115. Memorandum From Hendrik S. Houthakker of the Council of Economic Advisers to the Under Secretary of the Treasury for Monetary Affairs (Volcker)1

SUBJECT

  • Additionality in Foreign Aid

In its letter of May 22 addressed to you the Agency for International Development has suggested the relaxation of certain policies introduced by the previous Administration to insure that AID financed purchases are additional to normal commercial purchases of U.S. goods.2 This presents an excellent opportunity for a review of these policies and for the adoption of changes which will increase the efficiency of our foreign [Page 272]aid program. While we cannot vouchsafe for the accuracy of their estimates, AID’s suggested changes seem to us to go in the right direction, and we would like them to be considered sympathetically. The U.S. should also be exploring with other developed countries, through the Development Assistance Committee or other appropriate forum, other measures which might be adopted jointly to reduce the economic inefficiencies involved in aid-tying.

While “additionality” has been of some short-run benefit to the U.S. balance of payments, artificial inducements to buy U.S. goods which are not internationally competitive seem at least as likely to damage as to improve our longer-run trade outlook. For one thing, our products are thus given a stigma of undesirability. For another, our long-run export growth, as well as our political interests, can best be advanced by promoting rapid economic growth in the less developed countries. Additionality requirements have necessitated such interferences with sound development policy as the maintenance of exchange controls which might otherwise have been removed, the violation of credit ceilings, and increases in the procurement costs of public corporations. The costs of these interferences have been compounded by major delays in the disbursement of AID funds and by the irritation and resentment caused by our policies, particularly in Latin America. In general insistence on additionality is inconsistent with the liberal image the present Administration hopes to present to the world at large.

Since budgetary stringencies and Congressional pressures do not permit any immediate expansion of our foreign aid program (indeed the latter may impose further reductions), we ought at least to insure that the aid funds we do have available are utilized with maximum efficiency.

Although the structure of our balance of payments still leaves much to be desired, it is important to continue the effort at liberalization which we started in the direct investment program. The idea that we can improve our balance of payments by piling restrictions upon restrictions has by now proved to be illusory.

H.S. Houthakker
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential.
  2. Document 112.