28. Memorandum From the Deputy Assistant Secretary of State for Far Eastern Economic Affairs (Jones) to the Special Assistant to the President (Randall)1
SUBJECT
- U.S. Foreign Aid Programs
In accordance with your request, I submit a few of my thoughts on the above subject.
Policy Problems
Flexibility. Whether we like it or not, we are in the midst of economic warfare and the entire aid program should, in my opinion, recognize this. The trade embargo against Red China is one weapon; our aid program is another. Our whole economic operation should be of a piece. This is clearly stated in our U.S. policy objectives which, in regard to the aid programs, may be summarized as follows: to curb the power and prevent the expansion of international Communism and increase the strength and expand the influence of free world countries.
The Communists have launched an economic offensive which in the past six months has involved commitments of well over a billion dollars. An essential principle of our response to this challenge in my opinion should be that we should not outbid but out-perform the Communists. To do this, flexibility is essential. I mean by flexibility that funds should be available to be used, if, as, and when necessary in the U.S. interest and should not be tied to a budget appropriation schedule under which their use must be determined about two years in advance. The situation is too fluid for this fixed operation type of procedure. Neither should our response to special urgent situations be hampered by abstract general concepts which may prevent us from assisting a nation in the solution of its most difficult problems.
Were it not for the President’s direct action, we might well have been handicapped currently in the Hungarian and Polish developments by our inability to react promptly and decisively in a new situation. This flexibility should extend to trade as well as aid. We should be able to spend our money fast at the point of need as it arises.
It has also been the ICA policy not to give development assistance in areas where we have surpluses for export. Rice and tobacco are two commodity illustrations. Textile manufacturing is an [Page 135] industry example. This refusal of a request for assistance in certain areas raises doubts as to our real intentions in giving aid and tends to turn some of these countries to the Communists for solution of their major problems.
Examples:
Ceylon became involved with Red China because she had rubber to sell which the free world couldn’t buy. Rubber is life to Ceylon. The Communists bought it and even offered a premium price. The defeat of the conservative government under Sir John Kotelawala and the accession to power of a neutralist government rapidly reaching additional accommodation with Communist China may be partly traced to this development. Pre-emptive buying of this rubber, which the U.S. could have used in any event, might well have produced a different outcome.
A somewhat similar situation developed in Burma. The U.S. was selling its surplus rice on concessional terms to Asian markets while Burma’s rice surplus was soaring. The Soviets stepped in, bought up Burma’s surplus, and contracted to take 400,000 tons a year for four years.
Popular Impact
From an economic standpoint, insertion of aid at the “top”, that is, the financing of large-scale enterprises such as power plants, et cetera, is undoubtedly the most efficient method, but it often has little or no popular impact or dramatic appeal. America gets no popular credit for slowing down inflation in a country. In this period, we need not only to improve the economies of these countries—we need to make friends of their people. Too often, the general economic situation in a country improves as a result of our aid but it’s a case of “the rich getting richer” with little or no impact on the little man.
Greater consideration needs to be given, in my opinion, to popular impact programs and projects which create a friendly reaction.
Loans versus Grants
Most of the countries of the Far East can repay loans—exceptions are Korea and to a lesser extent Taiwan and Viet-Nam. In addition to being more satisfactory from the U.S. point of view, loans have the following advantages in most countries receiving assistance:
- 1.
- They prefer loans for reasons of self-respect—they feel under less obligation when they are borrowing money they expect to pay back.
- 2.
- They feel that loans have fewer strings attached than grant aid.
- 3.
- Loans provide greater incentive for effective utilization of aid funds—they are spending their own money.
The distinction should not be on the basis of whether the loan is a “soft” loan or a “hard” loan. There should be no factor in the decision as to whether the aid should be extended as a grant or on a loan basis. Long term loans, repayable in local currency for projects which otherwise could not qualify for conventional loans by the Export-Import Bank or the IBRD can in many instances be substituted for grants.
There is an important area of exploration as to the type of loans to be made by ICA versus the IBRD, Export-Import Bank, and the International Finance Corporation.
Basic economic development all over the world has been financed throughout history by invested capital or loans, private or government, whether we are talking about the United States, Europe or Latin America. Countries with the potential resources of Indonesia, Burma, Thailand, should not need grants for revenue-producing enterprises and probably not for basic non-revenue producing projects such as roads and bridges.
Administrative Problems
The thing that impresses me most about our aid program is that we are spending billions of dollars and muffing a great opportunity. We are doing this by getting in our own light. There is no doubt in my mind that these programs saved Europe from Communism after the war and have done the same for many countries in Asia during the past few years. But there is no gainsaying the fact that the major irritants in our relations with many countries in the Far East today have their sources in these same programs.
The twin evils from which these programs suffer are both traceable to administration. These are (1) procedural complexities which Asians do not understand and resent as interference with their own affairs; (2) lags in program implementation, also due largely to complex procedures. Three illustrations.
- 1.
- Approval of detailed project plans by ICA/Washington is a never-ending source of irritation. These governments think they know what they want. They don’t object to concurrence on the spot by an ICA Mission director thoroughly familiar with their problems, but they do object to being told what they should do. They resent reference to Washington with the months and months of delay this entails. This, incidentally, is a major problem for our Missions themselves. Most members of Mission staffs spend more time justifying to Washington what they are doing or planning to do than they spend doing it.
- 2.
- Asians do not understand why the same detailed procedural pre and post audit checks apply to loans as well as grants. In the [Page 137] case of loans, they are spending their own money. Why should they be treated like incompetents—why should not ICA loans be handled as bank loans are, they ask.
- 3.
- The average time it took to get delivery of supplies and equipment to our Mission in Indonesia when I arrived there as Director in July 1954 was more than 20 months from date of order. This usually meant more than two years from the time the project was first discussed with the Indonesian Government. In some cases neither the American who worked up the project nor the Indonesian with whom it was developed were around to carry it out by the time the necessary equipment arrived.
Conclusion:
The foreign aid program is an essential part of America’s foreign policy. Its effectiveness can be greatly increased. To accomplish this, however, flexibility of decision and operation not now possible under requirements of law must be provided. The program needs to be regarded as a major cold war weapon. It should be prepared for utilization under such circumstances and conditions as enable maximum exploitation of its capabilities.
- Source: Eisenhower Library, CFEP Chairman Records. Confidential.↩