253. Memorandum From Edward Fried and Henry Owen to President-Elect Carter 1

SUBJECT

  • Redirecting Foreign Aid

1. The Problem. During the campaign, you signalled your intent to follow a more forthcoming policy toward the developing countries. Relations have worsened over the past few years because the United States has been the most hard-nosed of the industrial countries in resisting the demands of the developing countries for a “new international economic order.”2 For the most part, these demands are not practical and the United States, as the richest and most powerful of the industrial countries, has to take much of the heat for opposing them. The new administration will be able to soften its rhetoric and explore the more moderate proposals sympathetically, but these actions will not go far to meet the demands of the poor countries. Development assistance through concessional and non-concessional capital transfers is the only major area where a new U.S. policy could make a big difference; but at the moment U.S. policy on foreign aid is in a state of paralysis.

2. Why Is This So? The developing countries could effectively use a great deal more foreign capital than they are now able to mobilize. Yet U.S. performance has been getting worse for years; the volume of economic aid we supply on concessional terms is down about 40 percent from a decade ago, adjusted for inflation. Furthermore, we have restrained the hard lending programs of the World Bank and the regional [Page 756]banks, that is, the loans they make on essentially market rates of interest and which require little in the way of budgetary resources from member governments.

The hard fact is that aid programs—both bilateral and multilateral—are in trouble on the Hill and the administration has done little to change the situation, even though there is ample reason to do so and powerful new grounds for making the case. If the United States is to move effectively to improve North-South relations, it will have to break the aid bottleneck at home. This would require a new sense of direction and purpose, a moderate increase of funding in FY 1978, and a substantial reorganization of our programs.

3. The Ford Approach. Most of the outgoing administration’s effort has gone into persuading the Congress to provide military aid and economic supporting assistance to bolster U.S. military allies and to use as a bargaining counter or as a political payoff in Asian, Middle East, and African negotiations. Such attention as it has been willing to devote to development aid has gone to bilateral aid, which can be used more readily to advance short-term U.S. foreign policy purposes. The result has been a growing and embarrassing shortfall on the multilateral front: The Congress has been unwilling to appropriate the funds to fulfill our commitments to provide capital for the World Bank and its soft loan affiliate, the International Development Agency (IDA), for the Inter-American Development Bank, and for the Asian Development Bank. There is a shortfall of $500 million past due these institutions, and the payment of an additional $700 million on previous commitments to them will carry over into the next two fiscal years. In addition the administration has dragged its feet in negotiations with other donor countries about future funding for these institutions, in particular on the next replenishment for IDA.

4. An Alternative Approach. During the campaign, you spoke several times (most notably in your New York speech to the Foreign Policy Association)3 of your intention to emphasize multilateral aid. This makes sense for several reasons:

(a) Multilateral aid is provided by international financial institutions, which can insist on tough self-help conditions without being accused of U.S. “imperialism.”

(b) About two-thirds of multilateral aid is provided by other donors—Western Europe, Japan, and the oil exporting countries. Every dollar of U.S. aid is thus multiplied several times.

[Page 757]

(c) Multilateral hard lending can shore up the international credit position of the developing countries in the face of pressures from the world recession and the oil price increase, while automatically distributing the credit risk among all industrial countries. This helps to maintain demand and employment in the industrial countries and reduces the risk that debt worries will cause a crisis in the international banking system.

(d) Multilateral concessional aid is detached from controversy about short-term U.S. foreign policy. It can thus be provided to such countries as India, which need it and can put it to good use, regardless of ups and downs in their day-to-day relations with the United States.

5. A Possible Model. A specific program to shift U.S. development aid to multilateral channels was recommended in 1970 by a task force of prominent private citizens chaired by Rudolph Peterson, former head of the Bank of America.4 These proposals were endorsed by many thoughtful students of development aid; they got nowhere during the Nixon administration but seem even more relevant today:

(a) Capital development aid should increasingly be provided through the World Bank group and the regional development banks (Asian Development Bank, Inter-American Development Bank, and African Development Bank).

(b) The U.S. bilateral program should consist essentially of technical assistance, redesigned to seek technological breakthroughs in a few major fields (e.g., population, agriculture, and education), or to experiment with new forms of development cooperation (for example, the financing of rural development banks). This bilateral program would be carried out by a new U.S. Development Institute, which would supplant AID (although it could selectively draw on its personnel), be supervised by a mixed public/private board of directors and, like a foundation, have sufficient continuity to support promising projects on a long-term basis.

(c) Supporting and military assistance should be provided separately from development assistance, and might be included in the Defense Department’s appropriation; this would clarify the trade-off between funds for security assistance and for U.S. armed forces. The security assistance program should be under the close policy guidance of the Department of State, since it is directed to political/security rather than development purposes—even though some or all of it might be administered by the Department of Defense.

Since U.S. capital development aid would be provided multilaterally, this approach would make it easier to move toward the concept of a world development budget, such as you suggested in your speech to [Page 758]the New York Foreign Policy Association. Such a budget could be drawn up by the World Bank; it would estimate for a few years ahead the rough total of capital needed for different developing countries, how much of this capital would be provided from domestic sources, and how much foreign capital would be needed. These estimates could be submitted to the Joint Ministerial Committee on Development,5 a group of senior government officials from both industrial and developing countries, and then used as a framework within which donor governments could consider needs for aid and present requests to legislatures.

6. Effect on the Budget. We now spend about $5.7 billion annually for foreign assistance, of which 55 percent is for development aid (including PL 480) and 45 percent for security assistance. The breakdown of the FY 1977 appropriation is as follows (in billion dollars):

Development Aid:
Bilateral (through AID) 1.1
P.L. 480 1.3
Multilateral .7
Sub-total 3.1
Security Assistance:
Military .8
Economic (of which .75 to Israel and .75 to Egypt) 1.8
Sub-total 2.6
Total $5.7

A redirection of foreign assistance, featuring heavy emphasis on multilateral development aid, a redesigned bilateral technical assistance program, and a declining security assistance program would require the following:

An increase of about $1 billion for multilateral aid in the FY 1978 budget. This would clear up past due accounts, mostly in subscriptions to the Inter-American Development Bank, and pay for the U.S. share of [Page 759]the fifth replenishment of IDA, negotiations for which are currently under way (see below).6

Holding the bilateral aid program to the present level of about $1 billion, while it is revamped and new funding requirements are established. (The Ford administration reportedly will be asking for an increase in bilateral aid in the 1978 budget). Eventually, the bilateral aid should decline as it is redirected to the provision of technical assistance.

Reappraisal of security assistance programs, notably to lay out the future level of funding and its implications for foreign policy and the defense budget. Some reduction seems feasible.

The increase in the FY 1978 appropriation for multilateral aid is large because your administration will have to make up in one year for many years of lagging U.S. attention to, if not neglect of, these programs. This will be an important budget decision. A strong U.S. lead now would exert an immediate positive influence on U.S. relations with the developing countries; more foot-dragging would be damaging to those relations.

The key decision—the U.S. position on the fifth replenishment of IDA covering the period 1978–80—will have to be taken early in the year. All donor countries except the United States and Saudi Arabia have agreed on a total replenishment for the three years of $8 billion, of which $7.2 billion is to be supplied by the OECD countries and $800 million by the OPEC countries. The U.S. share would be 30 percent of the total, requiring contributions of $800 million a year beginning in FY 1978. If IDA is not assured of new financing soon, it will have to cut its program drastically. This would be costly to the poorest countries, since IDA’s loans are restricted to these countries and represent the largest single element in their receipts of concessional aid.

If we phase bilateral aid into a smaller more effective technical assistance program and reduce security assistance, we should be able to support higher levels of multilateral concessional aid and to take the lead in negotiations with other donor countries to achieve this objective. Putting U.S. influence squarely behind multilateral aid, which is politically disinterested, would be convincing evidence that the U.S. objective is to improve the welfare of poor countries, not to influence [Page 760]their politics. This would be effective foreign policy for North-South relations.

In addition, the United States should be encouraging the World Bank and regional banks to expand their hard lending programs by increasing their subscribed capital. This mostly requires government guarantees (callable capital), rather than budgetary resources (paid-in capital). With their credit guaranteed by these increased subscriptions, the international institutions will be able to borrow more extensively in private capital markets and re-lend the proceeds to the developing countries on commercial terms.

The ability of many of the better off developing countries to service debt on these terms attests to the fundamental change that has taken place in their position. Most of them no longer depend on concessional aid; they can secure loans from the multilateral institutions at market rates of interest, which support and supplement their own access to private capital markets. As a result, concessional aid now can be concentrated on the poorest countries. They need more of it, but if it is provided multilaterally the burden for any one donor country, even the United States, will not be large and will be within our past level of foreign aid, because of the decline in bilateral development and security aid.

Furthermore, over the years the international financial institutions have grown steadily and have now reached the point where they are far and away the largest single channel for providing capital to the developing countries. These institutions have their failings, but these are more than offset by the fact that the institutions have made the world’s development effort international in character. Bilateral aid, whether from the United States or other countries, increasingly has become a political anachronism.

In short, as far as capital transfers to the developing countries are concerned, we have entered into a new and more promising phase, but we have yet to make this clear in presentations of our capital assistance programs to the Congress or to the public.

7. Next Steps.

(a) Funding. As indicated above, decisions on the IDA replenishment and on the FY 1978 budget request will have to be taken early in 1977, and will heavily influence political relations with developing countries.

(b) Reorganization of AID. It would be desirable now to commission a study to explore the pro’s and con’s of reorganizing the U.S. bilateral aid program and moving purposefully to a multilateral approach. To argue that multilateral aid makes much more economic and political sense today than bilateral aid is not an unqualified vote for the management or policies of international financial institutions; there is much [Page 761]criticism of these institutions on the Hill, and this needs to be carefully weighed on its merits. This study might be carried out in one of several ways: (i) the new Secretary of State might be asked to organize such a study within the executive branch; or (ii) a Commission of distinguished private citizens might be asked to explore the question; or (iii) a public policy research institution, such as Brookings, might be asked to undertake the study with substantial involvement of members of Congress. An executive branch study was successful in producing a new program in 1961,7 but the danger of a bias toward the status quo exists. Either of the other courses would be consistent with your statement during the campaign that you would ask for an outside assessment of aid early in your administration. Reaction to a new Commission of private citizens might be unfavorable because there is a long history of outside commissions studying U.S. foreign aid.

(c) Care should be taken not to foreclose this new approach by unsuitable appointments. The person selected to head AID should be open to change and have the kind of background that would be suitable for a technical assistance program, if that should be this agency’s future.

Edward Fried
Henry Owen 8
  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Subject File, Box 66, Transition Messages: To Governor #26–51: 12/3–14/76. Confidential. Forwarded to Carter under cover of a December 3 memorandum from Aaron and Lake. Carter initialed at the top of the page of the cover memorandum and wrote: “Good info—Include for early Jan mtg w/Congress leaders.” (Ibid.) At the time of this memorandum, both Edward Fried and Henry Owen were with the Brookings Institution, Fried as a Senior Fellow and Owen as the Director of Foreign Policy Studies.
  2. On May 1, 1974, at its Sixth Special Session, the UN General Assembly adopted without a vote a Declaration on the Establishment of a New International Economic Order (UNGA Resolution A/RES/3201 (S–VI)) and a Programme of Action on the Establishment of a New International Economic Order (UNGA Resolution A/RES/3202 (S–VI)). See Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Document 257.
  3. Carter spoke before the Foreign Policy Association on June 23; a partial transcript of his speech was published in The New York Times. (“Excerpts From Carter’s Speech and His Replies,” The New York Times, June 24, 1976, p. 22)
  4. On March 8, 1970, the Presidential Task Force on International Development (also known as the Peterson Task Force) submitted its report, entitled “U.S. Foreign Assistance in the 1970s: A New Approach,” to Nixon. For the text of the report, as well as Nixon’s remarks upon receiving it, see the Department of State Bulletin, April 6, 1970, pp. 447–467.
  5. Apparently a reference to the Joint Ministerial Committee of the Boards of Governors of the World Bank and the Fund on the Transfer of Real Resources to Developing Countries (more commonly referred to as at the Development Committee), which was established in October 1974. See Foreign Relations, 1969–1976, vol. XXXI, Foreign Economic Policy, 1973–1976, Document 83.
  6. In their December 3 cover memorandum to Carter (see footnote 1 above), Aaron and Lake noted, at Owen’s request, that Ford would “request an FY 77 supplemental appropriation of $540 million to make up U.S. arias [arrears?] with international financial institutions. For the FY 78 budget he will approve $375 million for IDA IV and $400 million for IDA V contributions. Together with other funds for international finance institutions, the total requests are $1.4 billion for FY 78 and adding in FY 77 the total comes to about $2 billion. The point is that as it leaves office, the current Administration is taking a ‘high option’ in funding international financial institutions after a long period of stringency and even neglect.”
  7. Possibly a reference to the 1961 foreign aid task force headed by International Cooperation Administration Director Henry Labouisse; see Foreign Relations, 1961–1963, vol. IX, Foreign Economic Policy, Document 103.
  8. Fried and Owen both initialed above these typed signatures.