102. Draft Memorandum From Secretary of the Treasury Shultz to President Nixon 1

SUBJECT

  • Multilateral Economic Development Assistance

We urgently need to assess where we stand with multilateral development aid, and to decide anew where we are going with it. In 1970, after the Pearson Commission’s work and Rudolph Peterson’s review of U.S. aid policy, we announced a shift to greater emphasis on multilateral development assistance, and the overhaul of our bilateral aid structure, with the express idea of phasing the latter down over time.2

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Beginning at about the time of that announcement, we have been experiencing increasing congressional delays in funding the international lending institutions at the levels we thought appropriate and committed ourselves to internationally. On the bilateral side, Congress has rejected the reorganization proposals and continued to reduce funding levels.3 We have made some noteworthy progress on multilateral programs already before the Congress, e.g., replenishment of IDA, but decisions cannot be postponed much longer on further replenishment of some existing multilateral programs and on some new ones.

There are a number of contributing factors to our recent problems with Congress over funding the multilateral institutions. The focus of these problems is in the House Appropriations Committee; our author-izing legislation has enjoyed substantial margins on the floor of both Houses, and the Senate Appropriations Committee is currently providing all we have asked for. Among the operative factors are:

(1)
The feeling that Congress can exercise less scrutiny and control over multilateral than bilateral programs, and that the Appropriations Committees are being asked to rubber-stamp programs already negotiated internationally.
(2)
The jurisdictional impact in the House of the shift from bilateral to multilateral aid, as between the Foreign Affairs and Banking and Currency Committees.
(3)
The general international economic situation which makes it difficult to argue for increased amounts of assistance in any form, as well as our over-all budgetary stringency.
(4)
Our own tendency to place a higher priority on obtaining security assistance funding when we have had to make such trade-off decisions on the Hill.
(5)
A number of special cases where loans to countries which had expropriated United States interests or were taking other actions which we felt were contrary to U.S. interests still went forward in international institutions, since we do not hold a veto except over the soft loan window of the Inter-American Development Bank.

Notwithstanding the Congressional delays we have experienced, I believe the reasons which gave rise to our decision to provide an increased emphasis on multilateral aid, as opposed to bilateral are to a great extent still true.

  • —Multilateral cooperation for development is an integral part of a broader cooperative world system. The multilateral institutions channel European efforts and resources that might otherwise be directed toward a Europe-oriented regionalism vis-a-vis the Third World. These institutions can be part of a fabric of stability that is important as international [Page 246]economic matters move to the foreground and security matters recede.
  • —The international institutions have already shown a capacity to work constructively with diverse economic systems and have considerable potential in a period of improving East-West relations.
  • —The overriding concern of Third World nations is with their own development. For these nations, the international lending agencies, with their established expertise in the problems of development, are a preferred instrument which they value, identify with and respond to more willingly on matters of policy. One element in this preference may be the fact that the multilateral agencies operate without large overseas staffs, whereas our bilateral programs entail a major U.S. presence in recipient countries.
  • —The international institutions are our most important vehicle for financial burden-sharing in the aid field. We expect, for example, a substantial reduction—six percentage points or more—in our share of future IDA replenishments,4 and we are well advanced in the process of bringing others in to share the costs of the Inter-American Bank, which we have borne almost alone.

But there are some real problems and some limitations involved in our primary reliance on the multilateral institutions that must not be overlooked in any candid appraisal. Particularly with the World Bank, there may be a danger of sheer bigness and a resulting tendency to move too far beyond the control of its major shareholder governments. Moreover, we cannot look to the international bodies to be responsive to our foreign policy objectives in particular countries of key interest to us. For such situations, bilateral aid, particularly security assistance, is a much more flexible instrument which we should continue to use in the future. We also are unable, under the international competitive bidding procedures of the multilateral agencies, to tie procurement as we can with our bilateral aid. As our international competitiveness improves, however, we should be able to regain some of the ground lost in recent years.

At present, we have pending before the Congress fully authorized appropriations requests for IDA, the Inter-American Bank (hard and soft windows) and the Asian Bank’s soft window. The pattern of appropriations over recent years, as well as projections for the period ahead and a comparison with bilateral levels, are shown in the attached table.5

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Different institutions serve our interests in different ways, and this has to be taken into account in planning for the future. IDA, for example, lends 40 percent of its funds to India, another 20 percent to Indonesia, Pakistan and Bangladesh, and very little to Latin America. The World Bank, on the other hand is a major lender to Latin America. At the regional level, the Asian Development Bank is still small, but concentrates on providing funds to countries which have been key to us in the East in the past, such as Taiwan and Korea. It is seen by most people in the area as an alternative to strict Japanese dominance to the whole aid process in that area of the world. The Inter-American Development Bank which is funded by ourselves and to a small extent by Canada is seen by the Latins as the major expression of our degree of commitment to that hemisphere. The Bank lends an amount about equal to the World Bank’s Latin American lending on an annual basis but much more of this is on a concessional or soft basis.

Looking at the next four years, I believe shifts of priorities in our funding of the various institutions should take place. I would think that the major emphasis should be holding growth in our present $320 million annual participation in IDA to a minimum; if other countries feel the need or desire to increase IDA activities, they could put in an increasing share. In any case, we plan on reducing the U.S. participation of 40 percent down to about one-third during the next three-year replenishment period beginning in 1974. At the same time we would keep our average annual level of commitments to the Inter-American Development Bank somewhere around $350 million in soft funds and around $200 million in hard funds over the same period. Although IDA has steadily increased its activities in Africa, a modest participation at the regional level through the African Development Bank is indicated. Finally our level of commitment to the Asian Development Bank will have to be augmented, with the understanding that a large portion of this may go to helping in the reconstruction of Southeast Asia.

In this respect, I believe the international institutions do have a special role to play in Indo-China and we are in consultation with the National Security Council staff to try to work out what seems to be a coordinated package on this. For example, the IDA and the ADB between them should be able to build up within a relatively short period of time to loans of $150 million a year to the area. This would allow us to obtain the support of other donor nations, so that the reconstruction effort would be seen as a joint multilateral one.

The program I have outlined for our multilateral development assistance must, of course, be closely coordinated with our planning for bilateral assistance, for this is where the Congress will compel us to consider trade-offs. At present, taking bilateral development lending alone, our main emphasis is clearly on multilateral channels of financing by about [Page 248]2:1. But defining bilateral aid more broadly to include security assistance, we have a more balanced total program, and in my judgment we should keep the over-all mix about where it is during the next four years, without a dramatic phasing down of bilateral aid or a corresponding dramatic increase in multilateral aid. I will be glad to cooperate and play any role you wish me to in the important process of achieving an integrated and coordinated approach to our total assistance program, multilateral and bilateral.

Even after we have fully satisfied ourselves as to the appropriate multilateral-bilateral mix, however, it will still take a major effort with the Congress to put our program across.

As I have indicated in my separate memorandum to you on our special problem in the IDB,6 your personal support and involvement on behalf of our multilateral programs is the key to success. Efforts limited to the departmental level, even with the full cooperation of State and NSC, can only be partially successful, and partial success is inadequate in meeting internationally negotiated commitments.

Specifically, Congressman Passman and key congressional leadership figures will have to be informed that you consider these international institutions to be responsive to our long-run economic interests, that you regard our support of them as an integral part of your foreign economic policy aimed at a peaceful and stable world order, and that you desire to see them funded in accordance with the international understandings negotiated under your instructions. Such a stance means, of course, that it will be necessary to resist the various trade-offs that Mr. Passman or others may seek to impose.

I would hope that, in addition to your response to my other memorandum, I could have an indication of your agreement that we should adhere to the original game plan of placing major reliance in our development assistance policy on the international lending agencies. It is also important for me to know at this juncture that you are prepared to make the game plan work by applying the weight of your office when and where it is required in the Congress this coming spring.

  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, IFIs. No classification marking. Drafted by E.J. Finkel. A handwritten note on the memorandum reads: “Discussed in IDA IV mtg w/PAV et al. 12/1.” According to notes by the Deputy to Assistant Treasury Secretary Hennessy, George H. Willis, the December 1 meeting was an internal Treasury meeting attended by Volcker, Hennessy, Finkel, Hirschtritt, and several others. Willis’ notes deal only with the IDA-share issue. (Ibid.)
  2. Reference is to the President’s September 15, 1970, message to Congress, printed in Public Papers of the Presidents of the United States: Richard Nixon, 1970, pp. 745-756.
  3. The legislation was sent to Congress on April 21, 1971, but it never came to the floor for a vote.
  4. A November 30 memorandum from Hennessy to Volcker on “IDA IV Replenishment,” deals with proposed guidelines for a December 14-15 Paris meeting (DAC) on the IDA IV replenishment. Item 6 reads: “We will indicate that a substantial reduction in the U.S. share is a sine qua non of U.S. participation [and] without giving any assurance that it will prove acceptable in the congressional consultations … should be understood to mean to not more than 30 percent.” (Ibid.) In a November 6 conversation with IBRD Vice President Sir Denis Rickett on the IDA replenishment, Volcker said that in order to get anything from Congress, it would be necessary to reduce the U.S. percentage share from 40 percent to between 20 and 30 percent. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 A 15, IFIs)
  5. Not found.
  6. Not found.