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

70. Report of the Task Force on Foreign Aid¹

Washington, undated.

The Foreign Aid Program faces two main problems:

• —to provide sufficient resources to meet minimum foreign policy objectives in priority countries;
• —to present the AID program to Congress in such a way as to command adequate support.

We would all like to avoid a major foreign aid fight next year. We would like to approach the Congress for as small a budget request as possible and with as few legislative changes as possible.

We have, therefore, investigated all feasible substitutions … Export-Import Bank, P.L. 480, debt rescheduling … that might allow us to get by in FY 1969 without an increase in AID appropriations.

We find, however, that no package of substitutable resources will do the job without AID funds on the order of $2.6 billion—approximately as much as we requested by FY 1968, but substantially more than will be appropriated this year.

We need the larger program in FY 1969 in large part because the Congress has cut so sharply for two years in a row. There is no slack left; key countries have run their reserves down to dangerously low levels; and we shall be scrounging in this fiscal year to put together a package in major countries that will enable us to hold the policy gains we have made.

It will not be easy to get more from the Congress next year. But we believe it is important to try. We should, and we will, expand our efforts to tell the AID story to Congress, how AID works and what it is achieving in major countries. We will aim at Congressmen who are key to enactment, at new members, and at others likely to be receptive. Our efforts will include as many Congressional trips to selected countries as can be arranged, consultations on developments in major countries, and selected briefings by senior officials and Cabinet members. With this effort, we hope to get the support we need.

Our principal conclusions are:

1. Major U.S. foreign policy interests would be seriously threatened if the AID appropriation is not significantly higher for FY 1969 than FY 1968. We will need $2.6 billion to maintain our programs in Vietnam, Thailand, Laos and Korea; to be responsive to the Latin Americans in our pledge made at Punte del Este; and to continue our share in the major multilateral development efforts going on in India, Pakistan, Turkey and Indonesia.

2. India is the country that is hardest hit by an aid cut. It will require special efforts this year, and substantial additional funds next year, to put together a package for India—including a large P.L. 480 program to build buffer stocks, multilateral debt rescheduling, resumed IDA financing and increased aid from other donors—that will enable India to move ahead. These are the critical years. The ability of India to hold together as a viable political entity is at stake, with implications for the stability of all of Asia.

3. A successful and timely replenishment of IDA is critical to our aid program around the world, and crucial in South Asia. A substantial increase in IDA resources must be promptly negotiated with other donors and passed by Congress in the next few months.

4. For the last several years, the Export-Import Bank has been taking more money out of the developing countries than it has been lending to them for development. It is important to reverse this trend. In order to keep the AID budget request at $2.6 billion, the Export-Import Bank will have to provide more funds next year to key countries that meet the Bank’s lending criteria, such as Korea, Turkey, Pakistan and Brazil.

5. We must do our part in multilateral debt reschedulings for Indonesia, India, Turkey, and Ghana. These countries are paying off excessively high amortization and interest on past loans. Relief from part of this burden is absolutely essential.

6. P.L. 480 will be used as an AID substitute wherever possible, but there are only few and limited possibilities to offset AID requirements.

7. We should request limited authority—on an experimental basis—to provide a U.S. guarantee on public and private borrowing in the U.S. capital market for countries and projects approved by AID.² If successful, this technique could be used in future years on a more substantial scale as an alternative to AID funds for selected countries.

8. To meet Congressional concern about excessive military expenditures by LDCs, military credit sales should be separated from the Foreign Assistance Act; and in the presentation of the FAA, the Administration should make clear its intent to enforce the policy expressed in the Symington amendment.³

9. We considered the advisability of shifting all or most of the Military Assistance Program out of the Foreign Assistance Act. This matter has been discussed with Chairman Morgan who will consult Committee members early in January. Given disagreement within the Task Force and the uncertainty about the Committee’s reaction, we will forward our recommendation as soon as possible in January.

The AID program has been quite successful in recent years. The development process has been greatly strengthened in almost all the countries to which we have given substantial support. Other donor countries are now contributing as much of their national product to this effort as we are, and a growing proportion of this total is being channeled through international institutions. The impact of our aid programs on the U.S. balance of payments is now minimal. To falter now would jeopardize the progress we have already made.

AID Requirements

The Task Force and the Senior Interdepartmental Group have reviewed in general terms the AID Budget Proposal for 1969, which analyzes the needs for external capital and the probable effects of reducing proposed U.S. aid levels. Because of the priority that must be given to Vietnam-related programs, a high proportion of any reduction would have to be absorbed by the major development loan programs in which the remaining funds are concentrated. The most serious effects would be of two sorts:

• —to hamper seriously the effective development efforts of countries such as Korea, Pakistan, Turkey, Chile and Colombia, where our aid has had a catalytic effect in eliciting and supporting self-help policies.
• —to jeopardize political stability as well as economic recovery in India and Indonesia, which are critical to our over-all foreign policy in Asia.

Further reducing aid to the effective users would not only jeopard-ize the large investments that we have already made in the development of those countries but it would seriously weaken our over-all posture toward the underdeveloped world. A cornerstone of this policy, reiterated with increasing force in every Presidential aid message of the past six years, is our willingness to help countries that are taking effective steps to help themselves. The credibility of that policy cannot be maintained at aid levels significantly below those recommended in this report.

The Task Force has given particular attention to the aid requirements of India and Pakistan and to the broader effects on South and East Asia of not meeting them. It is clear that the $300 million increase since 1965 in Supporting Assistance for Vietnam and related programs has been matched by a corresponding reduction in development lending, which falls very largely on South Asia. Until this year this reduction has been partially justified—and its effects masked—by the Indo-Pakistan war of 1965 and the droughts of 1965–66. The Indian economy and political structure have been greatly weakened in this process with adverse effects on national unity.

The minimum needs of India for external capital from the IBRD consortium in calendar 1968 and 1969 and a proposed negotiating strategy are summarized in Tab A.⁴ It is urgent to conclude the IDA negotiations early in the year and to schedule debt relief for both 1968 and 1969 to meet minimum requirements for current imports and to forestall a weakening in development policies. AID development lending of about $420 million will be needed for 1969 in addition to maximum contributions from IDA and other donors to support an acceptable rate of economic recovery. In political terms, this may well be the last good opportunity for the West to salvage sensible development policies and relieve the pressures undermining the Indian political system. A failure in India would seriously call into question the massive investment that we have made in Vietnam.

For Pakistan, it will require $180 million of development lending to provide the U.S. share of the IBRD consortium and maintain the promising development effort that is under way. Obligations of these amounts for India and Pakistan are needed to reverse the downward trend of assistance to the subcontinent and reap the benefits of our large investments in South Asia.

In Latin America the importance of economic assistance to our over-all relations is clearly established in the context of the Alliance for Progress and is supported by the Congress. Equally clearly, we must continue to rely on European donors to bear the main burden of assistance to Africa, where we cannot do much more than maintain on-going high priority programs during the present period of acute budget stringency.

The main questions of both economic and military aid strategy arise along the rim of the Communist world. Here we must not allow our concern with the immediate threat to 50 million people in Vietnam, Laos and Thailand to divert so much of our resources from the 800 millions in Korea, the Philippines, Indonesia, India, Pakistan and Turkey that their continued security and development are seriously hampered. We should be prepared to support effective self-help efforts in these key countries more adequately than we can at present whenever military expenditures in Vietnam decline. We must reenforce the effort to get increased contributions for a number of these countries from other donors.

Increased Use of Non-AID Resources

Given the pressures on the U.S. budget, it is necessary to reexamine sources of financing economic development that have a lower budget cost per dollar of resources transferred, even though these alternatives may be less desirable than AID funds in other respects. Alternative ways of transferring resources should be judged on the basis of their effects on the U.S. budget and balance of payments, their impact on Congress, their cost to the recipient country over time, their effectiveness in promoting development, and their effect on other U.S. programs.

Although it sees no major substitutes for appropriated aid, the Task Force considers increased Export-Import Bank lending, debt rescheduling, P.L. 480, and a U.S. Government guarantee of LDC private and public borrowing in the U.S. capital market⁵ to be the most promising sources of modest aid increments. Our conclusions on these four sources are given below. We have also taken into account the probable IDA replenishment and the amounts likely to be available from bilateral programs of other DAC members and the multilateral institutions. Several other possibilities have been rejected for the next fiscal year, including interest subsidies on LDC borrowings in the U.S. market and further tax incentives to U.S. private investment.

Debt Rescheduling. Underdeveloped countries now pay $2.8 billion per year in amortization of past debt and $1.2 billion in interest. Debt service therefore takes nearly 30 percent of gross capital flows to them. Payments to the U.S. account for nearly $700 million of the total (see Tab B).⁶

Debt rescheduling is the equivalent of untied aid when it permits the debtor to use the amount of rescheduled debt for other purposes. From the creditor viewpoint, it can be made subject to self-help conditions and scheduled for one or several years in advance.

Although debt rollovers have usually been regarded as a sign of bad financial management, in a number of cases they result from the past unwillingness of donors to provide loans on appropriate terms for the financing of development.

There are two serious limitations to the regular use of debt resched-uling as a supplement to appropriated aid:

• —indiscriminate use would vitiate efforts to obtain adequate self-help;
• —rescheduling that looks like back-door aid would invite Congress to impose controls on it or reduce aid appropriations.

Despite these limitations, multilateral debt rescheduling offers possibilities for selective use in situations where it will not appear as a reward for bad financial management. The probable recipients in the next two years are Indonesia, India, Ghana and Turkey, where changes of governmental policies and favorable judgments as to current performance make it possible to avoid setting an undesirable precedent. Rescheduling possibilities for these four countries amount to perhaps half of the current annual debt service of $625 million. The U.S. would contribute less to a proportionate rescheduling because its past loans have been on more favorable terms. Although the Export-Import Bank and IBRD may not formally reschedule their debt, they can make new loans at least equivalent to the amortization due them.

We recommend that the U.S. continue to encourage multilateral debt rescheduling in selected countries where the result will be to increase the net flow of assistance.

P.L. 480. Although efforts are being made to maximize the use of P.L. 480 commodities in substitution for appropriated aid, the special group set up to study this problem has concluded that the additional prospects for 1969 are quite limited. The main obstacles to expanding P.L. 480 above the levels currently anticipated in the AID Budget Proposals are:

• —the loss of commercial sales by the U.S. and other suppliers;
• —the need to maintain food prices at levels that will provide adequate incentives to local producers.

The principal opportunity for increased use of P.L. 480 lies in the benefits to be gained from building buffer stocks—especially in India and Pakistan—to adequate levels. This measure has already been recommended and incorporated into the basis for AID programming in the countries concerned. It will make possible a major breakthrough in South Asian agricultural policy, but it will not affect the need of these countries for foreign exchange.

Export-Import Bank. The role of the Export-Import Bank in financing underdeveloped countries has changed dramatically in the past five years. Until 1961 the bulk of the Bank’s long-term loans went to less developed countries and it was the main source of U.S. aid to Latin America. Since then the share of LDCs in Export-Import Bank lending has dropped to one-third and their debt service now exceeds new lending. As a consequence the Alliance for Progress has not caused an increased flow of U.S. capital to Latin America, since AID lending has merely replaced previous Export-Import Bank lending. On balance, the Bank is becoming a net importer of capital from the developing countries instead of contributing to the financing of development. (See Tab D)⁷

The causes of this shift lie in the relative emphasis that the Bank gives to its two objectives: (1) promoting U.S. exports and (2) supporting development. There are several hundred million dollars per year of projects in AID priority countries that would be eligible for Export-Import Bank financing except for the unwillingness of the Bank to increase its total portfolio in the countries concerned. The Bank’s export promotion objective would also be served by these loans, since they can be fully tied to U.S. procurement. The Bank has currently $1.3 billion in uncommitted lending authority, which is expected to be increased by Congress by $4.5 billion when the Bank legislation is re-enacted (probably early next year).

Since the Export-Import Bank is an autonomous agency responsible to the President and Congress and since it is being urged to extend its operations in other directions, the increased contribution that it should make to development lending must be weighed in this context. From an AID standpoint, highest priority should go to increased lending in its priority countries in 1968, since Development Loans and Alliance Loans have been sharply cut. The principal countries that should meet both AID and Bank criteria for increased lending are Korea, Peru, Turkey, Pakistan, Colombia and Brazil. Of these the current Bank “exposure” is high only in Brazil.

Because of the need to reconcile priority aid needs with other Bank objectives, we propose that the agencies concerned explore with the Export-Import Bank how it might achieve increased lending to qualified developing countries of greatest foreign policy interest. It is only by a reversal of recent trends that the U.S. can meet its legitimate share of aid requirements for 1968 and fulfill the President’s commitments to the Alliance for Progress.

United States Government Guarantee of LDC Bonds.⁸ We propose that Congress authorize U.S. Government guarantees of long-term borrowings in the U.S. private capital market by public and private bodies in developing countries that have reasonable prospects of repayment. Such borrowings would be for economic development purposes approved by AID and the funds tied to U.S. exports. To carry out this proposal, Title III of the FAA would be amended to authorize guarantees on loans to credit-worthy LDC governments as well as private entities for approved development purposes.

The ceiling for such guarantees would be modest, perhaps $30–$50 million in FY 1969. The proposal would be acknowledged to be pilot and experimental. (Further details of the proposal are given in Tab E.)⁹

The purpose of the proposal is to begin the transition to the use of private, rather than of public, U.S. funds for countries able to begin that transition because of their favorable development prospects and debt servicing capacity. A few LDCs—notably Mexico and Israel—are able to borrow now in the U.S. private market without a U.S. Government guarantee. There are several other countries that are now quite good risks—e.g., Korea, Thailand, Chile, Taiwan, some Central American countries—which have not entered the U.S. capital markets. A U.S. Government guarantee of long-term borrowings should facilitate the entry. As the relationship proved mutually rewarding, the U.S. Government guarantee might become redundant and could be withdrawn.

The principal merits of the proposal are (1) Such borrowing wouldnot be a charge on the U.S. Government budget. The budget would be affected only if the borrower(s) defaulted. (2) We may want to move in the direction of using private rather than public U.S. funds in a much more substantial way in FY 1970 and beyond—with an interest rate subsidy where needed. The FY 1969 proposal would be presented as a trial run. It would introduce Congress to the idea, as well as LDCs to Wall Street. (3) It is a new initiative, modest but sensible and forward-looking.

AID would supervise operation of the program. Proceeds could be used either for a specific project, e.g., municipal waterworks, or for more general development purposes, e.g., raw materials and spare parts to promote industrial development. These proceeds could be tied to U.S. exports in the same way as extended risk projects are now tied or, where the proceeds are for general development imports, in virtually the same way as program loans are now tied. Specified self-help measures could be required—where this was indicated—as a condition for receiving U.S. Government guarantees.

The guarantee would be “Full Faith and Credit”, like the guarantees now given for specific and extended risk.

Although in principle guaranteed borrowing could replace AID funds in certain cases—e.g., Chile, Korea, Peru—the proposal should be put forward as a supplement to, rather than a substitute for, the FY 1969 Development Loan request. The reason is that the program, if approved, would take time to get underway and we cannot be certain that anticipated needs would be met by this route.

Legislative Changes

It was agreed that 1968 will be a poor year to propose major legislative changes: they will be either brushed aside or lead to delay and deadlock in an election year session. The main objective should be to get the FAA in and out of Congress with a minimum of controversy, reserving major restructuring for the first year of the new Presidential term.

The changes considered by the Task Force are discussed in Tab G.¹⁰

Military Credit Sales.

It was agreed that divorcing the contentious military credit sales program from the aid bill is essential to secure quick passage of the FAA. Separating out military sales would not only speed action on the FAA; it would also increase support for the AID bill among opponents of arms expenditures by LDCs without weakening support for aid among defense-oriented members of the House. The Task Force recommends, therefore, that a Military Sales bill covering cash and credit sales of military items be presented to the Congress as a separate piece of legislation.

The Task Force was divided on the question whether credit for military sales should be financed by the Defense Department from funds appropriated in full for this purpose (direct credit sales) or by the Export-Import Bank and other sources on the basis of Defense Department guarantees.

Most Task Force members favored full appropriation for the following reasons. The guarantee program is highly controversial. It has already prejudiced the Export-Import Bank’s position on the Hill and might further delay passage of the Export-Import Bank bill which will probably be carried over to the next session. Moreover, to secure guarantee authority would probably require separate hearings before several Congressional Committees, and the delay in securing authorization might well delay the foreign assistance appropriation. This would be the case if, as is likely, jurisdiction over appropriations for military sales were assigned to the Passman Subcommittee and lumped by him with the AID appropriation. Finally, the guarantee program would increase, not decrease, the new obligational authority in the President’s budget to the extent that the Export-Import Bank is involved.

Support for the guarantee route rests on the fact that the appropriations required thereby would be only a fraction of the authorized program, and, if lumped with the foreign assistance appropriation, would swell that appropriation by a correspondingly lesser amount. Moreover, Chairman Morgan assumes that the separate military sales bill under consideration would involve guaranty authority.

Military Assistance Program.

The Task Force considered the advisability of shifting all or most of the Military Assistance Program out of the Foreign Assistance Act. The matter has been discussed with Chairman Morgan who will check with Committee members early in January. Given the uncertainty about the Committee’s reaction and the divergent views of Task Force members on the restructuring of MAP, this matter cannot be resolved until January. A working group of State, Defense, AID, and the Bureau of the Budget is considering the alternatives discussed on pages 5 and 6 of Tab G.

P.L. 480.

The Food for Freedom program—P.L. 480—expires on December 31, 1968. To minimize controversy, we should seek a simple extension of the expiry date. However, in order to resume P.L. 480 sales to Yugoslavia, we should consider at the appropriate time the necessary modification of those provisions of the Act excluding countries trading with Cuba.

Regional Banks.

We regard it important to get authorization to contribute $200 million over four years and, to the extent that other donors pledge their share, first year appropriation of no more than $50 million for the Special Funds of the Asian Development Bank. The authorizing bill is now before the Congress.

Should the President of the African Development Bank, Mamoun Beheiry, meet our conditions in good time (that is, provide information on how the special fund of the African Development Bank would be administered and used, and a schedule of expected contributions from other donors), we should be prepared to consider seeking authorization to contribute up to $20 million a year for a 3-year period to the special fund of the African Bank. The odds are high that he will not do so. We would not, in any case, ask for an appropriation.

The Task Force considered and rejected the following proposals:

(1) Transfer of AID/CORDS Vietnam programs to DOD. The advantages of reducing the AID request by $100 million and relieving AID of some criticism by opponents of the Vietnam war seem more than offset by the operational difficulties of the change and the likelihood of charges of increased “militarization” of civil programs.

(2) Creation of a separate Vietnam Civilian Aid Agency: This would reduce the AID budget by about $500 million and relieve AID of criticism on Vietnam “failures”. However, there are substantial disadvantages, including costly administrative duplication of AID, reduced funding flexibility, lessened support for AID bill by hawks, and little likelihood of increased appropriations for remaining AID programs.

(3) Revising the Structure of AID Appropriations: Alternatives considered included authorization and appropriations by region; or breakdown of development loan request into functional sub-categories to show uses—such as fertilizer—which command popular support. Both plans have considerable cost in terms of administrative flexibility and neither seemed to offer clear gains in Congressional support.

Presentation

The Task Force recommends against gathering together in one message to the Congress the AID request, P.L. 480 renewal, and IDA replenishment. Lumping the three programs would encourage the view that the programs are substitutable for each other rather than supplementary and invite deeper cuts than usual because the total of the three programs would appear large. Some reference would, of course, be made in the AID message to other relevant programs.

Regional Focus.

The Task Force considered the merits of giving India a central place in the AID presentation to point up the high political costs of a reduction in aid. However, given the negative attitude of the Congress toward India, and the ever present possibility that, during the course of the AID presentation, the Indian Government might embarrass the U.S. by actions or statements offensive to U.S. opinion, the Task Force concluded it would be best to follow the pattern of previous presentations, highlighting the India story in the regional context, but with no greater stress on South Asia than on other key country programs.

Military Expenditures.

The Task Force believes the presentation must take into account the general concern of the Congress about excessive military expenditures by AID recipients. A clear indication should be given of new and more stringent review procedures to deal with this issue, while at the same time, decisions should not be prejudged by the establishment of arbitrary criteria.

Thus, it might be stated that the President:

(1) Shares the general concern of the Congress about excessive military expenditures by AID recipients, as reflected in the Symington Amendment (Sec. 620(s)).

(2) In that connection, and to enforce that part of the law, has asked the Secretary of State to develop procedures, consulting in the Senior Interdepartmental Group and through the Interdepartmental Regional Groups as appropriate, for the continuing review of military expenditures by AID recipients.

(3) Has directed that periodic reports be made to him, with important cases being submitted to him for review.

At Tab F is a draft statement along which lines testimony could be developed for use in Congressional hearings on the bill.

Private Investment.

The presentation should emphasize the critical role of private effort, indigenous and U.S., in the development process, and the desirability of strengthening the capacity of AID’s new Private Investment Center to encourage and assist U.S. private investment in the LDCs. (See Tab on suggested themes for AID presentation.)¹¹

Other.

The presentation should show that the AID program constitutes a minimal drain on the balance of payments and that effective efforts are being made to achieve balance of payments additionality. Note should also be made of the importance of reenforced efforts to achieve increased contributions from others.

1. Source: Johnson Library, Central File, FT 600/Task Force on Foreign Aid, Box 36. Confidential. The report was transmitted to Joseph Califano by Nicholas Katzenbach under cover of a December 11 memorandum that noted that the report, which represented the consensus of the members of the Task Force, did not cover the program for military assistance. The agencies represented on the Task Force were the Departments of State, Treasury, Defense, Agriculture, Health, Education and Welfare; Agency for International Development; Council of Economic Advisers; Bureau of the Budget; and the White House.
2. Treasury opposes this proposal “unless and until a study can show the benefits outweigh the very considerable risks.” [Footnote in the source text.]
3. Debate over arms sales was a major issue during Congressional consideration of the foreign aid authorization bill, P.L. 90–137, approved on November 14, 1967 (81 Stat. 445), which involved in part the adoption of an amendment sponsored by Stuart Symington (D.-Missouri) requiring the President to terminate all foreign assistance to any nation that diverted such assistance to military expenditures or diverted their own resources to “unnecessary” military spending “to a degree which materially interfered” with their own development.
4. Tab A, “Working Group Report on Aid to India.” None of the tabs is printed.
5. See Treasury comments in footnote on page 3. [Footnote in the source text; reference is to footnote 2 above.]
6. Tab B, “Debt Rescheduling as an AID Presentation.”
7. Tab D, “Export-Import Bank.”
8. Treasury feels that the statement in this section does not reflect the important risks on both policy and technical grounds. [Footnote in the source text.]
9. Tab E, “Guarantee of Bonds.”
10. Tab G, “Legislative Changes Considered.”
11. Tab C, “Themes for AID Presentation.”