Office of the Historian

259. Memorandum From Henry Nau of the National Security Council Staff to the President’s Assistant for National Security Affairs (Allen)1

Washington, January 29, 1981

SUBJECT

  • Meeting Friday, January 30, 1981, 3:00 p.m. on Foreign Aid Retrenchment

The attached paper2 outlines the Stockman recommendations for foreign aid retrenchment which will be discussed at the meeting Friday afternoon,3 3:00 p.m. The highlights are as follows (see page 5–6 for best overview of the numbers):

1.
Security Assistance is excluded. OMB tells me this was done intentionally to indicate that they did not seek to propose increases or decreases in the FMS credit, IMET or MAP accounts. I had Bob Kimmitt check on whether State or Defense intended to raise the possibility of enhancement of the security assistance budget. His memo and recommendations are attached.4
2.
Every other major program takes some reduction with multilateral programs being cut back more than bilateral programs.
3.
Nevertheless, the most important bilateral programs for implementing foreign policy objectives are also cut substantially.
a.
PL–480 is cut by ½ in FY 82 and eliminated altogether after FY 82 (The Egyptian Ambassador has already called about the PL–480 cuts after the story in Thursday’s Post).5
b.
Economic Support Fund (excluding Egypt and Israel) is cut by $100 m in FY 82 (the contingency fund is eliminated) and increases only slightly thereafter to the same level in FY 85 that Carter proposed for FY 82 (meaning a real decline from Carter FY 82 levels).
4.
By contrast to PL–480 the bilateral AID account, which involves long-term project assistance for basic human needs (agriculture, health, etc.) and is therefore less flexible and useful for supporting new foreign policy initiatives, is not cut but increases by 3 percent annually from FY 82 on.
5.
All of this leads me to make the following points which you may wish to pursue at the meeting Friday:
a.
The President has given priority to budget reductions. We must all cooperate. Foreign aid has become an unpopular program because it has been divorced increasingly from US national security and foreign policy objectives. In the short-run, therefore, if more popular domestic programs must be cut, foreign aid too will have to be cut.
b.
However, short-term cuts must reflect the policy priorities of the new Administration, not continuing priorities of the previous Administration
1.
The proposed cuts for FY 81 must take into account the funds that have already been obligated by the Carter Administration, since cuts at this point must come from unobligated funds. I am told, for example, that the $211 m proposed cut in the AID budget will have to come heavily from Central and South America, a clear priority region for the new Administration.
2.
Is it not possible to cut IDA VI completely for FY 81, since a renegotiation of the replenishment is not likely to be accomplished before the end of the fiscal year?6
3.
Only modest amounts have been cut from the FY 81 budget for multilateral banks (except IDA) and international organizations and no cuts have been proposed for the Peace Corps? Have we looked at these accounts critically enough?
c.
In the longer-run (FY 83 on), the need to cut foreign aid is less persuasive. Support for foreign aid can be rebuilt by linking this aid more closely to visible US security and commercial interests. Indeed, as new directions are set for American foreign policy in the Indian Ocean and Southwest Asia, the Caribbean, Central America, and other areas, it will be imperative that we have adequate foreign assistance resources to support American objectives.
1.
Is it wise, therefore, to eliminate PL–480 aid unless we increase proportionately ESF funds?
2.
It is also misleading to show the ESF account excluding Egypt and Israel only. ESF funds are currently earmarked for Greece, Turkey, Spain, and other countries as well. Some 85% of ESF-money is locked in. The contingency fund of $100 m. is desperately needed, not only in FY 82 but in the out-years as well.

As Bob Kimmitt points out, you can expect Haig to support the retention of the ESF contingency fund. On economic assistance, State is internally divided between Hormats and, to a lesser extent, Rashish, who believe that Stockman’s proposals go too far too fast in the case of the IDA and multilateral bank reductions, and Buckley, who favors bilateral flexibility (hence PL–480 and ESF) even if it means cutting severely into US support of the banks.

[Page 659]

In my view, the cutback of the banks is unfortunate but necessary. When resources are tight and the security threat is more pressing, bilateral aid must take priority. IDA invests predominantly in India, Bangladesh and Pakistan. The first two are not high on the list of immediate US security interests. The World Bank, by contrast, invests primarily in Brazil, Mexico, Indonesia and South Korea. These are all important countries from the standpoint of US security interests. If anything therefore, we should favor the World Bank and the General Capital Increase (GCI) rather than continue IDA at the expense of GCI. This is the opposite of what Stockman recommends (see pages 7–8 of attached paper).

  1. Source: Reagan Library, Executive Secretariat, NSC Subject File, [Security Assistance] Foreign Aid (January 1981). Confidential. Sent for information. A handwritten note on the memorandum reads: “RVA: Tim Deal is on standby for this meeting. J.”↩
  2. Not attached.↩
  3. January 30.↩
  4. Not attached.↩
  5. See John M. Goshko, “Huge Cutback Proposed in Foreign Aid,” Washington Post, January 29, 1981, p. A1.↩
  6. An unknown hand bracketed this sentence in the left-hand margin.↩