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

20. Report of the President’s Task Force on Foreign Economic Policy¹

Washington, undated.

CHAPTER ONE AID

1. Economic Assistance and U.S. Foreign Policy

Foreign assistance programs have developed in response to a series of crises: post-War European prostration, the Korean War, flareups along the Iron Curtain, the collapse of colonialism, and growing social and political unrest in Latin America. In the underdeveloped world, they have gradually evolved from stop-gap measures designed to deal with the most visible aspects of these crises toward a more comprehensive attack upon the underlying economic and political problems from which crises arise.

This evolution became explicit in 1961 when the Act for International Development established continuing economic growth and the creation of self-reliant societies as the long term objectives of our assistance efforts.² As a result, more than half of the funds appropriated to AID are now provided to finance development loans and grants, in contrast to 1961, when three quarters of comparable appropriations went for military security and political stability. Other free-world donors have also substantially increased their contributions in both bilateral and multilateral assistance to developing countries.

The effective linkage of foreign assistance programs to basic foreign policy objectives has required years of improvisation and experimentation, not all of it successful. Much of this experimentation took place in countries along the Iron Curtain from Korea to the Middle East, where we had initially responded to threats of Communist expansion. We have to our credit notable successes such as Taiwan, Greece, Iran and Israel where rapid economic growth and increasing political stability have been achieved, permitting the phasing out of U.S. economic assistance. On the other hand, our experience in Korea and Turkey has been much less pleasant, despite similarly large aid inputs. Since these countries have not yet been able to achieve rapid growth and increased self-sufficiency, we have had to continue very substantial aid programs because we cannot accept the military and political consequences of economic failure. In a third group of countries an interplay of U.S. and international political considerations, host country intransigence and the absence of any immediate external Communist threat have resulted in curtailment or termination of aid, though the desirability of this course can at least be questioned. Countries in this group include Indonesia, Burma, and Iraq.

From the lessons learned through this diverse experience, we have drawn the fundamental propositions of our current aid philosophy. They are as follows:

1. Despite temporary preoccupation with other objectives, the overriding concern of viable governments in the less developed countries must be the climb from poverty.

2. Sustained progress in increasing per capita incomes, rather than attainment of any particular income level, is the meaningful test of a government’s effectiveness in this regard.

3. The interests of the United States and the other advanced countries of the free world require that these countries apply their attention and resources to this problem, that their governments achieve the degree of success necessary to maintain the confidence of their citizenries and their own ability to keep order, and that progress is made in the context of social and political institutions compatible with our own.

4. The policy instrument best suited to furthering these interests is foreign assistance, both as an indispensable source of growth-stimulating capital and as a lever to encourage recipients to adopt the policies necessary for progress.

Underlying all of these propositions, of course, is the blatant unacceptability of alternative paths of poor-country evolution, characterized by social and political chaos, massive popular dissatisfaction, worsening of living conditions, and quite likely, tendencies toward coercive systems of government on the Communist model.

In mounting programs to implement this philosophy, we have made two key operating assumptions: that the sense of progress necessary to produce the desired recipient attitudes and behavior can be maintained if per capita growth rates average about 2% in the aggregate; and that the ability of recipients to make effective use of aid as revealed by experience to date places a limit on the amount of aid the United States will supply. These principles have been most clearly manifested in our large programs in such countries as India and Pakistan, where our political interests are major and prospects for achieving economic growth are encouraging. In Latin America and Africa aid levels in each country are determined by how important that country’s progress is to the United States, how effectively it uses resources for development, and whether aid is available from non-U.S. sources. Only in a very few countries—Viet Nam, Laos, Jordan—are security considerations so dominant that we still provide economic assistance almost without regard for longer term development prospects.

Since Latin America is politically very important to the U.S. and European resources are available for Africa, we have given high priority to Latin America. In Africa, we have tried to maintain European aid predominance while the U.S. played a supplementary role, though in Tunisia, Nigeria and Liberia and, eventually, East Africa, a major U.S. effort is warranted by our criteria.

American assistance programs have thus become more diversified geographically and more oriented toward long term development. There is a similar trend in the assistance activities of the Western European countries, although many still concentrate their aid in former colonies. As a result, fewer underdeveloped countries are now dependent on a single dominant donor and the larger ones receive assistance from many sources. Thus, an increasing portion of all assistance is now devoted to long term development—perhaps $6 billion out of a Free World total of military and economic assistance of $8–9 billion.

2. Requirements for external capital under the current aid philosophy

Given this trend and the theory which underlies it, what is the probable magnitude of future needs of the underdeveloped countries for external capital? This section outlines the past trends in development performance and external capital inflow and estimates the results to be anticipated from alternative levels in the future. All the estimates are based on experience to date with the recipients’ performance and capacity to use external aid.

a. Past trends in growth and capital inflow

Since 1950 the combined Gross National Product of the underdeveloped countries has grown at about 4.2%—somewhat more rapidly in the export boom following the Korean War and less rapidly since. The gross investment required to sustain this rate of growth is equal to 16% of their gross national product of about $200 billion. The inflow of foreign capital has financed a share of this investment which has risen from less than 20% to nearly 30%. Since about half of growth has been offset by population increases, foreign capital has made possible more than half of the increase achieved in per capita income.

The distribution of this capital flow among countries has changed markedly, and it has been increasingly from public sources. In countries with relatively effective development programs, such as India, Pakistan, and Nigeria, needs for external capital have increased rapidly and the increase has been financed almost entirely from public funds. As shown on Table 1, the flow of public resources has risen at 11.5% per year over the past decade and is still rising at 10% per year. The flow of private investment, on the other hand, has increased at only 4% for the decade and has actually declined over the past five years. Since 1958, therefore, the total net flow of resources to the less developed countries has grown at about 5% per year—not much faster than their own increase in savings.

TABLE 1

Net Flow of Resources from DAC Countries to LDC’s ($ billions)

	1950–55 Average	1956–63 Average	1961–63 Average	1963	5-year growth rate (1958–1963)	10-year growth rate (1952–1962)
Public
U.S. Bilateral	$1.1	$2.2	$3.4	$3.6	10%	12%
Other Bilateral	.7	1.5	2.0	2.1	7%	11%
Total Bilateral	1.8	3.7	5.4	5.7	9%	11.5%
Multilateral	.2	.3	.6	.8	21%	11.5%
Total, public	2.0	4.0	6.0	6.5	10%	11.5%
Private	1.5	2.7	2.3	2.1	-5%	4.3%
Total DAC flow	3.5	6.7	8.3	8.5	5%	9.0%
Total, All Sources (see Table 5)	n.a.	7.0	9.0	9.4	5%	—

The U.S. share of public assistance provided by the Development Assistance Committee countries declined from 62% in 1956 to 55% in 1959. It has now risen again to 63% as a result of expenditures under the Foreign Assistance Act of 1961. The multilateral portion of the DAC total has risen from 8% to 12% and is expected to rise further.

United States economic assistance is currently provided through three main channels: AID bilateral programs (50%), P.L. 480 (37%) and the Export-Import Bank (8%). U.S. contributions to multilateral programs total only 5% of our total assistance. Over the past several years the commitments of the Export-Import Bank (which were 18% of the U.S. assistance in 1960–61) have declined substantially, while the share of P.L. 480 has risen by 10%.

b. Assistance needs and development policies

Past estimates of the future needs of the underdeveloped world for external capital have not provided adequate measures of the desirable flow because they have not taken sufficient account of the leverage effects of alternative assistance levels. In order to weigh more accurately the gains from higher aid levels against their cost, AID has now calculated the capital inflow that would be required in each of the principal recipient countries under various assumptions as to rates of growth, effectiveness in resource mobilization, and possible growth of exports. These calculations (which are shown in detail in an appendix)³ yield the estimates of total capital requirements shown in Table 2.

The need for external capital in any particular country is heavily dependent on (1) growth rates achieved, (2) success in improving development policies, and (3) ability to increase exports to advanced countries. To maintain the growth rate of 4.2% (less than 2% per capita) achieved over the past decade will require annual increases of 5% in external capital, about the rate of increase which has prevailed in the past few years. With the improvement in recipient internal performance that is envisioned in the better development plans, the average rate of growth could be raised to 5.1% (Table 2, line B). The capital inflow to support this effort would have to increase at 9% per year between now and 1970, but this rate of increase should then taper off.

By 1970 the GNP of the less developed countries would be $14 billion higher under the second assumptions than under the first, and investment would be $8 billion higher. Two-thirds of the required increase in investment would be financed by increased domestic savings and the remainder by an additional $2.8 billion of external capital.

Table 2 also gives external capital requirements corresponding to other combinations of growth and self-help performance. The range of capital requirements on the more likely assumptions (A and B) is $9–13 billion in 1970 and $12–18 billion in 1975, which corresponds to an annual rate of increase of between 5% and 10%. However, if all the underdeveloped countries could achieve the growth rates labeled “Best Possible”—rates which have so far been accomplished only in the most successful cases—the aggregate growth rate would rise to 6%. The corresponding range of capital requirements in 1970 would be $11–18 billion depending on the effectiveness of internal policies.

Requirements for external capital would be reduced somewhat for all growth patterns if more optimistic prospects can be assumed for the expansion of exports from these countries. Given present world trade policies and current prospects for growth in the advanced countries, total exports are not likely to grow more rapidly than the 4% rate of the past decade. Raising this rate of growth by a third would result in an increase in the level of LDC exports in 1970 of $3.2 billion. That would reduce the overall requirements for external capital by about $1.5 billion. Thus, it takes $2 of increased exports to save $1 of aid on the average. In countries where balance of payments is not the principal factor limiting growth, of course, it is necessary to raise taxes and savings as well in order to reduce the aid required.

TABLE 2

EFFECT OF LDC PERFORMANCE ON EXTERNAL CAPITAL REQUIREMENTS¹

($ billions)

(Annual rate of growth in requirements from 1962–1970 shown in parentheses)

		1970 Capital Requirements			1975 Capital Requirements
Growth of	Capital Flow in 1962	Historical Performance	Plan Performance	Best Possible Performance	Historical Performance	Plan Performance	Best Possible Performance
(A) Historical (Mean 4.3%)		9.1 (5%)	8.9 (5%)	7.4 (3%)	11.8	11.5	9.2
(B) Plan Targets (Mean 5.1%)	6.0	12.8 (10%)	11.7 (9%)	8.6 (5%)	18.4	17.1	11.7
(C) Best Possible (Mean 5.9%)		17.7 (15%)	14.3 (12%)	10.5 (7%)	25.8	22.1	15.6

3. Debt service and terms

To sustain a future growth rate of about 5%, the net resource transfer to the LDC’s must grow at an average annual rate of about 9% from now until 1970. The financial implications of this annual increase are shown in Table 3. The gross financial requirement over the period 1964–70 comes to $105 billion plus the service on new debt in 1970 of about $3 billion. However, if most of the funds carry short grace periods and commercial interest rates, the burden of new debt could reach $7 billion.

TABLE 3

LDC Gross Financial Requirements, 1964–1970

($ billions)

I. Requirements
Cumulative Resource Requirement (1964–1970)	$80
Cumulative Service of Pre-1964 Debt (1964–1970)	25
Total Financial Requirements	105
Net Resource Requirement (1970)	15
Gross Resource Requirement (1970)	18–20
II. Illustrative Sources of Financing (1970)
Grants	5–6
Official Credits and Private Investment	13–15

Growing short term debt severely limits the ability of the LDC’s to finance the imports required by their growth targets. If a net resource transfer of $15 billion is required by 1970, then the gross external finance required will be at least $18–20 billion, unless an increasing proportion of aid extended between now and 1979 is on softer terms.

In recent years the external debt of the less developed countries has grown at about 15% per year. Their annual repayments have been rising even faster. Easier terms on official credits have been more than offset by the growing volume of suppliers’ credits, which bear much harder terms. Indeed, the easing of the terms on official credits has made it possible for the underdeveloped countries to contract for a larger amount of suppliers’ credits. The annual debt servicing burden for $1 of suppliers’ credit has been about $.25 as against only $.06 for $1 of official credits.

This increase in debt service requirements would make little difference if enough gross external assistance were always forthcoming so that the required net resources could be transferred. But this is not the case. Sharp increases in debt service requirements actually provoke liquidity crises, since gross lending does not readily expand to meet the need. Some countries—Brazil, Argentina, Turkey, Chile—have already had external liquidity crises. Others are likely to encounter them during periods when their export receipts decline sharply, or their imports are unusually large. In such crises, efforts to refinance existing debt are competitive with efforts to obtain funds needed to promote growth.

Therefore, the capital exporting countries must be concerned with the net resource requirements. Aid programs must provide a level of gross lending sufficient to produce the net inflow of external capital implied by the desired growth rate, and on terms which do not intensify the problem. The latter is particularly important because to the extent our long term loans are used mainly to repay shorter loans on higher terms, it becomes increasingly difficult to defend higher gross lending.

The avoidance of liquidity crises requires international agreement to control the extension of hard-term credit. Easing of terms on official credits is only a partial solution if a large part of the borrowers’ debt-servicing ability must be devoted to short term debt. And it is even less effective if the United States tries to practice it unilaterally.

The Task Force offers the following suggestions for easing the debt-service problem:

I. DAC should seek to keep aid recipients from becoming overloaded with external suppliers’ credits. For example, agreement might be reached to group borrowers into three or four classes, according to the severity of their debt-servicing problems. Those with major debt-servicing problems would require screening by a DAC committee before they could be extended additional suppliers’ credits.

2. Suppliers’ credits extended by each DAC donor should be limited to some maximum proportion of the donor’s total financial assistance. Each donor could be obliged to refinance automatically suppliers’ credits extended in excess of this amount.

3. The United States should be prepared to lead other advanced nations in organizing moratoria on debt service.

4. The financial implications of more rapid growth

Free world aid programs are currently designed to support aggregate growth rates of 4–5 %. Substantially higher rates would be advantageous to donors as well as recipients since they are likely to involve lower total assistance costs in the long run, even though costs are higher in the short run.

For example, if India’s GNP grows at 4.3% (its best recent performance) and its development policies continue on present lines, a total inflow of $52 billion in new capital over a period of 23 years will be needed to increase per capita income by 50%. If the growth rate could be raised to 6.5%, the capital inflow required to achieve this income rise would fall to $26 billion over a period of 11 years. The lower growth rate would require only $16 billion during these 11 years, but this short-run economy would be achieved at a very high long-run cost.

Similar calculations for other less developed countries suggest that growth rates of 6–8% produce a given increase in per capita income at minimum total cost in foreign assistance, under typical conditions of self-help. These rates are well above the 5% objectives typical of recent plans.

More rapid growth saves on the total aid required to reach a given increase in per capital income for two reasons:

1. Rapidly rising income levels make possible higher tax and savings rates and more rapid export growth.

2. More rapid growth in GNP means that a smaller proportion of the increase in any time period is used just to keep up with the increase in population.

Table 4 shows the results of applying this analysis to all the less developed countries. As in the Indian example, the total capital inflow required for a 50% increase in per capita GNP is substantially reduced if growth takes place at the highest rate now considered feasible and given present development policies. If increased aid is accompanied by improved development performance, the reduction in total aid requirements will be even greater.

Thus:

1. At present growth rates, more than half of GNP growth is offset by increase in population. Thus substantial reductions in total external capital required to reach a target level of per capita income would result from faster growth of GNP, even without improvements in self help.

2. Raising the performance of the underdeveloped countries to the standard envisioned in their development plans would reduce external capital requirements for a given rate of growth by at least 25%.

3. The most efficient path to any aid objective—either an increase in per capita income or self-sustaining growth—is almost certain to involve substantial increases in total capital inflow in the next ten years.

In analyzing the possibilities for financing the capital inflows shown in this analysis, principal attention will be paid to the central estimates in Table 2: the 9–10% annual increase in external capital needed for growth rates averaging 5.1% with some modest improvement in development policies. While well below the growth rate that would maximize the recipient’s welfare or minimize the long term requirements for external assistance, this set of assumptions represents the greatest improvement in country performance, aid contributions, and other sources of external capital that we can envision given existing programs, policies and institutions.

TABLE 4

EFFECTS OF HIGHER GROWTH RATES ON TOTAL EXTERNAL CAPITAL REQUIRED TO INCREASE PER CAPITA GNP BY 50%¹

($ billions)

			Historical Development Performance		Planned Development Performance
Growth of GNP	Per Capita Growth	Years Required	Total External Capital 2	Average Annual External Capital	Total External Capital 2	Average Annual External Capital
Historical of GNP
India (4.3%)	1.9%	23			$47	$2.04
50 LDCs (4.3%)	1.9%	24	291	12.13	176	7.33
Plan Growth
India (5.3%)	2.9%	15			28	1.87
50 LDCs (5.1%)	2.7	16	213	13.31	157	9.81
Best Possible Growth
India (6.5%)	4.1%	11			22	2.00
50 LDCs (5.9%)	3.5%	13	206	15.85	158	12.15

5. Financing the capital requirements

To derive the possible future level of U. S. aid from global figures for external assistance, we must first consider the outlook for other sources of finance. These are (a) private investment, (b) multilateral assistance, and (c) other free world (DAC) bilateral assistance. The likely trends in each of these sources, as well as the resulting requirements for U. S. bilateral assistance, are shown in Table 5.

The range of net requirements for all countries (rather than the 50 countries in Table 2) has been estimated at $12–17 billion. The possibilities for financing requirements of this magnitude are indicated in Table 5.

a. Private Investment

In 1963 the flow of private investment from developed countries to the underdeveloped world—which includes suppliers’ credits and long term debt as well as direct investment—totaled $2.5 billion. Direct investment in extractive industries accounted for over two-thirds of the total and suppliers’ credits for 20%. Direct investment in manufacturing was only 10%.

A simple projection of current investment levels suggests a net flow of between $3.5 billion and $4.5 billion in 1970. This estimate assumes continuation of existing institutional arrangements and the existing investment climate. This is unlikely. To be sure, specific measures like tax credits and direct subsidies to increase the return on investment, and guaranties to reduce the risk may raise the level of private investment somewhat. So should improvement of the investment climate, a likely adjunct of increased growth rates in these countries. On the other hand, the political complications of foreign investment are distasteful to many countries. These political factors are especially relevant to investment in extractive industries, which is much the largest share of the total. There is little reason to expect any marked improvement in this regard; indeed, circumstances are more likely to worsen and lead to lower figures or even net disinvestment. The $2.5 billion figure shown in Table 5 is therefore optimistic.

b. Multilateral Assistance

It is in our interest to secure a substantial increase in the share of aid provided through international agencies. First, our contribution to these agencies ranges from 40% to 45%, considerably less than our 63% share of bilateral aid. Even if we have to increase our share of any increment in multilateral resources to 45–50%, a substantial reduction in our share of the assistance total would result, so long as other donors maintain their shares of bilateral aid.

TABLE 5

NET CAPITAL INFLOW BY SOURCE

($ billions)

Source	1956–60		Projected for 1970
	Average	1963	Low	High
A. Private1	2.9	2.5	2.5	2.5
B. Multilateral	.3	.8	1.7	3.3
C. Bloc Aid	.1	.4	.5	1.0
D. Other DAC Bilateral Aid2	1.5	2.1	2.7	3.5
E. U.S. Bilateral2	2.2	3.6	4.6	6.7
TOTAL3	7.0	9.4	12.0	17.0
Corresponding 50-country total		(6.3)	(9.0)	(14.0–15.8)

Second, the major outlet for increased multilateral assistance is expansion of the grant and soft lending programs of the IDA and IFC. These agencies provide aid on far more favorable terms than do most DAC donors. In our judgment, these advantages outweigh the balance of payments disadvantages that result from the fact that multilateral aid is difficult to tie.

A conservative estimate of prospective commitments and disbursements of multilateral aid is given in Table 6. On more optimistic assumptions, the total might run as high as $3.3 billion in 1970.

We do not, however, subscribe to the view that the entire U.S. aid effort should be exerted through the IBRD and related institutions, keeping only direct military and security programs in bilateral channels. International institutions have on the whole been followers, not leaders in aid practices and policies. Pressure of competition from bilateral lenders has been indispensable in inducing acceptance of successful innovation.

TABLE 6

MULTILATERAL AID DISBURSEMENTS

($ millions)

	1960	1962	1963	1970
IBRD	224	270	327	525
IDA	—	25	105	300
IFC	13	15	9	25
IDB	—	40	74	200
EDF	4	55	66	200
EIB	—	—	—	50
Total, capital	261	405	581	1300
UN	123	178	195	400
Total Disbursements	384	583	776	1700
Total Commitments	787	1293	1317	1900

c. DAC bilateral aid

The lower target of $12 billion shown in Table 5 could be reached without an increase in our share of DAC bilateral assistance above its current proportion of 60% of this total. However, the areas of most rapidly growing aid need are Latin America and South Asia, the areas of U.S. concentration. Accordingly, the projected figures assume that other DAC countries will broaden the geographic distribution of their aid, and thus maintain in 1970 their present share of the total.

d. Aid to be supplied by the United States

The U.S. bilateral contribution is determined from the range of needs of the LDC’s (from $12 to $17 billion in 1970) and the assumption of a constant proportion between the U.S. and other DAC contributors of net bilateral assistance. On this basis, between $4.6 and $7.0 billion of U.S. bilateral aid will be needed in 1970, depending on the performance of the recipient countries.

The possible distribution of this total among the major U.S. aid sources—P.L. 480, the Export-Import Bank and AID—is discussed in an Appendix. We conclude that a reversal of the decline in the Export-Import share of the total is both feasible and highly desirable. The share of AID in the total may have to rise to offset limited growth possibilities for the effective use of agricultural surpluses, particularly if requirements approach the upper limit of $7 billion. The maximum indicated for AID financing is $4 billion, which would require a 12% annual increase from 1963 to 1970.

6. Improving assistance policies

As the leader of the free world and the largest supplier of foreign assistance, the United States is in a position to influence the whole development effort through the way that it administers its own programs.

While our bilateral aid finances only 10% of the recipients’ development effort, its effect can be magnified by using aid to improve the efficiency of other development resources, domestic and foreign.

Among the most promising innovations in recent years are (1) formulation of overall programs for major aid recipients; (2) selectivity in allocating aid according to country performance; (3) use of aid to influence internal development policies; and (4) development of institutions to coordinate bilateral aid efforts. These procedures should be developed.

1. Country Programming. By relating the nature and volume of its assistance to recipients’ development programs, the United States has strengthened the ability of the recipient countries to formulate and carry out sound development policies. Country programs provide the best basis for assessing self-help efforts and development priorities, determining the most useful forms of assistance, and coordinating the aid efforts of various donors.

2. Selectivity in Allocating Aid. Assistance is most effective when it not only fills resource gaps but also provides the recipient an incentive to make better use of its own resources. This incentive effect can be achieved only when priority is given to countries which make relatively effective use of their own resources. While security and other political considerations will continue to affect aid allocation, AID has made considerable progress in establishing this priority. Further progress requires that development needs and self-help performance become the dominant criteria for U.S. assistance and that other objectives be even more often subordinated to them. Further tying of aid or greater use of assistance for export promotion would weaken this principle.

3. Influencing Development Policy. In the 25 countries where the U. S. provides substantial support for development, we have a real opportunity to influence key development policies. We have begun to exploit this opportunity in a few countries, such as Pakistan, Korea, Chile, and Colombia. In these cases we have made a portion of our aid available in the form of “program assistance” conditioned upon specific decisions on balance of payments policies, fiscal policy, and investment allocation. Such agreements provide a basis for increasing aid when performance standards are met as well as for reducing it when they are not (as in Brazil in 1963). Experience with this practice of “incentive programming” suggests that it should be extended to more of the countries where the U.S. makes a significant aid input.

Program assistance—the provision of imports necessary for development but not identified with individual investment projects—has proved to be the most efficient instrument for supporting development programs and influencing development policy. Sixty per cent of development lending now takes the form of program loans. This proportion should increase if we are successful in accelerating growth in the principal countries.

4. Aid Coordination. Since the bulk of public assistance will continue to be on a bilateral basis, the IBRD, the DAC and the Alliance for Progress (CIAP) should be strengthened in order to provide a more effective multilateral framework for a predominantly bilateral aid effort. They should perform the management function for the development assistance field that the IMF performs in the field of stabilization and balance of payments policies.

7. Is our current philosophy adequate?

The projections for future aid needs and our contribution to them in the preceding sections are based on the current philosophy of aid. That philosophy is a product both of history and of current notions of what is politically and economically feasible.

On its most optimistic assumptions concerning recipient self-help and free world aid, the current program will increase per capita income in the poor countries by some 50% over the next 15 years. This means an increase in average income from $140 to $200 per year. To achieve this, we will have to increase our aid contributions to more than twice the current level by the end of the period. Income per capita in the developed countries will then have reached a level perhaps eight times as high. In the face of this widening disparity, and especially in the context of a changing world political situation, is our present philosophy of aid still appropriate?

The Task Force believes that the answer to this question is no.

The attention of both the more and less developed countries is focused increasingly on the concrete fact of poverty in the underdeveloped countries, and upon the gap between the rich and the poor, rather than on the more abstract question of growth rates. Already this emphasis is beginning to appear in world discussions. The recent United Nations Conference on Trade and Development is only the beginning of organized presentation of these views. The prospect of disarmament adds to this emphasis. Any decrease in the resources spent by the major powers on defense will lead to urgent demands that some of the saving be devoted to narrowing the distance between rich and poor.

The increasing acceptance on both sides of a political theory of community underlies this shift. The proposition that rich and poor peoples alike are fellow members of a single world community implies an obligation of the richer to the poorer. This obligation implies, at least, that the wealthy must be concerned to see that the poor move as rapidly as possible toward the minimum income needed to support decent standards of life.

While this mode of thought cannot yet be said to represent national consensus, we believe that the trend is clear. Even European governments, often reluctant followers in the aid field, have begun to accept the concept of community and its consequences.

If this is so, the two operating assumptions underlying the current program can no longer be relied on. Growth in average per capita income of 2% per year will no longer provide the sense of progress that dampens dissatisfaction. Movement toward self-sustaining growth is not enough. Progress must be faster, and it must be overly directed toward attainment of decent living standards within the foreseeable future. Thus, we can no longer view recipient absorptive capacity as the operative limit on aid. Rather, increasing absorptive capacity must be seen as the heart of the aid problem, and we must be prepared to risk substantially larger amounts of money to accomplish such increases.

The income gap between the rich and poor countries cannot, of course, be closed within the time frame of this report. Experience suggests, however, that a per capita annual income somewhere in the neighborhood of $300–$400 will provide a minimum decent standard of living as well as the prospect of further growth with decreasing external assistance. This figure, of course, is representative, and cannot be applied to every underdeveloped country. The concept itself is most meaningful in South Asia, where at least a part of the apparatus of a modern society exists. It still has little meaning in African countries where the majority of the population is still organized in the institutions of tribal agriculture.

A breakthrough in increasing absorptive capacity will require larger amounts of aid year by year. But this in turn will result in savings in the total of aid expenditures in the long run. The arguments of Section 4 above apply even more forcibly here.

Of course, aid programs have sought from the beginning to raise the absorptive capacity of recipient countries. Technical assistance is directed to precisely this end. In many cases these efforts have had striking success. Nonetheless, there are fundamental limitations on the effectiveness of government-to-government activities in creating widespread institutional change. Penetrating widely and deeply into the institutional structure of the recipient country requires other approaches, particularly in agriculture, education, public health, and local government. The need here is for institutional innovation. Peace Corps was an important step in this direction. We will need many more.

In the industrial sector we already have a basis for building the kinds of institutions needed to do the job. The western business corporation is skilled and experienced in combining capital, technological know-how, organization and management to create new production units and turn them into functioning business enterprises. This experience has been developed in situations ranging from branch plants in the next state to subsidiaries in the Arabian desert. It is the major virtue of traditional private foreign investment that it makes use of just these capacities possible.

For a variety of reasons, we cannot count on increased conventional private investment as a vehicle for the greatly accelerated transmission of skills needed. The economic incentives for large-scale investment are insufficient. The political disincentives are strong; and there is little prospect of their becoming much less so since the poorer countries are likely to continue to view large-scale increases in traditional foreign private investment as something of a threat. Although this reaction may contain elements of prejudice, it also represents a judgment from past experience that is difficult to gainsay.

If capital investment is not the path of progress, we must develop new organizational arrangements more acceptable to the recipients and yet attractive enough to tap the skills and experience which the business community alone possesses in large volume.

A wide range of arrangements is conceivable through which private enterprises undertake management functions without risking their own capital. The spectrum runs from ventures between U. S. and foreign business concerns with both governments acting as guarantors, to ventures financed by the U. S. Government and the host government, to projects in which capital is channeled through public or quasi-public corporations that contract with business on a fee basis. In every case the U. S. business organization that takes responsibility for management would also take responsibility for training its successors. Whatever the arrangement, it should incorporate such limitations on ultimate ownership and external participation as are suited to the circumstances of the particular recipient country and the particular transaction.

Examples of this kind of mechanism can be found in current legislative proposals. The Cuban Claims Bill, in the last session of Congress, originally provided that once the value of a claim had been adjudicated by the Foreign Claims Settlement Commission, the claimant could get a loan up to a given proportion of the adjudicated amount for investment in an approved Alliance for Progress project.

A similar example is the proposal for a 30% tax credit for new investment in the underdeveloped countries, a proposal which, properly safeguarded, is well worth considering. The proposal would be substantially improved by giving the AID Administrator discretion to set standards to determine the eligibility of investments to receive tax credits. These could include, among others, provisions governing the training of local management and high-level technicians, as well as workers, and provisions with respect to local ownership and the like. The appropriate rules might well vary among countries.

What government and business did jointly in the defense buildup—provide the complicated weapons for our arsenal, train the men who operate and maintain them, and perform the research development and engineering tasks for them—is a rich storehouse of experience and analogy. The fixed fee contract with or without incentive provisions, government financing of most or all of the facilities required for specialized activity, private operation of government-owned facilities, the not-for-profit corporation doing government business, the joint venture in which universities and the government unite—all these were born of the needs of defense. If we had limited ourselves to the conventional government-buyer to private business-supplier relationship as we knew it before World War II, we could never have created and equipped our modern military force. We broke new ground because we saw defense as an urgent task for the national welfare. We can expect equal fertility of invention in response to the job of economic development if we view it in the same light.

The scale of the effort must be sufficiently large so that the business community sees this as they saw defense—not as a marginal problem, but as a major challenge—the financial returns must be sufficiently generous to attract their best talents. Innovation is a risky process and failures must be anticipated. The risk of failure must be accepted; failures should not be the excuse for drastic change in the direction of the program. Perhaps most important, we must recognize that it will take a relatively long period for this process of innovation to bear measurable fruit and that we must make an advance commitment to the whole effort if it is to have a decent prospect of success.

If we must be inventive and adaptive, so must recipient countries. One premise of the aid program, written into the Foreign Assistance Act of 1961, is that aid levels to a particular country should reflect the willingness of that country to mobilize its own resources in the development effort. This premise remains valid. The most effective use of aid is achieved when it not only fills an existing resource gap, but encourages the recipient country to make better use of its own resources.

Among the lessons recipients must learn is that efficient enterprises, whatever their ownership, require a managerial organization with responsibility for the business, with power over its budget, and with substantially the degree of independence that is conventionally accorded U.S. business management. The critical contribution of our own business system lies less in its ownership arrangements than in the central role it accords to autonomous organizational units responsible for their own resources and operating in response to the markets in which they buy and sell. The Communist world now shows signs of accepting this proposition; it should not be too difficult to convey it to the new nations.

It is only in industry that we have an institutional basis in our own society on which we can start to build. For the equally important problems which await us in agriculture, education, local government and public health, we ourselves must create new institutions which in turn can stimulate the process of innovation in the developing countries. Agriculture and rural development are especially important in this respect both because much of the population of the underdeveloped world lives close to the margin of starvation and because agriculture is typically the largest source of employment and the area of the greatest potential increase in productivity. It is, however, especially resistant to change. The agricultural extension technology appropriate to a highly literate farm community which is an intimate part of an advanced urban industrial society simply cannot carry over directly to the needs of the illiterate and isolated peasant villages of the underdeveloped world.

Closely bound up with the public health problem is the population problem. The rapid rate of population growth in the underdeveloped countries is a major drag on their efforts to raise incomes. Better sanitation and medicine reduce death rates, especially infant death rates and compound the problem. The importance of programs to dampen population growth is recognized in many underdeveloped countries, but effective programs for this purpose have not yet been developed. Here again institutional innovation is likely to be the key to success.

7. Conclusion

One stark fact emerges from the Task Force’s analysis. If the United States is to protect its material and moral stake in the stability and order of the underdeveloped world, it must be prepared to increase its foreign assistance programs sharply in the years ahead. To refuse to do so, or to abandon the aid effort is to deny ourselves the most effective means within our control for influencing long term developments in these areas in a favorable direction.

To increase aid appropriations on the scale we have suggested is a formidable political task. If American business can be involved in the aid effort along the lines we have recommended, it should provide some of the needed political support. If the task is projected against the background of the growth in our national wealth and budgetary sources, it can be made more manageable.

But in the end, to secure the aid appropriations necessary to pursue our interest in a stable and peaceful world is a challenge to the leadership of the Administration, a challenge which it has no option but to surmount.

1. Source: Johnson Library, National Security File, Subject File, Foreign Aid, Task Force Report on Foreign Economic Policy, 1964, Box 17. Secret. The report was submitted to the President under cover of a November 25 letter from Carl Kaysen, Chairman of the Task Force on Foreign Economic Policy. For this cover letter, part of the Report’s Introduction and Summary, and Chapter Three, “Money,” see vol. VIII, Document 18. For another extract from the Introduction and Summary, and Chapter Two, “Trade,” see Document 161.
2. 75 Stat. 436; the Foreign Assistance Act of 1961, P.L. 87–195, was approved on September 4, 1961.
3. Not printed.
1. Derived from net foreign balances of 50 LDCs accounting for 87% of total GNP. Bases for the estimates are given in the appendix. The total capital flow needed is $2–3 billion greater, as shown in Table.
1. The calculation covers the 50 countries analyzed in Table 2. Assumptions are the same as in Table 2. India’s export growth is assumed to be 2.7%.
2. Discounting future capital inflows at rates of 3–4% would reduce the differences in total capital requirements but still favor the higher growth rates.
2. Discounting future capital inflows at rates of 3–4% would reduce the differences in total capital requirements but still favor the higher growth rates.
1. Includes 1–5 year public or guaranteed credit and non-profit private foundations programs.
2. Assuming present proportions of U.S. bilateral (63%) and other DAC bilateral (37%).
2. Assuming present proportions of U.S. bilateral (63%) and other DAC bilateral (37%).
3. Exceeds the 50-country gap estimate by $3.0 by reason of: (a) Inclusion of all LDCs, (b) Capital outflows, and (c) discrepancies between capital flow and balance of payments estimates.