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

105. Memorandum From the Administrator of the Agency for International Development (Bell) to the Executive Staff of the Agency for International Development¹

Washington, March 1, 1965.

SUBJECT

• Visit to Paris, Bonn and London, February 21–27, 1965

Summary:

Several aspects of this trip impressed me and seem to me worthy of our joint attention. The major donor countries—France, Germany and Britain—are quite plainly committed to development aid over a period of years. In each the atmosphere was one of increasing, not decreasing, commitment. Each looks forward in varying degrees to future increases in amounts of aid. The U.K. and to a lesser extent Germany anticipate further liberalization of terms. There is agreement particularly in France and Germany on the need to emphasize better self-help performance.

Both Germany and the U.K. desire to move ahead with much closer bilateral coordination with us. In addition, France, Germany, and the U.K. agree on the desirability of strengthening multilateral coordination through support for 5 or 6 new IBRD consultative groups, and through more effective informal Big Four leadership in the DAC. Our proposals for improving DAC performance in (1) assembling and assessing data, (2) developing aid doctrine, and (3) monitoring its application to specific LDC’s were well received. There was support for a DAC ministerial meeting this July to agree on certain measures to help anticipate LDC debt crises, to discuss experience in debt consolidation and rescheduling, and to consider how to promote better self-help performance.

In sum, I had the impression that we have a number of opportunities to achieve closer partnership with the other major donors, who as a result of change of government and operating experience now increasingly share our views on the desirable aims, means, and policies of aid programs.

Aid Levels

Officials of all three governments expect increases in aid over the next several years. In France, Andre DeLattre, Director of External Finance, Finance Ministry, was projecting a small increase up to $1.4 billion in public and private resource flows to LDC’s (a return to the 1961 level) as part of the balance of payments plan for 1966–1970.² He foresaw a sizeable shift in aid toward non-franc zone countries. Minister of Cooperation Triboulet forecast a maintenance of present aid levels for French-speaking tropical Africa, with a continuing shift from budget support toward development aid.³

German officials, embarrassed by the low 1965 capital aid budget of DM 600 million, were generally confident that the Chancellor would increase aid levels after the fall elections. The Budget Director of the Finance Ministry suggested the possibility of at least DM 1,000 million next year (although he was unclear whether that amount included technical assistance—DM 204 million in 1965). Other FRG officials said the recent problems with aid to the UAR and Tanzania had resulted in some Cabinet members (including the Chancellor) placing an increased value on aid to LDC’s, and thought the aid budget next year might be doubled. FRG officials said that disbursements would rise in both 1965 and 1966, and after a dip reflecting the 1965 budget, continue upward thereafter. They hoped future aid authority would bring public and private resource flows to about the UNCTAD target of 1 percent of national income.

Mrs. Castle, Minister of Overseas Development in Britain, foresaw a small rise in aid within a new U.K. 5-year plan, with the ultimate aim to reach 1 percent of GNP excluding private capital. Apart from current balance of payments pressures and normal budgetary competition, the U.K. Treasury saw no obstacle in future increases in aid. ODM will discuss future aid levels in a White Paper to be published in June.

Concern was widespread that the U.S. was cutting back its aid effort. Officials expressed their relief when I explained the President’s A.I.D. legislative strategy and the fact that total U.S. assistance is not declining.

The Role of DAC

I found general acceptance, enthusiastic in Bonn, for the U.S. proposal for the longer term role of DAC (Attachment). The three main DAC tasks we proposed are these: (1) assemble more complete and accurate data on matters of importance to development and assess collectively the policy significance of these data, (2) develop a realistic body of principles and doctrine to guide aid efforts, (3) facilitate the application of such principles and doctrine in the conduct of aid programs for individual developing countries. German officials were particularly interested in U.S. experience in negotiating bilateral aid agreements providing for specific quantitative standards for self-help performance, and agreed this was an important area for DAC to work in. They had throught such self-help promotion possible only under multilateral sponsorship. All three governments strongly supported country meetings in DAC (supplementing IBRD consultative groups), which would examine LDC problems and aid requirements and attempt to work out common donor views on appropriate self-help performance measures and donor aid responses.

The French, Germans, and British as well as Chairman Thorp welcomed the idea of increased Big Four cooperation and leadership in DAC on an informal basis. It was agreed that this leadership should be flexible, and other countries could be included as appropriate on particular matters.

IBRD Consultative Groups

Before my arrival, World Bank officials had discussed with each government the Bank’s proposal to establish 5 or 6 new consultative groups over the next 18 months. I expressed U.S. support for such groups, noting our few differences in country priorities, and found support in principle in each capital. Consideration of particular countries was just getting underway. All three governments wanted Big Four consultation on countries before final agreement with the Bank. Germany strongly concurred that the Bank should be urged to improve its efforts at encouraging self-help performance. The British were anxious that the Bank present such groups in a way that would avoid giving LDC’s the impression they were being disciplined as “naughty boys.” The British also urged close IBRD and donor country consultation with the UN Special Fund and the EPTA regarding technical assistance to consultative group countries.

DAC Targets for the July High Level Meeting

The Germans were in full accord with all of the following proposals. The British and French were less explicit, but supported them too. (1) The DAC Working Party on Aid Requirements should prepare for discussion at the High Level Meeting a paper analyzing how the IBRD and A.I.D. have in practice related aid to self-help performance in individual countries and a proposed resolution on relating aid to self-help performance. (2) The Working Party on Financial Aspects of Development should prepare an analysis of experience to date with debt consolidation and rescheduling practices and how they might better be related to development aid programs and performance standards, (3) The DAC should reach agreement on an integrated DAC-IBRD reporting system on credits going to LDC’s. The OECD Secretariat and the Bank staff are well advanced on the specific details, (4) DAC should establish an “early warning system” to help anticipate LDC debt crises well before rescheduling becomes necessary.

German officials also agreed on the importance of more liberal aid terms although they were disinclined to establish quantitative DAC targets. They thought Germany could make wider use of official loans at 25 years, 3 percent, and 7 years’ grace after the election when the development lending budget would be increased. For this year supplementary aid funds would have to be raised on the capital market and lent to LDC’s at hard terms to maintain FRG aid levels. During the visit, however, the Cabinet approved the first interest rate subsidy on such a hard credit for Morocco, offering the prospect of greater flexibility this year.

In the U.K., Minister Castle was greatly concerned about future political problems that “aid” on commercial terms in generating. She placed high priority on liberalizing terms, advocated a spectrum from IDA terms on down, and promised a U.K. liberalization to be announced in the spring, if possible in time for the U.S. Senate aid hearings. She planned ODM consultations with Germany on this question with the implied hope of inducing changes there.

FRG Economic Cooperation Minister Scheel and I felt that the DAC High Level Meeting in July should be a Ministerial meeting and agreed to attend. U.K. Minister Castle said she would also try to attend.

Bilateral Cooperation

Full agreement was reached in Bonn and London on closer bilateral aid cooperation. In each case it was seen in part as a means for improving multilateral coordination in DAC and elsewhere. The Germans in particular, who have regular bilateral consultation with the French, stressed the importance of not undermining DAC.

Scheel agreed on a second US–FRG ministerial meeting in Washington next fall after the German elections and regularly thereafter every 9–12 months, alternating capitals. Increased senior staff visits to Bonn and Washington on country and functional problems, continued close Embassy relations in Bonn, exchange of information including classified data, and better field coordination were agreed on. Embassy Bonn and the FRG will jointly prepare a proposed schedule on follow-up staff meetings and a draft instruction to the field on coordination.

The understanding with the U.K. on bilateral cooperation was less explicit, but implied the same degree of cooperation, visits, information exchange, and field coordination.

Other General and Country Problems

Following are a number of problems that were discussed, some of them in connection with bilateral cooperation or other topics above:

Turkey. Keiser of the FRG Economics Ministry requested a U.S. concession to agree to rolling over $2 million of Turkish debt in order to provide Turkey with cash on a comparable basis to U.K., FRG, and French action. He hoped for the U. S. decision in time for the March 3–4 meeting of the Consortium.

Afghanistan. Germany regards Afghanistan as an urgent matter for US–FRG discussion. Credit repayments in kind to Russia are now 60 percent of Afghan export earnings. GOA has required FRG B/P aid which FRG cannot provide. Germany regards the Afghan difficulty as temporary in view of prospective oil and gas earnings and considers the Government’s current performance responsible. Germany has told Russia it must participate in any debt relief provided Afghanistan. Germany agreed with the GOA to discuss the situation with the U.S. and in DAC.

Chile. FRG officials urged that Chile, together with possible other Latin American countries, be the subject for the first follow-up staff level bilateral US–FRG meeting. They said Chile, along with India, Pakistan, and Turkey, was one of Germany’s main countries of concentration. In 1965 DM 40 million in lending authority is planned for Chile. The Germans were particularly anxious to discuss our experience and join with us in detailed self-help performance negotiations.

India, Pakistan, Keban Dam. The Germans desire to hold consultations with the U. S. prior to the IBRD consortia meetings and the Bank meeting on the Keban Dam. They agree on the need to urge the Bank to press more effectively for Indian self-help performance.

UAR. The FRG asked for discussions in normal channels before the U.S. makes any decision on resuming deliveries of PL 480 commodities to the UAR.

Korea. German officials favored a consultative group for Korea following a Japan-Korea settlement if Japan joined the group.

High Commission Territories. The U.K. expressed hope that the U.S. would consider joining Britain in aiding these territories. Minister Castle felt that as in British Guinea economic improvements can help settle political problems. I agreed to examine the question.

East Africa. Minister Castle agreed on shifting the East Africa consultative group from DAC to IBRD auspices. The OECD Secretariat said that a June DAC meeting was necessary to keep faith with East Africa and agreed that meeting could provide a transition to IBRD sponsorship.

Malawi. The U.K. is sending an economic mission to Malawi in June. Sir Andrew Cohen favored bilateral talks on Malawi over a DAC discussion at this time.

U.S. Pledge to the UN Special Fund and EPTA. The British in noting their increase of 17–1/2 percent in this year’s pledge to the two UN programs said that a U.S. pledge is urgently needed.

Merger of UNSF and EPTA; Africa Development Bank. The FRG would like to discuss these questions bilaterally at a later date.

Population and Family Planning. Minister Castle places a high priority on this topic and would like to arrange discussions and exchange of information as soon as possible.

Public Affairs. I agreed with FRG officials on the desirability of a Washington meeting of U.S. and FRG public affairs experts on means for increasing public support for aid.

Aid Tying. German Economics Minister Schmucker reported growing pressure to increase the extent of aid tying. (Schmucker described himself as the “last bastion” fighting for untied aid in the FRG, saying even the Economic Cooperation Ministry favored tying. I encouraged him to fight on and, in view of the strong German balance of payments position, to provide leadership on this issue.

Two Topics Needing Further Study. Discussion in Bonn revealed agreement on the inadequacy of existing analysis and understanding of: (a) the use and control of local currency windfalls that accrue to host governments as a result of loans extended under the two-step procedure. I agreed to inquire about the Bank’s thinking on this matter. (b) The relationship of export credits to LDC indebtedness and the need for a framework of analysis for this problem.

Attachment⁴

U.S. PROPOSAL WITH RESPECT TO THE FUTURE WORK OF THE DAC

I. The Over-all Role of the DAC

The United States and Germany, as substantial contributors to international organizations in the field of development assistance, and as donors with the widest geographical distribution of bilateral assistance in the world, have a common interest in attempting to make economic assistance as effective as possible—in seeing to it that the financial and institutional resources available are employed to yield maximum results in terms of economic development.

Partly as a result of the UNCTAD conference at Geneva last summer, the World Bank and other international institutions have begun to reexamine their program. While we can reasonably look forward to an extension of the role of international institutions in economic development, the great bulk of assistance provided will no doubt continue to be on a bilateral basis. Thus, substantial improvements in over-all effectiveness of aid will require improvements in the way bilateral assistance is administered and applied.

In the light of these needs, we consider that DAC should address itself to three principal tasks:

A. Assemble more complete and accurate data on matters of importance to development—e.g., debt burdens, transfers of resources between the developed and the underdeveloped world, and to assess collectively the policy significance of this information.

B. Work toward developing a realistic body of principles and doctrine which will support and make more effective the aid efforts of the developed countries.

C. Find means to facilitate the application of such principles and doctrine in the conduct of aid programs to individual developing countries.

Under each of these headings there seem to us to be certain actions which the United States and Germany might usefully promote in the DAC over the next few months. Agreement on such joint actions now, followed by continuing efforts in Paris, should improve the prospects for significant achievement in the DAC prior to the High Level Meeting in July. In making these proposals, the United States anticipates, of course, that the DAC will continue or initiate other useful activities, such as the Annual Aid Review, work on private investment incentives and discussion of agricultural problems.

II. Proposed Actions

A. The Assembling and Assessment of Data

The United States finds there is a deficiency of data on the external indebtedness of the developing countries.

To this end, we find encouraging the discussions of the OECD Secretariat and the staff of the IBRD to prepare a joint proposal for improving and dovetailing DAC and IBRD collection of information on public, publicly-guaranteed, and, as far as possible, unguaranteed private credits going to LDC’s. Data on unguaranteed private credits would normally be collected by the IBRD from the LDC’s. Given the advanced state of the staff work, it should be possible to reach final agreement on this program in time for the July High Level Meeting of DAC. We would hope the FRG would support this aim.

Such an improved system would materially increase our collective capacity to evaluate the debt situation of LDC’s. Chairman Everts has proposed in the DAC Working Party on Financial Aspects of Development Assistance that consideration be given to establishing an “early warning system” to anticipate impending debt crises in LDC’s. We support this proposal and would hope it could be discussed in the Working Party in the coming months with a view to agreement in some form at the July High Level Meeting.

B. Principles and Problems of Effective Aid-giving

1. The Principle of Self-help

On the basis of its own experience, the United States is convinced that the sine qua non of a successful program of economic assistance is its marriage with an effective self-help effort on the part of the recipient country. In this also lies the best hope of bringing countries to the point where they are no longer dependent on external assistance.

The United States has found that it has been possible in most countries where the effort has been made to obtain agreement on self-help performance objectives on a project basis, and considers that this is a useful accomplishment. However, for full effect, such efforts need to be extended to a wide range of a country’s policies and actions in mobilizing and applying its own resources; such things, for example, as tax, budgetary and fiscal policy and administration, the establishment and maintenance of effective financial institutions, investment policy, export promotion, etc.

For one donor to exercise important influence on a range of questions of this nature is of course difficult, but the United States considers that it has had a measure of success in a few LDC’s where American assistance played a major role. We would cite our experience, for example, in Pakistan, Korea and more recently, Brazil and Chile. In all of these countries, arrangements have been agreed upon, to relate the availability of aid to the effective performance of certain clearly defined undertakings of the recipient country. Aid has, in short, been purposefully used to stimulate the adoption and execution of necessary policies of self-help.

There are a number of countries where total external assistance is considerable, where no one donor plays a major role, and where close and effective cooperation among several donors is required to encourage the adoption and implementation of self-help measures. A desirable first-step would be to achieve common agreement among members of DAC on self-help and performance standards and feasibility of using aid to encourage the meeting of such standards.

The U.S. proposes that Germany join with it in proposing to the Working Party of Assistance Requirements and Performance the drafting of a report, which would incorporate U.S. and German views on the decisive importance of self-help efforts to economic growth. Such a report might discuss, and without implying that there are general formulae invariably applicable in all cases, some of the more important factors which enter into an effective self-help effort, and might cite some of the evidence showing how economic development has been accelerated by good performance of the developing country.

It is the United States’ view that if it proves possible to secure general acceptance of a report of this nature in the Working Party, it should be submitted to the High Level Meeting. We would not wish at this stage to prejudge possible actions of the High Level Meeting; however, we do suggest consideration of the possibility the Meeting might endorse the report in general terms, and might resolve that member Governments take account of effective resource utilization and planning by the LDC’s in determining the budgetary provision they make for aid, and their allocation of available funds. For maximum effect, it might prove desirable to publish both the report and the resolution.

2. Financial Policies of Donors

a. Debt Consolidation and Rescheduling Practices

Experience of the past several years has shown important connections between debt problems and development aid programs. Most recently we have joined with other DAC members in debt consolidation and rescheduling programs for Brazil, Chile, and Turkey. We do not have a carefully worked out set of proposals linking debt relief and development efforts, but we believe the donor countries need to consider this question carefully as they have already begun to do in the DAC Working Party on the Financial Aspects of Development Assistance.

We welcome the leadership Mr. Everts has shown thus far in the Working Party. We support his general proposal on anticipating debt crises, as mentioned above. We also believe that, when creditor countries agree on rescheduling of debt obligations, it might be appropriate to ask the LDC to take measures that will help avoid future debt crises. For example, in the case of the Chile rescheduling, the Chilean Government has agreed to place limits on the volume of new short-term credit the country will accept and to report periodically to the IMF on the compliance.

It may also be possible that rescheduling may provide enough leverage to enable the creditors to seek agreement by the LDC on certain desirable development policies. For example, it might prove possible on the occasion of consolidation and rescheduling to persuade a government, where it is appropriate, to adopt a more realistic exchange rate policy. Such action would be in the interest of DAC members both as creditors and as sponsors of development.

We would propose that the DAC Working Party on Financial Aspects of Development Aid explore this subject over the coming months. While we are not certain that time permits the preparation of definite recommendations for action for the July High Level Meeting, we feel that as a minimum a useful report might be prepared and presented which would summarize recent experience and analyze the extent to which the results have contributed to economic development as well as to financial solvency.

b. Terms of Aid

The Working Party Chairman has also proposed that DAC members agree on specific targets for aid terms, both globally and in consortia and consultative groups, and that they agree on a time schedule for arriving at the targets. We support the Chairman’s view that this proposal be considered for DAC agreement at the July High Level Meeting.

It seems to us that establishment of desirable targets for aid terms would give content to the Terms of Aid Resolution the DAC adopted two years ago. From the American point of view, agreed targets would also help persuade Congress that closer comparability of donor terms is in prospect and we believe such a formulation might be of assistance with your own Bundestag. In the last two years, the United States Congress has twice substantially hardened the most liberal interest rate AID could offer, largely because of the difference in terms among DAC countries.

In consortia and consultative groups we would suggest making aid terms a regular item on the agenda of every group. Minimum or target terms or a range of desirable or acceptable terms could be worked out in each case in consultation with the IBRD and the recipient country.

As to a global terms target, we believe there is still a strong case for over-all liberalization of terms in light of the 15 percent annual growth of debt service burdens of LDC’s and their long-term need for net inflows of capital. Accordingly, we would suggest a terms target that would provide for an increase in the proportion of DAC aid provided as grants or loans on very liberal terms.

The DAC Chairman’s Report last year included a table (page 46) showing the wide variation among DAC members in the proportion of net official disbursements in 1963 provided as bilateral grants, multilateral grant contributions, and bilateral loans at 3 percent interest or less. If a qualification for loan maturities and grace periods were added, say 25 years’ maturity and seven years’ grace, the proportion would have been significantly smaller.

Without suggesting at this point a specific target percentage for aid on liberal terms, we would hope that the DAC could agree on a sufficiently high percentage to be of real benefit to the LDC’s and to help avoid a hardening of U.S. terms. Donor countries currently providing a comparatively low percentage of soft aid could establish a gradual, but reasonable schedule of softening. We would hope that members might use the Annual Aid Review as an additional forum for discussing their possibilities and intentions for meeting the targets.

C. The Application of Principles and Doctrine

The DAC has an interest in the application to individual LDC’s of the principles and doctrine it develops. This can of course be done in a number of ways. General principles agreed to should help shape the bilateral programs of member Governments. These principles should also influence the operations of the consultative groups (not consortia) sponsored by the World Bank—those already existing and the five or six new ones the Bank contemplates establishing over the next eighteen months. The work on principles performed in the DAC could aid materially in providing to DAC member governments, which are also members of the consultative groups, a common standard judgment and agreed objectives.

After account is taken of the contemplated increase in the number of Bank Consultative Groups, and of the work of the CIAP in Latin America, there will remain a number of fairly important recipient countries for which no form of review or coordinating machinery exists. The United States believes that it may prove desirable for the DAC itself to review the development effort of certain of these countries in occasional meetings.

The primary objective in these country reviews, as we conceive them, would not be to estimate and fill a resources gap, but to develop a common appreciation of the situation in the LDC, and measures appropriate to deal with it. The review might normally include an assessment of the development efforts of the LDC, both present and required, the general economic policies which the LDC should be encouraged to follow, an appraisal of institutional assets and limitations, consideration of priority requirements for technical assistance, etc. An effort should be made to enlist the cooperation of the IBRD in preparing for these meetings, as well as the participation of staff experts in the meeting itself. Sometimes, one donor might take the initiative in submitting the basic paper, as the United States proposes to do in the case of Liberia, and the United Kingdom for Sierra Leone.

If such a meeting is properly prepared, and attended by country experts from respective capitals, it should be possible to secure agreement on most of these basic points in the course of a one-day session. The Secretariat might be commissioned to produce a paper setting forth the conclusions of the meeting, and this paper, circulated to capitals and field missions, would facilitate the application of coordinated policy.

1. Source: Washington National Records Center, RG 286, DAC Material: FRC 70 A 5922, Trip—Administrator David Bell, Paris, Bonn, London, February 21–27, 1965. Confidential. Drafted by Richard Palmer (AID/PC). Both the memorandum and its attachment are attached to Document 106. Two other attachments, an undated paper prepared in EUR/GER, “U.S. Proposal for Closer Bilateral Aid Relationships with the Federal Republic,” and a February 25 U.S.-German joint press communique issued at Bonn, are not printed. Regarding Bell’s trip, see Document 104.
2. A memorandum of Bell’s conversation with de Lattre, February 23, is in the Washington National Records Center, RG 286, DAC Material: FRC 70 A 5922, Trip—Administrator David Bell, Paris, Bonn, London, February 21–27, 1965.
3. This February 23 conversation was summarized in A–1938 from Paris, March 3. (Department of State, Central Files, POL 3 CCAM)
4. Limited Official Use. No drafting information appears on the source text.