112. Letter From the Administrator of the Agency for International Development (Hannah) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)1

Dear Mr. Volcker:

I am delighted to learn that you have constituted a staff group to review present policies designed to reduce balance-of-payments outflows due to U.S. Government expenditures.2

We are very anxious to rationalize and relax the stringent additionality measures which have been instituted, over and above aid tying, since 1965. Our economists estimate that these additionality measures, designed to reduce the substitution of aid-financed for commercial U.S. exports, have probably saved an average of only $35 million a year over the last four years. Even if perfect additionality were achieved, the maximum saving would be only $70 million. Our [Page 264] net direct expenditure of dollars outside the U.S. (the gold budget) was down to $178 million in FY 1968, out of total A.I.D. expenditures of about $2.0 billion, and will be less than that in FY 1969. In comparison to this achievement, attributable to aid tying, the additionality savings are pretty small.

To achieve these savings, we have had to apply quite onerous controls on the use of our development loans. These have forced aid recipients to intervene in the free market, contrary to our advice to them on general economic policy, in order to divert trade to the U.S. The restrictions have also reduced the effective amount of aid by making aid-purchased goods more expensive to recipients, and have made it more difficult for recipients to draw down our loans and put the aid resources to use as scheduled. Our additionality policies have become a constant source of irritation between the U.S. and host governments. A.I.D. officials must spend time, energy, and good will negotiating additionality measures, which detracts from their ability to press for better development policies.

Moreover, because additionality measures, by their nature, frequently force recipients to purchase more expensive and less satisfactory U.S. exports, we may be prejudicing our ability to build commercial markets for the longer run. Ultimately, our export prospects in poor countries depend on their accelerated development, which is the basic aim of our aid program.

Our precise proposals for ameliorating additionality policies, and the reasons for them, are explained in the enclosed papers.3

I hope very much that the enlarged Volcker Group dealing with balance-of-payments issues will be able to consider and make an early response to these proposals, without waiting for consideration of other balance-of-payments policies affecting all government expenditures.

My concern for an early Administration decision is two-fold. First, additionality measures are making it increasingly difficult to administer the aid program. The sooner we can ease these restrictive policies, the further we can stretch our reduced aid budget. Second, in the middle of June we will be discussing aid policies in two important international forums: The Development Assistance Committee’s review of the U.S. aid program and the sixth meeting of the Inter-American Economic and Social Council. In both meetings we expect intensive criticism of our additionality policies. If, as I hope, we are going to ameliorate our aid-related balance-of-payments policies, this [Page 265] would be an opportune time to announce it. This step would have important benefits for U.S. relations with the less developed countries.4

Sincerely yours,

John A. Hannah
  1. Source: Washington National Records Center, Department of the Treasury, Assistant Secretary for International Affairs Files: FRC 56 76 A 108, US/3/500 BOP Problem, Aid and Development Programs, Volume 4, 1966-1971. Confidential.
  2. A May 2 memorandum from Deputy Assistant Secretary of the Treasury John C. Colman to Volcker indicates that in response to Volcker’s request Colman had convened on May 1 an interagency group to review the balance-of-payment effects of U.S. Government expenditures (State and NSC representatives had been unable to attend). Colman noted that AID would prepare a paper on “additionality” which would recognize that Treasury and perhaps OMB might oppose AID’s “expressed desire to ameliorate present tying practices.” Other agencies would also prepare papers. (Ibid.)
  3. Not found.
  4. In a May 29 reply to Hannah, Volcker noted that he shared Hannah’s concern with reducing the political and administrative impact of additionality measures provided the adverse balance-of-payment impact of foreign assistance would be reduced to a reasonable minimum. Volcker doubted that it would be possible to reach interagency agreement on the additionality issues by mid-June. In a May 26 memorandum Volcker indicated to Colman that, aside from substance, the timing of any announcement would have to take account of the current balance-of-payment, special drawing rights negotiations, among other things, and mid-June appeared to be impossible. (All in Washington National Records Center, Department of the Treasury, Assistant Secretary for International Affairs Files: FRC 56 76 A 108, US/3/500 BOP Problem, Aid and Development Programs, Volume 4, 1966-1971)