36. Memorandum From Hendrik S. Houthakker of the Council of Economic Advisers to C. Fred Bergsten of the National Security Council Staff1

SUBJECT

  • U.S. Position on Aid Targets

We oppose options (1) and (2).2 Regarding option 1, we believe that: (1) The statement on the 1 percent target is so weak as to be worthless, and this will be clearly recognized by the LDC’s. (2) Certainly, we should not emphasize our “staggering domestic needs.” To any outside observer these will appear trivial compared to the needs of starving millions in the third world.

Regarding option 2: This is subject to misinterpretation. The LDC’s may misjudge the President’s influence with Congress on this issue and may feel betrayed when Congress rejects the request, which it is quite likely to do.

We favor a variant of option 3, but one which would place primary emphasis on the positive aspects of the President’s Foreign Aid Message.3 In making his statement the President might first note that [Page 83]although some less developed countries have made efficient use of our aid, elsewhere much aid has been dissipated in waste and corruption. This mixed record, combined with instances in which countries receiving American aid have expropriated U.S. firms and condoned anti-American demonstrations, has created widespread disillusionment with aid on the part of the American public. The result has been a steady fall relative to GNP in the amounts of aid appropriated by the U.S. Congress. Unless the effectiveness of aid is made more visible, a significant quantitative increase in U.S. aid can hardly be expected in the foreseeable future. Therefore, it is essential that both the donor and the recipient countries focus on improving the effectiveness per dollar of aid. The American people are ready to help those less fortunate, but they like to see results.

The President’s Foreign Aid Message places high priority on greater effectiveness. The proposal to untie aid would alone make each aid dollar at least 20 percent more effective, according to the conservative estimates of the Pearson Commission (p. 172). This estimate covers only the direct costs of tying and does not include a variety of indirect costs. For example, tied aid sometimes prevents funds from being used for the projects of highest priority to the LDC. The proposal to channel aid through multilateral institutions will result in a greater coordination of the U.S. efforts with those of other nations and thereby improve effectiveness.

As a complement to aid reform, the President has proposed that tariff preferences be granted to the manufactured exports of the lower income countries. The economic benefits which would accrue to the LDC’s from such a system of generalized preferences are equivalent to a substantial increase in the flow of aid.

In summary, we urge that the President’s statement avoid mentioning (either positively or negatively) quantitative formulations of any kind and should focus on our efforts to improve the quality of aid. This approach may also have a favorable impact on domestic opinion.

H.S. Houthakker
  1. Source: National Archives, Nixon Presidential Materials, White House Central Files, Box 30, Houthakker-Foreign Aid Policy. No classification marking.
  2. Reference is to options in a September 30 memorandum from Bergsten to Flanigan, Timmons, Houthakker, Schlesinger, and Martin Anderson, which transmitted a draft of Document 38.
  3. For text of the President’s September 15 message to Congress on foreign assistance reorganization, see Public Papers of the Presidents of the United States: Richard Nixon, 1970, pp. 745-758.