strong U.S. economic and military assistance programs will be required to support our foreign policy in Latin America, Africa, and Asia. Two key problems grip those continents: (1) the attempt by the Russian and Chinese Communists to seize control of the developing countries, an attempt which is accentuated at the present time by the competition between Moscow and Peiping for leadership of the international Communist movement, and (2) the necessity for the developing countries to overcome poverty, ill-health, and obsolete social and economic patterns. Effective foreign aid programs are essential to deal with these conditions and achieve the U.S. objective of a dynamic and peaceful world community of open societies.

This memorandum outlines the principal issues needing consideration in looking ahead to the foreign aid program over the next few years. We comment on the principal points about aid that are raised by the President’s Task Force on Foreign Economic Policy,² as well as a number of other issues.

This memorandum has been prepared by the Agency for International Development, with the benefit of comments from the Departments of State, Treasury, Defense, and Agriculture. It discusses (1) the prospective requirements for aid, (2) the legislative framework, and (3) current major program issues.

1. Requirements for Aid

a. Economic Assistance—The most important conclusion of the President’s Task Force is that more aid, not less, will be required for the next few years. The Executive Branch agencies agree.

This is especially evident in Latin America, but true as well of Africa and parts of Asia, as more of the developing countries organize themselves better and adopt stronger self-help policies, which will enable them to use—and to justify—larger aid from outside. (e.g., Brazil under the Castello Branco government is tackling its problems seriously, and therefore qualifying for major assistance, as Brazil under the Goulart government did not.)

It is plainly in our own interest to provide more aid when it can be used well. With respect to developing countries that are ready to sacrifice and work hard, the best and cheapest aid policy—for the U.S. and for other donors—is to give them maximum help, which will lead to economic independence, and the end of the need for aid, in the shortest possible time.

It is difficult to estimate how fast aid requirements will rise. Over the past ten years, economic aid from advanced countries to the developing countries of Asia, Africa, and Latin America rose from $2.0 billion to $6.5 billion per year. About 60 percent came from the United States. On the average, output in the developing countries rose by 4.2 percent per year, which was significantly higher than their population growth rates of perhaps 2.5 percent per year.

During this period, several countries—notably Greece, Taiwan, Israel, Mexico, Venezuela—made enough economic progress to end the need for further concessional economic aid. Several other countries—notably India, Pakistan, Iran, Thailand—made substantial progress.

Looking ahead, AID estimates that economic aid requirements are likely to rise on the order of 5 to 10 percent per year between now and 1970, based on a realistic anticipation of self-help performance by recipient countries. Assuming that the aid programs of other advanced countries rise proportionately, this would mean that expenditures under the U.S. bilateral aid program might need to rise roughly in the following way:

	($ billions)
	1963	1965	1970
			low	high
Ex-Im Bank (net)	.1	.1	.2	.5
P.L. 480	1.4	1.5	1.7	2.1
AID (net)	1.8	2.2	2.5	3.2
Other (including Peace Corps)	.1	.1	.2	.2
	3.4	3.9	4.6	6.0

The President’s Task Force considers that this rate of growth in aid will not support a rate of economic growth in the developing countries which is adequate to satisfy the political dynamics of those countries. Furthermore, the Task Force believes it would be possible, by a more generous and aggressive aid policy, to expand the investment capacity of the developing countries more rapidly than AID anticipates. On these assumptions, the Task Force would urge that the United States plan for a larger growth in economic aid than AID now foresees as necessary.

This difference of judgment about future requirements probably need not be resolved at present. The Task Force has not urged a different budget proposal for FY 66 than AID has submitted to the Budget Bureau, and we believe the Task Force would agree with the following recommendations.

Recommendations: (1) That the United States continue to relate its aid for development to strict standards of self-help by recipient countries, recognizing that this will require some increase in economic aid over the next few years, particularly in Latin America but also in Africa and Asia; (2) that the United States vigorously seek to help raise the managerial competence and investment capacity of developing countries.

b. Military Assistance—Since 1960, outlays for military aid (and for directly related supporting economic assistance) have fallen markedly.

Military assistance appropriations have been reduced from $1.8 billion in 1961 to $1.055 billion in 1965. Grant military aid to Western Europe has been phased out except for the completion of small remaining commitments. The budget proposal for FY 1966 is based on “normal” military aid requirements of $1 billion plus $170 million for unusual combat requirements in Vietnam and Laos.

Supporting Assistance, which amounted in 1961 to $1.1 billion, has been terminated altogether in such countries as Taiwan, Greece, Iran, Pakistan, and Turkey, where U.S. economic aid has been shifted to a development basis. Present commitments are about $400 million annually, with three-fifths going to Southeast Asia.

Future requirements depend heavily on unpredictable events in Southeast Asia, and there is no basis for projecting a clear trend.

Recommendation: That the United States continue to provide military and economic supporting assistance for the security efforts of countries striving to maintain their freedom, recognizing that this may require funds of the present order of magnitude for the next four years.

2. Legislative Framework

Next spring’s legislative presentation should certainly stress the successful themes of the past year: continued emphasis on a tight, “bare bones” budget, and continued emphasis on strong self-help standards and getting developing countries into a position in which they will no longer need aid. We would also like to urge the earliest possible beginning for the Congressional consideration of aid legislation; the Executive Branch will be prepared for hearings by February 1.

Beyond these points, there are important issues to be considered regarding the legislative framework of foreign aid programs.

For the last dozen years, the economic and military assistance programs have been authorized annually in a single bill and funds have been appropriated for them annually in a single bill. This is a very difficult legislative framework, which requires maximum Congressional time and energy, and results in minimum stability and continuity for the aid programs. With the gain in Congressional strength for the Administration following the November election, the question arises whether this legislative framework can and should be improved.

Three possible changes have been suggested.

a. Multi-year Authorization—Great advantages would be achieved if multi-year authorizations could be enacted for all parts of the aid program, as they have been in the past for some parts, (e.g. development lending was authorized for five years in the 1961 Act). Congress would presumably be unwilling to enact permanent authorizations, but a four-year authorization would not seem unreasonable in view of the obvious requirements of U.S. foreign policy. Such an authorization would provide a far stronger basis of stability and continuity for operating the aid programs, would accomplish a great saving of time and energy for both Congress and the Executive Branch, and would provide a strong base from which to continue pressing other advanced countries to enlarge their aid programs.

Arguments against a four-year authorization are the possibility that changing requirements may force the President to ask for annual amendments in the statute, thus losing the benefit of the multi-year authorization, and the possible unwillingness of the authorizing committees to abandon their annual legislative control of aid policy.

Chairman Morgan and Senator Fulbright have indicated that they would support a four-year authorization proposal, although both expressed skepticism about the likelihood of obtaining it in full.

Recommendation: That in view of its great advantages, the President make a major effort to obtain four-year authorizations for economic and military assistance, in amounts which will cover the probable annual changes in the different categories of aid, and with an arrangement under which the Executive Branch will present to the authorizing committees each year a full report on their current aid plans and programs. Annual appropriations would continue to be requested.

b. Separate Legislation for Military and Economic Assistance—The Executive Branch has frequently desired in the last dozen years to split off military aid from economic aid legislation. The principal advantage this would have is to eliminate some of the confusion in the public mind regarding our foreign assistance by permitting the Administration to emphasize the role of military assistance not as “foreign aid” but as an integral part of our own defense effort. In addition, it would replace a large legislative target with two smaller ones.

This proposal has always been strongly opposed by the leadership of the House Foreign Affairs Committee and of the House. The proposal was blocked at the last minute in 1961 by Speaker Rayburn, and the opposition of the House leadership a year ago was the principal factor leading the President to decide against the proposal at that time. The argument of the House leaders has always been that they need to have military assistance combined with economic assistance in the same bill in order to carry a satisfactory economic aid authorization. A part of the opposition by the House Foreign Affairs Committee may stem from a fear of losing jurisdiction over the military assistance legislation.

Senator Fulbright favors separate legislation. Chairman Morgan opposes it.

Recommendation: That in view of the risk to House passage of economic aid legislation, the President propose a combined aid bill in the past. Secretary McNamara differs with this recommendation, believing that the advantages of separate bills are substantial, the risks to economic aid legislation are low, and that, especially if jurisdiction over the military bill is left in the Foreign Affairs Committee, the price in lost good will of the split will not be great.

c. Fragmenting Aid Legislation—Senator Fulbright proposed a year ago and continues to propose today fragmenting the aid legislation into as many pieces as possible. Thus he would not only split off military aid legislation; he would also abandon altogether U.S. bilateral programs of development lending and technical assistance, and channel all U.S. funds for such purposes through the World Bank and other international organizations. He would channel supporting assistance through the State Department. He would thus end up with at least three aid bills, perhaps more.

On the merits, these proposals run contrary to U.S. interests. It would be detrimental to U.S. objectives if Felipe Herrera³ were administering all the U.S. funds for the Alliance and Tom Mann were administering none of them. Likewise in Africa and Asia, we need a major bilateral aid program to accomplish U.S. objectives in developing countries. (We should continue our policy of steadily enlarging the amount of money we contribute to international aid agencies, but this is an entirely different policy from one of abandoning our bilateral aid program altogether.)

In terms of legislative strategy it is difficult to see what Fulbright’s proposals would accomplish. The Congress would probably spend more, not less, time on aid if it had to pass several aid bills instead of one (or at most two). Moreover, unlike Fulbright, the majority in the Congress prefers bilateral to multilateral aid, and an effort to transfer the present bilateral programs to a multilateral basis would undoubtedly result in a major reduction in the total funds made available.

Recommendation: For these reasons we strongly recommend against Senator Fulbright’s position, while recognizing that he has thus far been unwilling to accept leadership on behalf of the Administration for aid legislation on any other terms. We believe this matter requires the President’s early consideration.

3. Program Issues

In addition to the general issues outlined above, the following specific issues need consideration.

1. Food supplies and population growth. Food supplies in developing countries are not keeping up with rising demands brought by growing populations and rising incomes. Very serious food shortages could develop in a few years’ time unless strong action is taken.

The fundamental response to this problem must be to help bring about greater agricultural production in the developing countries. U.S. surplus food cannot meet the demand, even though substantially increased food aid is necessary and desirable.

Therefore, we must clearly place new and heavier emphasis on technical and other assistance to agricultural production in developing countries, drawing more heavily on the resources of the Department of Agriculture, the cooperatives, the Land-Grant Universities and American industry.

Recommendation: That the President continue to stress in his public statements the need for the U.S. to help other countries expand their food production. We face opposition, led by Representative Whitten,⁴ to aid for agriculture in developing countries based on exaggerated fears of interference with potential U.S. agricultural exports, and it is important to state the Administration position clearly.

It is also necessary for developing countries to face the many problems stemming from rising rates of population growth, and more and more of them are doing so. As developing countries adopt their own population policies and programs, the question arises in what ways and to what extent the U.S. should assist.

Public and religious opinion at home and abroad have become increasingly ready to face the issues involved. The United States is now on record as urging developing countries to consider their population problems, but does not (and should not) urge any particular policy on any country. We favor and support careful research on all aspects of the problem, and have supported some training and technical assistance, particularly on demographic aspects of the matter. By and large, U.S. governmental action has followed, rather than led, public and Congressional opinion, and we believe this is desirable in the future as well. In our opinion the time has come to expand the range of technical assistance and other kinds of help the U.S. will provide to population programs of developing countries.

Recommendation: That U.S. assistance to population programs in developing countries be expanded without fanfare as requests are received. A.I.D. is preparing a memorandum on this subject recommending specific policy guidelines.

2. Enlarging the use of private U.S. resources to help the developing countries. We have been steadily expanding and improving our arrangements for drawing on the skills of American business, universities, cooperatives, labor unions, engineering firms, and many other institutions. We intend to continue these efforts to engage American professional skills more fully in the problems of development.

The President’s Task Force has recommended that new ways be sought to enlist the skills and energy of American business management in the development process—as new methods were devised some years ago to meet the demands of the missile age. They feel that U.S. private enterprise may be harnessed much more extensively to the problem of increasing the investment and growth capacity of the developing countries if management talents can be engaged separate from, as well as in association with, financial investment. This problem, among others, is now under intensive review by the Advisory Committee on Private Enterprise in Foreign Aid, chaired by Arthur K. Watson, whose report is due by June.⁵

Meantime, we are prepared now to make the following

Recommendations:

• —Congress be asked to raise the present limit on guaranties of U.S. business investment in developing countries against the political risks of expropriation, inconvertibility, and war by $1.25 billion per year—an amount we hope would be adequate for the next four years;
• —that Congress be asked to raise the limit on “extended risk” guarantees (against loss from any cause) from the present $300 million to $500 million, and eliminate the limits of $25 million per loans and $10 million per equity investment, retaining however the limit of guarantee to 75 percent of the value of any investment;
• —that Congress be asked to extend the Latin American housing investment guarantee program, (which guarantees up to 100 percent of an investment), by an additional $200 million, aimed primarily at developing financial institutions which can mobilize private savings for housing which meets the needs of middle and lower income families;
• —that Congress be asked again this year to authorize a special 30 percent investment tax credit for new private business investment in less-developed countries. The Treasury Department doubts that Congress will approve a credit of this magnitude, but has no objection to the request being repeated.

3. How rapidly should we expand U.S. aid provided through international institutions? We favor such an expansion because of the potential advantages of imposing self-help standards through international institutions, the lower U.S. share in such aid than in bilateral assistance, and the concessional terms still possible through these channels. The crucial questions here relate to funds made available to IDA and IDB for soft-term loans. Definite international agreements have been made covering the three years FY 1965–67 for the IDB and the three years FY 1966–68 for the IDA. The annual total contribution to IDA is $250 million of which the U.S. share is $104 million (42 percent), and the annual total contribution to IDB is $300 million, of which the U.S. share is $250 million.

Recommendation: That authorization be urgently sought early in the next session of Congress for the IDB contributions. The IDA contributions were authorized in the last session.

We believe future U.S. policy with respect to IDA should be to propose as large an increase in total contributions as we can get other donors to agree to, with the U.S. contribution limited to about 40 percent. A realistic view, however, would anticipate reluctance by the European donors to increase their IDA contributions very rapidly—a doubling of the total would be an extraordinary good result—and therefore little opportunity to shift from U.S. bilateral to multilateral financing in the next three or four years.

It is in our opinion too soon to make a judgment about future financing of IDB, where the non-U.S. funding is in any event smaller and the Bank’s policies are still evolving.

4. Finally, there is the issue of how to improve further the administration of aid, and particularly to eliminate marginal employees in AID. Last year’s request for selection-out authority to apply to AID’s civil service employees, parallel to the authority AID already has for foreign service employees, was not granted by the Congress. Our present opinion is that it would be extremely difficult to obtain it from the next Congress.

It is our understanding that John Macy is considering recommending to the President appropriate legislative and policy changes to convert all three foreign affairs agencies—State, USIA, and AID—gradually to a common personnel system, based on the Foreign Service Act. We would enthusiastically support such a proposal, and in that event would not recommend asking again for selection-out authority, since AID employees would be gradually converted to the foreign service system where the selection-out authority already exists.

If however the President decides not to ask for such a general change, or if the Congress refuses to grant it, then we would recommend repeating—in somewhat modified form—the request for selection-out authority for AID.

David E. Bell

1. Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 68 A 2148, Chron Files, December 8–11, 1964. Confidential. A covering memorandum from Bell to Moyers, December 9, reads: “Attached is our ‘Brief’ on the subject of foreign aid. There are several issues in it which deserve discussion. One in particular—the question of what form of legislation the President should request—requires fairly urgent consideration. I believe that State, Defense and AID would be the key participants, apart from the White House-Executive Office complex.”
2. See Document 20.
3. President of the Inter-American Development Bank.
4. Jamie L. Whitten (D.-Mississippi).
5. This Committee was established under Section 601 of the Foreign Assistance Act of 1963, P.L. 88–205 (77 Stat. 379), approved on December 16, 1963. The Committee, composed of representatives from business, labor, universities and foundations, was asked to “carry out studies and make recommendations for achieving the most effective utilization of the private enterprise provisions of this Act.”