151. Draft Memorandum From the Director of the International Development Cooperation Agency (Ehrlich) to President Carter1

SUBJECT

  • Increasing the Effectiveness of Development Assistance—Spring Budget Review

A principal aim in establishing IDCA as a separate agency—responsible directly to you—was to improve the effectiveness of U.S. development assistance. To that end, this Agency has worked with AID and other parts of the Executive Branch—in coordination with other bilateral and multilateral donors—to insure that our development resources have maximum development impact.

As a result of careful assessment, we determined that there must be more systematic and rigorous focus of AID resources on: (1) the priority areas of food, energy, and health and population; and (2) the [Page 587] recipient countries where development need is greatest and development performance will be strongest. Applying this policy, particularly in times of budget stringency, will mean that development assistance to some sectors and countries will be reduced or even phased out. The State Department has objected to this policy and its application, as stated in a separate memorandum.2 At the Spring Budget Review on foreign assistance, I understand that this will be one of the key issues.

This memorandum explains the reasons for the policy, the ways in which the policy will be applied, and the results of its application.

1. The Need to Strengthen Development Effectiveness

The demand—and need—for U.S. development aid far exceeds what the United States can supply. This would be true even if AID (and other development) resources were to expand at an accelerating rate. IDCA will press hard for substantial growth in development assistance. At the same time, we recognize the possibility that there may be no significant increases in AID’s budget through at least part of your second term. Our programs are under tight constraints.

Particularly in light of these constraints, we must seek to achieve the greatest possible development effectiveness with the funds and staff available. We must do this to meet the statutory purpose of U.S. development assistance: to support the basic human needs of poor people in Third World countries by accelerating economic development. This purpose, which you have affirmed on many occasions, may diverge from the short-term tactical needs of U.S. diplomacy. But it is wholly consistent with your basic foreign policy objectives in the long run.

Based on a review of development benefits and costs, we concluded that AID resources should be focused more than in the past. Otherwise we run the increasing risk that those resources will become irrelevant to overcoming development problems. To insure maximum development impact, consistent with the basic human needs mandate, we must increase our focus in terms of both problem areas and countries.

As in your 1981 Budget, the largest share of AID resources will continue to help combat world hunger, through support of agricultural production and distribution (including natural resources conservation). In energy, the primary attention will be on renewable resources—to complement the multilateral banks’ efforts in conventional energy fields. Finally, we will focus on primary health care and family planning support. These are the three sectors where, in our judgment, AID can [Page 588] make the most significant contributions and for which you have stressed your strong support. AID will continue to work in other areas only when its comparative advantage is clearly demonstrated and the impact of its support can be substantial.

We also concluded that strengthening development effectiveness requires focusing AID’s resources—staff, money, and attention—on fewer countries. AID now administers funds (development assistance or ESF) in 68 countries, maintaining staff in all but a handful. No other bilateral donor either provides such wide global assistance coverage or fields so large an assistance staff. This worldwide presence is clearly an asset to the United States, but our resources are now spread so thin in some countries that they are only marginally relevant to development requirements. Marginal resources neither advance a nation’s development programs significantly nor provide the opportunity to open serious dialogue on important development issues with the host government.

In our view, AID resources should be focused over time to achieve development objectives efficiently and to influence the development policies of the host government. To attain the necessary resources for some countries requires that AID resources in other countries be held at present levels or reduced. In some nations, the dim prospects of influencing either development or policy suggest eliminating our assistance entirely over a period of time.

The concept of focusing sufficient resources to achieve significant development progress in particular countries is not new. The U.S. aid program has focused its resources in the past to promote effectiveness, with some striking results. It continues to do so now though to a much lesser extent. Examples of the resulting development impact include Brazil, South Korea, and Taiwan. India was transformed in the 1960s from a major importer of foodgrains on the world market into a country that has helped to meet the food deficits of other poor nations. India is an example of what can be achieved when sufficient financial, technical, and analytic resources are applied to the task. The policy of focussing resources, therefore, is recommended by experience as well as analysis of the current situation.

2. Applying the Development Effectiveness Policy

In each of the three priority areas, we are working to focus AID programs in ways that complement and supplement—rather than duplicate—the efforts financed by the much larger resources of other donors, particularly the multilateral banks.

We will continue to look primarily to the multilateral banks for support of major infrastructure needs. In addition, we are paying explicit attention in each recipient country both to the total resources [Page 589] provided by other donors and to the kinds of activities those donors finance. If other donors are active in a country or sector, we are exploring their interests and abilities in the kinds of development projects we believe are needed before concluding that U.S. involvement is necessary.

In choosing the countries where AID should focus its resources to promote development effectiveness, we relied on three primary criteria. The first is the significance of U.S. assistance to achieve development objectives. This standard includes both the need for external financial and technical assistance and the availability of assistance from other donor countries, from other U.S. programs, and from multilateral organizations. The second criterion is the nature and extent of the host country’s commitment to development. This measure encompasses sound policies capable of leading to equitable growth, a record of performance in carrying out these policies, and concern for human rights. The third criterion is the importance to the United States of the country’s economic development.

In applying those criteria as we developed country-specific planning guidance for the Fiscal Year 1982 budget, we relied on Country Development Strategy Statements (prepared by the AID mission in each country in consultation with the Ambassador and other members of the Country Team), AID expertise available in Washington, and documentation from various development organizations.

Our concern is country development as a whole. Whether a country is large or small, its own development commitment will be the principal determinant of success. Although some poor people can be helped with U.S. resources even in a country with inadequate development planning, a poor record of human rights, and little commitment to equitable distribution of development gains, the impact will be small and transient; the numbers helped will be few. Our aid will be far more significant in countries with effective policies.

We also concluded that certain countries, despite the continued existence of poverty, are not appropriate recipients of scarce concessional funds because of substantial domestic resources or access to private capital markets. In their current situations, we believe that Indonesia and Nigeria both fall into this class, although we propose maintaining a $50 million allocation to Indonesia in view of the State Department’s expression of strong concern and because of our belief that a well-designed technical assistance program there can have a particularly significant development impact.

The effort that we are pursuing must be carried out over a number of years. We cannot say with certainty that a single shift of resources in a single year from one country to another will increase the overall development impact. But the cumulative effect of shifts over several [Page 590] years should have that effect since resources from poorer-performing countries will be applied to a small number of countries with strong performance records.

We also cannot guarantee that our application of the development criteria has been perfect—that our conclusions regarding an individual country are exactly right. But we are confident that the process is sound and that over time the result will be to improve substantially the effectiveness of our development assistance resources.

3. Results of Applying the Development Effectiveness Policy

Our focus on the three priority areas led to increased AID allocations in those areas for 1981, and we expect that trend to continue in the 1982 budget. Our application of the country criteria led to a threefold classification of current AID recipients. The first category consists of ten countries—some large, some small—with a clear need for U.S. assistance, sound development policies, and good development performance. We set high planning ceilings for these countries because we can have significant development impact on them. We intend to protect the allocations for these countries even if AID resources as a whole are kept to the 1981 level; if, as we hope, substantially increased resources will be available, these countries will be prime candidates to receive more, assuming solid projects and managerial capacity allow.

Countries in the second category satisfy the criteria less adequately, though the potential of development impact exists. Our planning ceilings for these countries are moderate, and the allocations will not be protected against budgetary inadequacies. A constricted AID budget, therefore, will pinch here; an adequate budget will not.

Prospects of substantial development impact from U.S. development assistance are low for countries in the third category. We therefore propose phasing out AID’s development assistance programs in these countries, though financial assistance without field staff is planned for some through other means such as private voluntary organizations.

To judge that AID should not have a program in a particular country or sector is not to conclude that the poor in the country should be unassisted or that the sector should be ignored. Bilateral donors other than the United States—e.g., Japan in East Asia and France in West Africa—are active in many of the countries involved. Even more important are the substantial aid funds from the multilateral development banks and U.N. development agencies—institutions that the United States helped to create and whose growth we have helped to finance since the end of World War II.

We recognize the danger that decisions on development assistance levels may be seen as based on short-term political factors rather than long-term developmental considerations. Every departure from the [Page 591] status quo entails that risk. We have attempted as best we can to structure the process to minimize the possible political cost. For countries facing a phase-out, we are planning careful, orderly transitions. Most would still receive new funding in 1982 and some even in 1983; the departure of staff would take an additional several years as ongoing projects are gradually completed. Partly because of this very care, the shift of resources toward countries with good performance will be relatively gradual; the increase in developmental effectiveness will similarly be a multiyear process during which there will be ample opportunity to correct errors, to adjust to the changing policies of recipient governments, and to smooth the transition to new arrangements.

In countries where U.S. non-developmental objectives must be met with financial assistance, other funding can be used, though we recognize the problems involved. Some of these needs can be addressed by the Economic Support Fund which, however constrained, is still larger than AID’s Development Assistance program. Some portion of the PL 480 program is also used for this purpose. Over the longer-term, America’s relations with developing countries should increasingly rely on non-concessional mechanisms, particularly trade and investment. IDCA will be vigorous in pursuing its mandate in these non-concessional areas.

We realize that unforeseen circumstances will preclude providing development assistance to some countries now considered in the priority group, and that other unexpected events will require allocations of that assistance to some non-priority countries. Events over the last year in Nicaragua and elsewhere are compelling evidence that predictions are not perfect. But this reality does not undercut the need for planning; rather, it underscores the need for adequate flexibility.

In most situations, the unforeseen circumstances relate to political, not developmental, factors within a particular country or region. To meet those situations, ESF or Defense Department funds should generally be used since those funds are intended to be allocated on the basis of political or military considerations. New needs relating to Persian Gulf base-rights arrangements are a prime example. An ESF contingency fund would, we believe, be a sound step in helping to deal with this type of problem.

One final point. The development effectiveness policy we are pursuing requires that the United States be significantly involved in development issues within the high priority countries. This means in some situations arguing with the governments of those countries and using our resources as leverage in the arguments. This is not always a comfortable situation, and the potential for discomfort should be recognized. It could be avoided, of course, by channeling all U.S. development [Page 592] assistance through multilateral institutions, as some in Congress have urged. We believe that course would be a mistake because AID funding and field missions have an important development impact. The policy outlined in this memorandum is designed to strengthen that impact.

Thomas Ehrlich3

Attachment

Draft Memorandum Prepared in the Department of State4

STATE’S RESPONSE TO EHRLICH’S MEMO

The Department of State supports and welcomes many of IDCA’s plans to use limited US development assistance funds as efficiently as possible.

Specifically, we agree that additional assistance should be made available to countries with good human rights records and to those embracing equitable development policies. There may also be merit in concentrating resources in fewer sectors if this is done in a flexible manner so as to take into account the diverse development needs of individual LDCs. The Department also supports IDCA’s efforts to trim the costs of AID’s overseas operations by using less direct-hire personnel.

The Department emphatically does not, however, support one broad element of IDCA’s recommended approach—that of terminating all aid to some countries in order to concentrate more assistance in others. In our view, such a policy offers no more than speculative, if any, new impetus to development, at the expense of real and foreseeable harm to the nation’s foreign policy needs.

In sum, the Department believes that:

—The resources IDCA proposes to reallocate in the concentration effort are too small to have any significant development impact.

—The development cost of terminating aid in some countries would well exceed the development benefits resulting from the increases in others.

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—Many of the types of programs IDCA would terminate have been extremely successful.

—Rigid adherence to the concentration principle may make the US aid program unresponsive to changing economic and political conditions in many countries.

—The concentration approach is not supportive of America’s global interest and responsibilities.

—Termination of programs will hurt US relations with the countries affected, and may result in loss of security facilities and put us at a disadvantage in countering Soviet influence.

—This is not the time either for another shift in our foreign aid philosophy or in the shape of our foreign policy.

The probable effects of the IDCA recommendation upon both development and foreign policy objectives are considered below.

Development Impact

IDCA’s central premise is that by concentrating US assistance in fewer countries, we can produce a greater development impact overall.

This premise must be examined first in the light of the basic reality that in real terms, American development assistance levels have been shrinking and American aid now has far less impact on a country’s development prospects than do the investment, income distribution, and other strategies followed by that country’s government. This means that IDCA’s principal examples of successful concentration—South Korea and Brazil—have almost no present relevance. Between 1954 and 1961 Korea received the equivalent, in 1979 dollars, of some $6.3 billion in economic assistance—an annual average of nearly $800 million. Between 1962 and 1968 Brazil received $4.1 billion, or $600 million per year. To repeat such programs now would exhaust almost the entire AID program and result in the termination of bilateral development assistance to all but two or three countries.

The IDCA premise also assumes that the saving gained by terminating certain country programs will be large enough to have a significant development impact in other countries. In fact, the actual savings will be relatively small; eliminating bilateral aid to those countries IDCA ranks as having a low priority would free up less than $45 million annually. Using this small savings in more highly ranked countries will probably not, even over time, provide the critical mass of resources necessary to make a significant dent in another country’s development.

Since large sums are ruled out by the budget, the practical issue is distilled essentially into two questions: whether greater concentration will give the US more total influence on the key determinants of development—the policies of recipient governments—and whether concen[Page 594]tration is inherently more productive in meeting the statutory purpose of development aid, that of helping the poor.

On the former question, we think concentration of resources would likely produce a net loss in our ability to foster sound development strategies in recipient countries. A decision to add another $5 million to a program in Kenya, for example (a country IDCA selects for more aid), would buy almost nothing on the margin in terms of a dialogue on development issues with the Kenyan government. But a decision to close down a program in, say, Burma (a country IDCA selects for termination) would flatly rule out any possible dialogue on development policies there. In short, while the gains to the program in terms of efficiency and influence are speculative, the losses are quite tangible. The weight of probabilities, therefore, clearly lies with the losses.

On the second issue, whether concentrating resources in a few programs is inherently preferable to small programs in helping poor people, IDCA’s argument is not borne out by experience. For example:

—In Guinea-Bissau, rice production of small farm families increased tenfold under an aid project carried out with almost no direct-hire staff presence. The project brought higher per capita consumption and food self-sufficiency to hundreds of families, and is an effective model for expansion and use elsewhere. The same staff also manages a PL 480 program, activities in food crop production, work on small-scale fisheries, and primary teacher training, while providing support for the program in Cape Verde as well.

—Another project, with little direct-hire staff management, was carried out in Sierra Leone. A partial listing of activities over a three year period includes construction of 200 schoolrooms, 16 health clinics and warehouses, 69 wells, seven water systems, and about 1,600 miles of road. Participants trained on the project returned to work in local government community development offices, giving further impetus to development country-wide. A Rural Training Institute was created at Kenema, and the Njala University College—now the government’s main sources of agricultural research and extension—was established.

—In Guatemala, despite official hostility toward cooperatives, AID began in 1970 to assist the national credit union federation and to build an agricultural cooperative federation. AID’s major inputs were a $2.1 million grant in 1970 and a $4.5 million loan in 1974. Today nearly 10% of the poor majority in Guatemala are members of cooperatives or credit unions, and the government has turned to the co-ops to carry out its high priority colonization activities in the northern part of the country.

IDCA uses India as an example of a country that was able to transform its agricultural sector in the 1960’s because it received sufficient financial, technical and analytical resources. In fact, only [Page 595] about %5 of US development assistance to India in the 1960’s went into the agricultural sector. The impact this agricultural aid had was not due to its size, but rather because it was used for high quality projects that over a long period of time produced a cadre of skilled agricultural planners and major agricultural policy reform.

These are but a few examples of a substantial body of evidence which shows that even the smallest projects, when they are well-conceived and well-run, can have a profound impact on people’s lives.

Neither experience, nor logic, nor the aid law itself gives any basis for limiting the search for worthy projects to a limited number of countries, especially if that list of countries is subjectively altered on a yearly basis. Many developing countries face altered development prospects, depending on specific political circumstances at particular points in time. It would be costly and inefficient to terminate and restructure assistance programs simply to meet the concentration objective.

There are other problems with IDCA’s analysis. IDCA cites no examples of where and how a concentration of US aid might supply the critical mass of resources necessary to make a significant dent in a country’s development. It is not clear on what basis IDCA rendered judgments on such complex areas as host government performance and commitment to development, which are key determinants in the ranking system. In addition, one element in the ranking seems inconsistent with IDCA’s concentration proposal: IDCA would determine a country’s need for US assistance by measuring per capita aid flows from other sources. But the logic of the concentration argument is that countries that receive substantial assistance from elsewhere should get more, not less, US aid.

Another factor to consider is that the proposed departure in policy could easily add to the domestic vulnerability of the AID program. Concentrating AID resources in a selected few countries would obviously raise the visibility of individual projects. If our relationship with one of those countries suffered a setback, Congressional resistance to the entire AID budget would increase sharply.

Foreign Policy Costs of Concentration

The other major concern of the Department is that the concentration policy would exact a clear political price, while offering at best an uncertain development return.

IDCA notes that “no other bilateral donor either provides such global assistance coverage or fields so large an assistance staff.” That [Page 596] is true. It is also true that no other donor has such wide global interests and responsibilities.

The importance of Third World nations to our security and well-being will continue to mount in the years ahead. And it is already very high. Our military depends on bases and communication and access facilities in Third World nations throughout the world. LDCs meet our needs for essential materials such as tin, bauxite, rubber, and—of course—oil. Developing nations take more of our exports than Japan and the European Common Market combined; the Third World will continue to be an area for instability and potential conflict, offering opportunities for Soviet exploitation.

In light of these considerations, assistance to poor people in developing countries is far more than a humanitarian gesture: aid is an investment in our own self-interest. It is probably the most important means we have for relating to the majority of the countries in the world; our most tangible expression of genuine concern about what happens to them; an investment in stability.

Moreover, the political importance of one country or another often cannot be projected. No one could have forecast two years ago that Somalia, Kenya and Nicaragua would today be near the top of our list of concerns. In a rapidly changing and volatile world our short-term priorities will vary greatly from year to year. The fact is that our long-term interests in the Third World are best served when we seek good relations with all Third World countries. This we can do most effectively by contributing to their long-term development.

Regardless of our protests to the contrary, implementation of the concentration strategy inevitably would be taken as an expression of American disinterest by any nation that is cut back or terminated. Even if “careful and orderly transitions” are planned for countries facing phase-outs, we cannot disguise the fact that the end result will be zero bilateral development aid. Indeed, just the preparation of a rank ordering of countries poses political problems. We cannot escape the reality that such rankings are likely to become public, producing an immediate political fall-out even if actual implementation is put off.

The damage concentration would cause can be appreciated by identifying some of the specific foreign policy costs we would encounter by terminating the country programs suggested by IDCA.

Burma, the largest country in Southeast Asia, with immense untapped resources, which, after 20 years of isolation, has begun a gradual opening to the outside world, and more importantly to Western countries, including the US. Burma is one of the world’s poorest countries, with a per capita GDP of $139.

Panama. The political risks of not maintaining US support during the transition period of treaty implementation far outweigh the small saving that would be gained by a phase-out.

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Costa Rica. The country is important to our Caribbean basing strategy, and is a moderating force in Central America. In addition, while still requiring concessional assistance to meet pressing development needs, Costa Rica has become a development model for the region.

The IDCA policy of concentration hits hardest in Africa, which has one-third of the world’s poorest countries and to which the Administration has devoted special attention. More than in any other area, bilateral assistance is our single most important contribution in individual African countries. But the ranking system employed by IDCA would result in6 bilateral African aid programs being terminated in FY 82 and no new bilateral programs being started.

The IDCA approach is biased against Africa in several ways. It tends to favor large countries. There are 28 African countries with populations of less than five million. The IDCA approach would reward countries that have skilled personnel and government institutions capable of effectively designing and implementing complex equitable development strategies. The great majority of African countries have attained independence only within the past two decades and as a result skilled manpower is in short supply and institutional capacity limited.

Individually, the development of these small African countries may not be as important to the United States as the development of countries like Bangladesh or Nicaragua. Collectively, however, the development of these small nations is of equal or greater importance and our leverage would be all the greater. This is the sort of reality the IDCA formula cannot take into account.

Finally, the domestic political environment must also be weighed here. It is indisputable that the sympathy of the American public and the Congress for development objectives is a cyclical matter, varying sharply with economic trends and ideological moods. Still, to the extent we can demonstrate that development aid also supports American political and security interests, domestic support for those programs will be stronger and steadier over time.

We are now in a period when aid programs are underfunded and under constant attack. Surely this is the least propitious time to propose changes that would downplay the elements of aid that have the greatest popular appeal.

In sum, the Department opposes, on both economic and political grounds, IDCA’s recommended policy of concentration. The concentration approach would limit our influence and damage our relations in the Third World while not increasing the effectiveness of our assistance efforts.

  1. Source: National Archives, RG 59, Records of the Under Secretary for Management (M), 1980, Box 5, Chron June 15–21, 1980. Confidential. In Lake’s June 19 covering memorandum, he wrote that Ehrlich’s memorandum outlined the IDCA’s policy for development assistance, which the IDCA would like to have addressed at the spring budget review. The Department of State, however, wished for a PRC to be convened in order to make policy recommendations to the President. (Ibid.)
  2. Also attached to Lake’s covering memorandum and printed as an attachment below.
  3. Printed from a copy with this typed signature.
  4. No classification marking.
  5. As on the original.
  6. As on the original.