31. Letter From the President of the International Bank for Reconstruction and Development (Black) to the Chairman of the Council on Foreign Economic Policy (Randall)1
Dear Clarence : I am writing in answer to your request for my comments on the report dated March 1, 1957 of the Presidential Advisers on the Mutual Security Program. You will understand, I am sure, that the views I express are personal and off-the-record; also that I am not in any position to comment on military aid and defense support programs as such.
If you remember the two papers I sent you on September 5, 1956,2 you will not be surprised to learn that I am, in general, disappointed in the report.
The report contains several proposals and many individual statements with which I am in agreement. For example, I welcome the recognition that foreign aid must be a long-term program, that some economic assistance is needed (p. 18) and should be administered separately from the military aid (p. 13), that expansion of trade and reduction of tariff barriers are desirable (p. 7), that private investment should be encouraged (p. 8) and that dollar loans should be based on judgments of creditworthiness (p. 10). I think the proposals for two-year appropriations (p. 14) and flexibility in expenditure (p. 14) are sound. I appreciate the expression of approval of the work of this Bank and of the potentialities of the International Finance Corporation (p. 9).
On the other hand, I seriously disagree with several positions taken in the report and I am not happy about its general tone and approach in so far as economic aid is concerned. I will confine my comments to matters that seem to me to be of major importance.
Analysis
I was disappointed to find so little analysis of the problem. The report contains little discussion of the needs for and purposes of economic aid and almost no analysis of the various means by which those needs and purposes can be met, of the ways in which the various sectors of the foreign aid program have met or failed to meet those needs and purposes, and the reasons therefor, and of the very wide differences that seem to me to exist between different countries and different areas of the world in all these respects.
[Page 142]Emphasis on Military Aspects of Aid
The conclusions of the report, and such analysis as it contains, all lean heavily, in my opinion far too heavily, in the direction of justifying all aid on strategic considerations. Although some economic aid is conceded to be necessary, it is very definitely treated as the tail of the dog. It is apparently intended that little aid, if any, shall be made available to countries outside of the collective security system except by the Export-Import Bank, World Bank and Monetary Fund (p. 11).
As I think you know, this does not correspond to my thinking. I believe that there are countries in the world which cannot achieve a desirable rate of development solely by means of repayable foreign exchange loans. A number of these, including some of the most important, are outside the collective security system.
Moreover, I feel very strongly that justifying economic aid by security considerations will harm the program. I am convinced that economic aid can be far more effective if it is divorced from politico-military strategy, not only in being administered by a separate agency, as the report suggests, but also, and more importantly, by being administered in the light of different objectives and standards. These should in my opinion be economic and not strategic.
Standards of Administration
The report contains very little about standards of administration of economic aid. This is perhaps inevitable in view of the lack of clarity about objectives. I was disappointed to find nothing in the report about using economic aid to encourage local effort and local savings, nothing about laying down standards of performance upon which further aid can be conditioned, and nothing about subordinating short-term commercial interests to long-term economic aims in the administration of economic aid. I was also disappointed to find no clear discussion of the desirability of concentrating economic aid on specific projects or programs, although the recommendation for selectivity and reduction in number of projects (p. 15) seems to suggest a leaning in this direction.
Loans Repayable in Local Currency Versus “Liberal” Loans Repayable in Dollars
I strongly disagree with the view suggested under the heading “Loan Policy Recommendations” (p. 10), namely that when conventional dollar loans are inappropriate because of creditworthiness considerations, resort should be had to long-term, low-interest-rate dollar loans. The alternative of loans repayable in local currency is condemned on the ground that they would jeopardize the soundness of the loan device. As one of the original opponents of “fuzzy” [Page 143] loans, I am distressed to see my point turned upside down. Long-term, low-interest-rate dollar loans do “jeopardize the soundness of the loan device” by burdening the recipient countries with additional foreign exchange obligations and making the terms of conventional dollar loans appear oppressive. Their use on any large scale would severely limit the effectiveness of conventional lending institutions and set up another serious barrier to the return of private capital to the field of international lending. Loans repayable in local currency, on the other hand, do not create foreign exchange obligations which compete with the claims of conventional lenders; indeed if properly formulated, they accomplish a transfer of resources to the recipient country which serves to build up its economic strength and hence its creditworthiness for conventional loans.
Capacity to Repay
I am glad to see the firm statement (p. 10) that loans should not be granted in circumstances in which there is grave doubt of repayment capacity. But the Advisers apparently believe that a program of fostering economic development can be financed on a repayable dollar loan basis, except in “exceptional cases” (p. 10) which should be “severely limited” (p. 11). In my opinion, as I have said above, there are a number of countries, some of them countries of great importance, which cannot achieve a desirable rate of development solely on the basis of repayable foreign exchange loans and which will also require for that purpose either loans repayable in local currency or grants.
With respect to these countries the report misses an essential point. Economic aid which does not burden the balance of payments (grants and local currency loans) will normally increase the amount of conventional lending that can be done. Economic aid which does burden the balance of payments (dollar loans, whether conventional or “liberal”) may merely replace conventional lending in whole or part. As I told the Advisers, the scope of World Bank lending in country after country depends on American aid being forthcoming in forms which will not burden the balance of payments.
This consideration, moreover, makes me doubt the soundness of the report’s proposal (p. 12) that U.S. surplus agricultural stocks should be sold for cash in dollars, though at reduced prices.
Obscurity
On several critical points, as the above comments indicate, I find the report somewhat obscure. I may therefore have misunderstood the intentions of the Advisers in some respects and have made criticisms for which there is no real basis in their thinking. Of more [Page 144] importance is the fact that this obscurity may confuse the public, which is already sufficiently confused in its thinking about economic aid.
In summary, I do not think this report provides the “new articulation of the purposes of foreign economic aid and its relation to United States interests” to which I looked forward in September. I very much regret being critical of the work of such eminent Americans who have generously responded to a call for public service, but I would be less than frank if I said I thought the report was a satisfactory basis for the formulation of foreign economic aid policy.
Sincerely yours,