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

52. Memorandum From the President’s Special Assistant (Hamilton) to the President’s Special Assistant (Rostow)¹

Washington, August 31, 1966.

SUBJECT

• Foreign Aid Money for FY 1968

Attached is a good, tightly-reasoned letter which Bill Gaud has sent to Charlie Schultze stating the case for more foreign aid money in the 1968 budget. BILL wants you to see it, but he is anxious not to undercut Schultze. The BOB planning figure to which he is reacting is a very tentative “ball park” estimate developed in the annual budget preview proc-ess. It does not represent any final Bureau position and BILL is not suggesting that it does. If this could be made clear to the President, it might not be a bad idea to put the letter into his night reading.

Gaud’s intent—which I strongly support—is to paint a clear picture of the overall foreign aid money setting in which all special requests for regional increases should be considered. He is worried, and rightly so, that such events as the Latin American Summit will tend to force decisions on pieces of the pie without regard to the whole. This is a particularly serious problem with regard to Latin America where he doesn’t fully control channels to the seventh floor of his building. (He had a near-miss last week when Linc Gordon tried to push through a Rusk-President memorandum recommending a Fund for Economic Integration.² The Secretary bounced it back for further staffing.)

As you see, BILL’s basic point is that he will need at least $300 million more in FY 1968 assuming no increase in the Alliance. (Of course this is gross aid flow; if the net flow is to be maintained, this amount will need to be considerably larger or we will have to manage major debt rollovers.) Privately, Gaud thinks that a $300 million increase is probably as much as we can pull off in Congress. Thus, he has advised Linc to try sources other than the Foreign Assistance Act, primarily the Treasury/Banking and Currency Committee route we use to fund the IDA and the IDB. In Fowler’s present mood, this is not a good bet. But it may be the only bet around.

Whatever the decision on the Latin American problem, however, Gaud’s letter should be required reading for everybody close to the money decision. He is not saying that regional increases should not be considered. He is saying that they should be approved only after careful thought about world-wide requirements and prospects on the Hill.

EH

Attachment³

Washington, August 25, 1966.

Letter From the Administrator of the Agency for International Development (Gaud) to the Director of the Bureau of the Budget (Schultze)

Dear Charlie:

I have your letter of August 13 giving me planning totals of new obligational authority to guide the preparation of our FY 1968 budget estimates.⁴

I would rather not comment on the military assistance figure until the Defense Department and ourselves have completed certain studies that are underway. But I do want to comment now on the planning figure of $2.5 billion for economic aid.

We in AID are not in a position to judge budget priorities between departments and agencies. I am therefore unable to say whether $2.5 billion is an appropriate amount for AID in terms of the overall budget situation. But I can tell you that such a figure would result in radical changes in our economic aid program.

Let us take a look at the various components of AID’s proposed budget in order to see how they would fit into a $2.5 billion total.

First, there are the following relatively small items aggregating $292 million (the figures in each case being those now estimated for FY 1968):

	Millions
Administrative Expenses (State and AID)	$65
American Schools and Hospitals	15
Investment Surveys	2
International Organizations (The sum total of 12 different requests)	210
Total	292

Second, there are the following security and emergency-related activities totaling $811 million:

Supporting Assistance (Vietnam)		$550
Supporting Assistance (other than Vietnam)		161
Korea, Laos and Thailand	($115)
Jordan	(22)
The rest of the world	(24)
Contingency Fund		100
Total		$811

The $500 million figure for Vietnam is taken from your letter. The $161 million figure for other Supporting Assistance requirements was used in our submission of June 13, and is almost certainly too low. And I expect you will agree that the Contingency Fund could not be prudently fixed at less than $100 million.

Third, our present FY 1968 figure for Technical Assistance/Development Grants is $246 million. Roughly 90 per cent of this is for on-going programs, and approximately 70 per cent is for projects designed to carry out the President’s initiatives in the fields of agriculture, education and health.

The above requirements total $1.349 billion. Although it may be that our fall review of these programs may result in some slight reductions, it is unlikely that any such reductions will be significant in amount. The $550 million figure for Vietnam is much the largest single item, and a substantial reduction in that item is unlikely to say the least.

On this premise $1.151 billion of the $2.5 billion will be left for (a) Development Loans, (b) the Alliance for Progress, (c) carrying out the President’s regional development concepts in Southeast Asia, (d) any new initiatives in Africa, and (e) any new initiatives in Latin America such as a fund for economic integration, new multi-national projects or higher growth targets of the sort referred to by the President in his speech commemorating the fifth anniversary of the Alliance for Progress.⁵

To get some idea of whether $1.151 is enough for these purposes, let us first consider our requirements for Development Loans and the Alliance for Progress. In our submission of June 13 we estimated these at $990 million and $660 million respectively. Their combined total of $1.650 billion is clearly far out of reach if we are to come within a ceiling of $1.151 billion. So, instead of looking at the Alliance plus our overall requirements for Development Loan funds, let us look at the Alliance plus the four principal DL countries—India, Pakistan, Turkey and Korea.

In each of these four countries we are engaged in a long-term development effort linked on the one hand to self-help measures taken by the recipient and on the other to substantial assistance supplied by other aid donors. Past, present and planned DL programs for them are as follows:

millions
	FY 1966 (Actual)	FY 1967 (Estimated)	FY 1968 (June Submission)
India	$300	385	485
Pakistan	120	188	195
Turkey	129	120	120
Korea	80	75	65
Total	$629	768	865

The total for FY 1966 was abnormally low because of the Indian-Pakistani war. The FY 1968 figure is higher than usual because of expectations of increased requirements for India. India has already taken certain important reform measures at the urging of the World Bank and the United States and in reliance upon assurances that we and the Bank would provide a fair share of the financing necessary to carry out and capitalize on those reforms. If it were not for this, $750 million would be a fair figure to pick as being adequate for our programs for these four countries without any add-ons. But in view of the Indian situation, it is hard to see how we can estimate FY 1968 requirements for them at less than $850 million.

If we subtract this latter figure from $1.151 billion we are left with $301 million for the Alliance for Progress. But that is not enough. Actual Alliance obligations in FY 1966 were $593 million; estimated new obligational authority needed for FY 1967 is $543 million, and for FY 1968 it is $660 million. These figures average $600 million, which would have to be cut by $300 million (or 50 percent) if only $301 million were available for the Alliance.

To look at the other side of the coin, suppose first priority were given to the $600 million for the Alliance. This would leave $551 million for India, Pakistan, Turkey and Korea—$300 million (or 35 per cent) less than the $850 million requirement.

It is clear, in short, that a $2.5 million ceiling for economic aid will result in a reduction of at least $300 million in the programs of either the Alliance for Progress or the four principal countries in which our Development Loan funds are concentrated. I say at least $300 million because, unless those programs are reduced by more than that amount,

• —we will be unable to make Development Loans to any countries other than India, Pakistan, Turkey and Korea;
• —we will not be able to fulfill the President’s promise to seek special funds for the Asian Development Bank;
• —there will be no funds for new initiatives in Southeast Asia, Africa, Latin America or elsewhere, and
• —there will be no funds with which to take advantage of political opportunities in the Philippines, Indonesia and other countries attempting to make a fresh start or significantly improving their self-help performance.

The inadequacy of a $2.5 billion planning figure may seem surprising in view of the fact that for FY 1967 we are asking the Congress for only $2.469 billion of new obligational authority. However, this seeming anomaly has a simple explanation. Because of the Indian-Pakistani war, we estimated our budget requirements for FY 1967 on the assumption that there would be a carry-over from FY 1966 of $197 million. There is no comparable carry-over from FY 1967 into FY 1968. That, plus the additional $100 million for India discussed above, accounts for the $300 million short-fall.

We will of course review our program intensively between now and November 1. At that time—or as soon thereafter as possible—I will submit a program which will be as lean as we can make it. But I hope you will agree that unless we are to change drastically the course of our foreign policy and the thrust of our aid program, we cannot stay within the planning figure of $2.5 billion.

Sincerely yours,

Bill

1. Source: Johnson Library, National Security File, Foreign Aid [2 of 3], Box 16. No classification marking. A handwritten note from Rostow to Hamilton on the upper right corner of the source text reads: “E.H. The battle must be fought for Bell’s requirements: —a national balance of payments education for all hands; —could EX–IM be used more? —What about IDA? —What about more intensive use of IBRD regular loans? —What about accelerating country-by-country and otherwise private capital flows? Let’s talk. W.”
2. Not found.
3. Limited Official Use.
4. Not found.
5. For text of President Johnson’s March 14 speech, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1966, Book I, pp. 317–319.