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

21. Letter From the Administrator of the Agency for International Development (Bell) to the Director of the Bureau of the Budget (Gordon)¹

Washington, December 4, 1964.

Dear Kermit:

Attached are our detailed budget recommendations for FY 1966, which in total call for new obligational authority of $2,674 million for economic assistance and $1,170.2 million for military assistance. The amount proposed for economic assistance is in line with the planning level which we discussed with you last summer, while the amount for military assistance is $170 million higher, due to the extraordinary expenses anticipated in Southeast Asia.

The proposed economic assistance program level of $2,790 million for FY 1966 is consistent with the recommendations of the Task Force on Foreign Economic Policy,² although my projections for future years are on a somewhat more conservative basis than theirs.

As you know, we are considering two major legislative changes: to seek a four year authorization and to seek separate bills for economic and military assistance. Representatives of the Defense Department and I are discussing these proposals with Congressional leaders at the present time, and we will forward firm recommendations on them as soon as possible.

I anticipate expenditures in FY 1966 of $2,150 million for A.I.D., $80 million for the Social Progress Trust Fund and $1,335 million for military assistance.

We are proposing no increase in employment for FY 1966. This matter is being handled separately through detailed discussions between our staffs.

As you know, your staff participated in the extensive series of review sessions upon which this request is based. We found their participation very helpful, and hope it was valuable from your point of view.

Sincerely yours,

Dave

Attachment³

A.I.D. LEGISLATIVE AND FUNDING PROPOSALS FOR FY 1966

A.I.D. is considering proposing that the Administration seek a four year authorization for Foreign Assistance and statutory separation of the economic and military programs. We recommend appropriations for FY 1966 totalling $2,674 million per year for economic and $1,170 million for military assistance. The present appropriation and administrative structure should be continued. The four year authorization should be sufficient to accommodate a gradual increase in development assistance and continuation generally at current levels of security and other assistance; requirements for future years cannot be predicted with confidence, but it seems likely that it will be in our interest to step up our assistance to a number of major aid recipients as they prove able to use it effectively in order to support accelerated growth which will better serve U.S. purposes and hasten the day when concessional U.S. assistance can be phased out.

The first section of this submission discusses the longer term perspective underlying our legislative and funding proposals. The second section explains our major legislative proposals. The third details the funding plan and appropriations for economic assistance recommended for FY 1966. The fourth section summarizes the military assistance proposals.

Part I. Objectives and Strategy

A. Objectives

The main purpose of the Foreign Assistance Program is to assist in building a world society of independent, self-reliant nations secure against external aggression or internal subversion; responsive to the rights and initiative of their people; progressively achieving their economic and social goals; and joining in international economic and political cooperation. The U.S. can be secure and prosperous only in such a world society.

Security is basic. Foreign assistance contributes to it in building the military capacity of less developed nations to protect their borders and to participate actively, if necessary, in the collective defense of the Free World. It also assists them in building the capacity to protect their political and social structures from internal subversion and to maintain law and order. Both military and economic assistance are engaged in supporting these purposes in varying degree.

Development is also basic. In the modern world, governments cannot continue stable and secure unless their people are able to satisfy their positive aspirations for progress. Foreign assistance provides the margin of resources needed for adequate progress without imposition of excessive sacrifices on the people. It is the alternative to repressive rule and economic coercion.

In addition to these long-term purposes, foreign assistance must also be flexibly responsive, at the margin and usually on a modest scale, to short-range policy requirements. This daily role of foreign assistance as the handmaiden of policy is of continuing importance, but the basic factors which govern the size of the program are the strategies developed in pursuit of the primary security and development objectives. This will be the main subject of the remainder of this paper.

B. Military Assistance Strategy and Trends

Pending are a number of studies and developments which may affect significantly the level and character of MAP in the five-year period. An examination of U.S. military objectives is underway. This will include a study of the relationship between missions assigned to U.S. strategic forces and the levels of complementary local forces in the various theaters. It must also include such political factors as the acceptability to the allies concerned of coverage by U.S. firms of certain risks or use of alternative defensive strategies. Recommended changes in force goals for some of the forward defense countries may ensue, although not in time to undermine FY 66 program levels. Any reductions in force goals, in any case, may be offset by military assistance requirements for qualitative improvements of remaining forces. In addition, the range of examination will undoubtedly include alternatives as to U.S. strategy and the deployment of U.S. forces with cost and political implications which must be carefully evaluated before decisions can be made on possible force reductions.

Similar basic thinking is needed and is going forward on the question of contributions to continental and world-wide peace-keeping forces by Latin American or African countries, and the relationship of the military assistance program to the development of such units. It is conceivable that over the course of a number of years a substantial share of the modest amount of military assistance flowing to these continents will be focused on peace-keeping units of a non-national dedication and scope. However, this too is a potential development which will have little effect on the FY 1966 budget. MAP programs in these two continents will, during this period, continue to be focused primarily on counter-insurgency and civic action.

In addition to Japan and most of Western Europe, several countries receiving MAP are now able to support their economies without concessional economic assistance and potentially are increasingly able to self-maintain their military establishments. Greece, Taiwan and Iran are already able to meet some requirements with internally produced materiel and may also soon be able to finance some offshore procurement from U.S. and other sources. However, political factors prevent further shifting of these countries at this time from grant aid to a credit assistance or cash purchase basis. There has been major progress in the last year toward integrated programming of military assistance grants and credits in South Asia. Further progress in this regard is anticipated throughout the budget period with particular regard to the economically stronger recipients in Latin America and elsewhere.

In several countries, savings are assumed in these estimates through local production and financing of defense items previously provided through MAP. Studies are now underway to explore further expansion of local defense production in all of the forward defense countries (except Laos). A.I.D. continues to work with Defense on these programs of planned steps toward self-help in the military field. Such steps will continue to be made gradually to avoid jeopardizing economic development goals for these countries.

The above trends and considerations support a view that appropriation requirements for “regular” or “foreseeable” military assistance will decline moderately over the next few years. However, current experience supports the view that we may expect increasing Communist pressure on the forward defense countries and subversive ventures in Africa and possibly Latin America. Such offensives would require substantial new programs to strengthen local forces or meet combat consumption requirements as in Laos, Vietnam and the Congo.

In sum, any projection of the future level of military assistance at this time is uncertain in the extreme, and the conservative levels indicated in the attached table assume the availability of substantial additional authority to meet unforeseen emergencies.

C. Development Assistance Strategy

The main considerations in programming development assistance are (1) the U.S. interest in the development of a country; (2) the country’s need for outside resources and ability to make good and efficient use of these resources in development; and (3) the availability to the country from other sources of needed outside resources. Based on these considerations, U.S. development assistance is regarded as a major element in an integrated U.S. plan for promoting U.S. objectives in the country concerned.

There have been some shifts over the past year in the way various particular countries look in terms of these criteria. The new government in Brazil is committed to reform and a vigorous development effort and has already announced a number of constructive measures. Peru has shown evidence of greater determination to deal effectively with its economic and social problems. Chile has given a mandate to a democratic administration committed to further reforms and continuation of sound economic programs. Pakistan has moved to liberalize its economic control system and is making good progress in invigoration of its rural economy.

In our proposed FY 1966 funding over two thirds of the development assistance recommended for country programs is intended for eight countries (India, Pakistan, Turkey, Nigeria, Tunisia, Brazil, Chile, and Colombia—see Table 1).⁴ The U.S. interest in development is high for each of these countries. We expect that country performance will be sufficiently good and that our aid and other assistance available to them together with country efforts will produce substantial, measurable, economic and social progress. Over 16% of country development assistance is intended for 10 additional programs—Central America, Argentina, the three East African countries, Ethiopia, Guinea (also receiving SA), Liberia, Morocco and Peru. In these countries too we recognize a U.S. interest in development progress. Hope for substantial achievement, however, is dependent on improved country performance or completion of necessary groundwork as a basis for a comprehensive development effort. Several significant changes are reflected compared to last year’s listing. Brazil has moved up to the first category on the basis of better prospects for improved performance. A definite U.S. interest in development progress in a number of additional countries in Africa has been recognized. We now distinguish much less between these two groups in terms of our program strategy. Better performance is possible and important even for the eight countries which have broadly satisfactory programs. We are seeking ways to use our assistance to promote better performance in all of these countries.

It is now generally recognized that successful development is primarily a result of effective performance by the government and people of the country concerned. Foreign Assistance can help. It can provide an important margin of resources and skills, but it cannot produce development at reasonable cost unless the country is making major efforts itself. This simple fact is the foundation for effective development assistance strategy. The essence of A.I.D.’s strategy is twofold. First, concentrate assistance in countries in which performance is good enough to enable our assistance to produce results. Second, administer assistance in such a way as to encourage and promote better performance by the recipient countries.

There have been some important developments in our approach to administering aid to promote improved country performance. We are less and less inclined to be satisfied with past performance standards in any aid recipient countries. In virtually every case we are intensifying our efforts to identify needed improvement in country economic policies and programs and to secure adoption of these improvements through “incentive programming”. In more and more cases we are seeking specific country undertakings with respect to these improvements, and in many cases we have provided incentives to important improvements by offering to provide more assistance than we otherwise would if needed self-help steps are taken. In other instances both project and program assistance are being deferred pending country adoption of measures which will make development assistance effective. As our experience with these techniques for promoting better performance grows, we expect to increase the effectiveness of our efforts.

Better coordination and cooperation among aid donors becomes more important as efforts expand to use assistance to negotiate improved performance by recipients. Incentive programming implies coordinated action in the major assistance programs of the U.S. Government; the Export-Import Bank, Public Law 480 program, and A.I.D. It also requires improved coordination of other bilateral donors and the international aid agencies. Experience to date with consortia and consultative groups has been spotty in this respect. We intend to work intensively with other governments and agencies to improve our joint efforts. The CIAP review was a major step in this regard, improved cooperation is high on the agenda of the DAC, and we are urging the IBRD to take a more active role in coordination.

D. Trends in Need for Aid

We have made an intensive study of available estimates of future foreign aid needs and we have conducted our own analysis of this question from several points of view during the course of the past six months. Our conclusions are as follows:

1. Any estimate of future assistance needs is conditioned on many unpredictable factors, particularly performance by the countries involved. Even if these determining factors could be predicted with accuracy, our estimates of future assistance needs would be approximate rather than precise. It is possible, however, to indicate alternative probable trends of needs, based on alternative assumptions concerning the determining factors.

2. U.S. objectives for development in many countries can probably be achieved sooner, and at smaller total cost, if the growth rate in these countries can be accelerated. This may be true even if this acceleration requires higher annual aid levels now. If more rapid growth allows better performance sooner, and also keeps farther ahead of population pressures, the higher annual aid levels will be required for fewer years, and the total cost will in many cases be less.

In our studies this summer we looked intensively at a number of the major countries and we also prepared across the board estimates for a group of 50 of the LDC’s accounting for the bulk of development needs. The major country studies involved detailed section-by-section analysis of past performance, country plans, and future prospects on the basis of which the web of situation, continuity and change under alternative policy assumptions was simplified down to a set of key performance indicators on the basis of which alternative patterns of growth and foreign resource requirements could be computed. The model thus developed was then used to project comparable alternatives for a sample of 50 less developed countries for which the necessary historical macro-economic data was available.

Table 2 shows the values for the variables used for four of the major countries and the average variables for the 50 countries. The key findings for India and Peru illustrate the conclusions of our country analyses with respect to development prospects, assistance requirements, importance of savings in relation to exports, and priority needs for better performance. They also illustrate the conditions under which it would be advantageous to us to provide increased aid to accelerate growth.

The major financial constraint on growth in India, as for most LDC’s, is a scarcity of foreign exchange. Imports are needed for growth of production, and export earnings limit India’s ability to purchase those imports. If more foreign aid were made available, India could expand necessary imports and grow more rapidly. Total aid required to achieve a given increase in income level will be minimized if annual aid is raised sufficiently to permit GNP to grow at 6% to 7% per year, and total annual foreign capital flows rising to $1,900 or $2,200 million by 1970. If Indian performance follows 1957–62 patterns, the lower figures are relevant; better performance would raise the desirable growth rate and the desirable rate of capital inflow. The upper figures would be relevant under the best Indian performance we consider likely.

The case of Peru, however, is somewhat different. The scarcity of savings will be more of a problem than the scarcity of foreign exchange for some time. Development policies should focus on increasing savings; increased exports will be far less valuable for Peru than for India. In cases such as Peru the entire financial burden of the increased investment needed for accelerated growth falls on foreign capital unless savings performance can be improved. Only through such improvement will faster growth mean smaller total aid to reach a given income target in such a case.

The results of the 50 country projections are summarized in Figure 1 which shows the range of external capital requirements of the LDC’s in 1970 (and the corresponding rates of increase from 1962–1970 in the flow of capital to the LDC’s) related to the various combinations of growth rate, growth of exports and country performance. The extreme low is $6 billion, roughly the present level, associated with continuation of growth at past levels combined with “best possible” improvements in export growth and internal performance—a very unlikely combination. The extreme high of $12 billion implying a 15% annual increase in net aid expenditures, results from the opposite combination of rapid growth combined with no improvement in performance or export expansion is also unlikely. More probable is the middle range where it appears that a 5–10% annual increase in the flow of aid can support a small to major improvement in LDC growth depending on their performance and success in expanding exports.

These estimates are subject to many qualifications. Nevertheless, we believe the conclusion is probably correct that faster growth will require an increase in the flow of external capital, even if performance improves substantially, and that if it were possible to step up the average growth rate of the LDC’s to something like 5% the total net flow of external capital would probably have to rise somewhere in the neighborhood of 5–10% per year.

As we noted above, it is advantageous probably in terms of total cost and certainly from a political standpoint, to support faster growth where it is practical in countries in which we have growth objectives. If it should prove possible to accelerate LDC development to something in the order of an average 5% growth per year, we think the developed countries of the West should find it in their interest to support such acceleration. They should therefore be prepared to finance a flow of resources rising by some 7 or 8% per year. In practice such a flow may not prove justified, LDC performance may be disappointing and the ability to accelerate development may lag. In view of recent developments in Latin America and the Near East and South Asia however, there seems to be a reasonable possibility that faster progress will be possible and every effort should be made to take advantage of it if it does materialize.

A.I.D. assistance in the total flow of foreign capital to the LDC’s will probably have to increase at least in proportion to the total. We intend to do everything practical to stimulate and expand private investment. It is important both as a source of needed outside capital and even more for its contribution to technical and managerial advance. It can make a critical contribution in some key industries. Nevertheless, it is unlikely to become more than a minor factor in meeting the capital needs of the LDC’s, particularly those not blessed with abundant oil and exportable mineral resources.

International aid-giving organizations, the IBRD complex, the UN Special Fund, etc. can probably be built up to provide an increasing proportion of LDC capital needs. This is advantageous both in increasing the contribution of other donors and also in improving the terms and quality of aid. We support the maximum growth of these institutions, including the possibility of matching additional contributions to them on up to a 50–50 basis. The main limit will be the willingness of other countries to increase their contributions.

Other bilateral donors are most unlikely to increase their relative share of the net flow of resources. In fact, vigorous efforts will be necessary to induce them to maintain their share, particularly when account is taken of the very heavy debt repayments now owed to the European countries by many of the major LDC’s, most of which must be refinanced or postponed by the creditor. Bloc aid will probably rise gradually but will not provide an increasing portion of the needed flow of resources.

Export-Import Bank credit could become an increasing factor if the Export-Import Bank were to follow more liberal policies than those which have resulted in the accumulation of nearly $1 billion of undistributed earnings in the last 15 years. It can be particularly effective as countries approach transition to normal sources of foreign capital and are able to dispense with extremely concessional aid. Realistically, however, the current and prospective flow of debt servicing from the LDC’s to the Export-Import Bank is such that a sharp increase in new loans is needed if it is to make any net contribution at all to the capital needs of the less developed world during the next few years.

It is difficult to forecast the possible role of PL 480-type programs. In recent years the demand for food in LDC’s, supported by rapid population growth and rising incomes, has outrun supply, despite rapid growth in agricultural production. There has been room for and need for substantial agricultural imports from the temperate zone countries, a large and rising share of which was financed by PL 480. This budget request is premised on the assumption that these trends will continue on both the demand and the supply side. A major renewed focus on more rapidly increasing agricultural production is needed but cannot be expected to reduce greatly the need for food aid by 1970. Any shift in the U.S. legislative picture which removed PL 480 financing would, of course, require a large, though not fully compensating, increase in the AID appropriation.

The above assumptions are summarized in Table 3, which being based on DAC reported data, is on a basis of expenditures net of reflows. Taking everything together, it seems quite optimistic to assume that other sources of assistance will continue to provide the present share of total resource flows to the LDC’s, particularly if these resource flows are to rise materially. We estimate that the U.S. aid share would have to rise somewhat if a flow near the high side of the probable need is to be achieved.

In light of the foregoing considerations, we have also looked forward on a program basis at possible requirements for the areas and countries with which the U.S. assistance program is most deeply concerned. Table 4 sets forth the resulting estimates of program obligations. These are not firm estimates of what will be required, but rather are attempts to estimate what might be in the U.S. interest on a conservative basis and also on somewhat optimistic assumptions concerning the ability of the countries concerned to step up their development progress with reasonable efficiency and self-help efforts. Annual appropriation requests will continue to be held to the hard requirements in the light of actual country performance. It may well prove unnecessary to request appropriations for these full amounts as the years pass by, but our multi-year authorization request is framed to permit coverage during the four years of the upper range of requirements should country performance justify appropriations at that level.

1. Source: Washington National Records Center, RG 286, AID Administrator Files: FRC 68 A 2148, Chron Files, December 1–7, 1964. Confidential.
2. See Document 20.
3. Confidential. Only Part I is printed here. Part II, “Legislative Proposals,” Part III, “Proposed Economic Assistance Program for 1966,” and Part IV, “FY 1966 Military Assistance Program,” which includes an unsigned, undated memorandum for the Secretary of Defense, are not printed.
4. None of the tables or figures is printed.